Mwss New Water Source Development Project

3 ASIAN DEVELOPMENT BANK RRP:PHI 35379

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED TECHNICAL ASSISTANCE LOAN

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM

FOR THE

MWSS NEW WATER SOURCE DEVELOPMENT PROJECT

September 2003

CURRENCY EQUIVALENTS (as of 1 September 2003) Currency Unit – peso (P) P1.00 = $0.0182 $1.00 = P55.04 ABBREVIATIONS ADB – Asian Development Bank AP – affected people AUSAID – Australian Agency for International Development AWUAIP – Angat Water Utilization and Aqueduct Improvement Project BIR – Bureau of Internal Revenue CDAP – community development action plan COA – Commission on Audit COB – current operating budget DBM – Department of Budget and Management DILG – Department of the Interior and Local Government ECC – environmental compliance certificate GAAM – Government Accounting and Auditing Manual IASC – inter-agency steering committee IP – indigenous peoples IPSA – initial poverty and social assessment ISA – Initial social assessment LAR – land acquisition and resettlement LGU – local government unit LIBOR – London Interbank Offered Rate LWUA – Local Water Utilities Administration MLD – million liters per day MTPDP – Medium-Term Philippine Development Plan MWCI – Manila Water Company, Inc. MWSI – Maynilad Water Services, Inc. MWSS – Metropolitan Waterworks and Sewerage System NRW – nonrevenue water NWRB – National Water Resources Board PIPDP – Preliminary Indigenous Peoples Development Plan PLARP – preliminary land acquisition and resettlement plan PMO – project management office PSAR – poverty and social analysis report PSP – private sector participation QCBS – quality- and-cost-based selection SOE – statement of expenditure TA – technical assistance TOR – terms of reference WSS – water supply and sanitation NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2003 ends on 31 December 2003. (ii) In this report, "$" refers to US dollars. This report was prepared by a team consisting of R. Frauendorfer, urban development specialist (team leader); R. Ondrik, senior programs coordination specialist; E. Araneta, counsel; S. Muramoto, project engineer; L. Blanchetti-Revelli, social development and resettlement specialist; M. Lindfield, housing finance specialist; and S. Wendt, social development specialist.

CONTENTS Page

LOAN AND PROJECT SUMMARY ii

MAP v I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 3 A. Objectives 3 B. Components and Outputs 3 C. Cost Estimates 6 D. Financing Plan 6 E. Implementation Arrangements 7 IV. PROJECT BENEFITS, IMPACTS, AND RISKS 9 A. Project Benefits and Impacts 9 B. Project Risks 11 V. ASSURANCES 12 A. Specific Assurances 12 B. Conditions for Disbursement 12 VI. RECOMMENDATION 13 APPENDIXES

1. Project Framework 14 2. Sector Analysis 16 3. External Assistance to the Sector 18 4. Financial and Institutional Analysis of MWSS 19 5. Terms of Reference for Feasibility Study for the Wawa River Project 32 6. Description of Water Source Projects 36 7. Terms of Reference for Capacity Building for Metropolitan Waterworks and Sewerage System 41 8. Cost Estimates and Financing Plan 44 9. Implementation Schedule 45 10. Poverty and Social Analysis Summary 46 11. Social Safeguards Issues 47 SUPPLEMENTARY APPENDIX (available on request) A. Nonrevenue Water Review

LOAN AND PROJECT SUMMARY Borrower Metropolitan Waterworks and Sewerage System (MWSS) Guarantor Republic of the Philippines Classification Poverty classification: Other Thematic: Human development, private sector development Environmental Environmental assessment for the new water source development Assessment projects will be carried out under the technical assistance (TA) loan in accordance with the environmental assessment requirements of ADB's Environment Policy. Project Description The MWSS New Water Source Development Project (the Project) will provide MWSS with a facility to engage consultants to prepare public and private sector projects for new water source development. The Project will consist of consulting services for (i) the preparation of feasibility and other studies required to prepare new water source projects, and (ii) capacity building for MWSS in the field of financial management. Rationale Six years after two private concessionaires, Manila Water Company Inc. (MWCI) and Maynilad Water Services Inc. (MWSI) took over operations from MWSS, water supply continues to be a major concern in the Metro Manila area. Nonrevenue water remains high, and some areas experience water shortages, low water pressure, and interrupted supply. By the end of 2002, MWCI and MWSI provided about 82% of the population in the MWSS service area with water. However, existing water sources can barely meet current demand, let alone connect additional customers, requiring the development of new water sources. Water provided from the additional sources will not only ensure improved and sustainable service delivery for existing customers, but also enable extension of service coverage, particularly for the urban poor. MWSS has identified three potential water source projects requiring comprehensive consulting services including preparation of feasibility studies and provision of high-level advice on legal and financial issues. The TA loan will provide MWSS with a facility to complete project preparation in time, ensuring appropriate quality. The envisaged projects will also generate potential business opportunities for the private sector in water source development. Objectives and Scope The objective of the Project is to provide consulting services to (i) prepare and design projects for the development of new water sources for Metro Manila suitable for financing from ADB, the private sector, or other sources, and (ii) improve MWSS’ capacity for financial management, accounting, and fiscal control. The resulting water source projects will improve the living conditions and health of the population in Metro Manila through providing safe water, and will facilitate the expansion of the service area, particularly to the urban poor. Projects will also generate business opportunities for the private sector in water source development. The Project consists of consulting services for Part A— Development of New Water Source Projects, and for Part B— iii

Development of New Water Source Projects, and for Part B— Capacity Building. Part A will include (i) feasibility study for the Wawa River Project; (ii) feasibility study, detailed design, and tender documents for the Angat Water Utilization and Aqueduct Improvement Project; and (iii) studies, including a resettlement plan, a review of existing design and tender documents, and financing arrangements, for the Laiban Dam Project. All three projects will address environmental, poverty, social analysis, and social safeguards concerns as required by ADB guidelines. Part B will include capacity building to strengthen financial management of MWSS, and will comprise training and preparation of manuals and guidelines for (i) management accounting; (ii) corporate planning, budgeting, and budgetary control; (iii) financial accounting; (iv) internal control and audit systems; and (v) data processing. Cost Estimates Total Project cost is estimated at $4.97 million equivalent, of which $1.30 million is the foreign exchange cost (26%), and $3.67 million equivalent (74%) is the local currency cost. Financing Plan It is proposed that the Asian Development Bank (ADB) provide a loan of $3.26 million or 66% of the project cost, to cover the entire foreign exchange cost and $1.96 million equivalent of the local currency costs. MWSS will finance the remaining local cost of $1.71 million equivalent. The Republic of the Philippines will guarantee the performance of MWSS' obligations under the Loan Agreement. Loan Amount and Terms A loan of $3.26 million from ADB’s ordinary capital resources will be provided under ADB’s London Interbank Offered Rate (LIBOR)-based lending facility. The loan will have a 10-year term including a grace period of 3 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a front-end fee of 0.5%, and such other terms and conditions as set forth in the Loan Agreement. Period of Utilization Until 30 June 2007 Estimated Project 31 December 2006 Completion Date Implementation An inter-agency steering committee (IASC) composed of MWSS Arrangements and the concessionaires was formed in March 2001 to prioritize and supervise development of new water source projects. The IASC will be responsible for guidance, monitoring, and supervising implementation of the Project. MWSS will be the Executing Agency and will implement the Project over 3 years through the existing project management office. Executing Agency MWSS iv

Consulting Services Consultants financed under the Project will be engaged in accordance with ADB’s Guidelines on the Use of Consultants, including the use of the quality- and cost-based selection method for consulting firms and arrangements satisfactory to ADB for the engagement of domestic consultants. Approximately 438.5 person-months of consulting services will be required, comprising approximately 36.5 person-months of international and 402 person-months of domestic consultants. Project Benefits and The TA loan will enable preparation of new water source projects Beneficiaries for Metro Manila resulting in improved living conditions and health of the population through provision of safe water and expansion of the service area, particularly benefiting the urban poor. The Project will also generate business opportunities for private sector participation in water source development through a transparent and competitive process, thus producing greater efficiencies and better services to the consumer.

o o 120 E 128 E 121o 40'E UMIRAY

LUZON PHILIPPINES Polillo o

16 N 16o N r Strait

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Project Area MWSS NEW WATER SOURCE i R Id y lang

a MANILA DEVELOPMENT PROJECT C r i r m e e U M k ar a n a g u l C r VISAYAS e I e n k am ina C r e e k

er 8No 8No Riv an MINDANAO ng Mt. Sumag Oyo o 15 50'N 15o 50'N

BULACAN r e v i o o y R 120 E 128 E a w i l i

TRANSBASIN u 121o 00'E TUNNEL B Baliwag Sumag San Rafael R. Bustos UMIRAY ANGAT RESERVOIR DIVERSION SITES Angat Mt. Mabitoan

Angat River ANGAT DAM Ravitan R.

IPO-BICTI TUNNELS Plaridel IPO DAM QUEZON

BICTI-LA MESA AQUEDUCTS Bicti Basin

Balagtas San Jose Del Monte r Mt. Calangdang e Riv Bocaue an ANGAT WATER lb a Bulacan UTILIZATION AND Tanga River t River n

AQUEDUCT o

IMPROVEMENT Pura M PROJECT LA MESA N Marilao RESERVOIR LA MESA WAWA DAM TREATMENT PLANTS Rodriguez 0510 Meycauayan Obando Tullaha Kilometers n R R er iv a San Mateo n

k i r a RIZAL M B

o s Valenzuela o Malabon B Caloocan BALARA os TREATMENT o Navotas R i LAIBAN DAM Quezon City PLANTS v Bosoboso e Marikina r

San Juan MANILA Antipolo Mandaluyong

Pasig Pasig Manila Bay River Taytay Makati Angono Pasay National Capital Pateros Baras City/Town Morong Tanay Tunnel/Aqueduct Taguig 14o 30'N Road 14o 30'N Parañaque Pililla River Provincial Boundary Las Piñas Bacoor Binangonan Boundaries are not necessarily Laguna de authoritative. Bay

o 121o 00'E 121 40'E

03-1181 RM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed technical assistance (TA) loan to the Metropolitan Waterworks and Sewerage System (MWSS), guaranteed by the Republic of the Philippines, for the MWSS New Water Source Development Project.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

2. The Government requested the Asian Development Bank (ADB) to consider a TA loan (the Project) to finance the preparation of new water source development projects required to meet future water demand in Metro Manila. Following the request, the Loan Processing Mission was fielded from 15 October to 16 November 2001. The Mission met with officials of MWSS and its two concessionaires, Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI), and the representatives of the National Economic and Development Authority, Department of Finance, and Commission on Audit. After extended discussions, an agreement with MWSS and the Government was reached in December 2002 on the scope, costs, financing, and implementation arrangements for the Project. The project framework is attached in Appendix 1. A. Performance Indicators and Analysis 1. Water Supply Coverage and Service Levels

3. As of the end of 2000, as reported in the Medium-Term Philippine Development Plan (MTPDP) 2001–2004,1 access to public water supply systems had increased from about 60% in 1985 to about 80% of the total population in the Philippines. According to MWSS, its concessionaires MWCI and MWSI served about 76% of the population living within the MWSS service area at that time. This contrasted with urban areas outside of Metro Manila, where 88% of the population had access to safe drinking water through systems provided by the Local Water Utilities Administration (LWUA), local government units (LGUs), and the private sector. By the end of 2002, the share of population served in Metro Manila by the concessionaires had increased to 82%. 4. Significant improvement in terms of coverage cannot be expected in the coming years, and it is unlikely that the MTPDP 2004 target of providing 90.5% of the population with access to safe drinking water will be met. In the MWSS service area the concessionaires lack sufficient water supply to expand their systems. For urban areas outside MWSS' reach the situation is even more difficult. Only 150 of 560 water districts have been able to avail of financing from LWUA, and there is little likelihood of this increasing unless the performance of LWUA is improved. 5. Even though levels of service generally have been improved in terms of expanded coverage, system reliability and capacity are frequently inadequate, and illegal tapping is common. Inadequate supply is usually manifested by low pressure in the distribution system during peak hours of use. Consequently, suppressed demand for water that makes it difficult to assess the real demand and to prepare adequate forecasts of demand and of willingness to pay.

1 National Economic Development Authority. 2001 Draft Medium Term Philippine Development Plan. 2

6. In 2002, nonrevenue water2 (NRW) in Metro Manila was about 60% on average, with 69% within the service area of MWSI and 53% in the service area of MWCI. 3 While water supplied in Metro Manila and in most water districts is generally disinfected with chlorine, water is often supplied without treatment and is of dubious quality in a number of areas. An analysis of the sector is presented in Appendix 2. 2. Lessons Learned

7. The key lessons learned based on experience with project implementation relate to systemic weaknesses in the sector in three areas. The first is the inability of institutions to develop new projects and to maintain existing water supply networks and thus to respond to rapidly increasing demand. Related issues are the lack of readiness for project implementation and the lack of transparency and accountability of the agencies involved. There is a need to support the development of new projects and to address the issue of NRW, as provided under the Project. New high priority projects must be prepared based on concerted, well-resourced efforts, linked to adequate funding of the resulting investment. 3. External Assistance

8. Multilateral and bilateral agencies have given considerable support for the urban sector and for the WSS sector in the Philippines. Since 1974, ADB has played a major role by providing 19 loans to the WSS sector amounting to approximately $728 million, and 27 technical assistance grants totaling $12.41 million. Projects for MWSS financed by ADB include 8 loans for water supply and 1 for sewerage. In addition to ADB, the major providers of official external assistance are the Japan Bank for International Cooperation and the World Bank. Others include the Australian Agency for International Development, Canadian International Development Agency, European Union, France, Germany (Deutsche Gesellschaft für Technische Zusammenarbeit and Kreditanstalt für Wiederaufbau), Japan International Cooperation Agency, New Zealand, United Kingdom Department for International Development, United Nations, and the United States Agency for International Development. A summary of external assistance to the sector is presented in Appendix 3. B. Analysis of Key Problems and Opportunities 9. The development of water supply systems is financed by a combination of government subsidies, internal cash generation of supply systems, foreign grant and loan assistance, and local government contributions. In the past, the main source of funding for water supply was the central Government assisted by bilateral and multilateral agencies. With the Government’s privatization thrust, private capital is also seen to help finance projects in the sector, as in the case of the MWSS service area. 10. Outside the MWSS service area, in systems managed by the water districts, internal cash generation has not been a reliable source for financing water system improvements. Tariffs are often set below levels required for full cost recovery. Funds for capital investment are usually provided through the following sources: (i) LWUA; (ii) LGUs; and (iii) loans from the Development Bank of the Philippines, and Land Bank of the Philippines. There are also cases where funds are provided directly through congressional allocations. Tariffs of water supply systems operated by LGUs often do not cover operation and maintenance costs, and LGUs have to provide subsidies to keep systems operating. LGUs fully subsidize loan repayment in many cases, and water districts often face political resistance when they try to raise water tariffs.

