Project Appraisal-Commitment Document

GPOBA Commitment Paper - Manila Water June 14, 2007 49301

PHILIPPINES GPOBA COMMITMENT PAPER

Project Name: Improved access to water services in Metro Manila (P106775)

Project Summary

The objective of the project is to provide access to water services through individual household connections to target low income communities in Antipolo City, Baras, Rodriguez and San Mateo in Rizal province and Taguig City, in the Manila Metropolitan Region, by Manila Water Company (MWC). MWC is a Philippine company which provides water supply and sewerage and sanitation services under the terms of a 25-year Concession Agreement to approximately five million people in the East Zone.

MWC is investing some USD 14m in new water supply infrastructure in these areas, but the low income households cannot afford the connection charges set by MWC and the Regulator, which currently total PhP 7,531.73 (USD 167). Under the proposed OBA scheme, the household would contribute PhP 1,620 (USD 36) towards the connection charge and GPOBA provide a subsidy for the remainder (PhP 5,911.73 or USD 131). This unit subsidy will be subject to annual indexation as specified in the terms of the concession contract. In order to make the household contribution more affordable, MWC is proposing an installment scheme over 12 months. The GPOBA subsidy would be paid directly to MWC as a single payment, conditional on the independent verification of 6 months satisfactory service delivery.

The OBA scheme will build on MWC’s considerable experience of working with low income communities through its flagship “Tubig Para Sa Barangay (TPSB)” or “Water for the Community” program. The program, started in 1998, has recently achieved the major milestone of reaching over one million low income customers.

1 GPOBA Commitment Paper - Manila Water June 14, 2007

Project Fact Sheet

Project Name: Improved access to water services in Metro Manila

Scope: Expanding access to water services to low income households in Manila

Total project costs: approximately US$ 17,000,000

Total GPOBA funding requested: The original application was for grant subsidy in the amount of USD 2,800,000 to connect some 24,000 low income households. However, subsequent investigations by MW have revealed that there are almost 50,000 potentially eligible households in the target communities. As a result, MW is proposing that GPOBA also consider a larger OBA scheme that would connect all eligible households within the target communities.

Option 1: US$ 2,970,000 (US$131/connection, 21,375 hh’s)  Connection subsidy funding: US$2,800,000  Scheme implementation costs: US$50,000 (audit and verification – tbc by MWC)  World Bank/ GPOBA for supervision: US$120,000

Option 2: US$: 6,720,000 (~US$ 131/connection, 49,680 hh’s)

 Connection subsidy funding: $6,500,000  Scheme implementation costs: $100,000 (audit and verification – tbc by MWC)  World Bank/ GPOBA for supervision = $120,000

Note – the output numbers are based on 2007 connection charges

Funding leveraged from other sources:

 Households will contribute PHP 1,620 (US$36) per household connection  MWC will finance the construction of the backbone infrastructure including booster pumps, reservoir, infiltration gallery and series of wells, and pipe-laying of secondary and tertiary lines. These associated investments have been approved by the regulator, the MWSS-Regulatory Office, as part of the five-year investment plan. That approval assures MWC of an appropriate rate of return on these funds, funded through user tariffs from its entire customer base (approximately USD 14m).

GPOBA Funding Source: IFC (100%)

Outputs: sustainable access to modern water services, as evidenced by:  Working connection to MWC network  Six months of billed consumption

Potential beneficiaries: approximately 21,375 poor households (about 105,000 persons assuming 4.7 per household – census estimate for average hh size in Metro Manila; community surveys indicate larger household sizes, ie 5-6 person/hh)

GPOBA subsidy “efficiency”: $28/person (at 4.7/hh)

Returns: FIRR is 1% without subsidy and 4-5% with subsidy EIRR is 34%

Targeting: In absence of national means tested system for households or individuals, “community-based targeting”, through surveys conducted by MWC to assess income levels against National Capital Region poverty line. In addition, target communities must be officially certified, as of national government directives for poverty surveys, as “indigent” by the respective Barangay leader, indicating a majority of households falling under the national poverty line, as per standardised means proxy tests.

Grant recipient: Manila Water will be the grant recipient and implement the OBA scheme

Financial Management: GPOBA subsidies will be disbursed directly to the private operator. An independent auditor will be responsible for output verification. [to be confirmed by FM specialist in Manila]

Disbursement: 100% after connection verification and 6 months satisfactory service delivery

Procurement: The procurement specialist is in the process of clearing the scheme design [confirmation to be provided by the Lead Procurement Specialist in Manila]

Environmental clearance: IFC has cleared the scheme - the formal clearance memorandum.is pending

Government endorsement: Yes  Local governments (Barangays)  The Regulator - MWSS RO

Exchange rate: PHP 45/USD

Panel of Experts Issues raised at Eligibility Stage

1. Connecting additional households

The panel enquired if there was any assessment of additional households (current 25,000) being connected if the subsidy is increased from the current US$ 2.8million to say US$ 5 million.

MW has identified almost 50,000 low income households that would be eligible for GPOBA funding. These additional households are covered in Option 2.

2. Household contribution and GPOBA subsidy

The panel asked if there was scope to increase the proposed household contribution level of 5% or $32.

MW has undertaken community surveys in representative low income communities and concluded that PhP 1,620 (USD 36 at prevailing exchange rates) is close to the affordability limits in such communities. Indeed, MW is now considering a proposal for these households to pay their contribution in installments over twelve months (as opposed to the three months proposed in the Concept Note).

3. Technical Assistance

The panel was of the view that the requested amount of Technical Assistance (US$ 225,000) was high since the proposed scheme is relatively simple and the concessionaire has considerable capacity.

MW has decided not to pursue the request for TA funding and has undertaken the design work using a combination of local consultants and in-house resources at its own cost.

ACRONYMS AND ABBREVIATIONS

ADB Asian Development Bank CERA Currency Exchange Rate Adjustment CPI Consumer Price Index CSER Corporate Social and Environmental Responsibility DENR Department of Environment and Natural Resources E-IRR Economic Internal Rate of Return E-NPV Economic-Net Present Value FCDA Foreign Currency Differential Adjustment F-IRR Financial Internal Rate of Return F-NPV Financial-Net Present Value HH Households IFC International Finance Corporation IFR Interim Financial Reports IRR Internal Rate of Return MBN Most Basic Needs MWSI Maynilad Water Services MWSS Metropolitan Waterworks and Sewerage System NCR National Capital Region MWC Manila Water Company OBA Output Based Aid PhP Philippine Peso PSP Private Sector Participation RO Regulatory Office SAP Systems Applications and Products TPSB Tubig Para Sa Barangay (Water for the Community) TUPRAI Technical University of the Philippines Residents Association Inc WHO World Health Organization

Improved access to water services in Metro Manila

Table of Content

A. STRATEGIC CONTEXT AND RATIONALE...... 7 A.1. Country and sector issues...... 7 A.2. Rationale for involvement...... 9 A.3. Higher level objectives to which the project contributes...... 9 B. PROJECT DESCRIPTION...... 10 B.1. Project development objective and key indicators...... 10 B.2. Project Components...... 10 B.2.1. Types of connections/ services eligible for subsidy payments...... 11 B.2.2 Poverty targeting and community selection...... 11 B.2.3. Connection payment and subsidy levels...... 12 B.2.4. Tariffs...... 13 B.3. Financial and economic analysis...... 14 B 3.1 Economic Analysis...... 14 B 3.2 Financial Analysis...... 14 B.4. Lessons learned and reflected in the project design...... 15 C. IMPLEMENTATION...... 16 C.1. Milestones for project implementation...... 16 C.2. Institutional and implementation arrangements...... 16 C.3. Monitoring and evaluation of outcomes/results...... 16 C.4. Sustainability...... 16 C.5. Critical risks and possible controversial aspects (and measures to mitigate them)...... 17 Annex 1. Summary of OBA payments required...... 18 Annex 2. Financial Management (OP/BP 10.02)...... 19 Annex 3. Disbursement (OP/BP 12.00)...... 25 Annex 4. Procurement (OM, July 15, 2002)...... 26 Annex 5. Environment and Social Safeguards (OP/BP 4.01)...... 27 Annex 6. Results framework and monitoring mechanisms...... 31 Annex 7. Project preparation and supervision...... 33 Annex 8. Implementation timeline and indicative subsidy disbursement schedule...... 34 Annex 9. Map showing the target communities in Manila...... 37 Annex 10. Survey Results...... 38 Annex 11. Letter of support/endorsement from Barangay Chairmen...... 40 Annex 12. Indigent Community Status Certification from the office of the barangay chairman...... 41

A. STRATEGIC CONTEXT AND RATIONALE 1

A.1. COUNTRY AND SECTOR ISSUES.

