Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD IBRD-42280) FOR TWO LOANS

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD IBRD-42280) FOR TWO LOANS Report No:ICR IN THE AMOUNT OF US$2.3 MILLION TO THE REPUBLIC OF THE PHILIPPINES Public Performance Audit (Ln PH) AND IN THE AMOUNT OF US$36.3 MILLION TO THE LAND BANK OF THE PHILIPPINES Urban Development Sector Unit Sustainable Development Department East Asia and Pacific Region Sewerage, Sanitation and DrainageDevelopment (Ln PH) FOR A WATER DISTRICTS DEVELOPMENT PROJECT June 28, 2007 This document has a restricted distribution and maybe used by recipients only in the performance of their official duties. It contents may be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective November 2006) Currency Unit = Philippine Peso PhP1.00 = US$0.02 US$ 1.00 = PP51 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ADB APL BESP CAS CBD CDS CSC DBP EIRR EO FM GEF GFI GOP HH IBRD ICR IFC ILI IRA JBIC LA LBP LBP-PMO LGC LGU LM LWUA M&E MSSP MTSP MWCI MWSS MWSS-RO NGO NRW Asian Development Bank Adaptable Program Loan Barangay Environmental Sanitation Plan Country Assistance Strategy Central Business District City Development Strategy Construction Supervision Consultant Development Bank of the Philippines Economic Internal Rate of Return Executive Order Financial Management Global Environment Fund Government Financial Institutions Government of the Philippines Households International Bank for Reconstruction and Development Implementation Completion Report International Finance Corporation Intensive Learning ICR Internal Revenue Allocation Japan Bank for International Cooperation Loan Agreement Land Bank of the Philippines Land Bank of the Philippines Project Management Office Local Government Code Local Government Unit Linear Meter Local Water Utilities Administration Monitoring and Evaluation Manila Second Sewerage Project Manila Third Sewerage Project Manila Water Company, Inc. Metropolitan Waterworks and Sewerage System Metropolitan Waterworks and Sewerage System Regulatory Office Non Government Organization Non Revenue Water ii

3 NWRB ODA OM O&M PA PAD PAWS PDO PIDF PMF PMO PMU PPA PPF PSD PSP QEA QSA SAR SEC SIL SLA SSD SSLDIP TF UP-NEC WD WDDP WTC WTP National Water Regulatory Board Official Development Assistance Operations Manual Operation and Maintenance Project Agreement Project Appraisal Document Public Assessment of Water Services Project Development Objectives Public Information Disclosure and Feedback Performance Measurement Framework Project Management Office Project Management Unit Public Performance Audit Project Preparation Facility Private Sector Development Private Sector Participation Quality at Entry Quality of Supervision Staff Appraisal Report Securities and Exchange Commission Specific Investment Loan Subsidiary Loan Agreement Sewerage, Sanitation and Drainage Development Support for Sustainable Local Development and Investment Project Trust Fund University of the Philippines National Engineering Center Water District Water Districts Development Project Willingness to Connect Willingness to Pay Vice President: James W. Adams Country Director: Joachim Von Amsberg Sector Director: Keshav Varma Task Team Leader: R. Mukami Kariuki iii

4 PHILIPPINES WATER DISTRICTS DEVELOPMENT PROJECT CONTENTS Page No. 1. Basic Information 1 2. Key Dates 2 3. Ratings Summary 2 4. Sector and Theme Codes 3 5. Bank Staff 3 6. Project Context, Development Objectives and Design 4 7. Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners 24 Annex 1. Results Framework Analysis 25 Annex 2. Restructuring 30 Annex 3. Project Costs and Financing 31 Annex 4. Outputs by Component 35 Annex 5. Economic and Financial Analysis 37 Annex 6. Bank Lending and Implementation Support/Supervision Processes 43 Annex 7. Detailed Ratings of Bank and Borrower Performance 46 Annex 8. Beneficiary Survey Result 47 Annex 9. Stakeholder Workshop Report and Results 48 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR 49 Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders 51 Annex 12. List of Supporting Documents 51 MAP: IBRD

5 1. Basic Information Country: Philippines Project Name: WATER DISTRICTS DEVELOPMENT PROJECT Project ID: P L/C/TF Number(s): IBRD-42270, IBRD ICR Date: 06/30/2007 ICR Type: Core ICR GOP for Loan 4227-PH Lending Instrument: SIL Borrower: Land Bank of the Philippines for Loan 4228-PH Original Total Commitment: US$ 38.6M Disbursed Amount: US$ 17.9 Environmental Category:A Implementing Agencies Metropolitan Waterworks and Sewerage System (MWSS) for Loan 4227-PH Land Bank of the Philippines for Loan 4228-PH Cofinanciers and Other External Partners 2. Key Dates Process Date Process Original Date Concept Review: 04/02/1996 Appraisal: 02/10/1997 Approval: 09/09/1997 Restructuring of Loan 4228-PH prior to signing 05/14/1999 Effectiveness Loan 4227-PH: Effectiveness Loan 4228-PH Closing for Loan 4227-PH Closing for Loan 4228-PH 09/10/ /08/ /10/ /10/ /30/ /30/ /30/ /31/2006 Revised / Actual Date(s) 3. Ratings Summary 3.1 Performance Rating by ICR Outcomes: PPA: Moderately Satisfactory; SSD: Satisfactory Risk to Development Outcome: PPA: Significant; SSD: Moderate PPA: Satisfactory; SSD: Moderately Bank Performance: Satisfactory PPA: Moderately Satisfactory; SSD: Moderately Borrower Performance: Satisfactory * Ratings reported in the electronic data sheet are overall ratings for the project (PPA and SSD). 2

6 3.2 Quality at Entry and Implementation Performance Indicators Implementation Performance Indicators QAG Assessments (if any) Rating: Potential Problem Project at any time (Yes/No): No Quality at Entry (QEA): None Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: 4. Sector and Theme Codes No Satisfactory Quality of Supervision (QSA): Original None Actual Sector Code (as % of total Bank financing) Central government administration General water, sanitation and flood protection sector Original Priority Actual Priority Theme Code (Primary/Secondary) Decentralization Secondary Primary Other financial and private sector development Primary Secondary Municipal governance and institution building Primary Primary Other urban development Primary Primary Pollution management and environmental health Primary Primary 5. Bank Staff Positions At ICR At Approval Vice President: James W. Adams Jean-Michel Severino Country Director: Joachim von Amsberg Vinay K. Bhargava Sector Manager: Keshav Varma Keshav Varma Project Team Leader: R. Mukami Kariuki N. Vijay Jagannathan ICR Team Leader: R. Mukami Kariuki ICR Primary Author: Pierre de Raet 3

7 6. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative) 6.1 Context at Appraisal (brief summary of country macroeconomic and structural/sector background, rationale for Bank assistance) By the early 1990s, water and sanitation service levels in Philippines urban centers had deteriorated considerably, mainly due to rapid population growth and urbanization, with negative impact on the environment. It was increasingly recognized that sector performance had been hurt by the absence of a well-articulated sectoral policy framework, lack of transparent financing criteria, inadequate management incentives to run water utilities as commercial enterprises, a highly fragmented market, low cost recovering tariffs and political interference in setting tariffs. The relatively poor performance of Bank-financed operations in the 1980s had encouraged the Bank to shift its assistance from project lending to sector work. Two other developments also militated in favor of reviewing sector policies, first, the adoption of the Local Government Code (LGC) in 1991, which established a far reaching decentralization of public services in the country, and second, the growing trend in the 1990s, towards private sector investment in the management of public utility systems. These factors led the Government (GOP) to undertake a Water Supply and Sanitation Sectoral Review under the aegis of the National Economic and Development Authority (NEDA), with the assistance of the Bank. The highlights of the study were the recognition that the demand for water/sanitation services was well beyond public financing capacity, thus requiring the need for greater private sector involvement, cost recovery, management at the lowest appropriate level, graduation of commercially viable water utilities from concessionary financing, and focusing public financing on investments in sewerage and sanitation that were cost-effective and financially sustainable. On the basis of the review, the NEDA Board, in 1994, adopted resolutions Nos. 4 and 5, which laid out the national policies for the water/sanitation sector. Resolution No. 4 called for more efficient management of water resources and encouraged private sector participation, while Resolution No. 5 addressed the growing problem of human waste, stating that sewerage and sanitation investments should be made on the basis of demand, i.e., on the basis of local preferences and willingness to pay. In June 1995, the National Water Crisis Act was enacted vesting the Executive Branch with special powers to address the recommendations of the Review, including the specific crisis faced by the Metro Manila area. The Bank played a critical role in assisting GOP in developing the new policies, which closely mirrored the direction taken by policies globally and reflected policy principles of providing water and sanitation services on the basis of demand and managing these services at the lowest appropriate level. Under the new policy framework, GOP launched in 1996, with the assistance of IFC, the privatization of the operations of Metropolitan Waterworks and Sewerage System (MWSS), the entity responsible for water, sewerage and sanitation services in the Metro Manila area. Two concessionaires were selected, for the Eastern and Western parts of the city, respectively, and the concession agreements entered into force in August The new framework also led the Bank to redefine its assistance to the sector with the objective of operationalizing the new policies, notably in 4

8 three ways: (i) by promoting private sector participation (PSP); (ii) by supporting Local Government Units (LGU) to deliver water and sanitation services in accordance with their new mandate under the LGC; and (iii) by promoting the role of Government Finance Institutions (GFI) as channels of external and internal funding to finance investments at the local level. Thus, in 1997, the Bank initiated a Public Performance Audit (PPA) System in the Metro Manila area as a complement to MWSS privatization and launched two operations directed at supporting investments by LGUs through GFIs, one through the Land Bank of the Philippines (LBP) for the Water Districts Development Project (WDDP), approved in FY98 and reviewed in this ICR, and one through the Development Bank of the Philippines (DBP), for the LGU Urban Water and Sanitation Project (APL- Loan 4422-PH) approved in FY99. The specific context for the WDDP project and rationale for restructuring is summarized below. On September 9, 1997, the Executive Directors approved two loans: (i) a loan of US$2.3 million to the Republic of the Philippines for piloting a Public Performance Audit System in the Metro-Manila area, to be on-lent for implementation to MWSS, in accordance with a Project Agreement (PA) between the Bank and MWSS - hereinafter referred to as the PPA Loan; and (ii) a loan of US$54.5 million to LBP, with the guarantee of the Republic of the Philippines, to finance Sewerage, Sanitation and Drainage investments in four large secondary cities (Davao, Cotabato, Calamba, and Cagayan de Oro) - hereinafter referred to as the SSD Loan, with the Local Water Utilities Administration (LWUA) tasked to provide technical assistance. The Board approval date coincided with the start of the East Asia financial crisis, which led to the rapid devaluation of the Philppine Peso among other currencies (see evolution of the exchange rate in Annex 3 (e)). For nineteen months thereafter, the loans remained not signed. The SSD Loan Agreement (LA) was not signed because LBP was unable to get the four participating cities to sign Subsidiary Loan Agreements (SLAs), a condition of effectiveness. The LGUs were unwilling to sign for the following reasons: (i) the East Asia financial crisis had led to uncertainty with respect to economic growth; (ii) as a result, the cities were hesitant to borrow for capital-intensive trunk infrastructure; (iii) also, as a result of the crisis, real estate values stagnated or declined thus depressing demand for capital-intensive sewerage investments; (iv) the mayors and city councils questioned on-lending rates offered by GFIs, which were more than double the IBRD lending rate; and (v) LGU commitments to new infrastructure investments were more difficult to come by as 1997 was the third year in the three-year local electoral cycle. Faced with this situation, LBP was reluctant to take the commitment risk. As there was cross-effectiveness between the two loans, the PPA loan could not be signed either. As a result of this, the signing of the two loans was postponed several times, and intensive discussions between the Bank and LBP were launched in early 1999 with a view to reformulating the project, keeping its original development objectives unchanged. LBP was keen to retain the loan as a substantial number of LGUs, after the 1998 elections, had showed interest in accessing LBP funding to finance urban infrastructure. However, there were conflicting views within the Bank as to whether the project was to be abandoned, salvaged, or integrated into the ongoing APL project managed by DBP. After a short Reappraisal mission in March 1999 and a Reappraisal Review 5

