Philippines: Metropolitan Waterworks and Sewerage System New Water Source Development Project

Validation Report Reference Number: PCV: PHI 2011-15 Project Number: 35379 Loan Number: 2012 July 2011 Philippines: Metropolitan Waterworks and Sewerage System New Water Source Development Project Independent Evaluation Department

ABBREVIATIONS ADB Asian Development Bank AWUAIP Angat Water Utilization and Aqueduct Improvement Project IED Independent Evaluation Department LARP land acquisition and resettlement plan MWSS Metropolitan Waterworks and Sewerage System PCR project completion report WTP water treatment plants NOTE In this report, $ refers to US dollars. KEY WORDS adb, asian development bank, independent evaluation department, nonrevenue water, philippines, private sector participation, public private partnership Director General Director Team leader Team members H. Hettige, Officer-in-Charge, Independent Evaluation Department (IED) H. Hettige, Independent Evaluation Division 2 T. Ueda, Senior Evaluation Specialist, IED2 J. Dimayuga, Evaluation Officer, IED2 R. Isidro-Cajilig, Evaluation Assistant, IED2 In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

PROJECT COMPLETION REPORT VALIDATION A. Basic Project Data PCR Validation Date: July 2011 Project Number: Loan Number: 35379 2012 Approved Actual Project Name: MWSS New Water Source Total Project Costs 4.97 1.42 Development Project ($ million): Country: Philippines Loan/Grant ($ million): 3.26 1.19 Sector: Social infrastructure Total Cofinancing ($ 0.00 0.00 million): ADB Financing ADF: 0.00 Borrower ($ million): 1.71 0.23 ($ million): OCR: 3.26 Beneficiaries ($ million): 0.00 0.00 Cofinanciers: None Others ($ million): 0.00 0.00 Approval Date: 14 Oct 2003 Effectiveness Date: 22 Feb 2004 17 Feb 2004 Signing Date: 24 Nov 2003 Closing Date: 30 Jun 2007 21 Oct 2008 Project Officers: R. Frauendorfer Y. Tsujiki Location: ADB Headquarters From 2003 Validator: Quality Control Reviewers: D. King, Consultant T. Ueda, Senior Evaluation Specialist, IED2 J. Dimayuga, Evaluation Officer, IED2 ADB Headquarters Director: 2007 H. Hettige, IED2 To 2006 2008 ADB = Asian Development Bank, ADF = Asian Development Fund, IED = Independent Evaluation Department, MWSS = Metropolitan Waterworks and Sewerage System, OCR = ordinary capital resources, PCR = project completion report. B. Project Description (summarized from the report and recommendation of the President 1 ) (i) (ii) (iii) Rationale. Six years after two private concessionaires (Manila Water Company and Maynilad Water Services) took over operations from the Metropolitan Waterworks and Sewerage System (MWSS) in 1997, water supply continued to be a major concern in Metro Manila. Nonrevenue water remained high, and some areas experienced water shortages, low pressure, and interrupted supply. By the end of 2002, the two concessionaires provided water to about 82% of the population in the MWSS service area, but existing bulk water sources could barely meet that demand. MWSS thus identified three water source projects, requiring feasibility studies and high-level advice on legal and financial issues, for potential funding. Thus, the main rationale of this technical assistance loan from the Asian Development Bank (ADB) was to prepare new water source development projects to meet the increasing water demand in Metro Manila. Impact. The project aimed to (a) stabilize long-term bulk water supply to Metro Manila by identifying technically, environmentally, and economically viable new supply sources; (b) improve MWSS capacity to fulfill its prescribed functions; and (c) allow the two concessionaires to improve service levels to Metro Manila, including providing safe water to urban poor communities. Objectives or expected outcomes. The project objectives included preparing feasibility studies for the development of new water sources for Metro Manila in a format suitable for financing by ADB, the private sector, or other sources; and improving the capacity of MWSS in financial management, accounting, and fiscal control. Expected outcomes were (a) a secure source of additional water to meet the needs of Metro Manila until 2020; (b) a project to be funded externally; and (c) augmented MWSS capability and capacity to plan, manage, and 1 ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Technical Assistance Loan to the Metropolitan Waterworks and Sewerage System for the MWSS New Water Source Development Project. Manila.