2 NRW is composed of (i) physical losses caused by leakages; and (ii) commercial losses resulting from illegal

connections, meter under registration, and billing inefficiencies. 3 Source: MWSS. 3

11. Six years after the concessionaires took over operations from MWSS, water supply continues to be a major concern in the Metro Manila area. By the end of 2002, the concessionaires provided about 82% of the total population within the MWSS service area with water. NRW remained very high at about 60% on average, and some areas still experience water shortages, low water pressure, and interrupted supply. At present, MWSS provides about 4,000 million liters per day (MLD) of water from the Angat Reservoir to the concessionaires for distribution to the population and to industry.4 However, these water sources can barely meet current demand, let alone connect to additional customers.5 Therefore, the development of new water sources is urgently required. Water provided from these additional sources will ensure improved and sustainable service delivery for existing customers and enable extension of service coverage, particularly to the urban poor. 12. Access to clean drinking water is essential for reducing urban poverty and to improve the economic status of the urban poor, who often have to rely on water supplied by vendors at high cost, and suffer from ill health resulting from inadequate access to clean water. Clean drinking water provides important social development and economic returns through reducing the burden of poverty, particularly on women, and through reducing water-borne diseases. The Project aims at increasing access to adequate water supply for the poor, in accordance with ADB’s operational strategy in the Philippines, which emphasizes poverty reduction and social development through promoting equitable growth, improving basic social services, and improving management and protection of the environment. 13. To meet future demand the Project will finance preparation of new water source projects.6 The assistance will incorporate key lessons learned from previous projects and will provide well- resourced, focused assistance for the preparation of high priority projects based on a least-cost approach. The Project will help to facilitate potential financing of subsequent investments by ADB, the private sector, and other sources, and will contribute to improving financial and administrative systems of MWSS.

III. THE PROPOSED PROJECT A. Objectives 14. The objective of the Project is to provide consulting services to (i) prepare and design projects for the development of new water sources for Metro Manila suitable for financing from ADB, the private sector, or other sources, and (ii) improve MWSS’ capacity for financial management, accounting, and fiscal control. The resulting water source projects will improve the living conditions and health of the population in Metro Manila through providing safe water and will facilitate the expansion of the service area, particularly to the urban poor. Projects will also generate business opportunities for the private sector in water source development. B. Components and Outputs 15. The Project consists of consulting services for Part A—Development of New Water Source Projects, and for Part B—Capacity Building.

4 MWSS' responsibilities include facilitating the provision of bulk water to the concessionaires; a detailed description of MWSS is included in Appendix 4. 5 According to MWSS, without the development of new water sources the projected supply of water would fall short of

demand by about 200 MLD in 2006. 6 Additional assistance to investigate long-term water supply is being provided by the Japan International Cooperation Agency to the National Water Resources Board through The Study on Water Resources Development for Metro

Manila. 4

1. Part A—Development of New Water Source Projects 16. Part A will include three components: (i) a feasibility study for the Wawa River Project; (ii) a feasibility study, detailed design, and tender documents for the Angat Water Utilization and Aqueduct Improvement Project (AWUAIP); and (iii) studies, including a resettlement plan, review of existing design and tender documents, preliminary design for a transmission pipeline, and financing arrangements, for the Laiban Dam Project. Detailed terms of reference (TOR) for a feasibility study for the Wawa River component are attached in Appendix 5. Descriptions of components (ii) and (iii) are included in Appendix 6. Detailed TOR for the water source development components (ii) and (iii) will be prepared by the Executing Agency during project implementation, to be approved by the ADB. (i) Part A.1—Wawa River Project: The Wawa Dam, located on the river of the same name, which forms part of the Marikina River, was constructed in 1906 and was in use as a water source for some decades. But water source facilities at the dam were abandoned a long time ago. To restart operations, the dam and associated infrastructure need major refurbishing. The envisaged investment project resulting from the TA Loan will comprise the renovation of the dam including the water intake, removal of silt from the reservoir, and construction of a new transmission pipeline and of a water treatment plant to deliver 50 MLD of water. The water treatment plant will be located close to the dam on a site already owned by MWSS, which also has the right of way for the new pipeline. The plant’s mechanical and electrical equipment has already been provided under a French soft loan (French Protocol) about 6 years ago and was intended to treat water from Laguna Lake. However, because of technical and environmental concerns the project at Laguna Lake has been deferred, and the equipment has been kept stored in a warehouse since then. Water supplied from the Wawa Dam will be provided to settlements in Rodriguez and San Mateo, which are currently serviced by MWCI through deep wells and surface water from Balara. The growing demand in these areas, particularly for the urban poor, cannot be met through these sources alone, and the deep wells are costly to operate. Investment costs are estimated at about $13.5 million. In order to develop the project, a feasibility study financed under the TA Loan will be prepared. Project development will include the preparation of preliminary land acquisition and resettlement plans (PLARPs) and plans for the relocation of a small community of informal settlers along the route of the pipeline and near the proposed site for the water treatment plant, as well as the preparation of the necessary environmental impact assessments and compliance reports. Total costs for the study are estimated at $309,000, of which ADB will finance $213,000. (ii) Part A.2—Angat Water Utilization and Aqueduct Improvement Project: The Angat Reservoir, complemented by water diverted from the Umiray river basin, is the main water source for Metro Manila and provides about 4,000 MLD water or 97% of total water production. The reservoir is used for water supply, irrigation, and hydropower generation. Current water right allocation from the Angat reservoir provides for water supply of 1,900 MLD, complemented by 1,300 MLD set aside for irrigation. In addition, another 780 MLD is diverted from the Umiray River into the Angat Reservoir for water supply purposes. MWSS plans to increase its share of water from the Angat Reservoir through a reallocation of water rights by converting an existing temporary allocation from the irrigation water to a permanent allocation, and by obtaining additional water from irrigation for water supply. A definitive ruling from the National Water Resources Board on 5

this issue will be sought by MWSS. Water from the Angat Reservoir is transported through a system of tunnels and aqueducts to the water treatment plants. However, recent surveys have revealed that aqueduct no. 5 (AQ5), which carries about 2,000 MLD, is in urgent need of repair. Leakage of this aqueduct is estimated at about 100 – 150 MLD. In case it would break, about half of the total water supply for Metro Manila would be at risk. MWSS and the concessionaires have taken action to carry out emergency repairs, but there is an urgent need to build a new aqueduct (AQ6), to be constructed in two phases. Phase 1 (5.5 km length) will serve as a by-pass while repairing the corresponding section of the existing AQ5, and will be financed by the Government of the Philippines. Phase 2 entails the construction of the remaining section (11.5 km length) of AQ6. Preparation of a feasibility study, detailed design, and tender documents for Phase 2 will be financed under the Project. Costs of the resulting investment project are currently estimated at about $90 million. This would include construction of AQ6 and pumping stations; repair of the existing AQ5; and, if additional water can be allocated, construction of additional transmission pipelines and an extension of water treatment plants. Project development for AWUAIP will include preparation of (i) a feasibility study, inclusive of PLARP, preliminary design, and, if required, a resettlement plan; and (ii) detailed design and tender documents. The cost of these activities is estimated at $2,100,000, of which ADB will finance $1,428,000 under the Project. An indicative list of tasks and budget items is set out in Appendix 6. The Executing Agency will prepare detailed TOR and budgets during project implementation for approval by ADB. (iii) Part A.3–Laiban Dam Project: Preparation of the Laiban Dam Project started in 1979. It is a project to deliver 1,900 MLD of high quality water to Metro Manila. Even though the construction of diversion tunnels had already been completed, further construction was suspended in 1989 for a number of reasons, including changed priorities and emerging resettlement issues. Today, about 3,000 families have settled on the dam site. Due to the growing need to secure long-term water supply for Metro Manila, MWSS is considering reviving the project at an estimated cost of about $1.0 billion. Project preparation financed from the TA loan will include the preparation of a PLARP for the relocation and rehabilitation of about 3,000 families, financing arrangements, review of existing design and tender documents, preliminary design of a transmission pipeline, and environmental impact assessment. Total costs for the TA are estimated at $2,049,000, of which ADB will finance $1,326,000. Detailed TOR and budgets will be prepared by the Executing Agency during project implementation for approval by ADB. 2. Part B—Capacity Building 17. For the FY1999 and FY2000, COA rendered an adverse opinion on the fairness and presentation of the financial statements of MWSS. While MWSS, in discussion with ADB, has already prepared and implemented an action plan to address COA’s recommendations, Project component Part B—Capacity Building will contribute to strengthening MWSS’ financial management and internal control mechanisms. Part B comprises training and preparation of manuals as well as guidelines for (i) management accounting; (ii) corporate planning, budgeting, and budgetary control; (iii) financial accounting; (iv) internal control and audit systems; and (v) data processing. Total costs for this aspect of the TA are estimated at $215,000, which will be financed by MWSS if grant financing from a bilateral agency cannot be secured. Detailed TOR and budget are enclosed in Appendix 7. 6

C. Cost Estimates 18. The total project cost is estimated at $4.97 million equivalent, of which $1.30 million is the foreign exchange cost (26%) and $3.67 million equivalent (74%) is local currency cost. Cost estimates are presented in Appendix 8 and summarized in Table 1. Table 1: Project Cost Estimates ($’000) Foreign Local Total Percent Component Exchange Currency Cost Part A: Development of New Water Source Projects A.1: Wawa River Project 97 212 309 6 A.2: Angat Water Utilization and Aqueduct 308 1,792 2,100 42 Improvement Project A.3: Laiban Dam Project 600 1,449 2,049 42 Part B: Capacity Building 0 215 215 4 Part C: Interest and Fees 293 0 293 6 Total 1,298 3,668 4,966 100 26% 74% 100% Source: Asian Development Bank estimates.

D. Financing Plan 19. MWSS has requested a loan of $3.26 million from ADB’s ordinary capital resources to help finance the Project. The loan will have a 10-year term including a grace period of 3 years, an interest rate determined in accordance with ADB’s London Interbank Offered Rate (LIBOR)- based lending facility, a front-end fee of 0.5% (the fee will be capitalized in the loan), and such other terms and conditions as set forth in the draft Loan Agreement. The Republic of the Philippines will provide a guarantee for the loan. No commitment fee will be charged for the TA loan. 20. Of the total project cost of $4.97 million, ADB will finance $3.26 million or 66%, including the complete foreign exchange costs of $1.30 million and $1.96 million equivalent of the local currency cost.7 The remaining 34% of total project cost will be financed by MWSS in cash and kind including the cost of office accommodation, counterpart staff, incremental administration, taxes, and duties. The Financing Plan is presented in Appendix 8 and summarized in Table 2. Table 2: Financing Plan ($’000) Foreign Local Total Percent Source Exchange Currency Cost Asian Development Bank 1,300 1,960 3,260 66% MWSS - 1,710 1,710 34% Total 1,300 3,670 4,970 100% 26% 74% 100% Source: Asian Development Bank estimates.

7 The share of 66% ADB financing is within the limit of 70% ADB financing for TA projects in the Philippines. 7

E. Implementation Arrangements 1. Project Management 21. The Executing Agency for the Project will be MWSS through its existing project management office (PMO), which was established to implement projects financed by ADB and other donors.8 MWSS is a Government- owned and -controlled corporation, created under Republic Act No. 6234 on 19 June 1971. The enactment of Republic Act No. 8041, the National Water Crisis Act of 1995, resulted in a reorganization of MWSS. After Executive Order No. 311 was issued on 20 March 1996, encouraging private sector participation (PSP) in the operations of MWSS, it entered into concession agreements with MWCI and MWSI on 21 February 1997. The former manages the East Zone and the latter the West Zone of Metro Manila. The concession contracts commenced on 1 August 1997. A financial and institutional analysis of MWSS including financial projections is presented in Appendix 4. 22. An inter-agency steering committee (IASC) composed of MWSS and the concessionaires was formed in March 2001 to prioritize and supervise development of new water source projects. The IASC will be responsible for guiding, monitoring, and supervising implementation of the Project. The Project will be implemented by MWSS through the existing PMO, which is headed by a PMO manager and comprises staff for engineering, project management, and administration. Staff seconded from the concessionaires will complement the PMO based on existing working arrangements for the implementation of ongoing MWSS-financed projects. However, involvement of concessionaire staff in the implementation of any part of the Project will be subject to the condition that the seconding concessionaire and its affiliates and subsidiaries agree to refrain from bidding for the resulting water source project. 23. The PMO will be responsible for overall implementation of the Project based on ADB’s Guidelines on the Use of Consultants and in accordance with other relevant ADB requirements, policies, and guidelines. Consultant selection will follow quality- and-cost-based selection (QCBS) procedures. Activities of the PMO will include (i) preparation of TOR and budget for each assignment, (ii) shortlisting of consultants, (iii) preparation of tender documentation, (iv) invitation to submit proposals, (v) evaluation of proposals, (vi) contracting of consultants, (vii) monitoring of consultants’ performance and output, (viii) preparation of withdrawal applications, (ix) payment of consultants, and (x) reporting. MWSS will provide logistical support for the consultants, including adequately furnished office space, data and project documentation, and access to communication facilities. 2. Subproject Formulation and Approval 24. The detailed TOR for the feasibility study for Part A.1—Wawa River Project and for Part B—Capacity Building are attached in Appendix 5 and 7, respectively. The PMO will prepare detailed TOR and budget for each of the other components in accordance with ADB requirements, guidelines, and policies and will submit them to ADB for comment and approval prior to recruitment of consultants. Individual consultants and firms of consultants, as required, will carry out studies and consulting services financed under the Project. 3. Implementation Period 25. The Project will be implemented over a 3-year period. Implementation is planned to commence in 2004 with recruitment of consultants for preparing the feasibility study for the Wawa River Project, and for the Capacity Building component. Further activities will include