9 Meeting in April 1999, it was agreed that, due to the pioneering nature of the project, which would be the first Bank project to channel funds to LGUs through GFIs, the Bank would restructure the loan and convert it from a project-based loan to a program loan, with each sub-project to be designed on the basis of the expressed demand of a LGU. The revisions were aimed at providing flexibility in implementation, using innovative cost-effective technologies, so that any interested LGU could participate, provided it signaled its commitment by entering into a SLA upfront with LBP. The design of the new operation was significantly different in three respects: First, it was converted to a program loan for undefined investments in water/sanitation as opposed to a pre-identified project (for which complete feasibility studies had been prepared prior to Board approval); Second, it called for a wide-open marketing effort to LGUs as opposed to a focus on four large secondary cities under the 1997 design. Given the uncertain number of sub-projects likely to materialize and, as a result of the considerable depreciation of the Philippine Peso following the East Asia financial crisis, the Bank proposed to reduce the SSD loan to US$36.3 million; Third, it assumed that LGUs would be able to complete sub-projects without assistance from a technical agency - under the restructured project, LWUA was not expected to carry out this function. The Bank s management (Regional Vice President) set a deadline of May 15, 1999 for signing the two loans. However, this did not provide enough time for the team to produce a new appraisal document that captured the change from a project to a program approach for the SSD component. Instead, an Operations Manual (OM) agreed between the Bank and LBP, dated April 27, 1999, specified the managerial, financial, economic analysis, administrative, engineering, and environmental policies and procedures for the execution of the component and the eligibility criteria for selection of sub-projects. This document, together with the May 5, 1999, Restructuring Memo to the Board and the new LA, constitute the basis for assessing performance under the SSD component. While the 1997 Staff Appraisal Report (SAR) remains the relevant document for the PPA component. The Board approved the restructuring on May 14, 1999, with appropriate changes to the SSD loan. The PPA Loan was left unchanged at $2.3 million with the cross-effectiveness removed. The two LAs were signed on May 15, The SSD loan became effective on September 10, 1999, and the PPA loan on October 8, Since the LAs pertaining to the original project were not signed, the present ICR covers the project as restructured in 1999 and the LAs signed at this time. This is justified on the grounds that the development objectives of the project, the philosophy behind the restructured project, and the rationale for Bank involvement remained unchanged., However the SAR differs greatly in content and can therefore not be used as a basis for this ICR. In each of the Sections below, the discussion will cover first the PPA loan and second the SSD loan. Since there were two loans, with components very different in nature and implemented by different entities, the ratings will be made separately. 6.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The objective of the project was to assist the Republic of the Philippines in: (i) creating an institutional environment which would encourage the participation of the private sector in water utilities; and (ii) supporting the participating LGUs in improving water, sewerage, sanitation and drainage within the areas of their jurisdiction. 6

10 The key indicators for the PPA loan were the following: 1. Input indicators: consultant appointment to undertake PPA work; and on-schedule establishment of pilot program for PPA in MWSS. 2. Output indicators: pilot reporting formats developed; issue of public audits in sample barangays of MWSS; and positive feedback on utility of PPA from MWSS and other stakeholders. 3. Outcome indicators: satisfactory if GOP decides to extend the PPA system to cover other water utilities. 4. Impact indicators measuring the benefits to communities in terms of service quality improvement (i.e., increased coverage and reliability of water supply). The following indicators were to be measured in sample areas of MWSS: percentage of total annual (or daily average) service hours (in which water is available at acceptable quality and pressure as defined by a concession agreement or Philippines national standards); percentage of households covered; average daily consumption of piped water per person (l/person); average daily (or annual) cost of piped water consumption; and percentage of non-revenue-water (NRW). The key indicators for the SSD loan, as agreed by the Bank and LBP in the OM, were the following: 1. Output indicators: additional number of households in the project areas using sanitation services according to an agreed Barangay Environmental and Sanitation Plan (BESP); length of sewerage collectors and sewage treatment capacity added to their system or number of onsite sanitation facilities installed; and number of LGUs with new legal and regulatory frameworks approved by the local legislature that make possible the contracting-out of the operation and maintenance (O&M) of the systems. 2. Outcome/impact indicators: at least four LGUs outside Metro-Manila successfully complete project implementation, i.e., provide the planned quality sanitation services to their communities; constructed sewerage and feeder water supply network outsourced to the private sector or water district; and number of successor sanitation projects prepared and approved by GOP. 7

11 6.3 Revised PDO and Key Indicators (as approved by original approving authority), and reasons/justification The project objective and the key indicators were not revised. 6.4 Main Beneficiaries, original and revised (briefly describe the "primary target group" identified in the PAD and as captured in the PDO, as well as any other individuals and organizations expected to benefit from the project) There were two primary target groups: 1) GOP was expected to capture policy-related benefits in two ways: (i) the PPA Loan, as a pilot exercise, was expected to strengthen private sector confidence to engage in long-term contracts with water utilities, providing much needed additional investments, management expertise and clientoriented services through which service delivery and coverage would improve; and (ii) the SSD Loan was to enable GOP to prototype technical, financial and institutional procedures through which the sanitation policy framework formulated in would be translated into investment programs in secondary cities and towns. 2) consumers in participating LGUs were expected to capture project-related benefits through improved access to water, sanitation, and drainage services on a sustainable basis. Expected benefits were in terms of reduction in morbidity caused by gastro-intestinal diseases, medical expenses, and working days lost due to illness as well as reduction in environmental degradation. 6.5 Original Components (as approved) The LA described the two components as follows: Part A: Public Performance Audit. (Base cost US$2.5 million). Development and piloting of a public performance audit system to measure the performance of concessionaires for water and sewerage services, through the provision of technical assistance. Part B: Water, Sewerage, Sanitation and Drainage Services. (Base cost US$31.6 million). 1. Improvement in the water, sewerage, sanitation and drainage services in participating LGUs through the construction of: (i) water, sewerage and drainage systems in barangays, (ii) on-site and communal sanitation facilities for residents of such LGUs, (iii) a sewerage system consisting of house connections, feeder and trunk sewers; (iv) a sewage treatment plan; and (v) drainage facilities. 2. Strengthening the capability of the Project Management Office [of LBP] to support the Participating LGUs in the design of their respective Sub-projects and to manage the overall implementation of the Project, through the provision of consultants services. Two types of investments were envisaged under the SSD component: Capital-intensive trunk investments in sewerage, drainage and wastewater treatment infrastructure were to be based on the priorities of LGUs as expressed through Council Resolutions. Base costs for 8

12 sewerage investments were indicatively estimated at USS$10.6 million, and for drainage investments at US$12 million. The second type of investment consisted of neighborhood level or feeder investments in barangays identified by LGUs as requiring immediate environmental and sanitation investment programs. Residents in these subproject areas were to be presented with service options in terms of water supply, sanitation, neighborhood drains and solid waste management, with the LGU specifying the budget ceiling to be financed by the loan and/or city equity. Through a participatory process involving NGOs and Partner Organizations, BESPs were to be prepared. These plans were to include specifications on how financing costs were to be shared between the LGU and communities, cost recovery ensured, and the suggested role of the operator of the systems, if any. Base costs for BESP investments were indicatively estimated at US$8.9 million. See Annex 3 for costs and financing plan. 6.6 Revised Components SSD component. By amendment dated June 26, 2000, the description of Section 2 of Part B was slightly modified to cover the financing of the preparation of feasibility studies, as follows: 2. Strengthening the capability of the Project Management Office [of LBP] to support the Participating LGUs in the preparation of feasibility studies, the design of their respective Sub-projects and to manage the overall implementation of the Project, through the provision of consultants services. Since this was a minor revision, it was approved by the Country Director. 6.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) The PPA loan was closed on June 30, 2003, the original closing date, with an undisbursed balance of US$334,323 cancelled. Despite the devaluation of the Peso over the period of the loan, no cancellations were requested. The SSD loan was substantially scaled back as a result of four cancellations at the request of LBP, totaling US$18.5 million with an undisbursed amount of US$1.7m cancelled (total US$ 20.3m). The cancellations were prompted by: (i) continued depreciation of the Peso from P 39/US$1.00 in 1999 to P 51-55/US$1.00 in ; (ii) loss of interest or withdrawal of several LGUs before signing a SLA; and (iii) as a result, reluctance of LBP to pay commitment charges while uncertainty regarding the likelihood of identifying other interested LGUs remained. Despite these cancellations, as a result of exchange rate fluctuations the actual Peso value of sub-loans did not change substantially. All cancellations were approved by the Country Director. The original closing date of June 30, 2004 was extended twice: to December 31, 2005; and then to December 31, 2006, in order to allow completion of investments in several LGUs. In May 2000, the Bank also approved an amendment to the LA to allow the preparation of feasibility studies by the Project Management Office of LBP (LBP-PMO) to assist LGUs that requested this kind of support. 9

13 7. Key Factors Affecting Implementation and Outcomes 7.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) The PPA component was prepared as part of the dialogue between the Bank, IFC, GOP and MWSS on the privatization of MWSS. There was strong commitment at the time on the part of the central ministries (Department of Finance and NEDA) to develop and extend the PPA, with the help of LWUA, to other towns in order to promote PSP in the sector. At entry, the Bank made special efforts to ensure a successful launch of the audit through workshops and seminars on the methodology and objectives of a PPA system. However, as LWUA s formal role in the project had been eliminated during restructuring, it was unclear how the roll out of PPA to other utilities outside Manila would be managed. The PPA was later renamed Public Assessment of Water Services (PAWS). For the SSD component, project preparation, design, and quality at entry were negatively affected by the developments described in Section 6. The Bank team had little time to assess the practical implications of launching a program loan, with few built-in safeguards against the uncertainties ahead. As a result, there were some shortcomings at entry with respect to ensuring that LGUs had technical assistance they required to implement sub-projects. While in the 1997 design technical support to the four LGUs was to be provided by the Support Office of the LWUA, once the focus shifted from four WDs to an open menu for all LGUs, LWUA was no longer party to the project. LGUs were expected to finance any technical assistance they required on their own and LBP, a financial institution with limited technical capacity, was to mobilize any additional technical assistance to LGUs through the Construction Supervision Consultant (CSC). In mid 2000, the Bank took steps to correct this, amending the loan agreement to allow the use of sub-loans for sub-project preparation/feasibility studies. However, for the BESP model, which was untested, and which was based on the principles of a demand-driven and bottom-up approach, participatory process, and flexibility in design based on consumers choice and willingness to pay, sub-project preparation took between six months and one year to complete, slowing disbursements and increasing costs to the participating LGUs in terms of commitment fees. In the restructuring memo to the Board, the following risks were identified: (i) LGUs backing out before project implementation by failing to enter into a SLA - this was recognized as unavoidable, and the act of widening the pool of LGU beyond the original four LGUs was expected to mitigate this risk; (ii) converting from project to program approach without buy-in of sub-borrowers, and without fully tested technical and institutional rules - this was also considered unavoidable as the restructuring of the loan left little time to secure sub-loan agreements from LGUs. Although it was also recognized as a weakness (that could lead to slow or partial disbursement), the Bank felt that the risk was balanced by strong GOP and borrower commitment and by a strong pipeline from LGUs; (iii) weak LGU commitment to environmental sanitation investments, particularly sewerage (trunk system, wastewater treatment), partial loan cancellation, and low interest in capital-intensive trunk infrastructure following the onset of the 1997 financial crisis, were considered as sufficiently mitigated by the innovative features and added flexibility offered by the project; and (iv) the potential for changes in LGU priorities associated with the three-year election cycle was to be 10