The Philippines is classified as a DAC III country, and from a World Bank Group perspective is non-IDA and a non IFC frontier country. Key national statistics are provided in the table below:

2005 Population growth (annual %) 1.75 Population, total (millions) 83.05 Life expectancy at birth, total (years) 71.04 Mortality rate, infant (per 1,000 live births) 25.00 GNI (current US$) (millions) 107389 GNI per capita, Atlas method (current US$) 1320.0 Prevalence of HIV, total (% of population ages 15-49)0.10

Manila Water

The delivery of water supply and sewerage services in the Metro Manila region is the responsibility of the government-owned Metropolitan Waterworks and Sewerage System (MWSS). Since 1997, MWSS has contracted out provision of services via two 25-year concessions based on a geographic division of the urban area: the east zone with a population of 2.3 million was contracted to the Manila Water Company (MWC), and the West zone with a population of 4.4 million was contracted to the Maynilad Water Services (MWSI).

The required service performance of both concessionaires is defined in the 1997 concession agreement as amended since that time. Since 1997 MWC has reduced NRW from 63% in 1997 to 29.9% in 2006 and has met and exceeded its major service obligations. Most notably, both access to and reliability of services, including in particular to low income households, increased substantially, and reliability in terms of 24hr availability has increased from 26% of customers in 1997 to 98% in 2007. MWC now supplies 5.1 million residents with water and sewage services.

Number of Households served, in thousands (source: MWC) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1Q2007 325 340 382 418 457 543 634 717 809 909 938

Service approval ratings, as per Public Performance assessments undertaken by the University of the Philippines with support from the World Bank have seen the rate of Barangays awarding a “very good” rating going up from 3% in 2001 to about 98% in 2006.

In financial terms MWC has been consistently profitable since 1999, and launched a successful IPO in 2005 on the Philippine Stock Exchange, raising about US$96 million. This performance has allowed it to raise significant resources. Since taking over the East Zone concession in 1997 and as of December 31, 2005, the company invested a total of PhP 17.5 billion ($338 million) on programs focused on extending the water network, reducing system losses and improving water quality. A total of 1,274 kilometers of pipeline have been laid and MWC more than doubled its customer base since 1997 to 938 thousand households by 2007.

MWC’s single largest shareholder (30.4% direct and indirect economic interest) is the Ayala Corporation, one of the oldest business conglomerates in the Philippines with operations in real estate, electronics, utilities, the automotive sector, banking and insurance. Other large shareholders include United Utilities (11.8%), Mitsubishi Corp (7.9%) and IFC (7.4%). The public owns about 37.9% of the company following the IPO.

The MWSS through its Regulatory Office (“RO”), is responsible for monitoring and adjusting water billing rates, monitoring and regulating service operations and infrastructure, as well as handling customer complaints. The RO approves the business plans of MW, and has adopted a Reward and Penalty system for Manila Water to compel the concessionaire to be effective and prudent in its operations

Connections for the poor – one of the remaining challenges

MWC has instituted a number of programs in pursuit of its stated vision to “…become the leader in the development and provision of water and wastewater services in ways that help build sustainable communities…”. Community programmes include water and sanitation for service institutions (eg hospitals, prisons and schools) and the cooperative development programme which helps develop backyard cooperatives which provide products and services for its supply chain. MWC’s flagship programme, launched in 1998, is the Tubig Para sa Barangay Program (TPSB or "Water for the Community"). Since its launch more than one million urban poor have been given a regular supply of clean, safe and affordable drinking water. The proposed GPOBA project builds both on the successful track record of the TPSB programme as well as concerns identified in various independent evaluations (eg ADB, WB).

The TPSB program sought to speed up rollout of connections to poor households by leveraging off the “community” culture in the Philippines and, by working through local community leaders, to achieve communal solutions for water supply. Initially MWC offered “communal” meter or “shared” meter (among 5-7 households) options to reduce the connection fees for individual households, whilst placing more responsibility on those individual households/communities for connecting households (downstream of the meter) and maintaining that “private” infrastructure. Subsequently MWC switched to provide “bulk supply” or “shared” bills, placing the pressure and costs of bill collection in part on the beneficiary communities; initially, communities were also charged higher “bulk” tariffs, a practice MWC with the consent of RO later modified by using social tariffs.

Several evaluations, while clearly crediting this approach with much faster improvements for poor households, have pointed out equity concerns, and MWC’s experience of operating such schemes has demonstrated a number of the drawbacks of the shared billing approach for individual poor households. MWC has suffered significant customer management and credit issues with this approach where some individual households have not paid their share of the billings, but MWC has been reluctant to disconnect the whole community. Therefore, MWC is proposing to connect all beneficiary households with individual connections in this OBA scheme. This is also consistent with the approach being proposed for the Jakarta OBA scheme, where there was little community support for shared metering/billing. This project would then provide the basis for a meaningful side-by-side comparison of the two approaches.

A.2. RATIONALE FOR INVOLVEMENT

The World Bank Group has a long and positive history of involvement in Manila water supply and sanitation:

 IBRD supported MWSS, MWSI, and MWC in the past and through various current operations involving the financial rehabilitation of the two concessions and the expansion of sewerage throughout Manila.  IFC originally advised the Government of the Philippines on the concessioning of MWSS and has an ongoing successful involvement with MWC through loans and equity.

We believe the proposed operation meets all of GPOBA eligibility requirements and criteria, in that it

 provides for expanded access to basic infrastructure services, in this case water supply through individual household connections  uses targeted subsidies, that in this case will be targeted based on an existing and institutionalized government proxy means test, the “minimum basic needs” surveys, which have been found acceptable for targeting purposes in other World Bank operations  shifts responsibility for delivering results and performance risks substantially to private providers of services, in that disbursement of grants to the service provider, MWC will be only after verification of successful connection of households and satisfactory services in line with regulatory requirements for a period of 6 months thereafter  includes a credible results monitoring framework, in that it incorporates regular reporting on improved community access and reduced household expenditure on water supply  is embedded in an overall concession framework that has proven to be robust, in terms of regulatory oversight, and historic performance of the service provider, both of which together provide sufficient comfort as to the sustainability of services that will be provided through this project

In accordance with the World Bank CAS, the project would support Government efforts to improve the living conditions of the urban poor, promote economic and social development by eliminating major water shortages, and improve environmental conditions by providing safe water.

A.3. HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES

The project will

 contribute to a deeper understanding in the Philippines of output-based approaches to the use of public funds,  build on and deepen MWC’s successful service expansion program to low-income communities and thus  contribute to a broader public and political support for private sector involvement in critical infrastructure services, which remains fragile given the diverse track record of private concessions in Manila and the Philippines broadly. For example, there has been no substantial case of PSP in water in the Philippines outside Manila, despite the vast

needs and inefficient management of utilities, largely due to the high profile troubles surrounding MWSI, the other Manila concessionaire.

B. PROJECT DESCRIPTION

B.1. PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS .

The project development objective is to increase access to piped water supply services for poor households in Manila, thereby enhancing the welfare of these households. The key indicators to track progress against these objectives are:

 Number of new connections made in low income, “indigent” communities, at service quality levels as specified by the MWSS RO (incl. 24-hr continuity of supply, at minimum pressures of 5 psi),  Increased consumption levels by beneficiary households that would provide a proxy indication for improved hygiene and reduced incidence of water borne diseases,  Reduction in household expenditure on water by target households, which would provide a proxy indicator for increased household welfare; other factors relating to higher productivity due to reduced illness and eliminated waiting times, would be difficult to track and quantify, but are nevertheless significant

B.2. PROJECT COMPONENTS

The proposed project will be embedded in a larger network expansion effort by MWC as stipulated in its five year investment plan as approved by the MWSS- RO. In the target communities MWC will be installing booster pumps, reservoirs, infiltration galleries/wells, and secondary/tertiary distribution pipelines, with an estimated total project cost of PhP 793,321,074 (approximately US$17.6m).