8 See Appendix 3. 8 studies for the development of the AWUAIP, and for the Laiban Dam Project. An implementation schedule is attached in Appendix 9. 4. Consulting Services

26. Consultants financed under the Project will be engaged in accordance with ADB’s Guidelines on the Use of Consultants, including the use of the QCBS method for consulting firms, and, for domestic consultants, arrangements satisfactory to ADB. Approximately 438.5 person-months of consulting services will be required, comprising approximately 36.5 person- months of international and 402 person-months of domestic consultants. Consulting firms that are affiliated with, or a subsidiary of, MWSS or the concessionaires will not be eligible to be engaged under the Project. 5. Advance Recruitment Action

27. At the request of MWSS, ADB has approved advance action for recruitment of consultants to address the urgency of developing the new water source projects. Advance action, which may take place prior to loan effectiveness, includes recruitment of international and domestic consultants, up to but not including contract signing. All advance recruitment of consultants will be carried out in conformity with ADB’s Guidelines on the Use of Consultants. MWSS was advised that approval of advance action does not commit ADB to finance the Project. 6. Disbursement Arrangements 28. The minimum withdrawal amount will be $100,000 equivalent in accordance with ADB procedures. Any disbursement below that amount will be made through the imprest account or reimbursement procedures. An imprest account will be established at a bank to be agreed upon by MWSS and ADB to facilitate the timely release of loan funds. The initial amount to be deposited in the imprest account will not exceed $320,000 equivalent. ADB’s statement of expenditure (SOE) procedure will be used to reimburse eligible expenditures and to liquidate advances provided to the imprest account. The individual payments that may be reimbursed or liquidated under the SOE procedure will not exceed $40,000 equivalent per payment. The imprest account and SOE procedure will be established and maintained in accordance with ADB’s Loan Disbursement Handbook, dated January 2001, and detailed arrangements between MWSS and ADB. 7. Accounting, Auditing, and Reporting 29. MWSS will assign a project manager within the existing PMO to be responsible for the implementation of the Project, including project supervision, monitoring, accounting, and reporting. MWSS through the PMO will (i) maintain separate accounts for the Project, and (ii) have such accounts and related financial statements audited annually by auditors acceptable to ADB and in accordance with the provisions of the Loan Agreement and Guarantee Agreement and as specified in the Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank. The imprest account and SOE records will also be audited as part of the annual audit. MWSS will submit to ADB certified copies (in English) of such audited accounts and financial statements, and the related reports of the auditors, within 9 months after the close of each financial year. The Project will be consistent with ADB’s guidelines on the prevention of fraud and corruption. ADB’s audit requirements have been discussed with MWSS and its auditor, and a full understanding of the loan covenant on audited statements has been reached. 30. The PMO, on behalf of MWSS, will submit to the ADB a quarterly progress report on commitments and disbursements, local and foreign costs, implementation status of approved 9 subprojects, problems encountered during the quarter under review, action taken or proposed to be taken to remedy the problems, and the expected progress during the following quarter. 8. Project Review 31. Progress under the Project will be subject to a formal review every 6 months following effectivity to enable MWSS and the Government to make adjustments in the project design and the implementation arrangements if needed. The review will cover in particular the status of subproject preparation and implementation, the performance of consultants, and the possible reallocation of loan proceeds.

IV. PROJECT BENEFITS, IM PACTS, AND RISKS

A. Project Benefits and Impacts 1. Poverty and Social Analysis

32. Water provided from the additional water sources developed under the Project will not only ensure improved and sustainable service delivery for existing customers, but also enable extension of service coverage, particularly for the urban poor. Both concessionaires have successfully taken action to provide urban poor with equitable access to safe and reliable water supply. By the end of 2002, MWSI had installed 63,730 connections for households of the urban poor under its Bayan Tubig (“water for the people”) program.9 MWCI, in a similar approach, has developed the Tubig Para sa Barangay (“water for the community”) program under which several poor families can share the cost and use of a single water meter. By the end of 2002, about 63,910 households have been connected under this program (footnote 9). The new water sources will not only improve the service quality of existing customers, but also facilitate the connection of new customers, including poor households. Poverty and social analysis will be conducted as part of the feasibility studies financed under the Project in accordance with ADB’s Handbook on Poverty and Social Analysis. The results of the analysis will be documented in the appropriate sections of the initial poverty and social analysis (IPSA) and, in greater detail, in the poverty and social analysis report (PSAR) for each of the water source projects developed under the Project. The poverty impact ratio will be computed in the economic analysis carried out for each of the water source projects. 33. Poverty and social analysis concerns to be discussed in the IPSA and the PSARs will include (i) an assessment of the poverty and social development impact of the Project on poor and vulnerable groups, including impacts on health, livelihood, and wealth; (ii) identification of gender concerns; (iii) preparation of design measures that will enhance the Project's contribution to poverty reduction and social development; and (iv) identification of participatory approaches to be applied in the preparation and implementation of the new water source projects. A poverty and social analysis summary is attached in Appendix 10. 2. Financial Analysis

34. A financial analysis was carried out following ADB’s Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank, including (i) evaluation of the financial performance of MWSS for the past 3 years (1999-2001) and (ii) preparation of financial projections for the duration of the Project. The financial projections are presented in Appendix 4 and indicate that MWSS will operate in a sustainable manner and that the costs of the Project are affordable to the organization.

9 Figures provided by MWSS. 10

35. MWSS’ single major source of revenue comes from concession fees paid by the concessionaires consisting of (i) MWSS current operating budget, (ii) debt service of existing loans, and (iii) counterpart funds for ongoing investment projects. Based on the projections, it is expected that MWSS will have to pay P31.2 million for annual debt service for the TA loan from 2007 to 2013, which will be covered through the concession fees, subject to tariff adjustments. The TA loan will therefore have limited impact on the financial performance of MWSS. Based on an average billed water volume in 2002 of about 1,500 MLD, the required tariff adjustment in 2007 will probably be in the range of about P0.06 per cubic meter.10 However, billed water demand is expected to increase until 2007, thus reducing the required tariff adjustment. A detailed financial and economic analysis will be carried out as part of the feasibility studies for the new water source projects resulting from the TA loan. 3. Nonrevenue Water

36. ADB has been providing loan financing for water supply infrastructure in the MWSS service area for about 30 years. While these projects supported major investment for NRW reduction including (i) water meter installation, (ii) replacement of valves and pipes, (iii) leak detection and repair, (iv) reducing illegal connections, and (v) conducting training programs, targets for NRW reduction have generally not been met. Following commencement of the concessions in August 1997, NRW reduction is now the responsibility of the concessionaires, who are implementing the ongoing MWSS projects as well as their own NRW reduction programs. 37. Despite considerable efforts and the involvement of experienced operators the level of NRW is still high at about 60% in 2002. It appears that targets set in previous projects for NRW reduction have been too ambitious and could not be met due to the complexity of the issues involved. For example, improving service quality, including 24-hour water supply in most of the service area and higher network pressure, has to some extent contributed to the continued high level of NRW through increasing water losses from the deteriorating network. NRW reduction will be a long-term effort requiring further massive investment in network rehabilitation, which can be financed only through appropriate water tariffs. In addition to reducing losses caused by leakage, continuous efforts will be required to reduce commercial losses as well, including illegal connections (footnote 2). While the main responsibility for NRW reduction rests with the concessionaires, feasibility studies financed under the Project will address NRW by reviewing programs for its reduction and assessing impacts on the forecast of water demand and production. 4. Private Sector Participation

38. All three water source projects will have the potential for PSP, which will be investigated during project preparation. TOR for the studies financed under the TA loan will explicitly require the consultants to assess the viability of PSP in all three projects. MWSS intend to involve the concessionaires in project management and implementation based on existing arrangements. However, detailed implementation and procurement arrangements, based on transparent and competitive procedures as required for projects supported by ADB, will be developed during preparation of the feasibility studies.

10 This compares with current average water tariffs per cubic meter of P15.76 for the MWSI service area, and P10.06

for the MWCI service area; source: MWSS. 11

5. Environmental and Social Measures

39. Environmental and social impact assessments, including issues of involuntary resettlement and gender development, will be integral components for the preparation of feasibility studies and other consulting services financed under the Project. Environmental assessment will be undertaken in accordance with the revised Operations Manual Section 20: Environmental Considerations in ADB Operations. Social Safeguards (Involuntary Resettlement and Indigenous Peoples) concerns, as outlined in Appendix 11, will be addressed in accordance with ADB’s Handbook on Poverty and Social Analysis and ADB policies on Involuntary Resettlement, as detailed in the Handbook on Resettlement: A Guide to Good Practice, and Indigenous Peoples. The impact of the proposed projects on indigenous people occupying land in the upper catchment areas of both the Angat and Laiban projects will be investigated in detail during the project studies, and appropriate mitigation measures will be designed if required. B. Project Risks 40. Risks Associated with Concession. The efficient implementation of the Project will rely on the continued commitment of MWSS and the concessionaires. The concessionaires will (i) be treating and distributing the additional bulk water provided from the new water sources, (ii) support the PMO through seconding of staff, and (iii) be responsible for loan repayment through adjusted water tariffs. One of the concessionaires, MWSI, which is responsible for providing water supply and sanitation services in the West Zone, has given notice that it will terminate its concession agreement. While this case is under arbitration, it will most likely result in reduced participation of MWSI in project implementation. The potential adverse impact on the Project will be limited, since (i) both MWSS and MWCI are sufficiently experienced, and each is staffed to successfully implement the Project without support from the other concessionaire; and (ii) the additional water sources resulting from the TA loan are urgently needed, thus providing a strong incentive for all parties involved to implement the Project expeditiously. In case MWSI will actually terminate its concession, either MWSS or a newly contracted concessionaire will take over responsibility from MWSI, including loan repayment. 41. Risks Associated with Consultant Selection. Quality and timely delivery of studies prepared under the Project will particularly depend on the competence and commitment of the consultants recruited by MWSS. This risk will be mitigated by (i) detailed TOR for the studies that fully address the issues set out in the Report and Recommendation of the President and that will be subject to approval by ADB, (ii) consultant recruitment following ADB procedures and guidelines, and (iii) consultant selection following QCBS procedures. 42. Risks Associated with Timely Implementation. The Project will include preparation of three potential water source projects. While the Wawa River Project and capacity building activities will come first, implementation of the other two projects will follow shortly. This will impose a heavy workload on the PMO, particularly at the beginning of project implementation, when consultants need to be recruited and adjustments to project design may be needed during the inception phases. This risk of implementation delays is manageable because the PMO (i) is experienced in recruitment of consultants and in working according to ADB requirements, and (ii) will be supported by staff seconded by the concessionaires as required. 43. Risks Associated with Availability of Bilateral Support for Capacity Building. Capacity building to improve financial management of MWSS is an important component for successful implementation of the Project and the resulting water source projects. To address this issue, capacity building has been included in the project design under Part B. While several potential bilateral funding agencies have been approached, grant financing for this component has not been secured yet. MWSS has agreed that the capacity building component will be 12 financed from its own funds in case a bilateral grant donor cannot be identified. Commencement of the capacity building component will be a condition for disbursement of funds for components under Part A of the Project. 44. Risks Associated with Resettlement Issues. The Laiban Dam component is particularly affected by resettlement issues. International nongovernment organizations have already expressed their concerns. The risk for the Project consists of delayed implementation through protracted consultations on resettlement. This risk will be mitigated by (i) detailed TOR for the studies that fully address the resettlement issues and that will be subject to approval by ADB, and (ii) active consultations by the MWSS and ADB with organizations representing settlers at the dam site. V. ASSURANCES A. Specific Assurances 45. In addition to the standard assurances, MWSS has given the following assurances, which are incorporated in the legal documents: (i) All projects will be designed in strict conformity with the applicable national environmental impact standards and in line with the Environment Policy of the Asian Development Bank. Initial environmental examinations will be undertaken for each subproject, and an assessment will be made as to whether the subproject is environmentally sensitive. Depending on the outcome of the assessment, and the requirements of ADB’s Environment Policy and of applicable national standards, an environmental impact assessment will be prepared for each of the resulting water source projects. (ii) The studies and engineering designs prepared for the subprojects and other consulting services provided will comply with all relevant ADB requirements, policies, and guidelines including, without limitation, ADB’s Policy on Involuntary Resettlement, Handbook on Resettlement, Water Policy, Guidelines for Incorporation of Social Dimensions in Bank Operations, and Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank. (iii) MWSS will ensure that all necessary counterpart funds for project implementation are provided fully and in a timely manner. (iv) In the event MWSS arranges for the PMO staff to be complemented by staff seconded by the concessionaires, or their affiliates or subsidiaries, the relevant concessionaire, together with its affiliates and subsidiaries, will be disqualified from bidding for resulting water source projects for which they have seconded staff. B. Conditions for Disbursement 46. The following conditions for disbursement have been agreed: (i) The disbursement of TA loan proceeds for Part A—Development of New Water Source Projects will be subject to the commencement of Part B—Capacity Building. (ii) No withdrawals will be made from the Loan Account for Part B—Capacity Building. 13

VI. RECOMMENDATION 47. I am satisfied that the proposed loan would comply with the Articles of Agreement of ADB and recommend that the Board approve the loan of $3,260,000 to the Metropolitan Waterworks and Sewerage System, to be guaranteed by the Republic of the Philippines, for the MWSS New Water Source Development Project from ADB’s ordinary capital resources with interest to be determined in accordance with ADB’s LIBOR-based lending facility; a term of 10 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Guarantee Agreements presented to the Board. TADAO CHINO President 15 September 2003 14 Appendix 1