14 mitigated by having appraisal and implementation of a substantial pipeline of sub-project investments set to coincide, as much as possible, with the start of the election cycle. Except for the first risk mentioned above, the others were clearly underestimated, given the limited institutional capacity and the highly volatile political life at the local level. However, the project was a high risk/high reward operation that led to several successor operations within and outside the Bank that have drawn on these lessons in their design (see Section 7.5). Finally, Bank files are silent on why the name of the project was not amended in 1999, but, clearly, it then became a misnomer. 7.2 Implementation (including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) PPA component. The component consisted of developing and piloting a public performance audit system in 50 barangays in both the Eastern and Western service areas of Metro Manila to measure the performance of the two concessionaires. The audit was carried out by consultants who developed the methodology and tested it with the inhabitants of the 100 barangays selected for this purpose. From the beginning, the National Engineering Center of the University of the Philippines (UP-NEC) was enjoined to the study to ensure transfer of know-how, technology and expertise. The PPA audit was successfully completed in July SSD component. Some 50 LGUs expressed interest to borrow from LBP for a total investment of about P1 billion, well enough to have used up the original US$ 36.3 million Bank loan. About half of the requests were approved on the basis of LBP standard procedures for assessing LGUs borrowing capacity. Out of these, ten LGUs signed a SLA with LBP, but four dropped out before project implementation, one because the municipal council did not ratify the SLA, one because of the perceived complexity of Bank procurement requirements, and two because they chose to pursue other financing options which in the end did not materialize. Other reasons for the high drop out rate are: (i) competition from new ODA funded facilities that were later established in LBP and DBP; and (ii) active marketing of other financing options, including bond flotation. As a result, the large demand for the facility in the early part of the project gradually evaporated, leading LBP, as indicated above, to cancel a total of US$ 20.3 million. Thus, by the end of the project six LGUs had received loans, four of which financed trunk investments, and the other two financed feeder infrastructure - water supply, sanitation, micro-drain and solid waste management sub-projects - in 15 Barangays. For the trunk investments, four cities (Cabanatuan, San Fernando, Candon, and Calbayog) chose sewerage, drainage and wastewater treatment infrastructure to abate the occurrence of flooding in their urban core, deemed as hindering economic growth and identified as a priority in their City s Development Strategy (CDS) 1. The interest on the part of these four cities in connecting households to a sewer system was limited as most households were already using private septic tanks. No separate sewerage networks or wastewater treatment plants were eventually built as these LGUs were unwilling, under the circumstances prevailing at the time, to invest in what were perceived as large scale projects that required land for trunk mains and wastewater treatment plants, were 11

15 considered disruptive, and required significant financial outlays. Thus, lower cost options such as septic tanks and combined sewerage/drainage systems that matched consumers preferences were constructed, along with the purchase of equipment for maintenance of these systems. For the feeder investments, Panabo City and the Province of Palawan identified low-income periurban and rural barangays in which water and sanitation were priorities. Through a consultative process, Barangays were assisted to prioritize service improvements and a survey of preferences was conducted to establish the level of commitment to the subproject. Water supply tariffs were based on sixty percent of the potential users expressing willingness to pay O&M costs. Initial investment costs were partly or fully covered by the LGU and agreements outlining cost sharing arrangements signed with all Water User Associations or Cooperatives (see Section 7.5 below). In both Panabo City and Palawan, households opted for water supply services, with minor sanitation investments fully subsidized by the LGUs. Annex 4 details outputs and construction costs broken down between trunk and feeder investments and between water and sanitation investments. The following factors affected implementation negatively: (i) the short election cycle coupled with political interference inevitably impacted project execution, for instance in the selection of the BESP barangays or in excluding or delaying technically desirable but politically unattractive sub-projects (a planned sewerage treatment plant in Cabanatuan was postponed in favor of a bridge); (ii) the technical assistance requirements of the LGUs proved more extensive than initially expected: although well equipped to manage the financial aspects of the project, LBP was not equipped to handle capacity building and institutional development aspects of LGU sub-projects, relying de facto and by default on the LGU to manage this with their own staff or consultants with some limited support from the CSC; (iii) the internal organization and staffing of the PMO was adjusted midcourse leading to less interaction between the PMO and LGUs, although participation of LBP s regional lending centers increased - while closer to the client, LBP lending centers were even less well equipped to handle technical issues; (iv) in several cases, due to lack of reliable cost estimates, sub-projects had to be scaled back or phased to match net borrowing capacity limits; (v) with respect to BESP, the participatory process lengthened the period required to prepare feasibility study; and (vi) environmental clearances and water development permits took long to be obtained due to bureaucratic obstacles. 7.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization PPA component. Key monitoring indicators were very comprehensive and well designed, reflecting the careful preparation of the component. Collection of the technical data was carried out as planned during the pilot phase to develop the methodology of the audit, with some initial difficulties with provider (concessionaire) data. The results of the pilot phase were used by the regulatory office of MWSS (MWSS-RO) and UP-NEC to design the subsequent and ongoing phases of the program, gradually expanding coverage to include the whole MWSS service area and to include sanitation. More importantly, the indicators were used by one of the concessionaires, Manila Water Company, Inc. (MWCI) to design its own monitoring program. This allowed them to closely monitor and improve performance in key areas being monitored by MWSS. SSD component. Owing to the fact that at restructuring this was converted to a program loan, the exact nature of investments, and therefore physical outputs, were unknown. Targets and intended outcomes were not identified at the outset and no baseline (such as number of households using 12

16 sanitation services, or length of sewerage collectors, etc.) was established. With the exception of one case, the indicators agreed between the Bank and LBP in 1999 were defined in general terms without any quantitative targets to be achieved and to be monitored in any measurable way during project execution. Most indicators were therefore met and reported as satisfactory. LBP is developing a monitoring system that will improve sub-project reporting and tracking across its LGU portfolio. 7.4 Safeguard and Fiduciary Compliance (focusing on issues and their resolution, as applicable) PPA component. There were no FM, procurement, or environmental issues to report. SSD component. The FM arrangements were satisfactory, both at the head office of LBP and at its lending and accounting centers. However, capacity at the LGU level varied fairly considerably and as a result, in the early stages of project implementation, some LGUs did not maintain separate project accounts. The matter was resolved by requiring LGUs to keep dedicated accounts with LBP where counterpart funds and sub-loan proceeds were deposited. With respect to environment safeguards, oversight rested with the PMO, which recruited an environmental specialist and a social development specialist. The PMO satisfactorily coordinated compliance of all sub-projects with Bank guidelines and national environmental rules and regulations. Since the participating LGUs were not acquainted with Bank procurement guidelines and procedures, the project reviewed the first contract for works and goods for each LGU. To assist LGUs, model bidding documents were prepared for all LGUs and LBP provided focused assistance through workshops and seminars on selection of consultants and bid evaluation. In addition, Bank and LBP staff conducted joint fiduciary reviews covering FM and procurement. However, the unfamiliarity of some LGUs with Bank guidelines and procedures remained causes of delay and lapses in documentation. LBP has refined and improved its LGU lending procedures to take these early lessons into account and the Bank and other development partners have agreed with GOP on harmonized procurement rules that will streamline requirements and processes considerably. As for the social safeguards, an abbreviated resettlement action plan was prepared and satisfactorily implemented for 13 project-affected persons as a result of the drainage improvements in Calbayog City. A relocation site was allocated and compensation paid by the City Government to the 13 persons. No other subprojects, required resettlement actions. 7.5 Post-completion Operation/Next Phase (including transition arrangement to post-completion operation of investments financed by present operation, Operation & Maintenance arrangements, sustaining reforms and institutional capacity, and next phase/follow-up operation, if applicable) PPA component. Upon completing the pilot phase of the audit in July 2001, MWSS launched two transitional activities: (i) on-the-job training of UP-NEC staff to extend the audit over the whole MWSS service area, and (ii) re-engineering of MWSS monitoring system on the basis of the pilot project s findings. The audit was renamed Public Assessment of Water Services (PAWS) and a 13

17 second survey conducted to expand coverage to 420 barangays in A third survey was undertaken in November 2006 covering 740 barangays, out of a total of 1,700 barangays. Full survey coverage is expected within 2-3 years. So far dissemination of performance indicators via the media has been limited to overview information, although an interactive website that would allow consumers to review information online is currently being piloted. MWSS-RO financed the 2003 survey from its budget, and, through continued dialogue with the concessionaires, agreed on a cost sharing plan for the 2006 survey. Thereafter, the cost of future surveys would be fully recovered in the rate rebasing. The results of PPA have been used by MWCI to enhance its public image with its customers and with external agencies as well as its position in the sector as a major private provider of water services. Furthermore, the extension of PAWS to sewerage and sanitation services in Metro Manila on a pilot scale is included in the Global Environment Fund (GEF) Manila Third Sewerage Project (MTSP) (TF ). The application of a more limited version of PAWS to water utilities outside of Metro Manila is also being discussed under a separate Bank project -Local Government Support for Provincial and Regional Water Supply. SSD component. For drainage investments, the LGUs concerned have assumed the operation and maintenance costs within their existing budget. So far, although plans to increase real property taxes and introduce other charges were mentioned, none have found it necessary to raise taxes to cover higher O&M costs. For feeder investments, operation of the water system is the responsibility of Water User Associations (registered as private business entities with the Securities and Exchange Commission - SEC) or Cooperatives created for this purpose. Staff of the Association or Cooperative operate and maintain the system based on water tariffs and sanitation charges agreed by the community at the time of the BESP process. As discussed in greater detail in Section 9 (Risk to Development Outcome) and in Annex 5 (Economic Analysis), a number of these institutions are facing significant challenges (e.g. due to rising energy costs which constitute the largest expenditure item). The sustainability of these systems is therefore closely being monitored by the LGUs (Palawan Province and Panabo City) which applied for loans for these systems and which continue to provide grants for any major or unexpected repairs. LBP does not have a system in place to continue monitoring sub-project performance after project completion. Its role in the post project period is limited to monitoring sub-loan repayment. 8. Assessment of Outcomes 8.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) PPA component. The development objective (DO) of the component is fully consistent with one of the major tenets of GOP s medium-term development plan and the Bank Group CAS, i.e., to improve the enabling environment for PSD by strengthening regulatory agencies and promoting private sector finance of infrastructure projects. The CAS specifically addresses the need to continue strengthening the regulatory capacity and independence of MWSS-RO. The relevance of PPA has been demonstrated by its continued expansion in the MWSS area and use in 14