2 operate all sources to supply water to the two concessionaires covering Metro Manila, either on its own legal right or as part of a negotiated partnership. (iv) Components and/or outputs. The project had two parts. Part A, to investigate three technical options for new bulk water sources for metro Manila: (a) Wawa River Project. The study comprised (i) technical assessment and renovation of the existing dam; (ii) de-silting the reservoir; (iii) construction of a new raw water pipeline and water treatment plant (WTP); (iv) preliminary land acquisition and resettlement plans (PLARPS); (v) plans for relocation of informal settlers along the pipeline route and the WTP site; and (vi) environmental impact assessments. (b) Angat Water Utilization and Aqueduct Improvement Project. This feasibility study aimed to examine the Angat Water Utilization and Aqueduct Improvement Project (AWUAIP) and included the development of a preliminary LARP, preliminary design and tender documents, a resettlement plan, a preliminary design for a transmission pipeline, and an environmental impact assessment. (c) Laiban Dam Project. Since 1979, the Laiban Dam Project has been envisioned to provide an additional 1,900 million liters of water per day for Metro Manila. Diversion tunnels were mostly completed, but due to resettlement issues and the construction of the Angat Reservoir system, construction for the dam was stopped in 1989. To secure additional water for Metro Manila, MWSS wished to review the Laiban Dam Project again. Thus, the feasibility study included preparation of preliminary LARPs for the resettlement of 3,000 families that have settled within the dam catchment; review and selection of possible options for financing; review and update of existing design and tender documents; preliminary design of a transmission line; and creation of an environmental impact assessment. Part B, for MWSS capacity building, had outputs that included preparing manuals, guidelines, and training for management accounting, corporate planning, and budgetary control mechanisms; financial accounting; internal control and audit systems; and software and hardware for data processing. This component was financed entirely from MWSS s own funds with no ADB loan proceeds used. C. Evaluation of Design and Implementation (project completion report [circulated on 30 July 2009] assessment and validation) (i) Relevance of design and formulation. This validation agrees with the project completion report (PCR) 2 that the project was relevant to the country's development needs. With escalating demand, through population growth and greater coverage by the concessionaires, the need to increase the supply of bulk water to MWSS was of high priority. The PCR reexamined a projected water demand (excluding that from the Laiban Dam), which demonstrated that bulk supply volume had remained constant, but improvements in nonrevenue water from 60% at appraisal to 37% at this project s completion was the reason that supply shortages had not occurred. Regarding the supply sources, the three proposed technical options (i.e., Wawa River, Angat, and Laiban) had been on file with MWSS for many years. Further, the project scope was based on the government s (or MWSS s) request to ADB at the time of conceptualization. The government priorities with external financing in the water supply sector changed (from ADB multi-tranche financing facility loan to a bilateral loan) during the course of the loan implementation. (ii) Project outputs. For part A: (a) Wawa River Project. The feasibility study met the schedule as proposed at appraisal. MWSS accepted the report as submitted. (b) Angat Water Utilization and Aqueduct Improvement Project. This component 2 ADB. 2009. Completion Report: MWSS New Water Source Development Project in the Philippines. Manila.