A To T P m tal e o am r u ou c n nt e t (P n p hP t e ) a r g s e e r t v o i c t e h

c e o n p n r e o c j ti e o c n t M 2 63 1 8 9 2,6 0 , 93, % 6 57 0 4 0 C 1 34, 7 4 , 62 % 6 7,5 2 00 0 G 5 12 2 1 , 6,0 6 9 00, % 1 00 1 0 . 7 3

The scheme is structured around a single output – the provision of a working household connection that has delivered acceptable service for a period of 6 months. Eligible communities are classified as indigent communities (as defined by the Ministry of Social Welfare); such status will be formally confirmed by the Barangay Chairman.

The verification of outputs will be undertaken by an independent auditor to be procured by MWC - to be selected in accordance with World Bank procurement policies and appointed subject to a no-objection by the World Bank/GPOBA. The auditor will authenticate signed household certificates that certify service quality, which would be collected from households by MWC. The respective local governments (Barangay) will also participate in the authentication process (see Annex 11 for letters of support/endorsement from Barangay Chairmen)

The following sections describe in more detail the various design elements of the proposed OBA scheme:

B.2.1. Types of connections/ services eligible for subsidy payments

Connections eligible for subsidy payments would be only individual household connections in the standard as prescribed in the concession agreements and as amended by the MWSS-RO. (see Annex Confirmation of connection standards).

B.2.2 Poverty targeting and community selection

An important feature of the project is that it targets small pockets of households/communities that are located within larger service areas of MWC that are already being served or will be shortly, and that subsidies are targeted to reach households predominantly below the poverty line for the Metro Manila area (National Capital Region – NCR). Official poverty statistics peg the 2007 annual per capita poverty line at PhP19,3451 (USD 430), or PhP8,061 (USD 179) per month for a family of five with a single income earner (out of which PhP4,805 [USD 106] would be to cover basic food needs).

MWC have adopted two approaches to assess/confirm low income community eligibility:

(i) surveying potential communities, leveraging its expertise accumulated through its TPSB program (see annex 10 for summary results). Surveys have been conducted on a small number of representative, unconnected communities, with average household incomes below the poverty line, and average monthly expenditure for water supply is in the range of PhP700-1,100 ($ 15.5- 24.4). MWC has committed to undertake similar community surveys throughout the implementation of the proposed project, for non-objection by GPOBA, but cautioned against surveying all potential communities at this point, in order as to not raise expectations with the community that MWC may not be able to manage should GPOBA decide to not fund, or to not fund on the scale proposed by MWC, the proposed project. These surveys were undertaken with the assistance of the Technical University of the Philippine Residents Association Inc (TUPRAI) and local house owner associations. The results are consistent with data obtained from community surveys undertaken by the World Bank, the ADB, and other agencies, over the last years.

(ii) MW will obtain certification from the barangay of the “indigence” of each community included in the OBA scheme (Annex 12 shows example certification statements). This assessment by the barangay is based on a survey by local governments, used (in various modification) in large parts of the Philippines by local governments for allocation of social welfare support, in the absence of an institutionalized and robust individual means test mechanism. The surveys, rather than using household income/expenditure figures, are based on a limited number of “most basic needs (MBN) indicators” each of which is a proxy indicator for income, enabling a scoring of households. Only the lowest 25 or 30% typically qualify as indigent. The World Bank has previously relied on this targeting approach (e.g. PhilHealth, the National Health Insurance Corporation, extends support to indigent households for medical insurance based on CBIS-MBN surveys, conducted by the local government Social Welfare Development Office). The methodological weaknesses of the approach are well documented, but currently it represents the most robust approach available at the local government level.

B.2.3. Connection payment and subsidy levels

1 National Statistical Coordination Board, 2007

OBA subsidies will be paid directly to MWC on a ‘per new connection installed and operating’ basis.

Without the GPOBA subsidy, the total connection charge payable by a household to MWC for a service connection is PhP7,531.73 (US$167). This charge, set for 2007, comprises:

Meter deposit PhP1,020.00 US$ 23 Guarantee deposit 600.00 13 Connection fee 5,911.73 131 Total PhP7,531.73 US$167

From the household survey data, and MWC’s experience of working with indigent communities, it is clear that such connection charges are unaffordable to poor households. However, community feedback indicates that low income households could afford to pay the meter deposit and guarantee deposit of PhP 1,620 (USD 36) if this was to be payable in installments. MW management is currently considering offering eligible low income households a 12 month interest free credit arrangement for such payments. The proposed subsidy, at 2007 prices, is PhP 5,911.73 (USD 131).

Under the terms of the concession agreement, the connection fee is indexed on an annual basis in line with CPI data produced by the RO. In 2006 the connection charge increased by 7.6%, and the 2007 CPI adjustment was 6.2%. MWC has proposed that the unit subsidy rate should be indexed in line with regulated CPI indexation, which would reduce the numbers of households that could be connected compared with the calculations presented here.

Given that 93% of the connections are planned to be installed by the end of 2008 (40% in 2007 and 53% in 2008) the impact of connection charge indexation should be relatively small, reducing overall scheme subsidy efficiency by around 4.5% (assuming CPI of 6.2% pa) compared with 2007 price based estimates.

The proposed subsidy rate and payment plan should ensure that total household expenditure on water, including recurrent water bill and contribution to the deposits, is within a range of 5% of household income, a threshold broadly viewed as acceptable to international institutions such as the WHO and the World Bank.

It should be noted that with the proposed scheme design GPOBA subsidies will not be substituting for MWC investment obligations that form part of the current five year plan approved by the MWSS-RO. The MWSS-RO will be fully informed as to the terms of the Grant Agreement and MW is in the process of obtaining a letter of endorsement for the scheme from the RO. This will further ensure that GPOBA subsidies cannot lead to any ‘super-profits’.

B.2.4. Tariffs

The domestic tariff schedule effective October 7, 2006 is summarized below:

MWC Residential Tariff effective October 7, 2006 PhP Basic CERA FCDA* Total First 10 cu.m. 50.20/conn 10.00/conn 0.55/conn 60.76/conn

Next 10 cu.m. 6.13/cu.m. 1.00/cu.m. 0.07/cu.m. 7.20/cu.m. Next 20 cu.m. 11.62/cu.m. 1.00/cu.m. 0.13/cu.m. 12.74/cu.m. Next 20 cu.m. 15.29/cu.m. 1.00/cu.m. 0.17/cu.m. 16.46/cu.m. Next 20 cu.m. 17.87/cu.m. 1.00/cu.m. 0.20/cu.m. 19.07/cu.m. Next 20 cu.m. 18.71/cu.m. 1.00/cu.m. 0.21/cu.m. 19.92/cu.m. Next 50 cu.m. 19.56/cu.m. 1.00/cu.m. 0.22/cu.m. 20.77/cu.m. Next 50 cu.m. 20.39/cu.m. 1.00/cu.m. 0.22/cu.m. 21.62/cu.m. Over 200 cu.m. 21.23/cu.m. 1.00/cu.m. 0.23/cu.m. 22.46/cu.m. * 1.10% of Basic

Basic Charge This pays the cost of operating, maintaining, improving and expanding the distribution network as well as other facilities which are responsible for bringing potable water to residential, commercial and industrial end-users in the East Zone.

CERA (Currency Exchange Rate Adjustment) This is a fixed surcharge of PhP 1.00 per cubic meter of water consumed. This is added to the Basic Charge for the recovery of costs.

FCDA Foreign Currency Differential Adjustment recovers foreign exchange losses arising from MWSS and MWC loans used for capex and concession fee payments.

The poor households to be connected under the proposed OBA project will be charged the same tariff schedule as all other residential households in their respective consumption brackets. Most residential customers consume around 30 cu.m per month and, at this level of consumption, will pay an average of PhP 10.5/cu.m. ($ 0.23). The monthly water bill at this level of consumption would be PhP 320 (USD 7). Where customers are connected to MWC sewers they will pay a 50% sewerage surcharge. It should be noted that business customers pay much higher tariffs, with MW’s total average tariff income being around PhP 20/cu.m., a level which reflects full costs of operation and investments and includes an appropriate rate of return on investments by MWC. In 2006, MWC achieved a ROE of approximately 22%.

