PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6342 Metro Wastewater Management Project Project Name Public Disclosure Authorized Region EAST ASIA AND PACIFIC Sector Sewerage (70%); Sanitation (20%); General water, sanitation and flood protection sector (10%) Project ID P113844 Borrower(s) LAND BANK WITH A PH SOVEREIGN GUARANTEE Land Bank of the 1598 M. H. Del Pilar Street Philippines 1004 Tel: /Fax: (63-2) 812-4056 [email protected] Public Disclosure Authorized Implementing Agency Maynilad Water Services, Inc; and Company Inc Environment Category [ ] A [ ] B [ ] C [X] FI [ ] TBD (to be determined) Date PID Prepared February 7, 2012 Date of Appraisal January 24, 2012 Authorization Date of Board Approval May 3, 2012

1. Country and Sector Background 1. Metro Manila contributes substantially to the economy of the Philippines. In 2010, the economy of the Philippines grew by about 7.1 percent coming out of the global financial crisis. Metro Manila contributed largely to the growth of the country as its economy is about one-third Public Disclosure Authorized the size of the Philippines. The city has a vibrant economy which includes commercial, financial, and tourism activities. It is expected that the economic growth in Metro Manila and the Philippines will remain strong as monetary and fiscal policies are gradually tightened and investor confidence continues to improve with ongoing efforts to reduce the cost of doing business, and promote public-private partnerships (PPPs) in the delivery of infrastructure services. In spite of the economic growth, progress remains to be made on the delivery of basic services such as sanitation. This project supports an increase in the collection and treatment of wastewater in Metro Manila that will improve the environment, reduce health risks, and better serve the population of the city, including the poor. As Metro Manila’s contribution to the national economy is large, the improvements due to the project will also benefit the national economy.

2. A successful PPP model has delivered results in water services that can now be extended to Public Disclosure Authorized sanitation. Metropolitan Waterworks and Sewerage System (MWSS), a government corporation, is the agency responsible for providing water supply, sewerage and sanitation services in Metro Manila and some cities of and provinces, with a total population of around 15 million. Since 1997, service delivery is being handled by two private Concessionaires on behalf

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of MWSS: Manila Water Company, Inc. (MWCI) for the east zone, and Maynilad Water Services, Inc. (Maynilad) for the west zone of the concession area. This PPP arrangement in Metro Manila has worked well and the two concession contracts have been extended to 2037. There is also a monitoring system in place, with Key Performance Indicators -Business Efficiency Measures (KPI-BEM), which requires the Concessionaires to meet service standards.

3. Inadequate sanitation imposes real costs on the economy and population . Economic losses from inadequate sanitation are estimated to be around 1.5 percent of GDP (2005) 1 due to health costs and impacts on water quality, tourism, and welfare of the population. In Metro Manila it is estimated that about 2 million cubic meters (m 3) of wastewater is generated every day, of which about 17 percent is currently treated before it is discharged into water bodies in and around Metro Manila. Most of the city has a combined sewer system which is used to collect wastewater from homes and surface run-off during rain. These combined drains are often not covered and untreated wastewater is discharged to the water bodies in and around Metro Manila creating health hazards and raising environmental concerns.

4. The strategy to improve sanitation in Metro Manila will include short and long term measures. Households that are not directly connected to the sewers typically use septic tanks; it is estimated that about 85 percent of the population use about 2.2 million septic tanks throughout the city. The conditions of the septic tanks vary and as a result their efficiency in treating wastewater is also not uniform. Further, septic tanks that overflow could pollute the groundwater. In the longer run, when separate sewer networks are in place, households would be able to connect directly to the sewers and by-pass the septic tanks. However, the cost of the installing sewers is going to be expensive and it will take time. Thus, the authorities have taken a two pronged approach to address sanitation issues in the medium to short term: (a) improve the operations of septic tanks through a regular septage cleaning process. Both Concessionaires have the responsibility of cleaning septic tanks and the progress in this regard has been substantial. The project is also expected to support a septage treatment facility of Maynilad; and (b) treat the wastewater that is currently discharged to the water bodies in and around Metro Manila. Both Concessionaires have agreed with authorities to increase the volume of treated wastewater and the project will support the construction of wastewater treatment plants, in line with the plans of the authorities. In the longer run, as separate sewers are put in place, the septic tanks will not be used but the wastewater collected from households would still be treated through the wastewater plants that are being planned currently.

5. A Supreme Court decision has further prioritized wastewater services in Metro Manila on the national agenda. Metro Manila is located in the hydraulic zone of Laguna Lake- River- corridor, which is interconnected by more than 30 tributaries in the urban area. The pollution level in these water bodies is very high. Recognizing the importance of cleaning up the Manila Bay watershed, in December 2008, the Philippines Supreme Court passed a Decision mandating the clean up, rehabilitation and restoration of water quality of the Manila Bay to ultimately reach a level fit for contact recreation (class B). The Supreme Court required the state agencies to clean up and rehabilitate the Manila Bay. MWSS is listed as one of the defendant agencies and, by extension, the two Concessionaires are required to increase the volume of wastewater treated and provide quarterly progress reports to the Supreme Court.