18 monitoring the concessionaires and its expansion to cover sanitation functions. The failed concession in West Manila was successfully rebid in January MWSS-RO will presumably be in a better position to set targets and monitor performance using PAWS. SSD component. The DO of the SSD component is also consistent with GOP s priorities and the CAS, a major pillar of which is to support replicable successes in delivering public services and improving public institutions at three levels, national, local and private sector. The objective of supporting LGUs in improving water and sanitation services is consistent with the specific CAS strategy of assisting LGUs through a coherent performance and capacity building framework encompassing revenue mobilization, planning and budgeting, fiduciary controls, and local service delivery. The design of the operation is also consistent with two features advocated in the CAS local platform : a participatory approach to encourage greater transparency and accountability in local government decision-making; and greater reliance on GFIs for the channeling of funds. 8.2 Achievement of Project Development Objectives (including brief discussion of causal linkages between outputs and outcomes, with details on outputs in Annex 4) PPA component. The objective of creating an institutional environment which would encourage the participation of the private sector in water utilities was only partly achieved for three reasons: (i) although the pilot audit was satisfactorily completed and scaled up after loan closing, and despite the fact that MWSS has re-engineered its monitoring system, it may take longer than expected to complete the full scale audit because of financing difficulties experienced by MWSI (although this may change with the introduction of new owners of MWSI in January 2007); (ii) the results of the most recent audit have not been disseminated to GOP agencies nor to the public; and (iii) while GOP has initiated actions to have a more independent regulator in place (a bill for the establishment of a Water Regulatory Commission was submitted to Congress in 2000), approval of the bill is still pending. Although an executive order (EO 279 of 2004) was issued designating NWRB as the economic regulator for the sector, NWRB has not been able to assume this role because they lack adequate resources. In this context, the expansion of PAWS beyond Manila has not been possible. SSD component. The objective of supporting participating LGUs in improving water, sewerage, sanitation and drainage within their area of jurisdiction was achieved since there is a causal link between project outputs and outcomes in terms of health and other benefits due to access to safe water and improved sanitation and environment: (i) in the four cities that invested in drainage, an estimated 261,000 people benefit from improved drainage, and therefore from reduced exposure to health hazards; and (ii) in the BESP barangays, some 3,500 households (or about 20,000 people) in poor communities now have access to safe water (expected to rise to about 5,300 by the design year), over 400 have on-site sanitation, and over 1,650 have access to communal sanitation facilities, all of which have a beneficial health impact (Annexes 4 and 5). 15

19 8.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) PPA component. Not applicable. SSD component. There was no EIRR computed for the project at reappraisal as it was a program loan with no preidentified projects. The OM therefore included a framework for economic analysis of subprojects, although it was not applied during project implementation because the investments funded were mainly drainage and small scale water supply systems (less than 700 connections), for which it was deemed unnecessary to undertake economic analysis. The method of economic analysis adopted in the ICR is a least cost analysis supported by an identification of project benefits and based on the willingness to pay of LGUs and the beneficiaries (see Annex 5). From a planning perspective, the economic rationale for the selection of investments at the LGU level was generally sound. The investments were an output of a systematic planning process involving broad based participation from stakeholders, local executives and the local legislature. At the sub-project level, the size, scope and design of investments were such that they maximized benefits within the LGU s net borrowing capacity as defined by GOP. The willingness to borrow and to assume loan repayment by the LGUs and the willingness to pay for the services by the beneficiaries were a measure of the economic value and consumer surplus attached to these investments in terms of economic, health, and environmental benefits. They were primarily the basis for the economic justification of the investments. Cost recovery was from a combination of tariffs and general taxes. However, and particularly for the BESPs, cost efficiency of investments was influenced by the quality of the consultations during sub-project preparation. In several cases, the per capita cost of investments was high and/or running costs higher than anticipated due in large part to rising energy prices. These factors were compounded by the fact that utility operators had limited prior experience operating systems and limited means to improve their capacity over the long-term. In contrast, the trunk investments being operated by the cities, where capacity limitations are less severe, are deemed to be more sustainable (see Annex 5 for details). 8.4 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs, and efficiency) Rating: PPA: Moderately Satisfactory; SSD: Satisfactory PPA component: Moderately satisfactory. The uncertainty of achieving the objective of completing the audit in the MWSS area - although due to extraneous factors such as the failed concession in one part of Manila and initial problems securing financing justifies the rating. Implementation of the pilot audit per se even if successfully completed was not the objective. While the pilot audit has had a positive impact on the performance of the concessionaire in Manila East, it is uncertain whether a similar result will be possible in Manila West, which has recently 16

20 been successfully rebid. It is worth noting the positive unintended outcome achieved by MWCI adopting a monitoring system that mirrors the PPA system. This has led to measurable improvements in performance, increased awareness and responsiveness of concessionaire to public perception and improved public perception of the quality of service. SSD component: Satisfactory. Consistent with achievements - as measured against output and outcome indicators (Annex 1) - the outcome of the SSD is rated satisfactory. A range of benefits in health, economic, social aspects were realized in all LGUs, despite some shortcomings in efficiency, which resulted from inevitable political interference and uneven quality in the participatory process in the BESP investments. However, on balance, the component has demonstrated the feasibility of LGUs borrowing funds to finance investments in complex socioeconomic improvement sub-projects such as the BESP, provided there is sufficient local technical and institutional capacity to operate and maintain the investments in a sustainable manner. 8.5 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development SSD component. The BESP sub-projects had a substantial impact on improving the quality of life among low income and poor barangays where piped-water supply and sanitation were almost nonexistent. The new investments have measurably improved the quality of life for households in farflung barangays in Palawan Province and Panabo City. Women identify several benefits of having water in their house, including an easier and more comfortable life, cleaner and healthier family, and more time to do other things than waiting for hours fetching water. Children have more time for studying and playing and men consider themselves richer because they have access to piped water. Overall, the LGUs and households involved in the project have a greater appreciation of the need to contribute towards operation and maintenance of systems in order to ensure sustainability, although their reliance on seasonal income poses a challenge for revenue collectors. Several BESP sub-projects have expanded their services to meet the needs of neighboring communities. (b)institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) PPA component. The audit had a positive institutional development impact in three areas: (i) MWSS-RO has perfected its monitoring system; (ii) one concessionaire has upgraded its own monitoring system to mirror PAWS; and (iii) UP-NEC has developed a capacity to conduct performance audits that could be extended to other urban centers - the range of indicators is currently being extended to cover sanitation. SSD component. The project had a positive impact on building LBP s lending program to LGUs. As the first ODA projects to support lending to LGUs, WDDP played an instrumental role in increasing access to long term financing for more complex projects such as water supply and sanitation. Participating LGUs have built up significant capacity to handle FM and procurement aspects/requirements of sub-projects; and this improved capacity will prove valuable for future 17

21 borrowing, e.g. from the successor project (SSLDIP) which is larger than the WDDP. The four cities which undertook drainage investments have built up their technical capacity to implement and maintain this type of project. However, the project has had a mixed impact on those LGUs that borrowed for feeder investments, largely because they lack the resources and technical know how to maximize the project s benefits by extending just in time support to BESP recipients. While the project had expected that private sector involvement in the operation and maintenance of BESP investments would yield additional benefits, this was not the case as investments were much too small to be financially attractive to the formal private sector and as a result, BESP communities created Associations or Cooperatives, registered as private entities with the SEC, that will have to acquire the necessary skills and capacity over time. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) 8.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) SSD component. Three types of beneficiary surveys were conducted under the BESP subcomponent: (i) Community Mapping, wherein households were interviewed to determine what type of environmental sanitation improvement was needed by the households and the community; in almost all sub-projects, piped water and sanitation were the priorities; (ii) in the Willingness to Connect (WTC) survey, more than 60 percent of the target households signified their interest in connecting to a piped-water system and commitment to pay the water and sanitation tariffs computed to cover the cost of repayment of the loan and/or the cost of O&M (see Annex 8 ); and (iii) during the O&M phase, a beneficiary consultation was conducted on the benefits of the project; almost all households indicated that their quality of life and their environment had improved. Stakeholder workshops/consultations with the LGUs at the provincial, city, municipality and barangay levels were also conducted to determine the demand and level of commitment to the project. For each of the BESP sub-components, project orientation workshops were conducted at the barangay level to involve as many households as possible in determining the type of environmental sanitation improvement they wanted and were willing to pay for. Training on leadership and basic organization and financial management was provided by the Provincial PMU of Palawan and the City of Panabo to all Associations and Cooperatives managing BESP subprojects. In addition, officers and staff of the five Associations and Cooperatives in Panabo City were sent to the WD of Davao City for an orientation on the basic O&M of a piped-water supply system. 9. Assessment of Risk to Development Outcome Rating: PPA: Significant; SSD: Moderate PPA component. Significant. The rating is based on an assessment of four probabilities: (i) there 18

22 may be further delay in promoting the extension of a PPA system to water utilities outside Manila; ( ii) arrangements for transfer of economic regulation function from LWUA to NWRB may not work as envisioned and within the prescribed time frame; (iii) the extent of PSP in secondary centers is unlikely to be significant due to political uncertainties/considerations at the local level; and (iv) in the absence of routine dissemination of the PPA results through the media, public advocacy will not materialize. Those risks are only partly mitigated by a Bank project currently at identification stage - that could expand the use of the public audit system in LWUA, support regulatory reforms and support PSP transactions. SSD component. Moderate. For the trunk investments, the main risk to the development outcome, i.e., increased health benefits, is the lack of maintenance of the drainage systems. This risk is moderate, as the cities concerned have the willingness, political interest, and resources to operate and maintain the systems satisfactorily. For the BESP investments, the risks are twofold: (i) the limited capacity of the private sector entities (Associations or Cooperatives) to collect adequate revenue to sustain the systems; and (ii) limited resources available to the sub-borrowers to provide the necessary technical assistance to BESP as and when required (see Annex 5 for details). However, on balance, and since the trunk investments represent about 75 percent of disbursements under the SSD loan, the risk for the SSD component as a whole is moderate. 10. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues) 10.1 Bank (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: PPA: Satisfactory; SSD: Moderately Satisfactory PPA component. Satisfactory. There were no shortcomings in identification, preparation or appraisal. The Bank prepared the component very carefully and convincingly persuaded GOP, MWSS, and IFC of the usefulness of launching a pilot PPA audit as a tool to promote PSP. At entry, it played a critical role in ensuring the soundness of the methodology. However, the expectation that the PPA would be extended to other water utilities, was perhaps overambitious given the existing institutional framework and MWSS-RO s limited role in this regard. SSD component. Moderately satisfactory. The high risk/high reward approach introduced at restructuring allowed the project more flexibility to innovate, thereby responding to GOPs decentralization and sectoral priorities, supporting efforts to increase access to finance through financial intermediaries, and bringing global experience to bear on the institutional reform process. (as in the case of the privatization of MWSS). This approach has paid off; for instance, access by LGU to GFI financing has improved. Unfortunately, the circumstances in which the project was restructured left no or little room for properly assessing the institutional framework, both at LBP and LGU levels, in which the project was to be executed. As such, the institutional capacity of the LGUs, especially those at the lower level such as municipalities or barangays, and of the private entities - Associations or Cooperatives was overestimated and insufficient attention was therefore 19

23 paid to building capacity in these newly formed entities. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: PPA: Satisfactory; SSD: Moderately Satisfactory PPA component. Satisfactory. The pilot study and the transition activities were completed in August 2002, during which time the Bank supervised the component regularly. This dialogue, with MWSS and the concessionaires, continued even after project closing, through other related projects that the Bank was supervising. For example, the rate rebasing exercise currently being supported under the GEF-MTSP will ensure a stable source of financing for the MWSS-RO and the expansion of indicators to cover sanitation is being supported through the same GEF-MTSP. In addition, the Bank has continued its effort to assist GOP in expanding the use of PPA. The expansion of PPA to WDs is currently being considered under the proposed LWUA project. SSD component. Moderately satisfactory. The Bank played an active role in monitoring construction of the physical investments as well as in assisting the different stakeholders to comply with Bank safeguards and fiduciary issues. Given their demand driven nature, the BESP subprojects were fairly complex and the Bank teams were constituted in a manner that reflected the diverse skills required. However, weaknesses in institutional capacity at LGU level, and of Associations and Cooperatives engaged to manage the systems, were not sufficiently addressed. This raises the question whether a technical assistance component could have been added financed either through parallel grant financing, or restructuring of the loan given the large uncommitted balances (although it is unclear that this would have been acceptable to LBP given its commercial nature). In the absence of a mid-term review, and given the delays in getting SLAs in place leading to a late start for most projects this opportunity did not arise. (c) Justification of Rating for Overall Bank Performance Rating: PPA: Satisfactory; SSD: Moderately Satisfactory PPA component. Satisfactory. The rating reflects both the high quality at entry and significant efforts made throughout the project to address shortcomings. While several external factors, including the financial crisis of the late 1990s, affected the eventual outcome of the pilot audit, the Bank team continued support for MWSS-RO beyond the timeframe outlined in the loan agreement through other parallel projects (e.g. the GEF-MTSP supported rate rebasing effort will secure stable financing for the continuation of PAWS). SSD component. Moderately satisfactory. Through the innovative approach promoted at restructuring, the Bank played an important role in demonstrating that a demand-driven approach to infrastructure investments with financing through a GFI is a workable formula to implement the sector policies formulated in the 1990s, provided that the LGU has the technical and institutional capacity to implement, operate and maintain the investments. However, with the limited time available at restructuring, the Bank overestimated LGU capacity to implement and manage sub- 20

