Validation Report

Reference Number: PCV: PHI 2011-25 Project Number: 30551 Loan Number: 1843 September 2011

Philippines: Mindanao Basic Urban Services Sector Project

Independent Evaluation Department

ABBREVIATIONS

ADB – Asian Development Bank DILG – Department of Interior and Local Government EA – executing agency EIRR – economic internal rate of return FIRR – financial internal rate of return IED – Independent Evaluation Department LBP – Land Bank of the Philippines LGU – local government unit NDF – Nordic Development Fund OCR – ordinary capital resources PCR – project completion report PSC – project steering committee RRP – report and recommendation of the president TA – technical assistance

NOTE In this report “$” refers to US dollars.

Key Words adb, asian development bank, dilg, lbp, mindanao, urban, sector, water supply, philippines

Director General H. Hettige, Officer-in-Charge, Independent Evaluation Department (IED) Director H. Hettige, Independent Evaluation Division 2, IED

Team leader K. Mohit, Evaluation Specialist, IED Team members O. Nuestro, Evaluation Officer, IED E. Li-Mancenido, Associate Evaluation Analyst, IED C. Roldan, Associate Evaluation Analyst, IED

The guidelines formally adopted by IED on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report.

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 REPORT PROJECT BASIC DATA Project Number: 30551 PCR Circulation Date: 26 November 2010 Loan Number: 1843 PCR Validation Date: September 2011 Project Name: Mindanao Basic Urban Services Sector Project Country: Philippines Approved Actual Sector: Water and other Total Project Costs 60.00 40.33 municipal infrastructure ($ million): and services ADB Financing ADF: 0.00 Loan ($ million): 30.00 19.53 ($ million) OCR: 30.00 Borrower ($ million): Land Bank of the 9.40 6.60 Philippines Beneficiaries ($ million): National Government 7.30 3.30 LGUs 7.30 4.90 Cofinancier: NDF Others ($ million) 6.00 6.00 Total Cofinancing 30.00 20.80 ($ million): Approval Date: 27 Sep 2001 Effectiveness Date: 15 Aug 2002 13 Sep 2002 Signing Date: 15 May 2002 Completion Date: 31 Dec 2007 30 Jun 2009 Closing Date: 30 Jun 2008 18 Nov 2009 Project Officers: Name: Location: From To A. Weitz ADB headquarters 2002 2004 M. Senapaty ADB headquarters 2004 2005 F. Steinberg ADB headquarters 2005 2009 Validator: O. Nuestro, Evaluation Team Leader: K. Mohit, Evaluation Officer, IED2 Specialist, IED2 Quality N. Bestari, Advisor, Director: H. Hettige, IED2 Reviewers: IEOD ADB = Asian Development Bank, ADF = Asian Development Fund, IED2 = Independent Evaluation Department (Division 2), IEOD = Independent Evaluation Department (Office of the Director General), LGU = local government unit, NDF = Nordic Development Fund, OCR = ordinary capital resources, PCR = project completion report.

I. PROJECT DESCRIPTION1

A. Rationale

1. Mindanao experienced high rates of urban growth in recent years with inadequate local investment in basic urban infrastructure and municipal services, remaining among the poorest regions of the Philippines despite abundant natural resources. High urbanization and low institutional capacity, affected local government units’ (LGUs’) ability to meet the demand for basic urban services. Consequently, there was an urgent need to improve urban service delivery by upgrading and expanding infrastructure, and improving the capability and capacity of LGUs to provide and manage services. Improved basic urban services would help reduce poverty and raise living standards, strengthen links between urban and rural areas, and support the peace process.

1 ADB. 2001. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Mindanao Basic Urban Services Sector Project. Manila. 2

B. Expected Impact

2. The project was expected to improve the quality of life of urban residents in Mindanao, supported by balanced and equitable regional development in the urban sector. It was expected to benefit more than 1 million urban residents by improving access to municipal services and supporting higher environmental standards.

C. Objectives or Expected Outcomes

3. The project had three primary objectives: (i) improve access to basic urban services through provision, upgrading, and rehabilitation of basic infrastructure and services; (ii) increase urban poor communities’ access to basic municipal services; and (iii) improve the institutional capacity and capability of LGUs to provide, manage, and maintain adequate municipal services and basic urban infrastructure. The project was expected to provide better access for (i) water for 250,000 persons; (ii) drainage and flood control for 120,000 persons; (iii) bus terminals and public markets for 550,000 persons; (iv) solid waste management for 280,000 persons; (v) urban roads and bridges for 470,000 persons; and (vi) other public facilities for 350,000 persons.