PROJECT FRAMEWORK Design Performance Monitoring Mechanisms Assumptions Summary Indicators/Targets and Risks 1. Goal § Improve living § Increased coverage § National statistics and conditions and health of the poor population reports of MWSS and the of the poor population with safe water concessionaires in Metro Manila supply and improved through safe water service quality on a supply and expanded sustainable basis service area 2. Purpose § Assist MWSS to § High quality feasibility § Reports provided by the § Absorptive capacity of develop new water studies and other consultant and MWSS MWSS and timely source projects for studies and reports availability of high Metro Manila suitable prepared, and advice § ADB review missions quality consultant for financing by ADB, provided services the private sector, or other sources § All preparatory work § Continued interest of for new water source the private sector for the § Improve MWSS’ development provision of basic urban capacity for financial completed and services in the management, projects ready for Philippines accounting, and fiscal financing and control implementation · Concession agreements smoothly executed 3. Outputs § Feasibility studies, § Project preparation § Reports provided by the § MWSS efficiently and other studies and completed in time consultant and MWSS utilizes loan facility and consultant support including (i) feasibility continues commitment required for the study for the Wawa § ADB review missions to timely and high preparation of new River Project; (ii) quality project water source feasibility study, § Interest expressed by preparation development projects detailed design, and private sector to tender documents for participate in the § Consultants deliver on § Capacity building for the Angat Water development of new time and in the quality MWSS financial Utilization and water source projects required management and Aqueduct accounting Improvement Project; § National statistics and § Capacity building is (iii) resettlement plan, reports on PSP, and successfully § Opportunities for PSP financing records of the MWSS accomplished for the provision of arrangements, Regulatory Office basic infrastructure updated design and § Environmental and services tender documents, social impact preliminary design of assessments and new transmission resettlement plans are line, and EIA for the in accordance with Laiban Dam Project ADB's revised OM Section 20: § Capacity building Environmental completed Considerations in ADB § Viability, Operations attractiveness, and options for PSP for § Continued government new water source support for PSP, projects carefully necessary legislation assessed in feasibility passed and enforced studies without delay

ADB = Asian Development Bank, MWSS = Metropolitan Waterworks and Sewerage System. Appendix 1 15

Design Performance Monitoring Mechanisms Assumptions Summary Indicators/Targets and Risks § Good governance in projects designed for PSP ensured through a transparent procurement process according to international best practice, including preparation of comprehensive tender documents, draft agreements, and outline of procurement process

4. Intputs § Project cost § $4.97 million § Consultants’ reports § Consultants recruited according to ADB § International § 36.5 person-months § ADB review missions guidelines consulting § Counterpart funds § Domestic consulting § 402 person-months available

§ ADB financing § $3.26 million § Competence of EA and consultants § MWSS contribution § $1.71 million § Continued interest of private sector to participate in the Project

EIA = environmental impact assessment, MLD = million liters per day, OM = operations manual, PSP = private sector participation.

16 Appendix 2

SECTOR ANALYSIS

A. Sector Description 1. As of the end of 2000 and as reported in the Medium-Term Philippine Development Plan (MTPDP) 2001-2004,1 access to public water supply systems had increased from about 60% in 1985 to about 80% of the total population in the Philippines. According to Metropolitan Waterworks and Sewerage System, its concessionaires Manila Water Company, Inc. and Maynilad Water Services, Inc., served about 76% of the population living within the MWSS service area at that time. This contrasted with urban areas outside of Metro Manila, where 88% of the population had access to safe drinking water through systems provided by the Local Water Utilities Administration, local government units (LGUs), and the private sector. By the end of 2002 the concessionaires provided water to about 82% of the total population within their service areas in Metro Manila. Since commencement of the concessions in 1997, service quality has improved, and the number of households connected has increased significantly. 2. Efforts at integrated planning and development of water supply programs to improve the situation at the provincial level have, in many cases, not shown significant progress. Sector data that could be used for planning and monitoring have become very scarce. The Asian Development Bank (ADB) water supply and sanitation (WSS) sector plan study conducted in 1999 and 20002 noted that more than 20 government agencies are involved in different aspects of the sector, resulting in a fragmented approach to management, an ambiguous definition of responsibilities, functional duplication, absence of a reliable comprehensive database, and fractured water resources management planning. The two national institutions with a significant and specific policy mandate in the WSS sector are the Department of the Interior and Local Government (DILG) and the National Economic and Development Authority. 3. In the past, the main source of funding for water supply was the central Government, with assistance from bilateral and multilateral loans and grants. With the Government’s privatization thrust, private capital is also seen to gradually help finance projects in the sector. Key problems in financing water supply include (i) inability of the majority of water supply agencies to generate sufficient funds from operations to finance system development and improvement, (ii) inadequate provision for operation and maintenance to sustain the current levels and quality of service, and (iii) inadequate assessment of ability and willingness of consumers to pay for WSS services. 4. While the National Water Resources Board (NWRB)3 is mandated to coordinate and integrate the plans and programs of all water resources agencies, such plans seldom receive NWRB approval. Until recently, master and river basin plans have been nonexistent and NWRB lacks the resources needed to assess and approve investment plans. This lack of effective coordinated planning and implementation of a river basin or watershed approach does not allow adequate priority setting and makes it difficult for both public and private sectors to prepare, offer, and assess investment proposals. 5. The lack of effective awl enforcement is also a concern, as watersheds continue to remain unprotected. This constitutes a major concern because (i) human settlements are fast encroaching into watershed areas; (ii) the common practice of employing kaingin (slash-and-

1 National Economic Development Authority. 2001. Draft Medium Term Philippine Development Plan. Manila.

2 ADB. 1997. Technical Assistance to Philippines for Water Supply and Sanitation Sector Plan Study. Manila.

3 NWRB was established on 28 March 1974 by Presidential Decree No. 424. Executive Order 123 issued 12 Septem ber 2002 resulted in the reorganization of NWRB and its subordination to the Office of the President. It is planned to transfer the NWRB to the Department of Environment and Natural Resources in the future. The main responsibilities of NWRB include regulating the use of water sources through the issuance of water rights, drafting of framework plans and policies, and overall coordination and integration of the water resources plan. Appendix 2 17 burn) cultivation sometimes results in uncontrollable forest fires; and (iii) logging and deforestation activities, despite legislative prohibitions, are degrading catchment areas. B. Government Policies and Plans 6. The overriding principle pertinent to the provision of WSS services is the empowerment of local government units (LGUs). The enactment of the Local Government Code (LGC) of 1991 provides them with a central role in the provision of WSS services. To implement this, national agencies have adopted the following policies and strategies: (i) provide a favorable environment for LGU activity in the WSS sector and assistance from DILG, together with encouraging private sector participation in the provision of WSS services; (ii) privatize water supply facilities in urban areas whenever appropriate; (iii) develop and provide incentives for contiguous water districts to amalgamate into single business entities to attract private sector investments in water supply development; and (iv) adopt a holistic approach to water resources development through the inclusion of supply, distribution, treatment, and sanitation. 7. In implementing and applying these strategies, agencies and organizations within the sector should apply the following crosscutting principles: (i) water sector development is to be participatory and consultative at each level, leading to commitment by stakeholders and action that is socially acceptable; (ii) water use should be sustainable with appropriate incentives, regulatory controls, and public education promoting economic efficiency, conservation of water resources, and protection of the environment; and (iii) successful water sector development requires a commitment to sustained capacity-building, monitoring, education, research, and learning at all levels, to respond effectively to the changing needs at the national, basin, project, service entity, and community levels. C. External Assistance to the Sector 8. There has been considerable support by multilateral and bilateral agencies for the urban sector and for the WSS sector in the Philippines. Since 1974 ADB has played a major role by providing 19 loans to the WSS sector amounting to approximately $728 million, and 27 technical assistance grants totaling $12.41 million. In addition to ADB, the major providers of official external assistance are the Japan Bank for International Cooperation and the World Bank. Others include the Australian Agency for International Development, Canadian International Development Agency, European Union, France, Germany (Deutsche Gesellschaft für Technische Zusammenarbeit and Kreditanstalt für Wiederaufbau), Japan International Cooperation Agency, New Zealand, United Kingdom Department for International Development, United Nations, and the United States Agency for International Development. D. ADB’s Sector Strategy 9. ADB’s operational strategy in the Philippines emphasizes poverty reduction and social development through promoting equitable growth, improving basic social services, and improving management and protection of the environment. The WSS sector is in a state of transition because of sector reforms introduced as a result of devolution and decentralization of sector responsibilities. ADB has encouraged a shift from a traditional top-down centralized planning approach to the concept of bottom-up planning and extensive local consultation, including training and capacity building of sector agencies in project management and community development. ADB is emphasizing community participation and decentralization of the implementation process. 18 Appendix 3

EXTERNAL ASSISTANCE TO THE SECTOR (SELECTED PROJECTS)

Funding Recipient Project Description Agency Agency ADB MWSS • Manila Water Supply, for $51.3 million, approved on 28 August 1974 MWSS • Second Manila Water Supply, for $49.0 million, approved on 7 September 1978 MWSS • Manila Water Supply Rehabilitation, for $39.3 million, approved on 27 October 1983 MWSS • Second Manila Water Supply Rehabilitation, for $26.4 million, approved on 24 January 1989 MWSS • Manila Sewerage, for $42.8 million, approved on 24 June 1980 MWSS • Angat Water Supply Optimization, for $130.0 million, approved on 14 November 1989 MWSS • Umiray-Angat Transbasin Project, for $92.0 million, approved on 21 September 1995 MWSS • Manila South Water Distribution Project, for $31.4 million, approved on 19 December 1991 LWUA • Municipal Water Supply, for $43.2 million, approved on 25 November 1993 DPWH • Rural Water Supply and Sanitation Sector Project, for $37.0 million, approved on 4 June 1996 LWUA • Small Towns Water Supply Sector Project, for $50.0 million, approved on 30 September 1996

World Bank LBP • Water Districts Development Project, for $56.8 million, approved on 9 September 1997 MWSS • Manila Second Sewerage Project, for $57.0 million, approved on 21 May 1996 DBP • LGU Urban Water Supply and Sanitation Sector Project, for $23.3 million, approved on 15 December 1998 DBP • LGU Urban Water and Sanitation Project — A (02) — APL, for $30 million, approved on 18 October 2001 JBIC MWSS • Angat Water Supply Optimization Project, 1990-2000 LWUA • Provincial Cities Water Supply Project II, 1992-1997 LWUA • Provincial Cities Water Supply Project III, 1995-2003 LWUA • Provincial Cities Water Supply Project IV, 1996-2003 LWUA • Provincial Cities Water Supply Project V, 1997-2004 DILG • Rural Water Supply and Sanitation Project, 2000-2004 French MWSS • Rizal Water Supply Project, 1993-1998 Protocol AusAID LWUA • Baguio Water Supply Upgrading and Rehabilitation Project, 1996-2004 Northern • Northern Mindanao Water and Sanitation Project Mindanao LGU KfW LWUA • Provincial Towns Water Supply Program DANIDA LWUA • Negros Urban Water Supply Project, 1997-2001 ADB = Asian Development Bank, AusAID = Australian Agency for International Development, DANIDA = Danish International Development Assistance, DBP = Development Bank of the Philippines, DILG = Department of Interior and Local Government, DPWH = Department of Public Works and Highways, JBIC = Japan Bank for International Cooperation, KfW = Kreditanstalt für Wiederaufbau (Germany), LBP = Land Bank of the Philippines, LGU = local government unit, LWUA = Local Water Utilities Administration, MWSS = Metropolitan Waterworks and Sewerage System. Source: World Bank Sector Assistance Strategy Note updated by NEDA September 1998; ADB; World Bank. Appendix 4 19

FINANCIAL AND INSTITUTIONAL ANALYSIS OF MWSS

A. Background 1. The Metropolitan Waterworks and Sewerage System (MWSS) is a Government-owned and -controlled corporation created under Republic Act No. 6234 on 19 June 1971. Republic Act No. 8041, the National Water Crisis Act of 1995,1 reorganized MWSS. After Executive Order No. 311 was issued on 20 March 1996, encouraging private sector participation in the operations and facilities of MWSS, it entered into concession agreements with two concessionaires, the Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI) on 21 February 1997. The former manages the East Zone and the latter the West Zone of the MWSS service area. The concessions commenced on 1 August 1997, and MWSS was divided into two independent entities, namely MWSS-Residual Services and the MWSS-Regulatory Office. 2. Based on the revised organizational structure and staffing plan approved by the Department of Budget and Management (DBM), MWSS Residual Services activities include (i) administration and management of retained assets, (ii) administration of existing loans, (iii) facilitating the provision of bulk water, and (iv) facilitating development of new water sources. The MWSS-Regulatory Office, on the other hand, is the regulatory body to monitor the provisions and performance targets specified in the concession agreements and to ensure that appropriate measures are being taken in case of noncompliance. An Asian Development Bank (ADB)-financed technical assistance (TA) grant for capacity building and strengthening of the regulatory body is under implementation.2 B. Institutional Analysis 1. Organization 3. The corporate powers and functions of MWSS are vested in and exercised by a board of trustees of nine members. Management of the company is vested in the administrator, who is seconded by the deputy administrator. There are three major departments: (i) Administration and Finance; (ii) Engineering and Project Management; and (iii) Asset Management, and General Services. The existing organizational structure is presented in Figure A4. 4. MWSS has 104 employees, complemented by 68 contractual staff. A summary of manpower is presented in Table A4.1.

Table A4.1: MWSS Personnel Department Employees Board Secretariat 14 Administrator’s Office 5 Deputy Administrator’s Office 4 Legal Division 6 Administration and Finance 28 Engineering and PMO 20 Asset Management and General Services 27 Total 104 Source: MWSS.