Given the track record of the regulator in setting tariffs, and the inclusion of a forex component in the tariffs following the Asian financial crisis and the bankruptcy of MWSI, risks to the sustainability of services due to low tariffs or financial distress of MWC are assessed as low at current.

B.3. FINANCIAL AND ECONOMIC ANALYSIS 1 B 3.1 Economic Analysis

The economic analysis has been done for 21, 375 households. Information from the socio- economic survey and MWC tariff structure (increasing block tariff) is used to calculate household consumption, expenditures on water and willingness to pay for improved access to water supply services.

The incremental net cash flow methodology is used for the rate of return calculations. The methodology confines quantified economic benefits to expenditure savings, time savings and value of health savings. Health benefits are also quantified based on the household survey for the target households and are restricted to those due only to direct patient treatment costs saved and adult working days gained as a result of reduced instances of diarrhea. However, since details on time savings are not available in the survey, these have been quantified based on adjusted World Health Organization (WHO)2 estimates i.e., water collection time saved per household is taken as half hour (WHO range 0.25-1.00 hour).

The methodology assumes one productive adult wage earner per household and minimum wage earnings as the opportunity cost of time. The minimum wage is adjusted downward for the high proportion of self and low-wage contractual employment among the target households.

The project has an economic Net Present Value of $ 19.2m and economic Internal Rate of Return of 34 percent. The E-IRR is 14% with only expenditure savings taken into account. It increases to 23% when time savings are added and to 34% with value of health benefits added. As a percentage of total benefits, expenditure savings account for 34%, time savings for 27% and health benefits for 38 percent.

The analysis uses a 12% discount rate and the useful life of the project is assumed 15 years.

B 3.2 Financial Analysis

The financial analysis is based on investment costs for connecting the 21, 375 households of which MWC contribution accounts for 80%, OBA subsidy for 16% and user contribution for about 4 percent. The project has a financial IRR of 1% without the OBA subsidy and 4-5% with the subsidy.

The results of the financial and economic analysis of the scheme are summarised in the tables below. Two sensitivities have been run based on different volumetric consumption assumptions. From the community surveys and operational experience of MWC it is believed that average consumption will be between 25 cu.m. and 30 cu.m. per month. The first table shows the returns for 25 cu.m./month and the second for 30 cu.m./month.

The FIRRs are low indicating the lack of commercial incentives for connecting low income households in peripheral unserved areas of Metro Manila. It should also be borne in mind that other properties will be connected which will pay higher water tariffs. However, MWC is a profitable business earning acceptable returns from the mix of higher consumption residential and higher tariff commercial customers across its concession area. Like many water utilities with high service ratios, there are significant diminishing marginal returns on new connections in peripheral, unserved areas, but the impact is diluted across millions of consumers.

The economic analysis demonstrates clearly the social benefits of the subsidy, with relatively even benefits accruing from reduced expenditure, time saving and health components.

25m3 consumption:

2 Guy Hutton and Laurence Haller, Water, Sanitation and Health Protection of the Human Environment, Evaluation of the Costs and Benefits of Water and Sanitation Improvements at the Global Level, World Health Organization, Geneva 2004.

Proportion of Benefits Expenditure 33.62 Time 27.48 Health 38.90

E-IRR 34% E-NPV $19,282,237 F-NPV (w/o subsidy) ($7,318,881) F-NPV (w/subsidy) ($4,140,790) F-IRR (w/o subsidy) 1% F-IRR (w/ subsidy) 4%

30m3 consumption: Proportion of Benefits Expenditure 33.08 Time 27.70 Health 39.22

E-IRR 34% E-NPV $19,282,237 F-NPV (w/o subsidy) ($7,104,773) F-NPV (w/subsidy) ($3,926,682) F-IRR (w/o subsidy) 1% F-IRR (w/ subsidy) 5%

B.4. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN. 2 3The project builds on ten years of lessons learnt in Manila since the privatization of MWSS, their respective pro poor connection programs, and good international practice. These lessons are reflected in the features of the scheme design, in particular:

 the selected approach to targeting  the choice of individual household connections (vs shared connections), and  the financing facility to be provided by MWC to eligible households in order to facilitate co- payment by households to connection charges.

C. IMPLEMENTATION

C.1. MILESTONES FOR PROJECT IMPLEMENTATION .

Annex 8 provides the proposed implementation schedule. The project is substantially ready for implementation, and implementation of the GPOBA project will be 90% complete by end of 2008 as per the proposed implementation schedule, with limited connections being added throughout 2009 and 2010.

C.2. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS.

MWC will be the implementing agency for the project and will be solely responsible for the construction of works, the retaining of consultants, and provision of services. MWC will conduct socio-economic surveys of target households/communities as per the sample surveys in all communities identified and will liaise with the local government in ensuring confirmation of individual communities as indigent.

Community based organizations will assist MWC during the planned road-show and public consultations for the scheme.

MWSS-RO, in its capacity as the regulator for the concession agreement, will endorse the project and receive updates on progress as per the existing regulatory reporting obligations, but will not assume any additional responsibility in the proposed project, for example it is not envisaged to reviewing outputs achieved as a precondition of grant disbursement.

C.3. MONITORING AND EVALUATION OF OUTCOMES/RESULTS 1 2The outputs of the project upon which GPOBA subsidies will be disbursed are:

 Verified working connections meeting specifications set by the concession agreements and MWSS-RO, and  Sustainable service delivery – monthly volume of water delivered, at pressure levels compliant with regulatory requirements, for a continuous period of six months after installment of connection

In addition to the monitoring and verification of actual outputs for certification and subsidy disbursement undertaken by the independent auditor, Annex 6 sets out additional information that will be collected by MWC and copied to GPOBA for monitoring and tracking purposes.

C.4. SUSTAINABILITY 3 4Once the households have been connected to the concessionaires’ network they will become customers of MWC – and subject to the terms and conditions of the Concession Agreements and

17 GPOBA Commitment Paper - Manila Water June 14, 2007 associated technical and service targets (pressure, water quality etc), as well as regulatory oversight through MWSS-RO. 5.

C.5. CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS (AND MEASURES TO MITIGATE THEM).

There are no critical risks to this project identified at this time; thus, no mitigation measures are proposed at this time.

ANNEX 1. SUMMARY OF OBA PAYMENTS REQUIRED

Cost component Foreign (and total) Foreign (and total) US$ million US$ million (Option1) (Option 2)

Installation of water service connections 2,800,000 6,500,000 for selected households.

Bank/GPOBA Supervision 120,000 120,000

Component 3: Consulting Services for 50,000 100,000 audits and output verification

Total 2,970,000 6,720,000

ANNEX 2. FINANCIAL MANAGEMENT (OP/BP 10.02). The FMS has prepared a draft report (see below) – finalisation of the FMS report will be dependent on the provision of further information by MW on a number of aspects of scheme implementation.

Financial Management and Disbursement Arrangements Global Partners Output-Based Aid for Manila Water Company, Inc.

1. Summary of the Financial Management Assessment. A Financial Management Assessment was carried for the proposed Global Partners Output Based Aid (GPOBA) in accordance with the guidelines issued by the Financial Sector Board, the objective of which is to determine whether Manila Water Company, Inc. (MWCI), the grant recipient and implementing entity, has acceptable financial management arrangement for the project. Overall, the Project meets the minimum Bank financial management requirements as stipulated in BP/OP 10.02. The financial management capacity at MWCI is considered satisfactory. The assessed financial management risk is considered low. The factors supporting this conclusion are summarized below.

MWCI is a publicly listed company and therefore subject to stringent rules of financial reporting by the Securities and Exchange Commission and other government bodies. The auditors rendered unqualified opinion on MWCI’s financial statements for the years 2004 -2006. It has a well defined organizational structure including its finance and internal audit department. These are staffed with qualified professionals with adequate work experience.

Institutional arrangement for the Project shall utilize the existing organizational structure and procedures. A focal person in the finance department shall be designated to monitor compliance with the financial covenants in the grant agreement. There is already an established group in operations that will implement the project. MWCI maintains its books of accounts and generates financial reports using the SAP system. The current chart of accounts will be adapted for the Project. The project transactions will be properly tagged in the books of accounts to facilitate the generation of project financial statements.