D. Components and/or Outputs

4. The chief components and related outputs were (i) part A: infrastructure investment: water supply, drainage and flood control, bus terminals and public markets, solid waste management, urban roads and bridges, public markets, and other public facilities; (ii) part B: institutional capacity building program: project management and implementation support, subproject preparation and implementation support, LGU capacity building program, and Department of Interior and Local Government (DILG) institutional strengthening program. Under part A, a total of 39 subprojects were approved and implemented, with 36 subprojects completed as of November 2010. Part B supported about 68 LGUs through various training modules, depending on the needs and requirements of the LGU. Each LGU was able to avail of technical skills training or attend workshops and relevant training and coaching sessions.

E. Provision of Inputs

5. Activities undertaken under part A included (i) identification of subprojects; (ii) preparation of feasibility studies, detailed design, and contract documents; (iii) bid evaluation, contract award, and procurement; (iv) construction of facilities; and (v) overall project implementation and coordination. Part B activities included project management support, subproject preparation and implementation support, capacity building for LGUs, and a DILG institutional strengthening program.

F. Implementation Arrangements

6. The Land Bank of the Philippines (LBP) was the executing agency for part A, and the DILG was the executing agency for part B. To undertake its responsibilities, the LBP designated its program management department to administer the project lending facility, while the DILG established the project development office to provide capacity building support to the LGUs. The national project steering committee (PSC) chaired by DILG comprised representatives from the Department of Budget and Management, the Department of Environment and Natural Resources, the Department of Finance, the Department of Public Works and Highways, the Housing and Urban Development Coordinating Council, the LBP, and the National Economic and Development Authority. At the regional level, the project established a technical review and coordinating committee chaired by LBP’s executive vice-president for Mindanao. The committee

3 comprised members from the DILG and other government agencies. Neither the PSC nor the technical review coordination committee met frequently. The project implementation units under the aegis of the LGUs coordinated with local bids and awards committees on procurement matters. The performance of LGUs varied considerably depending on local leadership and motivation. There was one case of misprocurement (project completion report [PCR], para. 29) and implementation of most subprojects took longer than planned.2

II. EVALUATION OF PERFORMANCE AND RATING

A. Relevance of Design and Formulation

7. The PCR concluded that the project remains relevant given its support to the Medium- Term Philippine Development Plan, 2004–2010. The report appropriately points out that the sector loan modality was flexible enough to accommodate the changing demands of the LGUs, including the financing mechanisms. The design of parts A and B was innovative, and their synergy improved LGUs’ access to urban infrastructure and services and strengthened their capacity to deliver services. However, the project failed to deliver on drainage, flood control, and solid waste management components (footnote 2, para. 40) as the LGUs did not want to borrow for drainage and flood control, reflecting a weakness of project design. Given the substantial accomplishments of parts A and B, built-in design flexibility, and appropriateness of the lending modality (sector lending) in view of project complexity (with 30–40 LGUs and 39 subprojects), this validation concurs with the PCR that overall the project was relevant.

B. Effectiveness in Achieving Project Outcomes

8. Appendix 1 of the PCR provided a complete picture of accomplishments compared with targets at the output and outcome level. Para. 3 describes the outcome performance indicators. Seventy-three percent of the target population was served, with targets exceeded for the bus terminals and public markets and other public facilities component. However, no result was obtained for the drainage and flood control and solid waste management components. Additionally, several of the shortlisted subprojects dropped out and fund utilization was lower than expected at 63.8%, resulting in the project’s appraisal target only being partly met (footnote 2, para. 42). Several factors contributed to subprojects dropping out of the project, including lack of adequate staff from the LBP to assist with the preparation of subproject appraisal reports. As stated, expected outcomes in the project design and monitoring framework were only partly met. This validation concurs with the PCR rating of less effective.