24 projects coursed through GFIs, and underestimated the risks attendant to the local political decisionmaking process, and the short electoral cycle Borrower (a) Government Performance Rating: PPA: Moderately Unsatisfactory: SSD: Moderately Satisfactory PPA component. Moderately unsatisfactory. While the government (excluding MWSS which is rated under 10.2 (b)) demonstrated ownership and commitment to a PPA system at preparation and saw to it that implementation of the pilot was successful, it failed to sustain reforms required to ensure coherence in the sector, including the congressional bill to establish an independent regulatory body for the water/sanitation sector, despite participating in deliberations at Congress and a study tour to US and UK aimed at increasing awareness of sponsors of the bill in both houses and members of government (NEDA, DOF, Office of the President). When it became apparent that Congress would not pass the bill, GOP (through Executive Order (EO) 279) assigned the task of economic regulation of WSPS outside of Manila to NWRB to address the conflict of interest within LWUA (being both financier and regulator of WDs) and the growing interest of LGUs in engaging in contractual arrangements with the private sector. However, it failed to ensure that the transition took place and that NWRB had adequate funding to fulfill their mandate. SSD component. Moderately satisfactory. At preparation, GOP played a constructive role in ensuring implementation of the 1990 reforms. However, because of the higher priority accorded to water services by LGUs, sewerage and sanitation received less attention. Nonetheless, there is continued interest within government in supporting the search for feasible solutions that could still somehow move the sector forward but within the willingness to pay of consumers. This is manifested in the support for piloting low cost technologies (e.g., communal sanitation systems, combined sewage/septage treatment, combined sewerage/drainage systems) by MWCI in the Bankfunded Manila Second Sewerage Project (MSSP) and MTSP, and with the Department of Environment and Natural Resources (DENR) under GEF-MTSP. Left to their own devices, on balance, the LGUs that opted for drainage investments performed satisfactorily, but some of those that opted for BESP investments were constrained by their limited capacity, despite their commitment to improve services in low-income communities. (b) Implementing Agency or Agencies Performance Rating: PPA: Satisfactory; SSD: Moderately Satisfactory PPA component. Satisfactory. MWSS showed commitment to the audit, as evidenced by integration of its results into its monitoring system. It was prompt to assign staff and recruit UP- NEC to carry out both phases. However, there were delays in starting the full implementation phase and the dissemination strategy via the media had not been launched at closing. As already noted, one concessionaire has cooperated closely with MWSS in carrying out the audit. However the other perceived the performance audit as unfair because of its weaker position: (i) following the 1997 East Asia financial crisis, it suffered most from the peso depreciation of more than a 100 percent to the 21

25 US dollar; and (ii) the west zone was a more complex technical operation to work in and manage (networks in West Manila are over 100 years old). This, compounded by other factors, caused the company to declare force majeure and ultimately bankruptcy in MWSS has a limited role to play in promoting or extending the PPA system outside Metro Manila as this falls under the responsibility of GOP and national agencies. SSD component. Moderately Satisfactory. This was the first loan of its kind from any ODA to LBP, who demonstrated a keen interest in the project during preparation and reappraisal as it was perceived as a vehicle for developing its lending program to LGUs. The project succeeded in expanding LBP s lending to LGUs as well as increasing access to finance through other channels LBP s cumulative lending to LGUs has grown from Php 11.9 billion in lending to LGU borrowers in 2000 to 25 billion in LBP conducted several roadshows throughout the country to promote the project and its concept and, during implementation, managed the financial and fiduciary aspects of the component satisfactorily, with diligence and effective control over its network. However, it did not have the technical capacity within its PMO to provide support to lower level LGUs. This task was therefore assigned to the CSC, who was not adequately equipped to undertake certain tasks (e.g. training and capacity building) that require a long term presence. Finally, the PMO/LBP did not build the capacity to manage in a consistent and systematic manner the information relating to project implementation/monitoring. These lessons have not been lost on LBP and have been built into the successor project - SSLDIP (Ln 4338 PH). (c) Justification of Rating for Overall Borrower Performance Rating: PPA: Moderately Satisfactory; SSD: Moderately Satisfactory PPA component. Moderately satisfactory. The rating reflects on the one hand the satisfactory carrying out of the audit albeit with some delays and, on the other, the uncertainty that its medium- to long-term development objectives will be achieved. It is unclear whether PSP in the sector will be promoted as a result. SSD component. Moderately Satisfactory. LBP performed well with respect to its handling of financial and other fiduciary aspects of the project; however, shortcomings in technical and institutional aspects of the project were not adequately addressed. These emerged during implementation, although their origin may lie in the design of the operation. GOP did not pursue the needed reforms to create an environment in which LGUs, especially the small and weak ones, are expected to manage investments in water/sanitation. LGUs did not have the capacity and the financial resources to mitigate the risks to development outcome, and LBP did not consider the responsibility for provision of technical assistance to LGUs as one of its mandates a finding to evaluate more thoroughly when assessing the role of GFIs as conduits for development finance. 11. Lessons Learned (both project-specific and of wide general application) PPA component. In the absence of an effective regulatory framework, the replication of PAWS for utilities outside Metro Manila is unlikely to happen. MWSS has succeeded in securing sustainable 22

26 financing for PAWS through the concessionaires replicating the PAWS system outside Manila will depend on the extent to which the conditions for sustaining it can be created. Given the difficulties faced by NWRB in assuming a broader regulatory mandate as proposed under EO 279, the expansion of PAWS outside Manila would require GOP action to revive the stalled reform process and make available adequate resources. The planned Local Government Support for Regional and Local Water Supply project will study the possibilities of expanding PAWS outside Metro Manila. SSD component. When designing, implementing and managing complex sub-projects (such as private sector contracts for water supply or solid waste landfills), LGUs often require specialized technical assistance and capacity building support from national government or the private sector. This support goes beyond routine capacity building in areas such as procurement, financial management and includes the participatory methodology, design of affordable tariffs, establishment of regulatory frameworks. As most LGUs and GFIs are unlikely to have this expertise in-house, the borrower or implementing agency should ensure that the design of on-lending programs takes into account these technical assistance requirements. GFIs may also consider designing special financing instruments for special purpose sub-projects (e.g. BESP which require extensive consultation and participation). In line with the rapid growth of GFI lending to LGUs (which has doubled since 2000), GOP should assess how best to strengthen the development finance function of these institutions. While LGUs are expected to exercise autonomy in implementing and managing their sub-projects, LBP also have a role to play in ensuring and monitoring the quality of inputs (economic viability) and outputs (functioning infrastructure). This role is currently limited and in WDDP, was assisted by a Construction Supervision Consultant. Under the follow-on operation SSLDIP (LN PH), LBP will strengthen its sub-project monitoring system to track implementation progress across its LGU portfolio. Further effort may be required to strengthen in-house technical capacity. The emphasis on compliance with the BESP process rather than on the quality of the participatory approach in determining demand and willingness to pay, as well as political considerations in the choice of barangays, affected cost efficiency of the investments in water supply. In terms of investment cost per connection, this is 106 percent higher (at P30,869) on average than the ceiling of P15,000 used as a viability indicator in the industry in designing piped systems, whether these are in rural or urban barangays 2. Given the nature of locations identified by Palawan Province, the cost of pumping equipment was higher (due to the nature of available water sources) than in Panabo City the ceiling of P15,000 was largely maintained in the latter. Ensuring that affordable financing is available for sub-project preparation (e.g feasibility studies, consumer surveys) is essential for sub-project sustainability. Under the WDDP project, several LGUs that obtained a single loan for both preparation and implementation phases noted that they incurred high commitment costs for BESP sub-projects this was due to the lengthy design phase that required consumer surveys and stakeholder consultation as an input to the design of the sub-project. By financing these phases separately (e.g. through a two-part loan for (i) preparation and (ii) construction), overall sub-project costs can be reduced. These lessons have been taken into account in the design of SSLDIP (LN PH). Utility operators of small remote water supply systems are likely to have less experience with private sector contracts and less ability to manage major or emergency repairs without outside support. While 23

27 some may be able to acquire adequate in-house capacity to operate and manage these systems independantly, most require periodic technical assistance and guidance from specialized bodies at regional or national level (e.g. to revise tariffs). Project concept and design for operations in the Philippines should take into account the unpredictable and complex political environment. 12. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies (b) Cofinanciers (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) 24

28 Annex 1. Results Framework Analysis Project Development Objectives (from Loan Document) The objective of the project was to assist the Republic of the Philippines in: (i) creating an institutional environment which would encourage the participation of the private sector in water utilities; and (ii) supporting the Participating LGUs in improving water, sewerage, sanitation and drainage within the areas of their jurisdiction. Revised Project Development Objectives (as approved by original approving authority) The objective was not revised. PPA component. (a) Output indicators Indicator Baseline Value Original Target Values (from approval documents) Indicator 1 : Pilot reporting formats developed. Value (quant. or qual.) 0 Not available Formally Revised Target Values Date achieved 09/09/ /31/2003 Comments (incl. % achievement) Actual Value Achieved at Completion or Target Years A Performance Measurement Framework (PMF) Information Management System (IMS) A Plan for Public Information Disclosure and Feedback (PIDF) While the PMF was completed by loan closing. The IMS and PIDF are only now being scaled up. Indicator 2 : Issue of public audits in sample Barangays of MWSS. Value (quant. or quality. 0 Not available 100 Barangays Date achieved 09/09/ /31/2003 Comments (incl. % achievement) Out of 1,697 Barangays, 100 were surveyed through the pilot audit. By 2006, this had been scaled up to 720 under a roll out plan. All 1697 are expected to have been surveyed by

29 Indicator 3 : Positive feedback on utility of PPA from MWSS and other stakeholders. Value (quant. or quality. 0 Not available Date achieved 09/09/ /31/2003 Comments (incl. % achievement) (b) Outcome indicator Indicator From perspective of consumers and concessionaires 95 out of 100 barangays surveyed rate overall quality as good. One of the concessionaires - MWCI use the PPA to guide their own monitoring plan and consider it instrumental in having improved their performance. Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Satisfactory if GOP decides to extend the PPA system to cover other water utilities. Value (quant. or qualit.) 0 Not achieved Date achieved 09/09/ /31/2003 Comments (incl. % achievement) (c) Impact indicators Indicator PPA has not been extended outside Manila. However MWSS is expanding the scope of work to cover all 1,627 Barangays and extending its application to sewerage and sanitation services. Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Percentage of total annual (or daily average) service hours (in which water is Indicator 1 : available at acceptable quality and pressure as defined by a concession agreement or Philippines national standard). Value (quant. or qualit.) 0 N/A Date achieved 09/09/ /31/2003 Comments (incl. % achievement) Consumers rated water quality good to very good, however low water pressure requires service improvement. Fifty-two (52) barangays out of the 100 surveyed have poor or very poor pressure performance. Indicator 2 : Percentage of households covered. Value (quant. or 0 qualit). MWSS reports an increase in coverage from 67% to 87% 26