1 Implemented under Executive Order No. 286 dated December 6, 1995.

2 ADB. 2001. Technical Assistance to Philippines for Capacity Building for the Regulatory Office of the Metropolitan

Waterworks and Sewerage System . Manila. 20 Appendix 4

Figure A4: MWSS Organization Chart

BOARD OF TRUSTEES

BOARD SECRETARIAT OFFICE OF THE ADMINISTRATOR

Legal Division OFFICE OF THE DEPUTY ADMINISTRATOR

ADMINISTRATION AND ENGINEERING AND PROJECT ASSET MANAGEMENT FINANCE MANAGEMENT OFFICE AND GENERAL SERVICES

Engineering Support Services Asset Management and Administration and General Services Finance Division Division Project Management Office Accounts Receivable Task Force Property Management Section

Administrative Services Section General Services Section

Loans Management and Investment

Fiscal Control and Budget Section

Controller and Accounting

Financial Review and Management Information

Source: MWSS. Appendix 4 21

5. The organizational structure of MWSS as approved by DBM after commencement of the concessions is still considered as an interim solution subject to a reevaluation of the staffing pattern by the management and approval by the board of trustees and DBM. While most of the existing positions are filled, there appears to be a need for MWSS to increase manpower and/or efficiency to fulfill its mandate. 2. Administration and Finance Department

6. Of the 28 regular personnel under the Administration and Finance Department, 7 are certified public accountants, 12 are accounting majors, while the others are commerce or business administration graduates. While the qualifications of the staff appear to be adequate, the program of work, information technology, and efficiency require improvement to cope with responsibilities requiring a great deal of work. 7. Since 1997 training for financial personnel has been conducted on three topics: (i) fiscal and property management; (ii) cash flow statement; and (iii) financial information system for externally assisted projects. Most of the personnel in the Finance Department have attended these training programs, which are shown in Table A4.2 Table A4.2: Training Conducted, 1998-1999 Title of Training Date Duration Attendees Fiscal and Property Management October 1998 40 hours 21 Cash Flow Statement May 1999 16 hours 24 Financial Information System October 1999 24 hours 36 for Foreign Assisted Projects Source: MWSS. 8. Improving information technology and upgrading of the computer system could significantly increase staff efficiency. An inventory of computer units available to the Administration and Finance Department shows an almost one-to-one ratio between regular personnel and computers. However, a number of computers are outdated, which is aggravated by incompatibility of operating systems and lack of an adequate network, resulting in low efficiency and lack of information sharing. Standard spreadsheet software is being used, but files are currently not linked, requiring duplication of work in encoding data and manual report generation. 3. Capacity Building 9. For FY1999 and FY2000 the Commission on Audit (COA) rendered an adverse opinion on the fairness and presentation of the financial statements of MWSS, citing a number of findings and recommendations that needed to be implemented by MWSS. The adverse opinion on the audited accounts has been aggravated by the fact that many of the recommendations previously made by COA have not been fully implemented by MWSS. This issue, together with findings of the Mission, has revealed weaknesses in MWSS financial management, accounting, and control that need to be addressed through capacity building. 10. Training programs for capacity building will include (i) management accounting; (ii) corporate planning, budgeting, and budgetary control; (iii) financial accounting; (iv) internal control and audit systems; and (v) data processing. Training will be complemented by the preparation of guidelines and manuals for specific financial activities including (i) budgeting procedure; (ii) accounting system; (iii) cash management; (iv) auditing; (v) report generation; and (vi) internal control. The need for improved information technology will be addressed through procurement and installation of computer hardware and software including an adequate 22 Appendix 4

network for the Administration and Finance Department. Outline terms of reference and budget for capacity building are presented in Appendix 7. C. Financial Analysis

1. Introduction

11. Financial analysis was carried out following the Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank, including (i) evaluation of the financial performance of MWSS for the past 3 years, 1999 – 2001; and (ii) preparation of financial projections for the duration of the Project. 2. Current Performance 12. MWSS’ single major source of revenue comes from concession fees paid by MWSI and MWCI. Smaller portions are derived from rentals of leased properties, interest income, and other operating and service income. The concession fees are determined by the provisions of the concession agreements and have to provide for three major expenditures: (i) MWSS current operating budget (COB); (ii) debt service of existing loans; and (iii) counterpart funds for ongoing investment projects. 13. The standard accounting system and procedure being followed by MWSS is embodied in the Government Accounting and Auditing Manual (GAAM). It provides guidelines for maintaining financial records of property, keeping books of account, and compiling final accounts and financial statements. Accounting standards, particularly those related to financial reporting, are defined by COA. Aside from the GAAM, no other guidelines or manuals are available to the financial staff to provide guidance on day-to-day operations. 14. Due to the absence of a corporate planning group, no multiyear budgeting is being done. Planning is limited to short-term budgeting and control procedures, which are based on annual plans. The annual budget is prepared each year but the mandate of MWSS with a privatized operation exempts it from the General Appropriation Act. Thus, it does not undergo the usual budget cycle that regular government agencies are subjected to, and it does not have any specific compliance date as far as DBM is concerned. 15. The COA Annual Audit Report discusses its findings relative to the legality and regularity of transactions and, to a limited extent, the evaluation of the adequacy and effectiveness of systems and procedures of certain aspects of the operations of MWSS, the main objectives of which were to ascertain the fairness and reliability of its financial position and the results of its operations. For FY1999 and FY2000, the Auditor rendered an adverse opinion on the fairness of presentation of the financial statements of MWSS, citing a number of findings and recommendations that would need the implementation of MWSS. MWSS, in consultation with COA and ADB, has developed and implemented a time-bound action plan to address the issues raised. In March 2002, COA confirmed that, per their evaluation of the actions taken, MWSS had substantially complied with audit recommendations. Of the six findings that caused the adverse opinion on the financial statements for FY2000, three had been fully implemented, two substantially complied with, and one partly implemented. For FY2001, COA rendered an unqualified opinion on the accounts of two MWSS projects financed by ADB. A qualified opinion was rendered on a third ADB-financed project, but was not considered to be a material qualification, since it would not have adverse impact on the quality of the project. 16. Because of the devaluation of the Philippine peso, the cost of debt service has increased considerably, and MWSI, which had taken on 90% of the existing debt at the time of concession commencement, requested adjustment of water tariffs in September 2000. An agreement for tariff adjustment was reached one year later, becoming effective for MWSI on 20 October 2001 Appendix 4 23

and for MWCI on 12 November 2001. MWSI has been in arrears in payment of concession fees since March 2001. Following tariff adjustment, MWSI committed to pay COB for 2002 fully in January 2002, and all outstanding fees for debt service and progress billing including interest and incidental expenses incurred in June 2002. However, payment of outstanding concession fees has not been settled yet. In the meantime, MWSS has applied for short-term loans from local and foreign banks to bridge the financial gap caused by the delayed payment of concession fees. By the end of 2002, MWSI had given notice that it would terminate its concession agreement, and arbitration is ongoing to decide about the termination arrangements. 17. Prior to the issuance of Republic Act 8424, the Tax Reform Act of 1997, MWSS had been enjoying tax exempt status from the Bureau of Internal Revenue (BIR). However, the issue of whether MWSS was still covered by the exemption from corporate tax came up in 1997 when BIR issued a new list of exempt agencies that did not include MWSS. A number of studies and consultations with BIR were done to settle the issue. Finally, in May 2001, a legal opinion was issued by BIR confirming the tax exempt status of MWSS. 18. MWSS is in the process of restating and clearing its financial statements according to COA’s recommendations. In the absence of restated accounts, the analysis of MWSS’ existing financial statements for 1999-2001, on which the auditor expressed an adverse opinion, as well as projections based on these statements, could be misleading. The income statements for 1999-2001, for instance, would indicate that the company has not been profitable in its operation, which is caused mainly by the nonclassification of concession fees for debt service and progress billing as revenue for the 3 year period. The financial statements for 1999-2001 are presented in Table A4.3-A4.6. 24 Appendix 4

Table A4.3: Income Statement, 1999-2001 (P million)

Item 1999 2000 2001

Operating and Service Income Revenue from Concession - Current Operating Budget (COB) 116.28 124.07 129.58 - Debt Servicea 0.00 1,997.24 1,709.24 - Progress Billinga 0.00 413.08 568.68 Rentals – Leased Properties 49.49 45.64 43.14 Total 165.77 2,580.03 2,450.64 Less Operating Expenses Personal Services 42.33 58.44 72.85 Bad Debts Expense 0.00 319.26 319.26 Depreciation 1,367.36 1,308.02 1,288.76 Amortization of Water Rights 0.90 0.90 0.90 Amortization of Organization Cost 299.05 267.59 267.59 Maintenance & Other Operating Expenses 48.90 38.65 52.10 Total 1,758.54 1,992.86 2,001.46 Income (Loss) from Operations -1,592.77 587.17 449.18

Add (Deduct) Other Income (Expenses) Interest Income 154.91 143.15 116.11 Incidental Income 15.23 4.74 3.53 Gain on Foreign Exchange 0.00 24.98 -3.46 Interest Expense/FOREX Differential Cost -31.17 -700.76 -455.96 Amortization of Organization Cost 0.00 0.00 0.00 Tax Expense 0.00 -24.55 -16.15 Total 138.97 -522.44 -355.93 Net Income (Loss) -1,453.80 34.73 93.25

a Concession fees for debt service and progress billing were booked as invested capital instead of revenue for 1999. Total amount for concession fees (1999, in P million) should be as follows: Current operating budget, P116.28; Debt Service, P2,061.31; Progress Billing, P355.35; totaling to P2,532.94. Source: MWSS.

Appendix 4 25

Table A4.4: Cash Flow Statement 1999-2001 (P million)

Item 1999 2000 2001

Cash Balance, Beginning 1,408.96 1,514.75 1,788.44 Cash Flows Operating Receipts Collection of Prior Year’s Receivable 15.66 12.95 8.91 Collection of MWSI’s Past Due Account 0.00 0.00 0.00 Concession Fees 2,532.94 2,534.11 955.69 Proceeds from Loans Foreign 1,285.47 1,374.88 2,689.88 Domestic 0.00 0.00 1,419.90 NG Equity 65.06 19.11 0.00 Others 186.86 237.40 242.21 Total 4,085.99 4,178.45 5,316.59 Cash Outflows Operational Expenses Personnel Services 45.69 53.65 70.72 Maintenance & Other Operating Expense 61.98 96.04 65.27 Capital Investments 1,324.92 1,598.77 2,864.17 Principal Repayments 885.45 951.91 1,009.95 Foreign 885.45 951.91 1,009.95 Domestic 0.00 0.00 0.00 Interest Payments & Other Charges 1,340.77 1,109.40 1,189.95 Foreign 1,144.81 974.62 1,119.24 Domestic 195.96 134.78 70.71 Investment in Sinking Funds 126.28 45.39 15.81 Others 195.11 49.6 148.54 Total 3,980.20 3,904.76 5,364.41 Cash Balance, Ending 1,514.75 1,788.44 1,740.62

Source: MWSS. 26 Appendix 4

Table A4.5: Balance Sheet, 1999-2001 (P million)

Item 1999 2000 2001 Assets Fixed Assets Property, Plant and Equipment 36,216.68 35,070.59 33,763.40 Construction in Progress 9,920.28 12,274.78 16,713.28 46,136.96 47,345.37 50,476.68 Current Assets Cash and Cash Equivalents 1,514.75 1,788.45 1,740.64 Accounts Receivable 351.79 162.22 1,896.80 Miscellaneous Receivable 268.09 0.00 116.53 Inventories 475.28 0.00 0.00 2,609.91 1,950.67 3,753.97 Advances and Deposits 360.59 552.96 431.26 Other Assets Stocks & Security of Service Enterprise 2.20 2.21 2.21 Miscellaneous Assets and Deferred Charges 0.00 1,453.43 585.37 Contingent Assets 107.65 107.65 107.82 Reorganization Costs 893.17 625.69 358.13 Investments 270.17 244.71 226.91 Miscellaneous 86.76 0.00 851.72 1,359.95 2,433.69 2,132.16 Total Assets 50,467.41 52,282.69 56,794.07 Liabilities and Capital Long-Term Liabilities Net of Current Portion 10,873.83 13,446.59 15,737.10 Current Liabilities Accounts Payable and Accrued Expenses 1,216.11 1,067.56 1,980.45 Bonds Payable 0.00 0.00 1,039.90 Current Portion of Loans Payable 144.71 214.18 225.18 Depository Liabilities 59.89 38.89 39.05 Trust Liabilities 54.02 179.59 212.68 1,474.73 1,500.22 3,497.26 Misc. Liabilities and Deferred Credits 6.26 257.52 270.64 Contingent Liabilities 0.00 93.52 93.52 Total Liabilities 12,354.82 15,297.85 19,598.52 Capital Stock Authorized 80 Million Shares Issued and Outstanding 60,954,868 shares 6,095.49 6,095.49 6,095.49 Donated Capital 1,046.97 1,046.97 1,046.97 Invested Capital 3,900.48 0.00 0.00 Appraisal Capital 28,656.48 28,656.48 28,656.48 Retained Earnings (Deficit) -1,694.48 1,078.23 1,288.79 Contingent Surplus 107.65 107.67 107.82 Total Net Worth 38,112.59 36,984.84 37,195.55 Total Liabilities and Net Worth 50,467.41 52,282.69 56,794.07 Source: MWSS. Appendix 4 27

Table A4.6: Financial Indicators, 1999-2001

Indicator 1999 2000 2001 Liquidity Ratio Current Ratio 1.77 1.30 1.07 Acid Test Ratio 1.27 1.30 1.04 Leverage Ratio Total Liabilities to Total Asset 0.24 0.29 0.35 Total Liabilities to Net worth 0.32 0.41 0.53 Long-Term Debt to Net worth 0.29 0.36 0.42 Source: MWSS. 3. Financial Projections 19. Financial projections have been prepared and are presented in Tables A4.7 to A4.10. However, it is evident that the financial viability of MWSS and the Project is largely dependent on the two concessionaires. When MWSI failed to pay the concession fee for several months, MWSS had to use its unappropriated reserve funds to meet obligations and finally had to resort to domestic and international short-term borrowing to meet its financial obligations. The resolution of several issues, including tariff adjustment for currency devaluation, will hopefully contribute to improved financial performance and reporting. The tax exemption of MWSS on payment of corporate tax likewise settles the issue of proper accounting of all relevant revenues, thus providing management with accurate financial information in the future. 20. The effect of the proposed TA loan is indicated in the projections. It is expected that MWSS will have to pay about P31.2 million for annual debt service from 2007 to 2013. However, debt service will have to be covered through the concession fees subject to tariff adjustments, thus having limited impact on the financial performance of MWSS. Based on an average billed water volume for 2002 of 1,500 million liters per day the required tariff adjustment in 2007 would probably be in the range of about P0.06 per cubic meter. This compares with current domestic water tariffs of P15.76 per cubic meter for the MWSI service area and P10.06 per cubic meter for the MWCI service area.3 However, billed water demand will have increased considerably until loan repayment starts, thus reducing the required tariff adjustment. A detailed financial analysis will be carried out for the new water source investment projects resulting from the TA loan, for which debt service will also have to be covered through the concession fees.