3 output also met the schedule and terms of reference at appraisal. However, identifying suitable relocation sites for families along the transmission line and on two water treatment plant sites caused significant delays. The Department of Environment and Natural Resources also implemented new watershed protection regulations, which further delayed site selection and required two extensions of the project in 2007 and 2008. The LARP and detailed engineering for the location site were then cancelled after the government decided to use a loan provided by the Government of the People s Republic of China, instead of the ADB multitranche financing facility, in 2006. However, this envisioned People s Republic of China assistance was cancelled at the time of the PCR (July 2009). 3 (c) Laiban Dam Project. At the request of MWSS through the Ministry of Finance, this subcomponent was removed from the scope of the TA loan. ADB agreed and cancelled $1.88 million from the loan. 4 For part B, consulting services for the capacity building component were completed in November 2005. (iii) Project cost, disbursements, borrower contribution, and conformance to schedule. The total project cost was appraised at $4.97 million, of which, at appraisal, ADB loan financing was projected to be $3.30 million (66%). With the cancellation of the Laiban Dam Project feasibility study (subcomponent A3), the actual total project cost was $1.42 million at completion. Of this, ADB loan financing was $1.19 million, and MWSS funded $0.23 million. ADB loan proceeds were used only for part A1 and A2 subcomponents. At appraisal, the project was estimated to take 3 years from January 2004. The AWUAIP study (subcomponent A2) required two extensions; the project was completed in April 2008. The main causes of the extensions were a delay in the start of consultant assignment for the AWUAIP detailed design and issues surrounding LARP preparation. For the AWUAIP, MWSS asked ADB in 2006 to change the safeguard requirement from the ADB standard to a Philippine government policy regulation (Republic Act No. 7279) before it decided to pursue the ensuing investment with a loan from the Government of the People s Republic of China rather than the ADB multitranche financing facility. (iv) (v) Implementation arrangements, conditions and covenants, related technical assistance, procurement, and consultant performance. The project operated through an existing project management office with a steering committee comprising representatives from the concessionaires and MWSS. Progress reports were submitted regularly, and consultant outputs were delivered on time. As previously stated, delays in some outputs were caused by factors related to LARP relocation site selection for the AWUAIP and safeguard requirements. This validation concurs with the PCR that these issues are given fair assessments. Performance of the borrower and executing agency. This validation does not fully support the PCR rating and rates the performance of the borrower partly satisfactory. The role and function of MWSS changed from a water supply company to that of a regulator, bulk supplier, and asset manager. With increasing water demand for Metro Manila, MWSS has responsibility to secure bulk supply. It has responded to this need by requesting ADB to assist in conducting three feasibility studies. The situation facing MWSS for water resource management in Metro 3 On 1 June 2010, the Social Sector Division of ADB s Southeast Asia Department updated the Independent Evaluation Department (IED) that the AQ-6 phase 2, rehabilitation of AQ-5, and interconnection of all existing aqueducts are now ongoing with one contract funded by the Government of the People s Republic of China. 4 At the time of the IED PCR validation process (June July 2009), the Energy and Water Division of ADB s South East Asia Department explained that MWSS decided to ask the concessionaires to finance consultants directly, since MWSS wanted to proceed quickly and were concerned about ADB s lengthy process for consultant recruitment. Therefore, the Laiban Dam Project subcomponent was cancelled from the loan. Subsequently, MWSS received several proposals for a private sector-financed project (including from CalEnergy and more recently, SMC). None succeeded, as they could not agree about the extent of government guarantees for takeoff. The Wawa River Project had also been put on hold because of unexpected water right issues.