30 Date achieved 09/09/ /31/2003 Comments (incl. % achievement) The PPA is a a survey of connected consumers. By the end of the pilot phase, MWSS reported that coverage had increased by an additional 2.1 million people. Average daily consumption of piped water per person (l/person); Indicator 3 : Average daily (or annual) cost for piped water consumption; Percentage of non revenue water (NRW). Value (quant. or qualit.) 0 N/A Date achieved 09/09/ /31/2003 Comments (incl. % achievement) These specific indicators were not used in the pilot phase. The PPA focused on a narrower set of indicators in the concession contract.. 27

31 SSD component. (a) Output indicators Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Additional no. of households (HH) in the project areas using sanitation services according to the BESP. Value (quant. or qualit.) 0 No target values 2,056 Date achieved 05/05/ /31/ /31/2006 Comments (incl. % achievement) This represents about 25 percent of the total number of households in the 15 barangays covered by the BESP sub-component. Indicator 2 : Value (quant. or qualit.) Length of sewerage collectors and sewage treatment added to their systems or no. of on-site sanitation facilities installed. Not available No target values Date achieved 05/05/ /31/ /31/2006 Comments (incl. % achievement) Indicator 3 : Value (quant. or qualit.) Length of sewerage collectors: 10,095 LM Communal septic tanks: 40 Toilet bowls: 2,056 Septic tanks: 400 Combined storm/drainage collection pipeline: 39,187 LM The combined storm/drainage data refer to the four cities that undertook trunk investments. No. of LGUs with new legal and regulatory framework approved by the local legislature for possible contracting out of O&M of the systems. 0 No target values Date achieved 05/05/ /31/ /31/2006 Comments (incl. % achievement) Ten barangays out of 13 operational. Ten barangays had their Association or Cooperative registered with the SEC or other authorizing entity. Three had their application pending with the SEC. 28

32 (b) Intermediate Outcome Indicators Indicator Indicator 1 : Value (quant. or qualit.) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years At least 4 LGUs outside Metro Manila Area successfully completed project implementation, with planned quality sanitation services in their communities. All LGUs: four cities under the trunk sub-component and 15 barangays 0 4 LGUs supported by two LGU subloans (a province and a city) for the BESP sub-component. Date achieved 05/05/ /31/ /31/2006 Comments (incl. % achievement) Constructed sewerage and feeder water supply network outsourced to private sector Indicator 2 : or water district. Value (quant. or qualit.) 0 No target values Date achieved 05/05/ /31/ /31/2006 Comments (incl. % achievement) The 13 barangays that are operational. As of November 2006, in the 13 barangays where the water system was operational, the management, operation and maintenance of the system were outsourced to a local Association or Cooperative in accordance with a Memorandum of Agreement between the LGU and the Association/Cooperative. Indicator 3 : Number of successor sanitation projects prepared and approved by GOP. Value (quant. or qualit.) 0 No target values Seven projects. Date achieved 05/05/ /31/ /31/2006 Comments (incl. % achievement) Six projects were under implementation, three financed through LBP, one through DBP, and two directly by GOP. Four of these were financed by the Bank, one by ADB, and one by Japan Bank for International Cooperation (JBIC). 29

33 Annex 2. Restructuring (if any) Restructuri ng Date(s) May 5, 1999, Restructurin g Memo Board Approved ISR Ratings at Restructuring PDO Change DO IP Amount Disbursed at Restructuring in US$ Millions N/A N/A 0 Reason for Restructuring & Key Changes Made Loan not signed 19 months after Board Approval 30

34 Annex 3. Project Costs and Financing (a) Project Cost by Component (in US$ Million equivalent) Components SEWERAGE, SANITATION AND DRAINAGE (Loan 4228-PH) PUBLIC PERFORMANCE AUDIT (Loan 4227-PH) Appraisal Estimate (US$ Millions) Actual/Latest Estimate (US$ Millions) Percentage of Appraisal Total Baseline Cost Physical Contingencies 0.0 Price Contingencies 0.0 Total Project Costs Project Preparation Facility (PPF) Interest and other charges on Loan 4228-PH accrued on or before March 14, IBRD 7.0** Total Financing Required * * Excludes counterpart funds provided by LGUs which were paid separately to LBP. ** Interest was miscalculated at restructuring and subsequently adjusted downwards to US$ 0.8m. See cancellation of US$ 6.2 million under Interest During Construction Category June 30, (b) Distribution of costs between SSD sub-components and between water supply and sanitation investments (in Ph. Pesos and US$ equivalent). The distribution of costs between trunk and feeder investments was 75 percent and 25 percent, respectively, and between water supply and sanitation investments 79 percent and 21 percent, respectively. It illustrates LGU demand and priorities. LGU Investments and Main Project Components a/ LGU Cost (P 000) % Trunk investments (all drainage) (a) San Fernando city (laterals, 48,048 vacuum tanker, dredging machine, rehabilitation of outflow) (b) Cabanatuan city (main line, 455,382 laterals) (c) Candon city (main line, laterals, vacuum tanker, hydraulic 101,892 31

35 excavator) (d) Calbayog city (main line, vacuum tanker) Feeder investments (a) Palawan province 48,203 Total 653,525 or US$13.1 M 75 Total 180,095 (i) Sibaltan (ii) Liminangcong (iii) New Guinlo (iv) Sta. Teresita (v) Danleg (vi) Caramay (vii) Tumarbong (viii) Alfonso Bliss (ix) Port Barton (x) Abaroan (b) Panabo city (i) Mabunao (ii) Datu Abdul Subtotal 13,976 (a) Water supply (piped system) 12,365 (b) Sanitation (toilet bowls, communal septic tanks) 1,611 Subtotal 18,581 (a) Water supply (piped system) 17,144 (b) Sanitation (toilet bowls, rehabilitation of drainage) 1,437 Subtotal 23,144 (a) Water supply (piped system) 18,054 (b) Sanitation (toilet bowls, communal septic tanks) 5,090 Subtotal 15,079 (a) Water supply (piped system) 13,798 (b) Sanitation (toilet bowls, communal septic tanks) 1,281 Subtotal 8,986 (a) Water supply (piped system) 6,014 (b) Sanitation (toilet bowls, communal septic tanks) 2,973 Subtotal 20,752 (a) Water supply (piped system) 16,181 (b) Sanitation (toilet bowls, communal septic tanks) 4,570 Subtotal -12,186 (a) Water supply (piped system) 10,743 (b) Sanitation (toilet bowls, communal septic tanks) 1,443 Subtotal -21,984 (a) Water supply (piped system) 16,791 (b) Sanitation (toilet bowls, communal septic tanks) 5,193 Subtotal 30,310 (a) Water supply (piped system) 17,472 (b) Sanitation (toilet bowls, communal septic tanks) 12,838 Subtotal 15,097 (a) Water supply (piped system) 12,943 (b) Sanitation (toilet bowls, communal septic tanks) 2,154 Total 37,721 Subtotal 4,876 Water supply (piped system) 2,604 Sanitation (individual toilet bowls and septic tanks) 2,272 Subtotal 6,047 (a) Water supply (piped system) 4,949 (b) Sanitation (individual toilet bowls and septic tanks) 1,

36 (iii) Manay (iv) Malativas (v) Kauswagan Subtotal 5,634 (a) Water supply (piped system) 4,537 (b) Sanitation (individual toilet bowls and septic tanks) 1,097 Subtotal 11,022 (a) Water supply (piped system) 10,070 (b) Sanitation (individual toilet bowls and septic tanks) 952 Subtotal 7,347 (a) Water supply (piped system) 6,616 (b) Sanitation (individual toilet bowls and septic tanks) (vi) Buenavista Subtotal 1,602 (a) Water supply (piped system) 1,602 (b) Sanitation - 0 Total 215,021 or US$4.3 M 25 Grand Total 868,546 or US$17.4 M 100 a/ Costs are net of studies, interest during construction and other charges related to the LGU subloan. Source: Land Bank of the Philippines (c) Financing Source of Funds Type of Cofinancing Appraisal Estimate (US$ Millions) Actual/Latest Estimate (US$ Millions) Borrower INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT % Percentage of Appraisal (d) Disbursement Profile 33

37 (e) Evolution in exchange rate: PhPeso/US$ (average Jan/Aug.) Source: IMF, IFS (period average) Note: The graph is in currency of the loan/credit/grant. 34

38 Annex 4. Outputs by Component Table 1 - Water supply sub-projects (BESP/feeder component) Coverage of Constructed Water Supply Systems LGU/BESP site Design Year Coverage (No. of Households) Served Population at Design Year a/ 2006 Coverage b/ in No. of Connections and Population No. of Households recipients of toilet bowls Palawan (a) Sibaltan 206 1, (835) 137 (b) Liminangcong 587 2, (1,855) 0 (c) New Guinlo 391 1, (2,010) 335 (d) Sta. Teresita 236 1, (1,080) 155 (e) Danleg (400) 110 (f) Caramay 240 1, (1,200) 165 (g) Tumarbong 217 1, (786) 140 (h) Alfonso Bliss 349 1, (1,745) 182 (i) Port Barton 600 3, (1,625) 246 (j) Abaroan 230 1, (865) 186 Total 3,166 15,830 2,387 (12,401) 1,656 Panabo city (a) Mabunao 543 2, (1,875) 149 (b) Datu Abdul 687 3, (1,715) 64 (c) Manay , (1,560) 80 (d) Malativas 328 1, (1,290) 63 (e) Kauswagan 378 1, (535) 44 Total 2,200 11,000 1,120 (6,975) 400 Grand Total 5,366 26,830 3,507 (19,376) 2,056 a/ Household size is 5 persons to a household. b/ As of October

39 Table 2 - Sanitation, sewerage, and drainage sub-projects (Trunk and BESP components) Length of sewerage collectors and sewage treatment added to their systems or no. of on-site sanitation facilities installed On site Sanitation Sewerage Drainage T (un) ST (un) SP (LM) STP (un) CSP (LM) A. Palawan Province 1. Port Barton, San Vicente 246 3, Caramay Roxas Abaroan, Roxas Tumarbong, Roxas New Guinlo, Taytay 335 1, Liminangcong, Taytay Danleg, Dumaran Sta. Teresita, Dumaran Sibaltan, El Nido 137 1, Alfonso Bliss, Quezon Sub-total A 1,656 10, B. Panabo City 1. Datu Abdul Dadia Manay Mabunao Kauswagan Malativas Sub-total B C. San Fernando City 995 Sub-total C 995 D. Cabanatuan City 23,822 Sub-total D 23,822 E. Candon City 6,340 Sub-total E 6,340 F. Calbayog City 525 Sub-total F 525 Total 2, , ,187 Abbreviations: T - toilet facilities ST - septic tank SP - sewage collection pipeline STP - sewage treatment plant CSP - combined (storm & drainage) collection pipeline un -number of units LM -linear meters 36