3 Source: MWSS. 28 Appendix 4 Table A4.7: Income Statement (P million) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 actual Item unaudited Operating and Service Income Revenue from Concession - Current Operating Budget (COB) 137.42 145.67 152.95 162.13 171.85 182.17 193.10 204.68 216.96 229.98 243.78 258.41 - Debt Service 2,046.36 3,752.37 3,185.54 3,043.58 2,753.26 2,604.47 2,473.79 2,433.47 2,180.24 2,164.44 2,147.44 2,130.43 Existing Loans 2,046.36 3,752.37 3,185.54 3,043.58 2,753.26 2,573.30 2,442.61 2,402.29 2,149.06 2,133.27 2,116.26 2,099.26 Proposed TA Loan 0.00 0.00 0.00 0.00 0.00 31.18 31.18 31.18 31.18 31.18 31.18 31.18 - Progress Billing 409.61 254.42 240.47 25.47 25.47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Existing Loans 409.61 254.42 218.64 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Proposed TA Loan 0.00 0.00 21.83 25.47 25.47 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Rentals - Leased Properties 47.30 50.14 53.15 56.34 59.72 63.30 67.10 71.12 75.39 79.91 84.71 89.79 Total 2,640.69 4,202.60 3,632.10 3,287.52 3,010.30 2,849.94 2,733.98 2,709.27 2,472.59 2,474.34 2,475.93 2,478.63

Less Operating Expenses Personnel Services 84.50 89.57 94.94 100.64 106.68 113.08 119.86 127.06 134.68 142.76 151.33 160.41 Depreciation 1,234.73 1,577.77 1,516.62 1,516.62 1,458.53 1,458.53 1,403.35 1,403.35 1,350.92 1,350.92 1,301.12 1,301.12 Amortization of Water Rights 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 Amortization of Organization Cost 266.49 266.49 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Maintenance & Other Operating Expenses 69.94 74.14 78.58 83.30 88.30 93.60 99.21 105.16 111.47 118.16 125.25 132.77 Total 1,656.56 2,008.86 1,691.05 1,701.46 1,654.41 1,666.11 1,623.32 1,636.47 1,597.98 1,612.75 1,578.60 1,595.19

Income (Loss) from Operations 984.13 2,193.74 1,941.06 1,586.06 1,355.89 1,183.83 1,110.65 1,072.80 874.61 861.59 897.33 883.44

Add (Deduct) Other Income (Expenses) . Interest Income 187.40 206.14 226.75 249.43 274.37 301.81 331.99 365.19 401.71 441.88 486.07 534.67 Incidental Income 14.87 266.36 17.99 19.79 21.77 23.95 26.34 28.98 31.88 35.06 38.57 42.43 Gain on Foreign Exchange 49.01 24.51 24.51 24.51 24.51 24.51 24.51 24.51 24.51 24.51 24.51 24.51 Interest Expense - 710.25 -2,317.75 -1,831.08 -1,704.30 -1,528.65 -1,417.54 -1,301.95 -1,213.10 -1,087.77 - 969.55 - 840.10 - 710.53 Tax Expense - 8.67 - 41.23 - 45.35 - 49.89 - 54.87 - 60.36 - 66.40 - 73.04 - 80.34 - 88.38 - 97.21 - 106.93 Total - 467.64 -1,861.97 -1,607.18 -1,460.46 -1,262.87 -1,127.64 - 985.51 - 867.46 - 710.03 - 556.48 - 388.17 - 215.86

Net Income (Loss) 516.49 331.76 333.87 125.60 93.02 56.19 125.15 205.34 164.59 305.11 509.16 667.58 Source: MWSS; Asian Development Bank. Table A4.8: Cash Flow Statement (P million) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 actual unaudited Cash Balance, Beginning 1,740.62 3,776.74 2,098.42 2,016.99 2,005.24 2,352.48 2,731.53 3,145.49 3,597.74 4,092.03 4,632.45 5,223.49

Cash Inflows Operating Receipts Collection of Prior Years' Receivables 6.36 8.91 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Collection of MWSI's Past Due Account 50.00 4,351.57 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Concession Fees 694.66 4,152.46 3,578.96 3,231.18 2,950.58 2,786.64 2,666.88 2,638.15 2,397.20 2,394.42 2,391.22 2,388.84 Proceeds from Loans Foreign 6,747.92 500.25 269.04 60.29 59.71 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Existing Loan 1,513.42 500.25 218.64 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Short-Term Loan 5,234.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Proposed TA Loan 0.00 0.00 50.40 60.29 59.71 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Domestic 786.15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Existing Loan 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Short-Term Loan 786.15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Advances 299.42 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Collection from Other Sources of Income 140.62 547.14 322.40 350.06 380.36 413.56 449.93 489.79 533.48 581.36 633.85 691.39 Total 8,725.13 9,560.33 4,172.40 3,641.53 3,390.65 3,200.20 3,116.81 3,127.94 2,930.68 2,975.78 3,025.07 3,080.23

Cash Outflows Operational Expenses Personnel Services 84.50 89.57 94.94 100.64 106.68 113.08 119.86 127.06 134.68 142.76 151.33 160.41 Maintenance & Other Operating Expenses 69.94 74.14 78.58 83.30 88.30 93.60 99.21 105.16 111.47 118.16 125.25 132.77 Capital Investments 1,875.98 754.67 509.51 85.76 85.18 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Principal Repayments 2,688.65 7,805.70 1,312.09 1,297.81 1,184.75 1,148.51 1,134.99 1,220.37 1,092.47 1,194.90 1,307.34 1,419.90 Foreign 1,197.42 6,983.07 1,299.47 1,285.19 1,172.13 1,135.88 1,122.36 1,220.37 1,092.47 1,194.90 1,307.34 1,419.90 Existing Loan 1,197.42 1,583.07 1,299.47 1,285.19 1,172.13 1,115.95 1,101.11 1,197.72 1,068.32 1,169.16 1,279.91 1,390.66 Short-Term Loan 0.00 5,400.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Proposed TA Loan 0.00 0.00 0.00 0.00 0.00 19.93 21.25 22.65 24.14 25.74 27.44 29.25 Domestic 1,491.23 822.63 12.63 12.63 12.63 12.63 12.63 0.00 0.00 0.00 0.00 0.00 Existing Loan 30.33 12.63 12.63 12.63 12.63 12.63 12.63 0.00 0.00 0.00 0.00 0.00 Short-Term Loan 1,460.90 810.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Interest Payments & Other Charges 1,327.63 2,354.68 1,873.44 1,745.77 1,568.51 1,455.96 1,338.80 1,213.10 1,087.77 969.55 840.10 710.53 Foreign 1,203.41 2,311.04 1,862.08 1,739.71 1,563.20 1,451.92 1,336.52 1,213.10 1,087.77 969.55 840.10 710.53 Existing Loan 1,062.95 2,143.04 1,862.08 1,739.71 1,563.20 1,440.68 1,326.59 1,204.57 1,080.74 964.11 836.35 708.60 Short-Term Loan 140.46 168.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Proposed TA Loan 0.00 0.00 0.00 0.00 0.00 11.25 9.93 8.53 7.03 5.44 3.74 1.93

Domestic 124.22 43.64 11.36 6.06 5.30 4.04 2.27 0.00 0.00 0.00 0.00 0.00 Appendix 4 29 Existing Loan 7.42 13.64 11.36 6.06 5.30 4.04 2.27 0.00 0.00 0.00 0.00 0.00 Short-Term Loan 116.80 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Investment in Sinking Fund - 5.78 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Others 648.09 159.90 385.25 340.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 Total 6,689.01 ######## 4,253.83 3,653.29 3,043.41 2,821.15 2,702.86 2,675.69 2,436.39 2,435.37 2,434.02 2,433.61

Cash Balance, Ending 3,776.74 2,098.42 2,016.99 2,005.24 2,352.48 2,731.53 3,145.49 3,597.74 4,092.03 4,632.45 5,223.49 5,870.12 Source: MWSS; Asian Development Bank. 30 Appendix 4 Table A4.9: Balance Sheet (P million) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 actual ASSETS unaudited Fixed Assets Property, Plant, and Equipment 32,540.80 31,784.81 31,006.90 30,049.01 28,691.21 27,214.31 25,668.28 23,955.16 22,149.10 20,190.99 18,110.99 15,837.20 Construction in Progress 18,923.24 19,677.91 20,187.42 20,273.19 20,358.37 20,358.37 20,358.37 20,358.37 20,358.37 20,358.37 20,358.37 20,358.37 Subtotal 51,464.04 51,462.72 51,194.32 50,322.20 49,049.58 47,572.68 46,026.65 44,313.53 42,507.47 40,549.36 38,469.36 36,195.57 Current Assets Cash and Cash Equivalents 3,841.03 2,098.42 2,016.99 2,005.24 2,352.48 2,731.53 3,145.49 3,597.74 4,092.03 4,632.45 5,223.49 5,870.12 Accounts Receivable 4,125.66 166.47 217.61 273.95 333.66 396.96 464.06 535.18 610.57 690.48 775.19 864.98 Miscellaneous Receivable 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Inventories 0.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 Subtotal 7,966.69 2,266.89 2,236.61 2,281.19 2,688.14 3,130.49 3,611.55 4,134.92 4,704.60 5,324.93 6,000.68 6,737.10 Advances and Deposits 407.56 203.78 101.89 50.95 25.47 12.74 6.37 3.18 1.59 0.80 0.40 0.20 Other Assets Stocks & Security of Service Enterprise 2.21 2.21 2.21 2.21 2.21 2.21 2.21 2.21 2.21 2.21 2.21 2.21 Miscellaneous Assets and Deferred Charges 1,694.71 1,864.18 2,050.60 2,255.66 2,481.22 2,729.35 3,002.28 3,302.51 3,632.76 3,996.04 4,395.64 4,835.21 Contingent Assets 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 Reorganization Costs 138.15 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Investments 0.00 12.00 24.00 36.00 48.00 60.00 72.00 84.00 96.00 108.00 120.00 132.00 Miscellaneous 221.12 243.23 267.56 294.31 323.74 356.12 391.73 430.90 473.99 521.39 573.53 630.88 Subtotal 2,164.00 2,229.43 2,452.17 2,695.99 2,962.99 3,255.48 3,576.03 3,927.43 4,312.77 4,735.45 5,199.19 5,708.11 Total Assets 62,002.29 56,162.83 55,985.00 55,350.32 54,726.18 53,971.39 53,220.59 52,379.06 51,526.43 50,610.53 49,669.62 48,640.97 Liabilities and Capital Long-Term Liabilities Loans Payable 16,199.00 16,057.00 15,518.15 14,728.02 13,978.00 13,130.88 12,215.18 11,124.59 10,059.28 8,785.35 7,277.09 5,516.83 Current Liabilities Accounts Payable and Accrued Expenses 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 1,248.99 Notes Payable 5,234.50 Bonds Payable 786.15 Current Portion of Loans Payable 246.82 271.50 298.65 328.52 361.37 397.51 437.26 480.98 529.08 581.99 640.19 704.21 Depository Liabilities 38.73 38.73 38.73 38.73 38.73 38.73 38.73 38.73 38.73 38.73 38.73 38.73 Trust Liabilities 230.48 230.48 230.48 230.48 230.48 230.48 230.48 230.48 230.48 230.48 230.48 230.48 Subtotal 7,785.67 1,789.70 1,816.85 1,846.72 1,879.57 1,915.71 1,955.46 1,999.18 2,047.28 2,100.19 2,158.39 2,222.41 Misc. Liabilities and Deferred Credits 301.97 301.97 301.97 301.97 301.97 301.97 301.97 301.97 301.97 301.97 301.97 301.97 Contingent Liabilities 33.26 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Liabilities 24,319.90 18,148.67 17,636.97 16,876.70 16,159.54 15,348.56 14,472.61 13,425.74 12,408.53 11,187.51 9,737.45 8,041.21 Capital Stock Authorized 80 Million Shares Issued and Outstanding 60,954,868 shares 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 6,095.49 Donated Capital 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 1,046.97 Invested Capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Appraisal Capital 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 28,656.47 Retained Earnings/(Deficit) 1,775.65 2,107.41 2,441.29 2,566.88 2,659.90 2,716.09 2,841.24 3,046.58 3,211.16 3,516.28 4,025.44 4,693.01 Contingent Surplus 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 107.81 Total Networth 37,682.39 38,014.15 38,348.03 38,473.62 38,566.64 38,622.83 38,747.98 38,953.32 39,117.90 39,423.02 39,932.18 40,599.75 Total Liabilities and Networth 62,002.29 56,162.83 55,985.00 55,350.33 54,726.18 53,971.39 53,220.59 52,379.06 51,526.43 50,610.53 49,669.63 48,640.96 Source: MWSS; Asian Development Bank. Table A4.10: Financial Indicators 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 actual unaudited Financial Indicators Liquidity Ratio Current Ratio 1.02 1.27 1.23 1.24 1.43 1.63 1.85 2.07 2.30 2.54 2.78 3.03 Acid Test Ratio 1.02 1.27 1.23 1.23 1.43 1.63 1.85 2.07 2.30 2.53 2.78 3.03 Leverage Ratio Total Liabilities to Total Asset 0.39 0.32 0.32 0.30 0.30 0.28 0.27 0.26 0.24 0.22 0.20 0.17 Total Liabilities to Net worth 0.65 0.48 0.46 0.44 0.42 0.40 0.37 0.34 0.32 0.28 0.24 0.20 Long-term Debt to Net worth 0.43 0.42 0.40 0.38 0.36 0.34 0.32 0.29 0.26 0.22 0.18 0.14 Source: MWSS; Asian Development Bank. Appendix 4 31 32 Appendix 5