1 Water and Sanitation Program, Economic Impacts of Sanitation in the Philippines , The World Bank; Jakarta: 2008. 2

6. A system for regulation of service delivery has been established for Metro Manila . To mitigate the environmental impacts of water pollution, the Government has enacted relevant water-related laws. In addition, Concession Agreements exist between MWSS and the two Concessionaires, a master plan guides their investments, and the Concessionaires’ operations are based on business plans that are regulated by MWSS. Within MWSS, a Corporate Office is responsible for overall water and sanitation services which are now being delivered through the two Concession Agreements with Manila Water and Maynilad. In addition, MWSS has a Regulatory Office which is responsible for monitoring and enforcing compliance with the Concession Agreements, reviewing water supply and sewerage rates, and responding to service complaints. The project will rely on this existing institutional arrangement, including the KPIs that are used to determine the quality of services provided by the Concessionaires.

7. An ambitious investment program has been lined up by the Concessionaires as part of the obligations under the extension of their concession term . Both Concessionaires are planning to undertake ambitious investments in wastewater collection and treatment in an effort to comply with their Concession Agreements and the Supreme Court decision to improve the quality of water in Manila Bay. Manila Water, covering the eastern part of Metro Manila, aims to achieve 30 percent coverage 2 by 2012; 45 percent by 2016; 63 percent by 2021 and 100 percent by 2037. Likewise, Maynilad which covers the western part of Metro Manila, plans to increase sewerage coverage to 14 percent by 2012; 30 percent by 2016; 66 percent by 2021; and 100 percent by 2037. The Metro Manila Wastewater Management Project (MWMP) project will help the two Concessionaires to embark on this ambitious investment program by supporting initial investments in selected sub-catchments.

2. Objectives

1. The Project Development Objective is to improve wastewater services in selected sub- catchments of Metro Manila and surrounding areas. This will be achieved by supporting Manila Water and Maynilad to increase their coverage of wastewater collection and treatment and septage management which will contribute towards improving the environment in Metro Manila. This project has a focus on improving wastewater services in the city (which will contribute to improving the water quality in Manila Bay) and is in line with the support provided by the Bank for overall urban development of Metro Manila. Over the years, the Bank has supported the development of the metropolitan area through a number of activities including those related to institutional support provided to Local Government Authorities and urban water and sanitation. The Metro Manila Wastewater Management Project is conceived as part of a broader program of support for the urban renewal of the metropolitan area, which is expected to include work on flood management, disaster risk management, and slum upgrading. The positive environmental externality of the project is large, and it will benefit all citizens of Metro Manila, including the poor. Improvements in wastewater services will improve the environment and reduce health risks for the citizens, including the poor who currently suffer on account of untreated wastewater being discharged into the rivers and creeks along which they often reside.

2 Percent of wastewater treated in the area served by the Concessionaire. 3

3. Rationale for Bank Involvement

1. The project is consistent with the CAS . The proposed project forms an integral part of the Bank’s assistance program to the sanitation sector and overall program in the Philippines. The Bank Group’s FY2010-2012 Country Assistance Strategy (CAS) highlights the Bank’s role in sustaining inclusive growth by supporting the Philippines to: (a) maintain macroeconomic stability; (b) improve the investment climate; (c) increase access to better public services for the poor; and (d) reduce vulnerabilities by expanding and rationalizing the country’s social safety net, improving disaster risk management, piloting climate change adaptation and expanding climate mitigation. 3 In expanding and improving wastewater services, this project directly supports objective (c) above of the CAS, which focuses on increasing access to public services.

4. Project Description

1. Eligible investments have been specified . The project will finance investments by Manila Water and Maynilad in wastewater collection and treatment, and septage management in Metro Manila. Investments under the component will help the Concessionaires meet their service obligation targets under the Concession Agreements. Eligible investments will include wastewater collection and treatment and septage treatment. Consulting assignments related to project implementation are also eligible and would include: preparation of feasibility studies, construction supervision, preparation of environmental and social safeguard reports, preparation of project summary reports and audit reports, and public awareness campaigns to inform the citizens about the project and the benefits of better water and wastewater services. The Concessionaires will pay for any land acquisition and resettlement costs, which will not be financed with Bank funds.