40 Annex 5. Economic and Financial Analysis (including assumptions in the analysis) There was no EIRR computed for the project at reappraisal as it was a program loan with no pre-identified projects. However, the OM included a framework for economic analysis for sub-projects, but it was not applied during project implementation, since the investments funded were mainly drainage and small scale water supply systems (less than 700 connections), for which it was deemed unnecessary to prepare an economic analysis. The method of economic analysis adopted in this ICR is least cost analysis supported by an identification of project benefits. The least cost analysis is done within the context of the willingness to pay of LGUs and the beneficiaries. The willingness to pay of LGUs is represented by their willingness to borrow for the investment (using IRA as main collateral) 3 and the extent to which they are willing to absorb the cost of loan repayment. For the BESP sub-projects, this was enhanced by the willingness to pay of the beneficiaries determined through a willingness to connect (WTC) survey requiring that at least 60% of them signify their willingness to pay an estimated tariff (to cover at least O&M, a minimum monthly water consumption of 5 cubic meters, and a nominal amount for sanitation). Investments were made within the borrowing capacity of the LGUs. For drainage, the limitation of the LGU budget envelope required that the investment be prioritized and implemented in phases based on an approved urban drainage master plan (prepared under the project with the LGU borrowing for the studies) designed according to the hydraulics of the target catchment area and an assumption of rainfall occurrence for the drains. Priority was given to areas where benefits were highly visible (mainly the central business district), while contributing to the growth of the city in the short- to medium-term; the participating cities are either regional business or institutional centers, or transit hubs for newly-opened up municipalities and barangays. For feeder investments, LGUs gave priority to barangays (mostly rural) without access to safe and potable water and with high incidence of water-borne diseases, and where there was a demand from the beneficiaries for water supply services. The size and scope of the investment and level of service were based on the LGU budget for the BESP site and the willingness to pay of the beneficiaries for the services that was determined beforehand. This involved an iterative process of consultation between the project preparers of the LGU and the recipient communities, the output of which was a design that ensured buy-in from the communities. However, the emphasis on compliance with the BESP process rather than on the quality of the participatory approach in determining demand and willingness to pay as well as political considerations in the choice of barangays, affected cost efficiency of the investments in water supply. In terms of investment cost per connection, this is 106 percent higher (at P30,869) on average than the ceiling of P15,000 used as a viability indicator in the industry in designing piped systems, whether these are in rural or urban barangays 4. This did not apply to Panabo City where the ceiling of P15,000 was largely maintained. This is due to the relatively small size of the systems and their location in mostly rural barangays, where population density is low. For the BESPs in Palawan, other factors such as difficult water sources (presence of iron, manganese, hydrogeology of the aquifer) and the long distance from the main power grid of the province - thus requiring the installation of generators - contributed to the high investment costs. Also, since the choice of barangays was largely politically motivated and since expectations of stakeholders had already been raised, it was difficult or too late to shift to more viable areas once it became clear that the systems were to be expensive (Table 1). 37

41 Table 1. Investment Cost per Connection by Water Supply System LGU/BESP site Cost of Water Supply System (P 000) Design Year Coverage (No. of Households) a/ Investment Cost per Connection (P) b/ Palawan c/ (a) Sibaltan 12, ,024 (b) Liminangcong 17, ,206 (c) New Guinlo 18, ,174 (d) Sta. Teresita 13, ,466 (e) Danleg 6, ,673 (f) Caramay 16, ,421 (g) Tumarbong 10, ,507 (h) Alfonso BLISS 16, ,112 (i) Port Barton 17, ,120 (j) Abaroan 12, ,274 Average Panabo city (a) Mabunao 2, ,370 (b) Datu Abdul 4, ,655 (c) Manay 4, ,178 (d) Malativas 10, ,268 (e) Kauswagan 6, ,238 (f) Buenavista 1, ,695 or US$894 Average 12,561 or US$251 Total Average 30,869 or US$617 a/ Design year is 2006 and 2016 for Palawan and Panabo, respectively. b/ Household size is at 5 persons per household. c/ All BESPs in Palawan have generator sets because of unreliable power supply and the long distance from the main power grid of the province. Generator sets comprised about 5 to 10 percent of the investment cost of the water supply systems. Source: Land Bank of the Philippines Project Benefits. Project benefits are described separately for the two main types of investments: drainage, and water supply and sanitation. Benefits from drainage investments. At least 261,000 are estimated to benefit both directly and indirectly from improved drainage (absence of flooding) 5 in the central business district (CBD) of the four cities. Indirect beneficiaries refer to the transient population who transact business in the CBDs during the day (Table 2). Table 2. No. of Beneficiaries of Drainage Investments in Participating Cities, 2005 LGU CBD Population a/ Transient Population Total Direct/Indirect Beneficiaries San Fernando city 141,751 50, ,751 Cabanatuan city 32,953 16,500 49,453 Candon city 6,933 No data 6,933 Calbayog city 11,188 1,678 12,866 Total 192,825 68, ,003 a/ Population of barangays covered by the drainage investments of the project. Source: LGUs 38

42 Other benefits from the drainage investments include the following: (1) Health benefits in terms of reduced risk of exposure to sewage-contaminated run-off during occurrences of flooding. This is conservatively estimated at P4.42 M for 2005; 6 (2) Increase in economic activity as measured by the increase in number of business permits issued by the city in the CBD area after project completion. For example, Candon City has seen an increase of about 22 percent in number of business permits issued from 2005 to 2006; (3) Increase in prices of real property in the area as measured by the increase in market prices and zonal valuations. Based on interviews with the Project Management Units of the 2 cities visited, the increase in real property prices ranges between 70 and 100 percent. The increase in zonal values is expected to result in windfall revenues for the cities; and (4) Institutional benefits from implementing and operating combined sewer and storm drains, with the potential of further improvement in environmental conditions through the construction of wastewater treatment plants in the future 7. Benefits from water supply and sanitation investments. By the design year, an additional 27,000 people in BESP sites would benefit from improved water supply with a level of service comparable to that available in urban areas (24 hours supply, a minimum of 3 meters water pressure and water potability according to national standards). By the end of 2006, close to 20,000 had benefited from the investments. Also, more than 2,000 households have benefited from better hygiene practices thanks to improved household toilets and a cleaner environment with the availability of septic tanks (Table 3). Table 3. Coverage of Constructed Water Supply Systems LGU/BESP site Design Year Coverage (No. of Households) Served Population at Design Year a/ 2006 Coverage b/ in No. of Connections and Population No. of Households recipients of toilet bowls Palawan (a) Sibaltan 206 1, (835) 137 (b) Liminangcong 587 2, (1,855) 0 (c) New Guinlo 391 1, (2,010) 335 (d) Sta. Teresita 236 1, (1,080) 155 (e) Danleg (400) 110 (f) Caramay 240 1, (1,200) 165 (g) Tumarbong 217 1, (786) 140 (h) Alfonso Bliss 349 1, (1,745) 182 (i) Port Barton 600 3, (1,625) 246 (j) Abaroan 230 1, (865) 186 Total 3,166 15,830 2,387 (12,401) 1,656 Panabo city (a) Mabunao 543 2, (1,875) 149 (b) Datu Abdul 687 3, (1,715) 64 (c) Manay , (1,560) 80 (d) Malativas 328 1, (1,290) 63 (e) Kauswagan 378 1, (535) 44 Total 2,200 11,000 1,120 (6,975) 400 Grand Total 5,366 26,830 3,507 (19,376) 2,056 a/ Household size is 5 persons to a household. b/ As of October

43 The Willingness to Pay (WTP) of the households internalizes private benefits such as convenience (e.g., reducing time spent to fetch water from long distances), better economic opportunities (for employment or backyard/small scale businesses), and improved health. At the community level, based on interviews and anecdotal evidence from site visits, a marked improvement in health conditions in terms of lower incidence of water borne diseases has been reported, in as much as the source of drinking water prior to the project were not potable shallow wells, creeks and springs. This has also translated into lower budget/expenditures for the LGU health and sanitation offices. However, the sustainability of the water supply systems as designed is being threatened by the lack of capacity of the operators, who are community-based staff hired by cooperatives of associations with limited or no prior experience in operating similar facilities and lacking the technical and management skills and know-how, to set tariffs and keep them abreast with increasing O&M costs. Sustainability in some cases is affected by the poor quality of construction and the lack of buy-in (e.g. location of water supply) by some communities despite the participatory BESP process used in project design. Cost recovery of investments and O&M Costs Sub-loan repayment for both trunk and feeder investment were absorbed by the LGUs and are to be recovered mainly from general taxes. For the drainage investments, recovery of capital and O&M costs are entirely shouldered by the borrowing LGUs. In general, the LGU budgets for O&M of drainage facilities have increased on account of the maintenance cost of equipment procured under the project and increase in length of drainage pipes that have to be maintained. There are plans, however, for increasing real property taxes and charging for sewerage connections in the future. For the BESPs, water tariffs, in the case of Palawan, were designed to cover only O&M costs, including major repairs and replacement. For Panabo, they were designed to cover both capital and O&M costs. Typically, revenues include some fees not related to the provision of water supply services (e.g., Association membership fees). The performance to date of those water systems that are operational (numbering 13 out of 15 BESPs - two in Panabo were completing construction during ICR) is marginal in the sense that they are barely recovering O&M costs. This is probably symptomatic of the low capacity of the operators, but may also signal consumers inability to afford higher tariffs (to cover significantly higher fuel cost) given the low economic base of most households (low and seasonal incomes of farmers). Expenses (i.e., without recovering capital costs) comprise between 74 and 82 percent of revenues (2005 data) for Panabo and Palawan BESPs, respectively rising fuel prices are a key factor. For both Palawan and Panabo City, the LGUs require that a portion of the funds generated from operations be remitted to the LGUs to finance major repairs and replacement. In the case of Panabo, this is in terms of a lease fee 8, and in the case of Palawan, 80 percent of net income is supposed to go into a reserve fund for major expenditures in the future. While these agreements have been signed (for all operational BESPs in Panabo and for four out of ten in Palawan), none so far has been implemented. In fact, major repairs to correct poor construction or damage due to inclement weather (typhoon) have so far been funded by the LGUs 9 (Table 4). 40

44 Table 4. Extent of Cost Recovery for Operational BESPs, 2005 (in P) a/ LGU/BESP site Revenues b/ Expenses (without debt service and Net Income Expenses as % of Revenues depreciation) Palawan (a) Sibaltan 51, , (7,015.70) 114 (b) Liminangcong 371, , , (c) New Guinlo 279, , (25,839.10) 109 (d) Sta. Teresita 130, , , (e) Danleg No data No data No data No data (f) Caramay No data No data No data No data (g) Tumarbong 181, , , (h) Alfonso BLISS 1,129, , , (i) Port Barton 286, , , (j) Abaroan 155, , , Total 2,586, ,118, , Panabo city c/ (a) Mabunao 335, , , (b) Datu Abdul 303, , , (c) Manay 496, , , Total 1,136, , , a/ CY 2005 was selected to illustrate the financial performance of the operational BESPs having the most recent annual data. b/ Malativas and Kauswagan were not yet operational at the closing of the loan. LGU Sub-loans The methodology used by LBP to determine LGU net borrowing capacity imposes an outer limit on LGU borrowing, thus defining the size of sub-loans secured under the project, and limiting as a result utilization of the World Bank loan. This methodology is largely based on a statutory requirement providing that total debt servicing be maintained within 20 percent of the LGU s regular revenues (in practice, IRA) at the time of loan application (basically a one year time slice). LBP complements this calculation with qualitative considerations related to its credit rating system of its borrowers. In general, estimates of net borrowing capacity by LBP are lower than those calculated by the Bureau of Local Government Finance. The project OM included an LGU Long-term Financial Planning Model intended to provide an alternative method of estimating LGU borrowing capacity. This model was seen as a dynamic model in the sense of considering multi-year projections of revenue and income as well as using accrual rather than cash basis for the projections, since LGUs are essentially considered corporate entities under the LGC. At reappraisal, it was expected that the LBP and LGUs would adopt this model to plan their investments, but LBP opted to be conservative and keep its own model, since the project was its first lending program to LGUs and was seen as a pilot. Conclusion There are mixed findings on the economic and financial analyses of the project. From a planning perspective, the economic rationale for the selection of investments at the LGU level was generally sound given that the investments were an output of a systematic planning process involving broad based participation from stakeholders, local executives and the local legislature. At the sub-project 41