The internal audit department of MWCI in its organization structure is administratively under the Chief Finance Officer and functionally under the Audit Committee of the Board of Directors. The scope of the internal audit work covers all special projects and shall include transactions of this Project. The internal audit department staff is adequate and is composed of degree holders of accounting, finance and engineering, 40% of which are certified public accountants including its manager. The finance department of MWCI has adequate staffs that are degree holders of accounting, finance & treasury and/or certified public accountants and with an average of over 10 years related work experience.

MWCI has experience in implementing Bank-financed projects under the Manila Second Sewerage Project and the Manila Third Sewerage Project.

The objective of the project is to provide affordable potable water to the target beneficiaries of communities in Antipolo City, Baras, Rodriguez and San Mateo in Rizal province and Taguig City through the Tubig Para Sa Barangay (“TPSB”) or Water for the Community program of MWC. Based on the assessment by the local government units and MWC, almost all of the target beneficiaries would not be able to afford the Php 5,566.60 (USD 112) connection fee together with the standard meter and guaranty deposits. The project being an output-based aid will use the reimbursement method of disbursement. The aid will be based on the number of household connections completed at an agreed rate. An independent firm/individual will be engaged to certify on the number of household connections completed and on a test basis verify compliance with the established criteria of free household connections and grant subsidy entitlement as described in the grant agreement.

For the proposed loan, the following arrangements should be made: a. The finance department will separately tag the project transactions to facilitate the generation of project financial statements. b. The Project funds are composed of the grant fund and MWCI’s internal funds. The reimbursement method will be used under this project. Withdrawal of grant fund shall be supported by a certification by an independent firm/individual of the number of household connections of eligible beneficiaries. Terms of Reference for this will be agreed with the Bank before grant signing. c. MWCI shall submit annual audited financial statements of the entity and the project to the Bank on or before June 30 of each year together with the external auditor’s management letter. d. Interim unaudited financial report shall submitted 45 days after the end of each calendar quarter, which shall consist of the statement of sources and uses of funds and the physical progress report.

2. Risk Analysis – A summary of the financial management assessment risk ratings is provided in the table below. The detailed discussion immediately follows hereunder. Risk Assessment Comments Inherent risk Country N/A The Project is not affected by the country issues described in the CFAA because MWCI, the grant recipient and implementing entity is a private company. MWCI shall provide the counterpart fund for the Project & is therefore not affected by the country’s problems on tight budget and delays in cash remittance to the Project. Political interference is also not a problem in Project implementation Entity MWCI a private company has adequate organizational structure and policies and L procedures in place. MWCI has posted profits in 2004 to 2006. (See related discussion in Implementing Entities section below). Project L The grant will finance only the household connection fee based on the number of eligible beneficiaries connected and in accordance with the conditions set in the agreement as certified by an independent firm/individual. Control risk Implement- L MWCI has already gained experience in Bank-financed projects under the ing entity Manila Second Sewerage Project and the Manila Third Sewerage Project. Funds flow L As the grant fund will be disbursed for the subsidy on the household connection fee based on the number of household connected, MWCI will therefore prefinance the entire cost of this project. Grant fund will be disbursed to MWCI

using reimbursement method which shall be supported by a certification of an independent firm/individual on the number of households connected based on the criteria/conditions described in the grant agreement with respect to output and targeting. Staffing L MWCI has adequate highly qualified officers and staff in financial management, who are degree holders and/or certified public accountants. They have on the average over 10 years related work experience. Accounting L MWCI is guided by a financial management manual that contain the companies policies and policies and procedures. procedures Internal N The internal audit department of MWCI in its organization structure is under the Audit Chief Finance Officer but all reports are addressed to the Audit Committee of the Board of Directors. The scope of the internal audit work covers all special projects and shall include transactions of this Project. The internal audit department staff is adequate and is composed of degree holders of accounting, finance and engineering, 40% of which are certified public accountants including its manager. External N MWCI is required by the SEC to submit annual audited financial statements. Its Audit financial statements are audited by Sycip Gorres Velayo & Co, a local private accounting firm & a correspondent firm of Ernst & Young. See detailed discussion under External Audit section below. Reporting N MWCI as a private entity prepares its financial statements in accordance with and generally accepted accounting principles in the Philippines which are not monitoring different from IAS. The Accounting Standards Council of the Philippines has already approved the new set of Accounting Standards based on the revised IAS and new IFRS issued by the International Accounting Standards Board. This therefore makes IAS & IFRS the GAAP in the Philippines. MWCI prepares monthly & quarterly financial statements with comparison against budget, which are discussed with the concerned departments/units before submitting to the Board of Directors. Annual audited financial statements in addition to the quarterly financial statements are submitted to the SEC, Board of Investments, Bureau of Internal Revenue, etc.

A project control officer is assigned for every project. The officer coordinates & monitors the physical & financial progress of the Project with the project team, logistics (procurement) & finance department. Information N MWCI’s has computerized financial management system, SAP. The system will systems be able to record project transactions in one sub-ledger account. The data though will be transported to Excel to sort the information in order to report them by activities. MWCI has an information technology department that supports the users and the infrastructure. All users of the system have undergone adequate training. Adequate safeguards are in place to safeguard the data. H – High S – Substantial M – Moderate L/N – Low /Negligible

Strengths and Weaknesses Strengths

1. MWCI has well defined organization, with clear roles and responsibilities. MWCI has assigned a project team to ensure that project activities are properly implemented and supervisedThe staff in the finance department of MWCI and in the Controllership Group,

ITOD, and LID of LBP is adequate in number and are degree holders or certified public accountants with an adequate number of years related work experience. 2. MWCI has already gained adequate knowledge in implementing Bank-financed projects under the Manila Second Sewerage Project and the Manila Third Sewerage Project.

Weaknesses

There is no significant weakness in the financial management system of MWCI.

Funds Flow/Disbursement Arrangements The total project size is PhP 793,321,074.3 (USD15.93m).

Amount per Total amount Total amount Percentage to service (PhP) ($US) the project connection MWC* 24,973.00 616,042,025.50 12,369,079.92 78% Customer 1,620.00 39,962,160.00 802,372.45 5% GPOBA 5,566.60 137,316,888.80 2,757,090.43 17% Total 32,159.60 793,321,074.30 15,928,542.80 100.00% *includes construction of booster pumps, reservoir, infiltration gallery and series of wells, and pipe-laying of secondary and tertiary lines to reach the target communities

Subsidy level. Below is the breakdown:

Pariculars PhP US$ Meter deposit 1,020.00 20.48 Guaranty deposit 600.00 12.05 Connection fee 5,566.60 111.77 Total 7,186.60 144.29

The grant amounting to $2.8 million will be disbursed over a period of four years using output- based. Therefore MWCI will prefinance the entire cost of the project and will claim reimbursement from the Bank for the agreed subsidy on connection fee for every qualified household connection completed in accordance with the conditions/criteria described under output and targeting in the grant agreement.

Withdrawal of funds from the Bank shall be through the submission of duly signed Withdrawal Application and Statement of Expenditures (SOEs) and a certification of an independent firm/individual on the number of households connected qualified for grant subsidy. Disbursements under the Project shall comply with the Bank policies and procedures on disbursements and financial management as reflected in the Bank’s Disbursements Handbook and Financial Monitoring Report Guidelines.

Accounting Policies and Procedures/Reporting & Monitoring/Information System

The Project will be mainstreamed and will be using the same financial management policies and procedures of MWCI. The financial management policies and procedures of MWCI have been assessed and found to be adequate for this Project. MWCI has adequate computerized accounting

23 GPOBA Commitment Paper - Manila Water June 14, 2007 system that allows proper recording and tracking of project transactions. MWCI has adequate controls in place from procurement processing, processing of payments to suppliers, recording and reporting.

MWCI as a private entity prepares its financial statements in accordance with generally accepted accounting principles in the Philippines which are not different from IAS. Internal Audit

MWCI has an internal audit department that is administratively reporting to the Chief Finance Officer in its organizational chart but functionally reporting directly to the Audit Committee of the Board of Directors. The department covers financial and operations audit and are to implement risk-based approach audit. All operating units/department and special projects are covered in its scope of work. The department has four CPAs, including its department manager, and seven staff who have degrees in accounting, finance and engineering, and with over 10 years of related work experience. The internal audit department is expected to include the project in its annual scope of work. Reports resulting from such review will be made available to the Bank upon request.