C. Efficiency of Resource Use in Achieving Outputs and Outcomes

9. The PCR rated the project less efficient. The reevaluation of completed revenue- generating subprojects showed that of the 14 reevaluated subprojects, only five remained financially and economically viable, while three were marginal, and the rest had negative results.3 The high cost of capacity building (e.g., part B) made the project less efficient in achieving its outputs and outcomes. Several subprojects in the public markets component registered marginal to negative financial and economic internal rates of return (FIRRs and EIRRs). The reduced financial viability of these subprojects was attributed to the adoption of lower tariffs or fees than those proposed in the feasibility studies. For the water supply component, it was also due to the number of unmet household connections. Furthermore, the

2 ADB. 2010. Completion Report: Mindanao Basic Urban Services Sector Project in the Philippines. Manila. 3 Reevaluation was not carried out for nonrevenue subprojects such as equipment, gymnasiums and sports centers, and municipal halls. These were designed as social projects in the subproject appraisal reports.

4 impact of two local elections (in 2004 and 2007) caused substantial project delays (footnote 2, para. 43).4 The government’s PCR was critical of the project’s implementation framework, which contributed to delays in the approval and implementation of subprojects.5

10. Project costs, disbursement, and borrower contribution. The project cost at completion was $40.3 million equivalent, comprising $15.6 million equivalent in foreign exchange and $24.6 million equivalent in local currency, against the estimated $60 million at appraisal, comprising $27.6 million in foreign exchange costs and $32.4 million in local currency costs. This included partial loan cancellation of $9.27 million equivalent because of slow disbursements and delays in subproject implementation. The government’s inability to provide capital grant funds also contributed to the low utilization of the infrastructure investment (part A). The Asian Development Bank (ADB) resolved this by approving a new financing mix in July 2005. 6 Disbursements remained slow until implementation consultants were fielded in 2003.7 The PCR stated that appropriate ADB guidelines were adopted in consultant recruitment and procurement procedures, although there was one case of mis-procurement (PCR, para. 29). Consultant performance is reported as satisfactory.

11. Cancellation and delays to subprojects; mis-procurement, minor as it may be; and a poor EIRR all lend credence to a less efficient rating. This validation concurs with the PCR rating of less efficient. Results of the FIRR and EIRR computation are summarized in Table 1.

Table 1: Results of Financial and Economic Reevaluation (%) Financial Evaluation (FIRR) Economic Evaluation (EIRR) As After As After Type of Subproject/Name of LGU Appraiseda Completionb Appraiseda Completionb A. Water Supply System 1. Naawan, Misamis Oriental 14.1 6.1 17.1 8.8 2. Impasugong, Bukidnon 23.2 14.6 27.1 17.2 3. Alubijid, Misamis Oriental 20.9 5.3 24.6 7.5 B. Public Market 1. Roseller T. Lim, Zamboanga del Norte 12.7 negative 17.5 negative 2. Alicia, Zamboanga Sibugay 11.1 negative 17.9 4.6 3. Dumalinao, Zamboanga del Sur 15.7 negative 20.1 negative 4. Guipos, Zamboanga del Sur 14.6 negative 19.8 2.9 5. Barobo, Surigao del Sur 13.4 5.7 17.5 7.8 6. Hagonoy, Davao del Sur 18.1 8.5 25.8 16.1 7. Makilala, North Cotabato 13.1 12.8 25.9 16.5 8. Mati, Davao Oriental 14.7 negative 18.7 negative 9. Ozamis City, Misamis Occidental 18.0 10.9 22.0 13.6 C. Transport Terminal 1. Kidapawan City, North Cotabato 14.0 negative 16.0 1.4 2. Panabo City, Davao del Norte 14.4 13.3 18.7 17.3 EIRR = economic internal rate of return, FIRR = financial internal rate of return, LGU = local government unit. a FIRR and EIRR were based on subproject appraisal report. b FIRR and EIRR were based on updated actual data as of project completion review mission. Source: Asian Development Bank. 2010. Completion Report: Mindanao Basic Urban Services Sector Project in the Philippines. Manila.