45 level, the size, scope and design of investments were such that they maximized benefits within the LGU s budget envelope. The willingness to borrow and to assume loan repayment by the LGUs and the willingness to pay for the services by the beneficiaries were a measure of the economic value and consumer surplus attached to these investments in terms of economic, health, and environmental benefits. They were primarily the basis for the economic justification of the investments. Cost recovery was from a combination of tariffs and general taxes. However, and particularly for the BESPs, cost efficiency of investments was affected by the quality of the consultations during sub-project preparation in Palawan, in particular. This resulted in some cases in investments reflecting options that seem too expensive from a technical point of view and/or that led to poor buy-in of the communities. These factors are affecting sustainability, including the fact that utility operators, in general, are ill-prepared for their responsibilities and are not sufficiently supported to increase or improve their capabilities to operate the systems over the long-term. On the other hand, the trunk investments being operated by the cities where capacities are higher are deemed to be much more sustainable. 42

46 Annex 6. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/Specialty Lending Vijay Jagannathan Sector Manager MNSSD 1 st Task Team Leader Senior Water Supply and Luiz Tavares AFTU1 Sanitation Specialist Aldo Baietti Sr. Financial Specialist EWDWS Joseph Reyes Financial Management Specialist EAPCO Karen Jonesy Jacob Consultant EASUR Cecile Vales Procurement Spec. EAPCO Maya Gabriela Q. Villaluz Operations Officer EASEN Angelina Ibus Operations Officer Supervision/ICR Luiz Tavares Senior Water Supply and AFTU1 Sanitation Specialist R.Mukami Kariuki Local Program Coordinator EASUR Preselyn Abella Financial Management Specialist EAPCO Christopher Casuga Ancheta Sanitary Engineer EASUR Karen Jonesy Jacob Consultant EASUR Rene SD. Manuel Procurement Spec. EAPCO Benoit Laplante Public Disclosure Maya Gabriela Q. Villaluz Operations Officer EASEN 2 nd Task Team Leader 3 rd Task Team Leader 43

47 (b) Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (US$ Millions) 1 05/08/1998 Satisfactory Satisfactory /16/1998 Unsatisfactory Unsatisfactory /28/1999 Satisfactory Satisfactory /15/1999 Satisfactory Satisfactory /14/2000 Satisfactory Satisfactory /26/2000 Satisfactory Satisfactory /08/2001 Satisfactory Satisfactory /20/2001 Satisfactory Satisfactory /26/2002 Satisfactory Satisfactory /12/2002 Satisfactory Satisfactory /15/2003 Satisfactory Satisfactory /17/2003 Satisfactory Satisfactory /03/2004 Satisfactory Satisfactory /20/2004 Satisfactory Satisfactory /22/2004 Satisfactory Satisfactory /22/2005 Satisfactory Satisfactory /08/2006 Satisfactory Satisfactory /25/2007 Satisfactory Satisfactory (c) Staff Time and Cost Lending Stage of Project Cycle Staff Time and Cost (Bank Budget Only) USD Thousands No. of staff weeks (including travel and consultant costs) FY FY FY FY FY FY FY FY

48 Supervision/ICR FY FY Total: FY FY FY FY FY FY FY FY FY FY Total:

49 Annex 7. Detailed Ratings of Bank and Borrower Performance Bank Ratings Borrower Ratings Ensuring Quality at Entry: Quality of Supervision: Overall Bank Performance: PPA: Satisfactory SSD: Moderately Satisfactory PPA: Satisfactory SSD: Moderately Satisfactory PPA: Satisfactory SSD: Moderately Satisfactory Government: Implementing Agency/Agencies: Overall Borrower Performance: PPA: Moderately Unsatisfactory SSD: Moderately Satisfactory PPA: Satisfactory SSD: Moderately Satisfactory PPA: Moderately Satisfactory SSD: Moderately Satisfactory 46

50 Annex 8. Beneficiary Survey Results (if any) BESP sub-components SUMMARY OF THE WILLINGNESS TO CONNECT/PAY SURVEY* NO. OF HHs IN BARANGAY THE SERVICE AREA NO. OF HHs WILLING TO CONNECT/PAY (WTC SURVEY RESULT) % OF HHs WILLING TO CONNECT/PAY PALAWAN 1. Port Barton, San Vicente % 2. Abaroan, Roxas % 3. Caramay, Roxas % 4. New Guinlo, Taytay % 5. Liminangcong, Taytay % 6. Sibaltan, El Nido % 7. Danleg, Dumaran % 8. Sta. Teresita, Dumaran % 9. Tumarbong, Roxas % 10. Alfonso Bliss, Quezon % PANABO CITY, DAVAO DEL NORTE BATCH 1 1. Datu Abdul Dadia % 2. Manay % 3. Mabunao BATCH 2 4. Malativas % 5. Kauswagan % 6. Buenavista % * Willingness to pay surveys were conducted to assess the extent to which a critical mass of households were willing to pay for services. The survey established likely tariffs and overall financing envelopes which were to be used to design a cost effective sub-project. 47

51 Annex 9. Stakeholder Workshop Report and Results (if any) None conducted. 48

52 Annex 10. Summary of Borrower's ICR and/or Comments on Draft ICR PPA component: Overall, MWSS-RO, as the implementing agency, viewed the implementation of the PPA component as successful, notwithstanding some delays due to provider (concessionaire) data. The objective of putting in place a credible, transparent performance measurement framework that combines consumer and provider data, results organized into an information management system serving as a decision support tool for both regulator and concessionaires, and a plan for public disclosure and feedback, is deemed to have been largely met. The immediate results were better services by the concessionaires as they sought to respond positively and quickly to issues on service quality in specific areas/barangays where public perception was identified in the survey(s) as low. Among the highlights considered by MWSS-RO in the implementation of the pilot PPA are: (a) development of a performance measurement system that is practical, easy to comprehend and apply, comprehensive and flexible, relevant to Philippine conditions and allowing feedback to the regulator and the concessionaires; (b) a database and information management system customized to the regulator s needs; (c) a public information plan developed and partially tested; (d) a plan developed for sustaining funding of the PPA beyond the pilot phase (between 1 to 2 centavos per cubic meter of user fee); (e) the participatory manner in developing the system involving a wide range of stakeholders; and (f) the successful buy-in of the PPA system by the concessionaires. The Pilot Phase of the PPA Process generated many lessons, most of which are being addressed in Phase 2. These lessons are that: (a) consumer survey data can be collected efficiently with a wellrun survey operation, even for a large number of households, and this can be done cost-effectively with local partners (university). Once established, the cost of subsequent surveys are lower and more predictable; (b) the participation of the concessionaires is essential for developing and calculating reliable performance indicators and can be increased through sharing of data and creation of Working Groups to address issues before they become problems (i.e. treat the PPA like a Partnership Tool); (c) during the pilot phase public information disclosure should be handled carefully to avoid misinterpretation; (d) the PPA performance measurement system serves as a better baseline for privatization projects than traditional engineering assessments. Since completion of the pilot survey in 2001, efforts to institutionalize the PPA system have been initiated. Taking advantage of the momentum and the lessons learned from the Pilot Project, in 2002 the MWSS Board of Trustees approved the full-scale implementation of PPA in the entire MWSS service area. They also renamed the PPA Public Assessment of Water Service (PAWS). In the first year of full scale implementation (March 2003 to February 2004) 420 Metro Manila Barangays and 1 pilot barangay each from Rizal and Cavite were surveyed with funds from MWSS- RO and he PAWS website ( launched. In the second year survey coverage increase to 720 Metro Manila Barangays, and an additional 11 from Rizal and 3 from Cavite. By the fifth year (2010), all 1,697 Metro Manila Barangays, 25 barangays in Rizal, and 10 in Cavite will have been incorporated in PAWS. The concessionaires are committed to reimbursing all costs of the PAWS from 2006 onwards, including the Sewerage and Sanitation Module which is to be developed and field tested in In Conclusion, the Metropolitan Waterworks Sewerage System views the implementation of this component as successful. 49

53 SSD component: LBP considers that it has achieved the project objectives based on the performance indicators set out in the project appraisal document, as follows: (a) a benchmark of four LGUs outside of Manila providing quality sanitation services against the actual number of six LGUs that have successfully participated in the program; (b) management of 13 operational systems outsourced to the private sector in the form of lease agreements and memoranda of understanding with community-based water associations and cooperatives; and (c) seven successor sanitation projects approved by government. Among the major issues that were encountered during implementation are the following: (a) the disruption in subproject preparation brought about by the three-year election cycle - it is recommended that subproject identification and preparation be synchronized with the election cycles; (b) long gestation period of projects prepared using a demand driven approach - this increased commitment fees paid by LGUs, and led to higher overall sub-project costs; (c) assessment of LGU borrowing capacity determined the size of subprojects as well as their decision to borrow given other development priorities; (d) low demand from LGUs for sewerage and sanitation investments which required much more effort in marketing the facility particularly in the early part of the program; (e) subproject preparation studies funded out of the LGU loans reduced the amount available for the subproject itself because of borrowing capacity constraints, and (f) the limited capacity of the LGUs including lack of familiarity with project procurement and environmental guidelines, contributed to delays in implementation; and (f) close supervision and handholding required by LGUs was deemed expensive by LBP. The lack of a program for sustained capacity building in operation and maintenance, particularly for BESP investments, is recognized as a risk to their long term sustainability. Lessons learned by LBP with respect to its lending operations are as follows: (a) given that subproject preparation and implementation are likely to take up a good portion of the full term (nine years) of a local chief executive, it is prudent to select LGUs with local chief executives that are not in their third term in office; (b) program loans are preferable to project loan as they provide more flexibility in implementation for the GFI, including in terms of procurement, disbursement, supervision and performance monitoring; (c) however, the cost of a program loan may be higher because of the need for more intensive marketing and involvement of regional lending centers, and for supervision and capacity building assistance to LGUs; (d) the need to build in-house capacity of both the GFI and LGUs requires that consultancy requirements are appropriately determined, including arrangements on where consultants would be better posted, that is, whether at LBP or the LGUs; and (e) the need for a continuing program of capacity building on Bank procedures and policies for LBP and LGUs to ensure sustainability of operations and investments. LBPs assessment of the World Bank s performance is as follows: a) the limited menu rendered the loan inflexible LGUs could only borrow for water supply with sanitation; b) cumbersome procurement procedures led to delays in sub-project processing, and higher costs which were borne by local government units; c) commitment fees imposed on LBP by the World Bank were passed on to LGUs thus increasing overall sub-project costs as; and d) similarly sub-project preparation costs were funded from sub-loans including time spent on participatory planning and preparation of feasibility studies for small barangays; finally (e) the results monitoring framework for evaluating the performance of the Project was unclear from the start this was a missed opportunity for Land Bank- Project Management Office and the concerned local government units to design a more appropriate monitoring system.. 50

54 Annex 11. Comments of Cofinanciers and Other Partners/Stakeholders N/A. Annex 12. List of Supporting Documents Staff Appraisal Report, July 29, 1997 Loan Agreement (LN 4228-PH), May 15, 1999 Loan Agreement (LN 4227-PH), May 15, 1999 Memorandum of the President on Restructuring, May 5, 1999 All Amendments to Loan Agreement Operational Manual, April 27, 1999 Aide-memoire of Bank Supervision Missions All Project and Implementation Status Reports Bank Correspondence with GOP, MWSS and LBP ICR Manila Second Sewerage Project, May 16, 2006 Metropolitan Manila Water and Sewerage System Public Performance Assessment (PPA) Project, Implementation Completion Report, MWSS Regulatory Office Implementation Component Report for Water District Development Project (World Bank PH 4228), Land Bank 51

55 52