• Component 1: Investments in Wastewater Services by Manila Water (US$193.4 million.) This component will support technical assistance and investments by Manila Water in wastewater collection and treatment in the east concession zone of Metro Manila. Goods, works, non-consulting services (such as training), and consultant services can be supported under this component. It is expected that there will be only one investment carried out by the company: the North and South Pasig Sewerage System, which will include the construction of a wastewater treatment plant (capacity of 165,000 m 3/day) and associated combined sewers (65 km). The feasibility study has been prepared and Manila Water is in the process of procuring a Design Build contractor for the wastewater treatment plant and has hired consultants that will carry out the detailed designs of the sewerage network. The Bank loan funds may be used for other activities of Manila Water, in line with project objectives, in case the loan funds allocated for the North and South Pasig Sewerage System are not fully utilized.

• Component 2: Investments in Wastewater Services by Maynilad (US$178.3 million ). This component will support technical assistance and investments by Maynilad in wastewater collection and treatment, and septage management in the west concession zone of Metro

3 The recent CAS Progress Report (May 19, 2011) continues to highlight the need for improved services. 4

Manila. Goods, works, non-consulting services (such as training), and consultant services can be supported under this component. Six potential investments have been pre-identified, as follows - with indicative costs: (a) rehabilitation of the existing Ayala- Sewerage Treatment Plant (STP) that has a rated capacity to treat 10,000 cubic meters per day (m 3/day) of wastewater – $1.2 million; (b) construction of the South Septage Treatment Plant that is expected to treat about 250 m 3/day of septage collected from septic tanks – $4.7 million; (c) construction of the Talayan STP in the San Juan river basin with a capacity of 15,500 m 3/day – $13.3 million; (d) construction of the Valenzuela STP with a capacity of 60,000 m 3/day – $55.0 million; (e) construction of the STP with a capacity of 46,000 m 3/day – $58.7 million; and (f) construction of the STP with a capacity of 66,000 m 3/day – $45.4 million. The Bank loan funds may be used for other activities of Maynilad, in line with the project objectives, in case the loan funds allocated for the above-mentioned sub-projects are not fully utilized.

2. The project will be carried out in phases . The Phase 1 investments would be those for which the sub-project sites are known and for which the safeguard documents have been submitted to the Bank. There are four investments in this phase with the first one being undertaken by Manila Water and the remaining three by Maynilad: (a) North and South Pasig Sewerage System; (b) rehabilitation of an existing STP in Ayala Alabang; (c) construction of a new STP and associated wastewater interceptors in Pasay; and (d) construction of a new STP and associated wastewater interceptors in Talayan. Except for the rehabilitation work in Ayala Alabang, Manila Water and Maynilad will carry out the construction of STPs through Design Build schemes where a selected contractor will carry out the design and construct the treatment plants. For the interceptors, both Concessionaires will hire consultants to carry out the detailed design, prior to hiring a construction company to install the interceptors. The Phase 2 investments are the indicative investments for Maynilad where construction will start after March 31, 2013. These potential investments are for the Muntinlupa STP, Valenzuela STP, and the South Septage Treatment plant. Maynilad is in the process of acquiring land for these sites . Once the land is acquired, site specific conditions would be known and Maynilad would be able to prepare the necessary safeguard instruments during project implementation.

5. Financing (US$m.) Source: Sub-Borrowers (Manila Water and Maynilad) 96.7 International Bank for Reconstruction and Development 275.0 Total 371.7

6. Implementation

1. LBP is the Borrower of the Bank loan; Manila Water and Maynilad are Sub-Borrowers. LBP has been designated by the Government as the intermediary for on-lending the Bank loan proceeds to the two beneficiaries, Manila Water and Maynilad. A Loan Agreement between the Bank and LBP would be signed; Manila Water and Maynilad each would sign Sub-Loan Agreements with LBP and Project Agreements with the Bank. As the Borrower, LBP will ensure

5 that the terms and conditions outlined in the Loan Agreement are passed on to the two Sub- Borrowers. The Department of Finance (DOF) would provide the sovereign guarantee for the Bank loan will sign a Memorandum of Agreement with LBP and a Guarantee Agreement with Bank. LBP has worked with the Bank on seven previous projects as a financial intermediary, including the Manila Third Sewerage Project which has identical institutional arrangements – involving LBP, Manila Water, and the Bank – as this project. Based on the experience of working with the Bank, LBP is familiar with Bank policies. LBP has created a Project Management Office (PMO) for the MWMP, which will be responsible for supervising project implementation and complying with the reportorial requirements of the project. The PMO will draw on Corporate Banking Department-I (CBD-I), Program Management Department-II (PMD- II), and Environmental Program and Management Department (EPMD) staff as well as the services of a consulting firm in project implementation. The CBD-I will assist in financial management. The EPMD will handle the environmental compliance concerns of the project and the PMD-II will supervise the Sub-Borrowers’ compliance with the agreed framework on procurement, technical and social aspects of the project. Furthermore, both Sub-Borrowers have adequate capacity to carry out sub-project preparation and they have each established a team to carry out the project. Training will also be provided to ensure familiarity with processes to be carried out under the project.