4 Manila region will continue to be under political debates. The government will select the financiers in the water sector depending on (a) availability of other external assistance and financial charges; (b) terms and conditions, including safeguards and other due diligence requirements; (c) business strategies of two concessionaires; and (d) political decision involving various public sector reforms. Future investment in this sector will continue to face lingering uncertainties. The government (i.e., MWSS) should have had (a) a clear long-term vision, (b) supporting investment plan with secure financing and guarantees, (c) full commitment to address resettlement issues, and (d) sound government agency coordination mechanism. The government s commitment to the TA loan was substantially reduced. (vi) Performance of the Asian Development Bank. This validation concurs with the PCR rating that ADB's performance was satisfactory. ADB has a long association with the Philippine water sector (as shown in Appendix 3 of the report and recommendation of the President) and has been instrumental in assisting the government to promote and attain private sector participation to improve the supply and distribution of water to Metro Manila. Further, the project design was compact and focused at the time of appraisal. However, during implementation, MWSS and the two concessionaires investment plan and intention of external financing changed. It is important for ADB to assess the government s long-term commitment in the sector continuously. Given that ADB is based in Manila, more frequent official review missions should have taken place, especially during 2006 2007, more than once a year. D. Evaluation of Performance (project completion report assessment and validation) (i) (ii) (iii) (iv) Relevance. The PCR's rating was relevant, and this validation concurs with the rating. The project at the time of appraisal was relevant, in line with the MWSS mandate of delivering improved bulk water supply to Metro Manila. Outputs were designed to enhance further investment (both public and private) in delivering services, which was congruent with both ADB and government goals. Effectiveness in achieving outputs and outcomes. While the PCR rating was effective, this validation s rating is less effective. The feasibility studies, designs, and bidding documents developed under part A aimed to build and operate water supply systems using the detailed designs created under the loan. Based on this plan, ADB had initiated processing a multitranche financing facility of $400 million for the AWUAIP; however, during this loan s implementation, MWSS decided to avail of a loan provided by the Government of the People s Republic of China, but this also did not materialize at the time of PCR. Moreover, the original loan's goal was to secure additional source of water in Metro Manila, which did not occur at the time of PCR. Other subcomponents (e.g., water treatment plans) produced through the detail design is not moving forward at the time of PCR. Efficiency in achieving outputs and outcomes. The PCR rating was efficient. However, as this project was a technical assistance loan, and the main objective was to produce feasibility studies for future investment, a standard efficiency rating is not applicable. Yet based on general delivery of intended outputs (see C[ii]), this validation concurs with the PCR rating of efficient. Outputs were completed with minor delays and in accordance with the terms of reference. Preliminary assessment of sustainability. The PCR did not clearly provide a sustainability rating. The main reason seems to be that there was no certainty at the time of the PCR of the eventual investment by ADB nor of the government on proposed water resource expansion projects for Metro Manila. 5 The outputs and outcomes were not confirmed due to lack of 5 However, a new e-mail confirmation (after the PCR publication) from the government details that some portions of the AWUAIP have been constructed under a loan from the Government of the People s Republic of China.

5 anticipated investment. The PCR stated (para. 27) that the capacity building component outputs have yet to be incorporated into the financial audit system. Consultants contracted to deliver a capacity building program also addressed financial issues raised by the Commission on Audit. However, without an MWSS financial management performance assessment, neither the PCR nor this validation can verify that MWSS staff has attained the necessary capacity and capability. In addition, Part B of the loan was totally funded by the government. (v) Impact (both intended and unintended). Para. 28 of the PCR stated that construction of the projects has not yet begun, and there is no impact to report so far. This validation concern with the assessment, i.e., no significant impact. In recent years, MWSS has experienced serious difficulties in handling the Maynilad Water Services concession, including substantial financial impacts. However, MWSS succeeded in the international arbitration with Maynilad, survived the financial turmoil caused by the failure of the concession, and reprivatized the concession, which may have exemplified MWSS's strong capacity. The capacity building (funded entirely by MWSS) should have improved the capacity of MWSS staff to manage financial systems and reporting, which would have a positive impact within MWSS and develop confidence in Commission on Audit about the performance of MWSS. In recent years, MWSS went through serious difficulties in handling the Maynilad concession, including substantial financial impacts. MWSS succeeded in the international arbitration with Maynilad, survived the financial turmoil caused by the failure of the concession, and successfully reprivatized the concession, which may have exemplified MWSS's strong capacity. There is little evidence on the extent of ADB s direct involvement in part B, the capacity development. E. Overall Assessment, Lessons, and Recommendations (validation of project completion report assessment) (i) (ii) Overall assessment. The PCR rated the overall project successful. This validation's overall rating is partly successful. The project was conceived and designed according to the Medium- Term Philippine Development Plan 2004 2010 and ADB s country strategy 6 to ensure longterm viable supplies of bulk water to Metro Manila. As was emphasized in the original report and recommendation of the President, and the PCR, the technical assistance loan s objective was to provide MWSS with a facility to engage consultants to prepare sector projects for new water resource development. This validation takes the view that the loan could have looked into a more rigorous feasibility study framework, which can provide long-term security for future water supply and critical assessment of overriding risks (including legal provision) that may deter potential external investors. The government s commitment and interests in the TA loan was substantially reduced during the implementation. Lessons. For the AWUAIP, instead of pursuing the ADB multitranche financing facility, the government decided to accept a loan from the Government of the People s Republic of China. The government is also dealing with many official development assistance partners, and there are grants and loans with better conditions than ADB loans. The project team insists that the government s decision to change funding sources was unexpected, through project documents, this validation does not find significant evidence suggesting that ADB actively explored other development partners investment plans in the sector, prior to or in the early stage of the loan implementation. ADB should have also assessed its own comparative advantage in offering its assistance to the Philippine development assistance environment in the water sector. A master plan for water resource development in each river basin including careful assessment of conflicting responsibilities for regulation, extraction, and approvalin the sector is needed for future ADB engagement.. 6 Government of the Philippines, National Economic Development Authority. 2004. Medium-Term Philippine Development Plan 2004 2010. Manila; and ADB. 2005. Country Strategy and Program: Philippines 2005 2007. Manila.