TERMS OF REFERENCE FOR FEASIBILITY STUDY FOR THE WAWA RIVER PROJECT A. Introduction

1. The existing water supply systems within San Mateo and Rodriguez (Montalban), both in the province of Rizal, are supplied from deep wells operated by Manila Water Company, Inc. (MWCI) and from surface water provided from Balara. However, growing water demand in the area is difficult to meet from existing sources, and deep wells render inadequate yield and are costly to operate. The Metropolitan Waterworks and Sewerage System (MWSS), in cooperation with MWCI, is considering providing water to the area from the existing Wawa Dam (the Project). 2. The Project will comprise the renovation of the dam including water intake, removal of silt from the reservoir, and construction of a new transmission pipeline and water treatment plant. The water treatment plant will be located close to the dam on a site already owned by MWSS, which also has the right of way for the new pipeline. The plant’s mechanical and electrical equipment has been provided under a previous project and is stored in a warehouse. The cost estimates for the feasibility study are presented in Table A5. B. Objectives 3. The objective of the feasibility study is to investigate and assess the technical, financial, economic, institutional, social, and environmental viability of the proposed Project according to Asian Development Bank (ADB) requirements and guidelines, and to formulate and prepare the Project suitable for financing from ADB, the private sector, or other sources. C. Scope of Services 4. The consultant will prepare a feasibility study and preliminary design, and will undertake the following: (i) Review and update existing reports, studies, and data relevant to the Project. (ii) Undertake a hydrological assessment of the Wawa River Basin and adjacent river basins to derive the daily and monthly flow series and design floods, and to estimate the corresponding flow diversion capacity that can be treated using available electrical and mechanical equipment. (iii) Review and carry out an analysis of the water quality, sources of pollution, and contamination in the catchment area and their impact on the water treatment plant process design and treatment efficiency. (iv) Review previous studies, collect new data, and carry out necessary investigations to assess the yield that can be economically obtained from the diversion of water from the dam as well as the possibility of establishing a hydrological network. (v) Study the structural integrity of the existing dam, intake, sluice gates, trash racks, etc., as well as the existing raw water aqueduct that was laid within the vicinity of the dam abutment area, with a view to their rehabilitation and use in the proposed Project. (vi) Prepare a topographic survey of the treatment plant site, and a topographic profile survey of the proposed transmission lines from the dam to the treatment plant and service area. (vii) Carry out a geological survey of the proposed treatment plant site and conduct geological and geotechnical field reconnaissance, investigations, mapping, and assessment, based on the surface geologic survey and investigation of possible geological problems or constraints affecting the project components as input into Appendix 5 33

engineering design, construction methodology, equipment to be adopted, etc.; and carry out field visits to confirm the geological constraints of the project area. (viii) Determine facilities needed to divert the raw water from the dam, to convey it to the treatment plant and to the target service area, and facilities needed for treating the water. (ix) Assess all aspects related to the efficient diversion of flow from the dam intake to the proposed treatment plant, considering the possibility of constructing a desilting basin to prevent the accumulation of a large volume of silt during wet months; consider the construction of an aqueduct and the alignment definition, cross section, excavation methods, lining, and rock support requirements leading to its interconnection to the proposed treatment plant. (x) Prepare preliminary engineering designs for the above-mentioned facilities, including access roads and other Project-related facilities, providing enough details for accurate definition of the project cost and development of the design criteria for future detailed engineering design. (xi) Prepare the cost estimates for construction, operation, and maintenance of the proposed works; prepare a preliminary bill of quantities for estimating the cost of each component to determine the division of project components into future separate contract packages; prepare contract packages, cost estimates, a financing plan, procurement plan, implementation plan, and implementation arrangements. (xii) Assess the suitability of the available stored water treatment plant equipment for the Project; assess the integrity of the packed equipment, the need to refurbish, and, if necessary, the availability of spare parts and additional equipment required. (xiii) Prepare a water demand study and perform a demand-supply calculation and service connections projection for the target service area, including but not limited to (a) determination of water supply against production requirement; (b) demand for domestic, commercial, industrial, and institutional consumers; (c) nonrevenue water; and (d) forecast of service connection requirement for the consumer groups mentioned. (xiv) Formulate, conduct, and recommend an optimal flood operation plan for the Project. (xv) Undertake environmental assessment of all impacts related to the construction and operation of the proposed Project, identifying related mitigating measures to minimize adverse impacts on environment, ecology, or human settlements; carry out an initial environmental examination and, if required, an environmental impact assessment; and prepare all documentation required for the issuance of an environmental compliance certificate (ECC). (xvi) Prepare an estimate for incremental wastewater generation and a summary plan for collection and disposal of wastewater. (xvii) Prepare a financial and economic analysis of the Project in accordance with ADB’s Guidelines for Economic Analysis of Projects , and the Handbook for the Economic Analysis of Water Supply Projects , including analysis of alternatives, least-cost, tariff, and affordability analysis. (xviii) Undertake an initial poverty and social analysis (IPSA) and a poverty and social analysis according to ADB’s Handbook on Poverty and Social Analysis. These will include, but will not be limited to, household surveys; social, poverty, and gender analyses; community participation; affordability of water tariffs and willingness to pay; and collection and analysis of health data (particularly on the incidence and causes of waterborne diseases). 34 Appendix 5

(xix) Prepare all documents related to social safeguards. This will include (a) an assessment of the land acquisition and resettlement (LAR) and indigenous peoples (IP) situation, and (b) preparation of the sections on resettlement and indigenous peoples in the IPSA as outlined in the ADB Handbook on Poverty and Social Analysis. When warranted by the IPSAs, prepare preliminary LAR Plans fitting the ADB Policy on Involuntary Resettlement as outlined in the ADB Handbook on Resettlement: A Guide to Good Practice, and preliminary IP development plans fitting the ADB Policy on Indigenous Peoples. (xx) Prepare an institutional analysis of arrangements for implementation and operation of the Project, and prepare a capacity-building program to address identified capacity shortfalls. (xxi) Prepare a risk analysis for the Project including mitigating measures. (xxii) Assess the possibilities for private sector participation in the construction, financing, and operation of the Project. (xxiii) Prepare terms of reference and cost estimates for additional consulting services as may be required. (xxiv) Assist and advise the Executing Agency, including training for its staff, on issues of resettlement, indigenous peoples, and public information. (xxv) Provide advice on legal issues relating to water and other property rights in connection with the Project. (xxvi) Upon request of MWSS, provide other services related to the Project not specifically covered in the above. 5. In general, the consultant will prepare the feasibility study in accordance with ADB requirements including but not be limited to ADB’s Policy on Involuntary Resettlement, Environmental Assessment Requirements and Environmental Review Procedures, Guidelines for Incorporation of Social Dimensions in Bank Operations, Handbook on Poverty and Social Analysis, Guidelines for Economic Analysis of Projects , Handbook for the Economic Analysis of Water Supply Projects , Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank, Handbook on Resettlement, Guidelines for Procurement under ADB Loans, and Guidelines on the Use of Consultants by ADB and its Borrowers. D. Staffing

6. A consulting firm or consortium of firms will carry out the study, providing a team of international and domestic consultants. It is expected that a total of 16.5 person-months (3.5 international and 13 domestic) will be required. The consultants will have expertise in the following disciplines: (i) hydrology, (ii) geology, (iii) dam engineering, (iv) hydraulic and hydro- mechanical engineering, (v) electrical engineering, (vi) water supply engineering, (vii) wastewater engineering, (viii) environment, (ix) socioeconomic dimensions, (x) resettlement, (xi) financial analysis, (xii) economic analysis, and (xiii) legal. E. Reporting

7. The consultant will prepare the following reports: (i) inception report within 1 month after commencement of the study; (ii) concise monthly progress reports (1-2 pages); (iii) draft final report 4 months after commencement; (iv) final report 1 month after receiving comments; (v) documentation required for the ECC; Appendix 5 35

(vi) drawings, plans, tender packages, and other reports and documentation as required. 8. The consultant will provide all reports in 10 copies in English in printed form, plus electronic form (MS Excel, MS Word, pdf-format, and other electronic format as required).

Table A5: Cost Estimates and Financing Plan Feasibility Study of the Wawa River Project ($‘000) Item Foreign Local Total Cost Exchange Currency A. Asian Development Bank Financing 1. Consultants a. Remuneration and Per Diem i. International Consultants 86 0 86 ii. Domestic Consultants 0 52 52 b. International and Local Travel i. International Travel 6 0 6 ii. Local Travel 0 5 5 c. Reports and Communications 0 2 2 2. Stakeholder Consultations and Workshops 0 1 1 3. Surveys 0 50 50 4. Contingencies 5 6 11 Subtotal (A) 97 116 213 B. MWSS Financing 1. Office Accommodation and Transport 0 16 16 2. Remuneration and Per Diem of 50 50 Counterpart Staff 3. Taxes and Duties 0 25 25 4. Contingencies 0 5 5 5. Others 0 0 0 Subtotal (B) 0 96 96 Total 97 212 309 MWSS = Metropolitan Waterworks and Sewerage System Source: Asian Development Bank estimates.

36 Appendix 6

DESCRIPTION OF WATER SOURCE PROJECTS A. Angat Water Utilization and Aqueduct Improvement Project

1. Objectives. The objectives are (i) to investigate and assess the technical, financial, economic, institutional, social, and environmental viability of the proposed Angat Water Utilization and Aqueduct Improvement Project (AWUAIP) according to Asian Development Bank (ADB) requirements and guidelines; (ii) to formulate and prepare the Project suitable for financing by ADB, the private sector, and/or other sources; and (iii) to prepare detailed design and tender documentation. The AWUAIP consists of two phases: Phase 1 comprises construction of the first section (5.5 kilometers [km] length) of a new aqueduct (AQ6) serving as a bypass during repair of the corresponding section of aqueduct no. 5 (AQ5). Due to the urgent need for repair of AQ5, Phase 1 will be financed by the Government. Phase 2, which will be prepared under the Project, comprises construction of the remaining section of AQ6 (11.5 km length), repair of the corresponding section of AQ5, and other items as specified under Scope of Services. 2. Scope of Services. Part A: Project Preparation will include, but not be limited to, the conduct of a feasibility study and preliminary design of the 11.5 km section (Phase 2) of AQ6. The feasibility study and preliminary design will address (i) the technical, financial, economic, social, and environmental assessment of the Project; (ii) the possibility of increasing the water right allocation of the Metropolitan Waterworks and Sewerage System; (iii) determination of the least-cost approach; (iv) private sector participation; (v) resettlement; and (vi) financing plan for the Project. Part B will include (i) preparation of detailed design and tender documents, and (ii) assistance in tender evaluation and contract award. 3. Budget. The total budget is estimated at $2.1 million from which $982,000 is allocated for Part A and $1,118,000 for Part B. It is expected that a total of 251 person-months of consultants (11 person-months international and 240 person-months domestic) will be required of which a total of 117 person-months (5 person-months international and 112 person-months domestic) are allocated for Part A, and a total of 134 person-months (6 person-months international and 128 person-months domestic) are allocated for Part B. The indicative cost estimates for the Project are presented in Tables A6.1 – A6.3. B. Laiban Dam Project

1. Objectives. The objectives are (i) to assess the technical, financial, economic, institutional, social and environmental viability of the proposed Project according to ADB requirements and guidelines; and (ii) to formulate a project suitable for financing by ADB, the private sector, and/or other sources. 2. Scope of Services. Project preparation will include but not be limited to (i) review of existing design and tender documentation, (ii) preliminary design of a proposed transmission pipeline line from the Pantay Treatment Plant to Taytay Reservoir, (iii) financing arrangements for public and/or private sector participation, (iv) preparation of a resettlement plan, (v) preparation of environmental impact assessment leading to the securing of a new environmental compliance certificate; (vi) social impact assessment; and (vii) stakeholder consultations. 3. Budget. The budget is estimated at $2.05 million. It is expected that a total of 155 person-months of consultants (22 person-months international and 133 person-months domestic) will be required. The indicative cost estimates for the Project are presented in Table A6.4.

Appendix 6 37

Table A6.1: Indicative Cost Estimates and Financing Plan Angat Water Utilization and Aqueduct Improvement Project ($‘000) Part A: Feasibility Study and Preliminary Design Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing 1. Consultants a. Remuneration and Per Diem i. International Consultants 130 0 130 ii. Domestic Consultants 0 447 447 b. International and Local Travel i. International Travel 8 0 8 ii. Local Travel 0 6 6 c. Reports and Communications 0 8 8 2. Stakeholder Consultations and 0 6 6 Workshops 3. Surveys 0 31 31 4. Contingencies 7 26 33 Subtotal (A) 145 524 669

B. MWSS Financing 1. Office Accommodation and 0 50 50 Transport 2. Remuneration and Per Diem of 0 144 144 Counterpart Staff 3. Taxes and Duties 0 68 68 4. Other 0 35 35 5. Contingencies 0 16 16 Subtotal (B) 0 313 313 Total 145 837 982 MWSS = Metropolitan Waterworks and Sewerage System Source: Asian Development Bank estimates.