External Audit

MWCI is required by the SEC to submit annual audited financial statements. Its financial statements are audited by Sycip Gorres Velayo & Co, a local private accounting firm & a correspondent firm of Ernst & Young. The external auditors conduct the audit in accordance with the auditing standards in the Philippines, which are not significantly different from International Standards on Auditing. The external auditors issued unqualified audit opinions on MWCI’s 2003 to 2006 financial statements. In the 2005 management letter of the external auditors to MWCI, there were no significant contentious issues reported. MWCI shall include in the external auditor’s term of reference the audit of the Project transactions.

Audit Report Due Date MWCI  Entity’s annual audited financial statements (balance sheet, income statement, statement of cash flows), together with the notes to the No later than 6 months financial statements after end of MWCI’s fiscal year  Project financial statements (statement of cash receipts & disbursements), together with the notes to the financial statements No later than 6 months after end of MWCI’s  Auditor’s management letter issued to MWCI fiscal year

No later than 6 months after end of MWCI’s fiscal year

Other reporting requirements

MWCI shall furnish the Bank with quarterly unaudited interim financial reports (IFR) throughout the life of the Project within 45 days after the end of each quarter, which shall consist of: (a) a brief description of the project progress; (b) financial reports (project sources and uses of funds for the current period and cumulative to date), (c) procurement status report, and (d) physical progress report. Draft format of these IFR will be agreed prior to grant signing.

Supervision plan

FM supervision mission visit shall be undertaken once a year during project implementation to ensure that the loan proceeds are used for the purpose it was granted, which may take at the most one week. FM supervision can also be performed by telephone and emails in cases of follow up of certain issues. The scope of the supervision is left to the professional judgment of the FM specialist. It may cover any of the following: (1) Review of the continuous maintenance of adequate FM system by the implementing agency; (2) Review of withdrawal applications where deemed necessary; (3) Follow up of timeliness of FM reporting and actions taken on issues raised by external auditors; (4) Review of financials as well as progress of the project; and (5) Review of compliance with the financial covenants

ANNEX 3. DISBURSEMENT (OP/BP 12.00).

Note – this draft is to be confirmed by FMS and PS

(i) Allocation of Proceeds. The Project will be implemented over a period of three years. Disbursements will be against the following expenditure categories: Output-based Aid Contracts and Consultants’ Services.

(ii) Implementation Agreement and Blanket Application for Withdrawal (BAW). The details of the implementation arrangements will be described in the Project Implementation Annex of the Grant Agreement. The Recipients’ accounting and financial management systems used for the purpose of the implementation of the Project are operational and satisfactory to produce the agreed upon Financial Monitoring Reports (FMRs).

(ii) Cash-flow projections. As part of each replenishment request, the Recipients will submit cash-flow projection estimates of disbursements for project expenditures for the ensuing six months.

(iii) Quarterly replenishment requests. Replenishment of the project account will be on a quarterly basis. The Recipients will submit quarterly replenishment requests for each calendar year to the Bank, reflecting expenditures paid during the previous three months and an estimate of expenditures for the ensuing six months. These quarterly requests will be in the agreed FMR format, which will include the following for disbursement purposes: (i) aggregate disbursements by the Recipient; (ii) breakdown of aggregate disbursements by disbursement category; (iii) percentage project account reconciliation statement; and (iii) forecast of expenditures for the next two FMR reporting periods.

(iv) Deposit Account. Advances (if any) from the Grant Account will be deposited into the Recipient’s dollar denominated bank account. The Recipient will maintain separate ledger accounts for the grant funding of the project. Advances to the Recipient from the Grants’ Account will be managed in accordance with Bank Guidelines as set forth in the Operational Manual and the Disbursement Letters to be issued by the Bank.

ANNEX 4. PROCUREMENT (OM, JULY 15, 2002).

Pending – the procurement specialist has completed a major part of the procurement review, but is awaiting information from MW on certain aspects of proposed scheme implementation.

ANNEX 5. ENVIRONMENT AND SOCIAL SAFEGUARDS (OP/BP 4.01).

Note – the IFC clearance needs to be restated in a project specific memorandum

IFC is providing the environmental and social safeguards clearance for this project through its Performance Standards procedures. According to IFC “As a result of IFC's three investments in Manila Water, IFC has conducted environmental and social due diligence and periodic and ongoing supervision of the Company's water and sanitation activities since 2002, including their programs for low income neighborhoods. We have found that MWC continues to manage its environmental and social performance in accordance with Philippine laws and regulations and international standards, including the IFC Performance Standards on Social and Environmental Sustainability. Provided that the proposed GPOBA sanitation activities are consistent with the WB Group's most current recommended approaches to sanitation and wastewater management under the conditions found in these neighborhoods, IFC expects these to comply, as well.

Consistent with the recently agreed Guidance Note on IFC involvement in GPOBA operations, please consider this IFC's compliance statement on this matter.”

Identified applicable performance standards The following Performance Standards apply to this repeat investment:

- PS1 – Social and Environmental Assessment and Management - PS2 – Labor and Working Conditions - PS3 – Pollution Prevention and Abatement - PS5 – Land Acquisition and Involuntary Resettlement

MWC’s water and sewerage concession involves activities in the metropolitan areas of Manila, and does not extend to any ecologically sensitive areas. Moreover, there are no indigenous people or cultural heritage issues associated with its activities.

Environmental and social categorization and rationale Like two earlier IFC investments in MWC, this grant is a Category B project because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria.

Key environmental and social issues and mitigation MWC continues to manage its environmental and social performance in accordance with Philippine laws and regulations and international standards, including the IFC Performance Standards on Social and Environmental Sustainability. The company has demonstrated its commitment to its social and environmental goals, which, in turn, have been integrated and aligned with their business goals. Ongoing activities that have social or environmental impact and risks are considered part of the company’s recently established Corporate Social and Environmental Responsibility (CSER) initiative, which covers five areas:

- Activities aimed at improving services to the community; - Improvements in health and safety for the public and employees; - Initiatives for employee development;

- Environmental protection programs; and - Economic development opportunities for local community cooperatives, SMEs and suppliers.

Social and Environmental Assessment and Management Systems:

MWC’s management philosophy exhibits a strong socially responsible ethic, as demonstrated by senior management’s commitment to their CSER initiative. Based on the original assessments conducted in support of the 1997 privatization and subsequent studies prepared by the World Bank and ADB in support of the Metro Manila sanitation strategy, Environmental Management Plans have been prepared to cover construction and operation of facilities and project components to be implemented by MWC. These plans describe the agreed mitigation measures, as well as monitoring arrangements.

Although the company does not have a formal environmental management system (EMS), MWC’s management structure, philosophy, and procedures allow it to successfully manage and enhance environmental and social performance. The company has an awareness of the issues and the willingness to address them as demonstrated by assigning appropriate resources and motivating staff. Staff has adequate capabilities to ensure that issues and solutions are understood and proper procedures followed. For the most part, appropriate organizational structure and procedures are in place as evidenced by their success in meeting current environmental obligations, as well as implementation of the various community programs. In the coming years, MWC intends to develop a formal EMS, and seek accreditation to ISO 14001, the international EMS standard.

Labor and Working Conditions:

MWC has an active human resources program that focuses on developing the talents and skills of each employee. The company provides training opportunities to employees that are strategically aligned with corporate needs, and seeks to enable key employees to become managers instead of performing work that is limited to a specific function. There is a robust Labor-Management program, which includes venues for clearing union issues and concerns and providing corporate updates to keep the union abreast of business operations and major corporate programs. Grievances are also resolved on the shop floor. Twenty-five percent of Manila Water employees are women.

MWC has an established employee health and safety program which conforms to normal water and sanitation industry practice. It sets out individual responsibilities within the company for ensuring all activities of work (whether direct or contracted) and places of work under their control are safe and without risk. MWC has produced a series of written work procedures defining safe systems of work to be used by MWC employees and contractors.

Compliance with policy and procedures is monitored by means of periodic audits, and violations are noted and corrective actions communicated effectively. MWC has a network of health and safety committees which regularly report on health and safety matters to the Corporate H&S Committee chaired by president of the company.