6 (iii) Recommendations. The PCR recommended that ADB monitor the prospects of ongoing and potential investment opportunities by using the feasibility studies produced from this loan. As previously mentioned, the government has its own priorities and makes political decisions. Public private partnerships with major investors in this sector would require high expertise and skills, and this would demand expensive advisory on legal and financial negotiation and documentation. F. Monitoring and Evaluation Design, Implementation, and Utilization (project completion report assessment and validation) The failure to produce a LARP for the AWUAIP was not detailed in project files nor in the PCR; subsequently, the covenant compliance on this issue was changed to compliant in the PCR stage, which had been a recurring issue during the implementation. A loan implementation monitoring and evaluation system to constantly update (i) other development partners investment plans, (ii) how the government and two concessionaires intend to comply with ADB safeguard due diligence, and (iii) recording of ADB s actual involvement in capacity building would have been useful to gauge project development. G. Other (e.g., safeguards, including governance and anticorruption; fiduciary aspects; government assessment of the project, as applicable) (project completion report assessment and validation) One possible reason why the government requested the cancellation of the Laiban Dam Project feasibility study was ADB s stringent social safeguard compliance requirements. Independent Evaluation Department H. Ratings Project Completion Report Review Relevance: Relevant Relevant Effectiveness in Achieving Outcome: Efficiency in Achieving Outcome and Outputs: Preliminary Assessment of Sustainability: Borrower and Executing Agency: Reason for Disagreement and/or Comments Effective Less effective Most of the subcomponents (e.g., WTPs) regarding feasibility studies did not make progress. Efficient Efficient Not rated Not rated As there was no substantial ADB or government investment from this loan (however, partial investment by another development partner just started), this validation is unable to rate it. Satisfactory Partly satisfactory The government did not have (a) a clear long-term vision, (b) supporting investment plan, (c) commitment to address resettlement issues, nor (d) sound agency coordination. Performance of ADB: Satisfactory Satisfactory Impact: No impact yet No impact Same as sustainability this validation is unable to rate it. Overall Assessment: Successful Partly successful Quality of PCR: Partly satisfactory

7 I. Comments on Project Completion Report Quality The level of information and background provided concerning shortcomings with the original outputs and succeeding investments have little detail in the PCR. Specifics on the changing intent of the government for future investment and what triggered scope reductions could have been useful for future pipelines in the Philippines and to draw lessons. J. Recommendation for Independent Evaluation Department Follow-Up No follow-up is recommended. K. Data Sources for Validation Data sources used in the preparation of this report included the report and recommendation of the President, back-to-office reports, PCR, progress reports, and other relevant project documents.

REGIONAL DEPARTMENT S RESPONSE TO THE PROJECT COMPLETION REPORT VALIDATION REPORT On 18 February 2011, the Director of the Independent Evaluation Division 2, Independent Evaluation Department (IED) received the following comments from the Urban Development and Water Division (SEUW), Southeast Asia Department: We have reviewed IED s earlier draft project completion report validation report circulated to us and its final draft that was sent to us for SEUW s review. We appreciate that the comments we made to IED on the earlier draft have been adequately incorporated in the final draft. Therefore, we have no comment to make on the final draft.