38 Appendix 6

Table A6.2: Indicative Cost Estimates and Financing Plan Angat Water Utilization and Aqueduct Improvement Project ($‘000)

Part B: Detailed Design and Tender Documents Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing 1. Consultants a. Remuneration and Per Diem i. International Consultants 148 0 148 ii. Domestic Consultants 0 510 510 b. International and Local Travel i. International Travel 7 0 7 ii. Local Travel 0 8 8 c. Reports and Communications 0 8 8 2. Stakeholder Consultations and 0 5 5 Workshops 3. Surveys 0 35 35 4. Contingencies 8 30 38 Subtotal (A) 163 596 759

B. MWSS Financing 1. Office Accommodation and 0 57 57 Transport 2. Remuneration and Per Diem of 0 164 164 Counterpart Staff 3. Taxes and Duties 0 78 78 4. Other 0 42 42 5. Contingencies 0 18 18 Subtotal (B) 0 359 359 Total 163 955 1,118 MWSS = Metropolitan Waterworks and Sewerage System Source: Asian Development Bank estimates. Appendix 6 39

Table A6.3: Indicative Cost Estimates and Financing Plan Angat Water Utilization and Aqueduct Improvement Project ($‘000) Total of Part A and Part B Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing 1. Consultants a. Remuneration and Per Diem i. International Consultants 278 0 278 ii. Domestic Consultants 0 957 957 b. International and Local Travel i. International Travel 15 0 15 ii. Local Travel 0 14 14 c. Reports and Communications 0 16 16 2. Stakeholder Consultations and 0 11 11 Workshops 3. Surveys 0 66 66 4. Contingencies 15 56 71 Subtotal (A) 308 1,120 1,428

B. MWSS Financing 1. Office Accommodation and 0 107 107 Transport 2. Remuneration and Per Diem of 0 308 308 Counterpart Staff 3. Taxes and Duties 0 146 146 4. Other 0 77 77 5. Contingencies 0 34 34 Subtotal (B) 0 672 672 Total 308 1,792 2,100 MWSS = Metropolitan Waterworks and Sewerage System Source: Asian Development Bank estimates.

40 Appendix 6

Table A6.4: Indicative Cost Estimates and Financing Plan Laiban Dam Project ($‘000)

Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing 1. Consultants a. Remuneration and Per Diem i. International Consultants 540 0 540 ii. Domestic Consultants 0 530 530 b. International and Local Travel i. International Travel 30 0 30 ii. Local Travel 0 20 20 c. Reports and Communications 0 20 20 2. Stakeholder Consultations and 0 30 30 Workshops 3. Surveys 0 90 90 4. Contingencies 30 36 66 Subtotal (A) 600 726 1,326

B. MWSS Financing 1. Office Accommodation and 0 160 160 Transport 2. Remuneration and Per Diem of 0 300 300 Counterpart Staff 3. Taxes and Duties 0 157 157 4. Other 0 70 70 5. Contingencies 0 36 36 Subtotal (B) 0 723 723 Total 600 1,449 2,049 MWSS = Metropolitan Waterworks and Sewerage System Source: Asian Development Bank estimates.

Appendix 7 41

TERMS OF REFERENCE FOR CAPACITY BUILDING FOR METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM

A. Objectives

1. The objective of the consulting services (the Project) is to strengthen the financial management system and the capabilities of the in-house financial staff of the Metropolitan Waterworks and Sewerage System (MWSS), particularly where financial management is involved, and enhance productivity and governance. The cost estimates for the Project are presented in Table A7.

2. In particular, the Project will: (i) improve the financial management system, which comprises (a) management accounting; (b) corporate planning, budgeting, and budgetary control; (c) financial accounting; (d) internal control and audit systems; and (e) data processing; (ii) improve skills on strategic corporate planning; (iii) provide technical support mechanisms and training for enhancing staff productivity; and (iv) provide assistance to resolve and settle Commission on Audit auditors’ qualifications and recommendations on the FY1999 and FY2000 audited financial statements. B. Scope of Services 1. Advisory Study on Financial Management 3. The consultant will undertake the following: (i) Review the current system and procedures of (a) management accounting; (b) corporate planning, budgeting, and budgetary control; (c) financial accounting; (d) internal control and audit systems; and (e) data processing. (ii) Propose, design, and implement improved operation and financial management in budget preparation process, cash management, accounting, auditing, and reporting. (iii) Review the existing mechanism for internal control for each activity and recommend and design internal control and internal audit systems to enhance sound governance and financial internal control within MWSS. (iv) Identify and prepare legal and administrative requirements to implement proposed mechanisms and improvements. (v) Develop and produce relevant manuals and guidelines for budget preparation, cash management, accounting, auditing, and financial reporting, incorporating internal control in each activity. (vi) Prepare progress reports and the final report as required. 4. The assistance will be conducted in such way as to ensure that all concerned staff are involved and consulted on every activity and that all are sufficiently empowered to perform their respective functions in the process. The component will emphasize not only the preparation of manuals and guidelines but also the integration of the proposed mechanisms into the current system. 2. Human Resource Development 5. The consultant will undertake the following: 42 Appendix 7

(i) Confirm the training needs of MWSS under the various course headings, including the number of participants and required course content. Give consideration to developing the following training courses: (a) Financial Management · Budgeting · Management accounting · Accounting · Internal control and internal audit · Recording, report generation, and data processing (b) Strategic Corporate Planning (c) Computer Software (ii) Prepare detailed course curricula and training material for each course based on the assessment of MWSS requirements. (iii) Prepare the detailed schedule, venue, number, and selection criteria of participants for each course. (iv) Conduct the training. (v) Prepare guidelines for milestones and criteria for impact assessment of the training program. (vi) Prepare progress reports and the final report as required. 6. The training program on financial management will be conducted after the completion of the advisory study to ensure incorporation of the results in the training content. 3. Provision of Computer Hardware and Software

7. The consultant will do the following: (i) Assess the computer hardware and software available, including accounting and financial management software, and prepare specifications for the purchase, installation, and commissioning of personal computers, computer network, printers, modems, software, and other relevant components as required, within the given budget of $30,000, including training of staff in the operation and maintenance of the system. (ii) Assist and advise MWSS during all stages of the procurement of the computer hardware and software including evaluation of proposals, signing of contract, and testing and passing of the system. C. Staffing 8. A consulting firm will carry out the Project, providing a team of domestic consultants. It is expected that a total of 16 person-months will be required. The consultants will have expertise in the following disciplines: (i) financial management, (ii) accounting, (iii) corporate planning, (iv) budgeting and budgetary control, (v) internal control and audit systems, (vi) training, and (vii) computer systems and data processing. One expert can cover more than one field of expertise.

D. Reporting Requirements 9. The following reports will be prepared: (i) inception report, within 1 month of commencement, outlining initial progress and recommending any changes required to the agreed upon work plan; (ii) concise monthly progress reports (1-2 pages); (iii) a draft final report within 6 months after commencement; (iv) a final report within 1 month after receiving comments; Appendix 7 43

(v) manuals and guidelines; (vi) training materials; (vii) other reports and documentation as requested by MWSS. 10. The consultant will provide all reports in 10 copies in English in printed form, plus electronic form (MS Excel, MS Word, pdf-format, and other electronic format as required). Manuals, guidelines, and training materials will be provided in a number according to relevant MWSS staff participating in the Project.

Table A7: Cost Estimates and Financing Plan Capacity Building for MWSS ($‘000)

Foreign Local Total Item Exchange Currency Cost A. MWSS Financinga 1. Consultants a. Remuneration and Per Diem i. International Consultants 0 0 0 ii. Domestic Consultants 0 100 100 b. International and Local Travel i. International Travel 0 0 0 ii. Local Travel 0 2 2 c. Reports and Communications 0 6 6 2. Equipment 0 30 30 3. Seminars and Conferences 0 5 5 4. Contingencies 0 7 7 Subtotal (1-4) 0 150 150

5. Office Accommodation and 0 11 11 Transport 6. Remuneration and Per Diem of 0 36 36 Counterpart Staff 7. Taxes and Duties 0 15 15 8. Contingencies 0 3 3 Subtotal (5-8) 0 65 65 Total 0 215 215 MWSS = Metropolitan Waterworks and Sewerage System a Capacity Building will be financed by MWSS, if bilateral grants cannot be secured. Source: Asian Development Bank estimates.

44 Appendix 8

COST ESTIMATES AND FINANCING PLAN ($‘000)

Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing 1. Consultants a. Remuneration and Per Diem i. International Consultants 904 0 904 ii. Domestic Consultants 0 1,539 1,539 b. International and Local Travel i. International Travel 51 0 51 ii. Local Travel 0 39 39 c. Reports and Communications 0 38 38 2. Stakeholder Consultations and 0 42 42 Workshops 3. Surveys 0 206 206 4. Contingencies 50 98 148 5. Interest and Fees 293 0 293 Subtotal (A) 1,298 1,962 3,260

B. MWSS Financing for Part Aa 1. Office Accommodation and Transport 0 283 283 2. Remuneration and Per Diem of 0 658 658 Counterpart Staff 3. Taxes and Duties 0 328 328 4. Contingencies 0 75 75 5. Others 0 147 147 Subtotal (B) 0 1,491 1,491 Subtotal (A) and (B) 1,298 3,453 4,751

C. MWSS Financing for Part Bb 1. Capacity Building 0 215 215 Total 1,298 3,668 4,966 MWSS = Metropolitan Waterworks and Sewerage System a MWSS financing required for Part A consisting of (i) Wawa River Project, (ii) Angat Water Utilization and Aqueduct Improvement Project, and (iii) Laiban Dam Project b MWSS financing required for Part B Capacity Building, if bilateral grants cannot be secured for financing of this component; a detailed cost estimate for this component is presented in Appendix 7. Source: Asian Development Bank estimates.

46 Appendix 10

POVERTY AND SOCIAL ANALYSIS SUMMARY

1. It is expected that, by improving service quality and expanding the number of poor families with water connection, the water source developments to be prepared by the Project will have positive impacts on the poverty situation in the Metro Manila areas they aim to serve. It is also anticipated that the new water sources will contribute to maintaining low water costs and improving livelihood, hygiene, and sanitation standards of serviced households. These benefits are expected to result in a reduction of household expenses and greater income opportunities for poor water users. The projects will particularly benefit women, who among all household members are usually the ones who are most involved in water use. 2. The Project will document poverty and social development concerns in accordance with the Asian Development Bank Handbook on Poverty and Social Analysis by preparing the appropriate sections of the initial poverty and social assessment and a poverty and social analysis report detailing poverty and social impacts for each of the water sources to be developed. 3. The poverty and social analysis will focus on the following: (i) determine the magnitude and likely impact of the Project on the poor, (ii) identify design measures that will enhance the Project’s contribution to poverty reduction and social development, (iii) identify constraints for vulnerable groups to benefit from the Project and identify design measures to overcome these constraints, (iv) conduct gender analysis to identify potentials and constraints for women to participate in and benefit from the Project, and (v) identify how water users can be mobilized through participatory mechanisms in the preparation of the new water sources. Appendix 11 47

SOCIAL SAFEGUARDS ISSUES (Involuntary Resettlement and Indigenous Peoples) 1. The Metropolitan Waterworks and Sewerage System New Water Source Development technical assistance loan (the Project) constitutes an effort to facilitate the planning of new water source projects for Metro Manila including (i) the Wawa River Project, entailing the rehabilitation of the Wawa Dam and Reservoir and the construction of a pipeline and water treatment plant; (ii) the Angat Water Utilization and Aqueduct Improvement Project, entailing the repair and construction of aqueducts and associated facilities; and (iii) the Laiban Dam Project entailing the construction of a major dam and associated infrastructure. In case the Asian Development Bank (ADB) will consider participating in financing of these projects the planning work carried out under the Project will provide an extensive base for their final preparation.

2. In designing the Project attention was given to land acquisition and resettlement (LAR) and indigenous peoples (IP) issues. Initial social assessments (ISAs) of LAR and IP impacts will be prepared. When warranted by the ISAs, (i) preliminary LAR plans (PLARPs) fitting the ADB Policy on Involuntary Resettlement as outlined in ADB’s Handbook on Resettlement: A Guide to Good Practice1, and (ii) preliminary IP development plans (PIPDPs) fitting the ADB Policy on Indigenous Peoples will be prepared. 3. PLARPs planning will follow several principles, including the following: (i) impacts will be minimized as much as possible based on a thorough analysis of design alternatives; (ii) LAR will be planned so as to improve or at least restore the living standards of the affected people (AP); (iii) APs eligible for compensation and rehabilitation will include informal settlers and IPs; (iv) impact surveys will be based on recent cadastral maps; (v) APs will be fully consulted on compensation and rehabilitation options; (vi) affected assets will be valued at replacement and market rates based on ad hoc surveys; (vii) detailed resettlement areas and agricultural replacement areas plans will be included in the PLARPs; and (viii) compensation, agricultural/residential replacement plots, and relocation subsidies will be scheduled so as to be delivered in full prior to impoundment, ground leveling, or demolition. 4. PIPDP initiatives will be commensurate to IPs' degree of vulnerability, impact type, and agreements between the Executing Agency and IPs. If affected IPs are fully integrated in mainstream society and culture and impacts have no specific sociocultural dimensions, the PIPDPs will be included as a chapter in the PLARP. The same applies if affected IPs keep a degree of sociocultural and institutional distinction and impacts carry some sociocultural dimension but do not have broad community effects. However, if affected IPs maintain a degree of sociocultural and institutional distinction and impacts not only carry a sociocultural dimension but have wide community or livelihood effects, the PIPDPs will be prepared as stand-alone documents inclusive of a participatory community development action plan (CDAP), and specific implementation schedules and budgets. 5. PLARP and PIDP planning will be based on a participatory process involving civil society and APs. Particular attention will be given in ensuring that the design of eventual residential and agricultural replacement land schemes, or of PIPDPs’ CDAPs, is carried out with the participation and endorsement of the beneficiary communities and their nongovernment organization representatives.

1 Cases affecting 200 or more APs, or 100 or more APs belonging to IP or vulnerable groups require a full LARP; cases affecting less than 200 APs or 100 IP or vulnerable groups APs require only a short LARP (for details and definitions see the “ADB Handbook on Resettlement: A Guide to Good Practice".) 48 Appendix 11

6. In case ADB will consider in the future participating in financing of a project developed under the TA Loan, PLARPs and PIPDPs will be thoroughly reviewed during project appraisal including consultations with the APs, update of impact surveys based on detailed design, revised plans for resettlement areas, and new schedules and budgets, as may be required.