MWC’s accident statistics indicate that accident rates are comparable to developed country construction industry and water utility experience worldwide. In recent years, the company has initiated a number of measures to improve health and safety of its workforce, and data show that the number of incidents continues to drop. For example, MWC has improved its safety barrier system around all pipeline construction sites – issuing approved barriers to contractors.

Pollution Prevention and Abatement:

Provision of raw water resources continues to remain the responsibility of MWSS, although there is considerable uncertainty over the availability of new sources to meet demand in the MWC system beyond 2009. Future potential projects have been identified – Wawa Dam, Angat Reservoir optimization, Laguna de Bay, and the future Laiban Dam – but there is no guarantee these will be developed. For the near term, MWC has developed a program of developing small, interim sources in conjunction with continuing reductions in non-revenue water (NRW) leaks to meet demand, including infiltration wells on the Marakina River (close to Laguna de Bay), tapping springs in Taytay, and installing additional treatment capacity at its La Mesa Water Treatment Plant. MWC has made significant progress on NRW reduction, and it stands at 30.2% at the end of June 2006, well within reach of the World Bank’s target leakage “best practice “ level of 23%.

MWC’s potable water treatment plants continue to produce good quality drinking water, and records show that the finished water complies with Philippine National Standards and WHO guidelines, and the plants should be able to continue to produce water complying with these and other international standards.

With the help of the World Bank’s and ADB’s MSSP, MTSP, and the PRRP programs, Manila Water continues to progressively implement septage handling and disposal with resulting significant beneficial impact on the water quality of the concession area. Because the three new septage treatment plants will not be operational until 2007, septage collected by the desludging trucks continues to be temporarily disposed on barren land areas covered by volcanic ash (lahar) in Pampanga northwest of Manila.

The sewage treatment plants operated by Manila Water, including 26 newer package treatment plants serving smaller service areas, are generally performing well, and continue to produce treated effluent that meets discharge limits imposed by the Department of Environment and Natural Resources (DENR) according to monitoring carried out by both MWC and DENR.

Wastewater screenings from the sewage treatment plants are disposed to landfill and the dried sludge cake produced by the plants is used by the local community as soil conditioner. Owing to the lack of industrial discharges to the sewer system, the sludges are relatively free of toxic contaminants and are suitable for this end use. Going forward, MWC will ensure that adequate environmental and health safeguards are in place to protect those transporting and using the sludges, and, in coordination with the local authorities, that consumers are protected through restrictions on the types of crops treated with sludge (i.e., root crops or crops which are always cooked) and the method of application.

MWC has established a number of emergency response procedures to cover foreseeable eventualities relating to their business and to external security. The procedures cover: preparedness and response principles; communications with local authorities and emergency response bodies; medical aspects and first aid; incident reporting and investigation; and employee training.

Land Acquisition and Involuntary Resettlement:

MWC has adopted a comprehensive ”Framework for Resettlement” policy based on IFC and World Bank Involuntary Resettlement policies. This framework discusses the principles and

30 GPOBA Commitment Paper - Manila Water June 14, 2007 objectives governing resettlement in project areas, describes the process and responsibilities (MWC and various Government Agencies) for preparing, approving and implementing resettlement plans tied to specific construction activities. The Framework also addresses the criteria for compensation and assistance to be provided to various categories of displaced people, consultation and the monitoring and evaluation of the process.

Owing to its obligations to expand water and sanitation services by constructing new pipelines and constructing the World Bank funded septage treatment plants, MWC occasionally has been faced with having to temporarily or permanently displace residents or businesses from construction rights-of-way. Given the complexities (i.e., time and resource demands) involved in relocating legal and illegal residents, the company tries to avoid using occupied land wherever possible. In those instances however, where it cannot be avoided, MWC prepares Resettlement Action Plans per their Resettlement Framework policy, and appropriately addresses consultation and compensation of people as required. To date, 100 households have been affected and compensated under this policy.

Client's community engagement

MWC’s water tariff is considered affordable, with monthly water bills much less than 5% of the income for low income households, which is commonly cited World Bank indicator of affordability. MWC’s tariffs are also less expensive than other household utility costs. Water cost is approximately 1.8% of income for low income families.

MWC’s “Tubig Para Sa Barangay” (“TPSB”, or “Water for the Poor Communities”) provide’s low-income communities with properly connected water service at affordable rates. Areas that qualify for this program are those where there are large clusters of urban poor families, often illegal residents, with no pipe water service or, if there is piped water service in the area, with many illegal connections and poor water quality. By 2005, the total urban poor population served under this program reached 893,000 and further support to this relevant program is proposed through this project. The company has also implemented a micro-finance program to complement its efforts in assisting the marginalized communities to become self-sufficient. Dubbed Livelihood for the Community, this microfinance program seeks to provide financial assistance in the form of small loans to qualified families within the TPSB beneficiary communities. More recently, MWC further refined its microfinance program by supporting small businesses that could supply to MWC (e.g., signage, meter assemblies, bollards, pipe fittings, etc.).

The company conducts regular community presentations to update them on performance, as well as the status of service improvement projects. Every activity or program is also coordinated with the local government unit concerned in order to facilitate project implementation and encourage understanding by the affected communities. Aimed at creating an understanding and awareness of the company’s plans and programs, MWC crafted an NGO Engagement Plan which provides for quarterly dialogues to understand these stakeholder’s various concerns and queries. These will enable the company to develop specific action plans to address them. MWC seeks to engage NGOs for specific projects in the provision of water and sanitation services to low-income communities by maximizing their involvement from conceptualization to actual project implementation and evaluation.

ANNEX 6. RESULTS FRAMEWORK AND MONITORING MECHANISMS. 1 In addition to the monitoring and verification of actual outputs for certification and subsidy disbursement undertaken by the independent auditor, the following information will be collected by the applicants and copied to GPOBA for monitoring and tracking purposes.

Output Based Aid in Water – Manila Water Project Indicators

Project Characteristics

Project output(s) Surveys, Poverty targeting (surveys, community decisions, geographic) geographic OBA design period 1 month Planned implementation period for outputs 48 months

Financing GPOBA Donors Govt. Local Investment grants USD ths 2,800 na na Na

Private sector finance mobilized for investments USD ths

Project Outcome

Investment cost per connection established USD Subsidy per connection USD Outreach of OBA grant(s) to poor population % GPOBA payments proceeding according to plan (Y/N)? Payments delay, if any months Local co-funding supplied as planned (Y/N)? Tariff adjustment clauses respected OBA service provider before project (public/private) OBA service provider after project (public/private) User assessment of project (no/poor/fair/good/very good) Degree of local capacity building (none, low, medium, high) Means of dissemination of lessons learned, if any 2007 2008 2009 2010 No. of beneficiary households no. Connection rate % No. of new connections established no. Water sales per year m3 Billing collection rate for OBA household connections % Service availability (daily average) h/day Unscheduled water supply failures lasting more than 30 min. no./yr. Water tariff PHP/m3 Affordability ratio 1) % Time savings from new OBA household connections Hrs/day/con

Replicability and other

Pilot scheme or replication? Scheme introduced to other potential financiers (Y/N)? Scheme considered for replication/replicated (Y/N)? Funding of replications if any (government, donors) Increase in employment? Improving enabling environment? Improving government capacity (e.g. for replication and scale- up, working with local private operators, etc)?

1) Average water bill per household per month divided by average monthly household expenditure

ANNEX 7. PROJECT PREPARATION AND SUPERVISION 2 3A. Institutions responsible for project preparation:

41) GPOBA c/o World Bank

52) Manila Water Primary contacts: Paula Pe Benito (Investor Relations Officer) Glo Padua-de Castro (Treasury Department Head) Sherisa Nuesa (Chief Financial Officer)

6B. GPOBA/World Bank Team:

Core Team:

7Name 8Title 9Unit 10Iain Menzies 11Task Team Leader 13GPOBA/FEU 12Sr. Infrastructure Specialist 14Preselyn Abella 15FM Specialist 16EAPCO (Country Office) 17Ceclilia Vales 18Lead Procurement Specialist 19EAPCO (Country Office) 20Mara Warwick 21Sr. Urban Environment Specialist 22EASUR 23Mukami Kariuki 24Program Coordinator 25EASUR (Country Office) 26Maya Gabriela Villaluz 27Operations Officer 28EASRE (Country Office) 29Stephen Bailey 30Principal Environmental 31IFC (ESD) Specialist 32Dirk Sommer 33Program Coordinator 34IFC (PBGI)

Advisory team:

35Name 36Title 37Role 38Unit 39Patricia Veevers-Carter 40Program Manager 41Peer Review/ 42GPOBA Advisory 43Irving Kucynski 44Panel of Experts 45Advisory 46GPOBA 47Alejandro Jadresic 48Panel of Experts 49Advisory 50GPOBA 51Bill Kingdom 52Lead Water & 53Advisory 54EASUR Sanitation Specialist 55 56 57 58 59 60C. Project Preparation Costs 61Manila Water originally applied for scheme design technical assistance of USD 275,000. However, the scheme design work has subsequently been undertaken in-house at no cost to GPOBA.