4 The Independent Evaluation Department fielded a Philippines country assistance program evaluation mission (2008), which found out that processing and implementation of the initial LGU projects took an average of 627 days from the date of submission of a letter of interest to the release of the 15% mobilization for project implementation. 5 LBP. 2010. Completion Report: Mindanao Basic Urban Services Sector Project. Manila. 6 Footnote 2, para. 21. The new financing mix was 90% loan financing and 10% LGU equity against the planned financing mix in the RRP of 70% loan financing and 30% LGU equity, which included a government grant component for qualified LGUs. 7 Disbursement projections in the RRP (15% in year 1, 30% in year 2, etc.) were unrealistic. No disbursements occurred during the first two quarters, when the project was in development.

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D. Preliminary Assessment of Sustainability

12. The FIRR data presented in Table 1 (footnote 2, Appendix 12) potentially affects the sustainability of project outcomes. The FIRR is negative to marginal at best. The PCR, however, rated the project likely sustainable in light of the various initiatives and measures proposed by the LBP and DILG to sustain project outputs, e.g., completed markets, terminals, and water supply systems. However, these measures are in the nature of legislative codes, operation manuals, cost recovery plans, and policy commitments only. There is no evidence in the PCR that these measures actually translated to flow of funds for financial sustainability and self- sufficiency of the subprojects. The PCR noted that most income-generating projects required a government subsidy in the first 3 years of operation. However, there is no information on how the poor FIRR of subprojects would be addressed to sustain the project financially after the 3- year grace period. The current practice of keeping tariffs and fees at levels lower than those proposed by the project feasibility study is not expected to change in the foreseeable future. In light of the foregoing, this validation rates the project less likely sustainable.

E. Impact (both intended and unintended)

13. The PCR did not rate the impact of the project. It reports that appropriate environmental laws and policies were complied with in the project’s implementation, and environmental protection measures were built into the feasibility study where negative impacts were envisaged. Economic impact is expected to be positive, resulting from employment opportunities generated from the subprojects. The financial viability of the subproject leaves a question mark on the long-term and sustained economic benefits of the project. The PCR did not present any information on the “impact on institutions,” which this validation considers was important given the emphasis of part B (institutional capacity building program) of the project. Taking into account the sustainability assessment in para. 12, this validation rates the project as having had moderate impact.

III. OTHER PERFORMANCE ASSESSMENTS

A. Performance of the Borrower and Executing Agency

14. The PCR rated the overall performance of the LBP and DILG satisfactory, as both executing agencies did their best to complete the complex project. However, the difficult working relationship between the LBP and DILG affected project performance, including subprojects cancellation, delays, and low fund utilization. Lack of adequate staff provision by the LBP to assist with subproject preparation and withdrawal of government funding after 2005 when the government introduced the “no grant policy” adversely affected the project. The project development office of the DILG failed to establish the project performance monitoring system, and subsequent attempts at data management (e.g., results monitoring and evaluation systems) did not succeed. There was partial compliance with the project covenant regarding establishment of the program management department and provision of counterpart funding. Of the 15 project covenants (footnote 2, Appendix 10), the borrower had partial compliance with two and compliance with amendment for three covenants. Finally, the financial viability of the project was affected by the government’s decision to keep tariffs and fees (public market rent, transport terminal fees, water supply user fees, etc.) lower than the project feasibility study recommendations. Notwithstanding project complexity, this validation rates the performance of the borrower and executing agency partly satisfactory.

B. Performance of the Asian Development Bank

15. The PCR rated ADB performance satisfactory, with adequate project review missions facilitating resolution of numerous project issues. ADB participation in the PSC and technical

6 meetings was active and productive. It made best efforts to process project approvals to avoid delays and make implementation smooth, including acting as an intermediary when relations became strained between government parties. In view of project complexity, the number of actors involved, and other events (e.g., national elections) outside of ADB’s control that affected project performance, this validation endorses ADB’s performance to be satisfactory.

C. Other

16. The PCR reported positive gender impacts from the project through improved employment opportunities for women. None of the subprojects negatively affected the culture and beliefs of indigenous peoples and/or Mindanao's Muslim population (footnote 2, para. 48). Appropriate environmental laws and regulations were reported to have been complied with. Appendix 10 of the PCR reports that all environment and social covenants were complied with. No subprojects required land acquisition or resettlement.

IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS

A. Overall Assessment and Ratings

17. The project made laudable efforts toward its goal of improving the quality of life of urban residents of Mindanao. The project design and lending modality were appropriate for the project objective and the design demonstrated sufficient flexibility to accommodate challenges encountered during implementation, hence rated relevant. Various subproject delays, and cancellation of the drainage, flood control, and solid waste management components reduced effectiveness. With 73% of the target population eventually being served and with fund utilization less than the anticipated 63.8%, the project’s appraisal target was only partly met, and thus rated less effective. Efficiency was marred by a negative to marginal EIRR for most subprojects. Delays in subprojects’ implementation, one incident of mis-procurement, and poor EIRR resulted in the project being rated less efficient. Although well intentioned, LBP and DILG efforts to introduce policy and management initiatives for sustaining project outcomes remain in question. There is no evidence yet of actual flow of funds providing financial sustainability and self-sufficiency to the subprojects or a plan to address projects’ financial viability after the grace period. A poor FIRR also affects the financial sustainability of the project, rated less likely sustainable. This validation accords an overall rating of partly successful, as in the PCR.

Ratings PCR IED Review Reason for Disagreement/Comments Relevance Relevant Relevant Effectiveness in Less effective Less effective achieving outcome Efficiency in achieving Less efficient Less efficient outcome and outputs Preliminary Likely Less Likely Poor FIRR, low project tariffs, and absence assessment of of a plan to address long-term financial sustainability: viability of the subprojects Borrower and Satisfactory Partly Strained working relationship of LBP and executing agency: satisfactory DILG; counterpart funding withdrawal, inadequate LBP staff time, and partial compliance of covenants Performance of ADB Satisfactory Satisfactory Impact Not rated Moderate Questionable project financial viability, no information on long-term institutional impact Overall assessment Partly Partly successful successful

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Ratings PCR IED Review Reason for Disagreement/Comments Quality of PCR Satisfactory Information presented logically and with candor ADB = Asian Development Bank, DILG = Department of Interior and Local Government, IED = Independent Evaluation Department, LBP = Land Bank of the Philippines, PCR = project completion report. Sources: ADB. 2010. Completion Report: Mindanao Basic Urban Services Sector Project in the Philippines. Manila; ADB Independent Evaluation Department.

B. Identification of Lessons

18. The PCR generated a number of useful lessons. This validation agrees with all of the lessons identified in the PCR. Another lesson that merits attention is the need for improved and expeditious processing of approvals both within ADB business processes and within the government to avoid delays to approval of variation requests and other procurement matters.

C. Recommendations for Follow-Ups

19. The PCR also included several recommendations, all of which this validation endorses. In particular, the recommendation on performance-based allocation of government assistance, taking into account full cost recovery of services, is critical for inducing a performance-based reward culture among government agencies seeking government or international assistance.

V. OTHER CONSIDERATIONS AND FOLLOW-UP

A. Monitoring and Evaluation Design, Implementation, and Utilization

20. Project design required implementation of a project performance and monitoring system. A results-based monitoring and evaluation system was adopted for the 39 completed subprojects in lieu of the project performance and monitoring system. However, the results- based monitoring and evaluation system was not very effective, and the project was implemented without an adequate data management system.

B. Comments on Project Completion Report Quality

21. The PCR generally met the requirements for self-evaluation. This validation found both the ADB PCR and executing agency’s PCR to be candid, thorough, and detailed with adequate documentation to support their findings and conclusions. An area where possibly more information could have been provided in ADB’s PCR was the institutional impact of the project on organizational improvements within LBP, DILG, and LGUs as a result of the project’s part B. This validation rates the quality of the PCR satisfactory.

C. Data Sources for Validation

22. The primary data sources for the validation were the ADB PCR; the executing agency’s PCR; the RRP; and mission memoranda of understanding, aide-mémoires, and back-to-office reports.

D. Recommendation for Independent Evaluation Department Follow-Up

23. In view of the quality and findings of the PCR, this validation does not recommend the Independent Evaluation Department to conduct a project performance evaluation in the future.

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REGIONAL DEPARTMENT’S RESPONSE TO THE PROJECT COMPLETION REPORT VALIDATION REPORT

On 28 June 2011, the director of the Independent Evaluation Division 2, Independent Evaluation Department (IED), received the following comments from the Urban Development and Water Division, Southeast Asia Department.

We have reviewed the IED’s draft project completion report validation report circulated to us on 24 June 2011. We agree with your findings and will address issues raised with regard to sustainability and pricing of services when processing and implementing future projects.