34 ANNEX 8. IMPLEMENTATION TIMELINE AND INDICATIVE SUBSIDY DISBURSEMENT SCHEDULE

SUBSIDIES Connection charges 2007 5,911.73 per household 2008 6,278.26 (In PHP) 2009 6,667.51 2010 7,080.89

No. of Total cost per Target Date of beneficiar community (In completion Municipality/City Barangay Community y hh PhP) 2007 June Antipolo City Dalig Dalig1 200 1,182,346.00 Dalig 2&3 700 4,138,211.00 San Roque Don Enrique 1,000 5,911,730.00 Knight of Columbus 1,000 5,911,730.00 San Jose El Dorado 1,500 8,867,595.00 Mayamot Sitio Salangbayan 100 591,173.00 Baybay Sapa 500 2,955,865.00 Dela Paz Sitio Malanim HOA 240 1,418,815.20 Marikina City Parang Lakas Bakod 54 319,233.42 San Mateo Banaba Banaba extension 600 3,547,038.00 Taguig City Western Bicutan TUPREAI 300 1,773,519.00

July Antipolo City Dela Paz Purok Angela 150 886,759.50 Sta. Cruz Purok Upper Lucban 40 236,469.20 Taguig City Upper Bicutan PO Conversion 865 5,113,646.45 Western Bicutan Palar, Masagana 570 3,369,686.10

North Triangle Alliance (NTA)/Montalban October Rodriguez San Jose Heights Ph1&2 3,700 21,873,401.00

December Angono Botong-Domsa 1,500 8,867,595.00 San Vicente Riverside 500 2,955,865.00 Antipolo City Dela Paz Pinagmishan 180 1,064,111.40 San Roque San Lorenzo Ruiz 1,000 5,911,730.00 Sitio Golden Hills 300 1,773,519.00 San Agustine Village 106 626,643.38 Rodriguez San Jose Sub-urban Extension 4,000 23,646,920.00

Gawad Kalinga Housing Projects in various locations within the East Zone 1,000 5,911,730.00 20,105 118,855,331.65

35 No. of Total cost per Target Date of beneficiar community (In completion Municipality/City Barangay Community y hh PhP) 2008 March Antipolo Mayamot Lusrai 1 400 2,511,302.90 Boso-boso 2,000 12,556,514.52 Tanza 2,000 12,556,514.52 San Roque Nazarene Ville 1,000 6,278,257.26 Don Enrique 500 3,139,128.63 Quezon City Pag-asa San Roque 1, 2 & 3 7,000 43,947,800.82 Ramon Magsaysay Lagoon Community 150 941,738.59 Block J Community 30 188,347.72 Bahay Toro Sitio Militar 2,000 12,556,514.52 Neil Property, Upper Tandang Sora Banlat 500 3,139,128.63 veterans Village Area Pasong Tamo 9/8 1,200 7,533,908.71 Luzon Ave. Purok 5, 2, Culiat 3A Singian Ville 750 4,708,692.95 Old Balara Sitio Payong 1,2,3 & 4 1,350 8,475,647.30 Vasra Pael Compound 1,100 6,906,082.99 Sauyo Sitio Cabuyao 500 3,139,128.63 San Mateo Sto. Nino Riverside 1,500 9,417,385.89 Back Chapel 500 3,139,128.63 Pulang Lupa 1,000 6,278,257.26 Gulod Malaya Marquez Compound 100 627,825.73

December Angono Bagumbayan Bagumbayan 150 941,738.59 Pag-asa Sitio Sapa 150 941,738.59 Baras Pinugay Pinugay Habitat 1,000 6,278,257.26

Gawad Kalinga Housing Projects in various locations within the East Zone 1,000 6,278,257.26 25,880 162,481,297.89

36 No. of Total cost per Target Date of beneficiar community (In completion Municipality/City Barangay Community y hh PhP)

Gawad Kalinga Housing Projects in various locations within the 2009 Decemeber East Zone 2,000 13,335,018.42

No. of Total cost per Target Date of beneficiar community (In completion Municipality/City Barangay Community y hh PhP) 201 0 December Rodriguez San isidro Banai Ville 75 531,067.11 Joville 3, F. Rodriguez St. 420 2,973,975.81 Salvador Compound 1,000 7,080,894.78 Hilltop compound, Litex San Jose Road 200 1,416,178.96 San Rafael Hillside Yagit, Daang Tubo 1,000 7,080,894.78

Gawad Kalinga Housing Projects in various locations within the East Zone 1,000 7,080,894.78 3,695 26,163,906.22 49,680 307,500,535.76

37 ANNEX 9. MAP SHOWING THE TARGET COMMUNITIES IN MANILA

Manila Water (Sponsor) Location

Metro Manila and adjacent cities and municipalities. The map represents MWSS’s franchise area (blue is MWCI)

38 ANNEX 10. SURVEY RESULTS

Household surveys were conducted by MWC in three pilot communities. These surveys were designed to obtain information such as current levels of water consumption and current household expenditure, and indicative household income levels. An indicative monthly expenditure for water supply across communities is PhP 1,100 (from the survey results, there is wide variation in both the quantity of water consumed by households as well as their monthly expenditures and cost).

The surveys confirmed the status of the communities as low income “indigent” communities, with hh income levels clearly below, ie almost half the poverty line income assessed for the National Capital Region.

For illustration purposes, Table 1 compares the average cost of water paid by households3 to the cost of an equivalent amount of water under the official MWC tariff of PhP19/m3. On average, households are paying PhP1,100/m3 of vended water compared to an upper level of PhP475 with network supply. However, it should be noted that many households use significantly less water per month. The community of Tupreai is an outlier in terms of comparatively cheap (at 185% of network tariffs) water supplies, but provides a good demonstration of the price elasticity for water consumption even for low income households. Even at the comparatively low costs of alternative supplies for Tupreai residents, welfare benefits to hh’s from a network connection are about PhP400/month. These observations appear plausible and broadly in line with the social assessment done by the World Bank recently, as indicated in Table 2 below, which confirms (i) the high variation in water consumption (4-9 m3) in most low income communities, and prices charged by vendors (PhP100-125), high elasticity in demand (Bank estimates an immediate doubling of consumption following connection of the network), high monthly household expenditure PhP 1,100/month and significant drop in household water expenses post connection of about PhP400-500.

Table 1: Average monthly household expenditure w/o network supply Monthly Cost (PhP/m3) Total Monthly % of HH Usage (m3)* Cost income, indicative El Dorado 6 125 750 12.5% Knights of Columbus 6 100-125 600-750 8% Montalban Heights 9 125 1,125 28% (NTA) Tupreai 24 35 700-1,000 15% Network Supply 25 (using 19 475 7% (assuming a slightly lower 6,000 hh than avg. income) usage)*

3 This is calculated on the basis of the average per cubic meter cost of water for each household based on the quality consumed and price paid. This is different than the average cost of unit cost of water based on total volume consumed and amount spent for all households. While the later results in a much lower unit cost of water, it does not represent the average cost faced by each household. For this reason, we have chosen to present the results based on a household average.

39 Source: MWC community surveys

 compared to an average water consumption of 30m3 for existing residential MWC customers; even this level may not be achieved by the communities currently consuming less than 10M3, a doubling of consumption, and thus even lower monthly expenditure is a realistic short term assumption.

40 ANNEX 11. LETTE OF SUPPORT/ENDORSEMENT FROM BARANGAY CHAIRMEN

41 ANNEX 12. INDIGENT COMMUNITY STATUS CERTIFICATION FROM THE OFFICE OF THE BARANGAY CHAIRMAN

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