2. Environmental Safeguards . The Bank’s policy on Environmental Assessment (OP 4.01) will be triggered for this project. To this end, both Manila Water and Maynilad have prepared the Environmental Assessment (EA) documents for the Phase 1 investments. The EAs identify the environmental issues of a sub-project and the mitigation measures. Public consultations were carried out to seek the views of the population that would be located near the wastewater treatment plants to be constructed under the project. Concerns of the public (noise, dust, smell etc.) will be addressed through the Environmental Management Plans (EMPs) that are included in each of the EAs, which have been publicly disclosed. In addition, an Environmental and Social Safeguards Framework (ESSF) has been prepared by LBP, in consultation with the Concessionaires, and publicly disclosed. The ESSF outlines the environmental and social safeguard procedures that are to be carried out during project implementation. The procedures outlined in the ESSF will also apply for Phase 2 investments.

3. Social Safeguards . The Bank’s policy on Involuntary Resettlement (OP 4.12) will apply for this project. To this end, Manila Water and Maynilad have prepared the necessary social safeguard documents:

• Manila Water acquired two adjacent properties (50,000 and 890 m 2) through a willing buyer-willing seller scheme for its North and South Pasig Sewerage System. The transaction has been documented through a Resettlement Completion Report and the process followed is consistent with OP 4.12.

• For Maynilad, the company acquired 1841 m 2 and 10,025 m 2 (three adjacent properties) for its STPs in Talayan and Pasay, respectively. These properties were also acquired through a willing buyer-willing seller scheme and the transactions have been documented through two Land Acquisition Reports that show that the process carried out was in line with

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OP 4.12. The rehabilitation work in Ayala Alabang rehabilitation is on an existing STP and additional land is not needed for this project. 4. The above mentioned social safeguard documents cover the land acquired for the STPs. The conveyance systems (interceptors and pumping stations) for these new STPs are expected to be installed under existing roads or public areas which would minimize the requirement for land acquisition. However, in case land is to be acquired for the conveyance system, the provisions of the ESSF would ensure compliance with OP 4.12. If an involuntary resettlement takes place due to the land acquisition, the Concessionaires will prepare a Resettlement Action Plan (RAP), in accordance with the Resettlement Policy Framework (RPF) that is included in the ESSF.

7. Sustainability 1. Project investments are integrated into the activities under the Concession Agreements. The sustainability will be assured under the project as the proposed investments are part of the overall obligations of the Concessionaries to increase wastewater treatment in Metro Manila. The capital and operating expenditures would be in line with the respective Concession Agreements and the existing tariff mechanism would ensure that costs are recovered. In addition, both Concessionaires are already working on sanitation issues and would be able to maintain and operate the assets created under the project. Further, the public sector oversight through MWSS and LBP will ensure sustainability on project preparation and implementation, asset management, and delivery of quality services to the population. Furthermore, the Supreme Court directive to clean up Manila Bay has created a broad coalition of entities that would like to address the environmental issues of Metro Manila. The project is also supported by the Government which will provide the sovereign guarantee for the Bank loan.

8. Lessons Learned from Past Operations in the Country

1. Learning from past projects in the sector in Manila and in other countries, the following points have been incorporated in the project design:

• Public consultations are important prior to the construction of a wastewater treatment facility. The project requires that proper public consultation is carried out prior to the investments being confirmed for Bank financing. Further, both Concessionaires have an ongoing public awareness program and they will continue to inform the public about the benefits of improved sanitation. Information campaigns need to be carefully conducted and the project benefits well explained to all stakeholders, including local government and affected populations.

• Lack of availability of land has to be factored in the project. Given the high density of population in Metro Manila, it would be difficult to acquire land as most areas are built- up and not all non-built areas are suitable for the construction of a wastewater treatment plant. As Maynilad has not acquired the land for all its sites, delays in land acquisition could delay implementation. Thus, the project is designed in a flexible manner so that in case the proposed sub-projects of Maynilad cannot be financed due to difficulties in land acquisition, other investments could be considered as long as they meet the project objective and the sub-project eligibility criteria.

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• Τhe technology has to match the construction of wastewater treatment plants in densely populated areas. Due to land limitations, the treatment plants have to be constructed in a limited space. This will require suitable use of technology where the land requirement is low. Further, the operations of the treatment plants cannot raise environmental concerns and odor problems. These factors have to be considered while constructing the plant and as needed international best practices will be incorporated in the project design.

9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP /BP 4.01) [X] [ ] Natural Habitats ( OP /BP 4.04) [X] [ ] Pest Management ( OP 4.09 ) [ ] [X] Indigenous Peoples ( OP /BP 4.10) [ ] [X] Physical Cultural Resources ( OP/BP 4.11 ) [ ] [X] Involuntary Resettlement ( OP /BP 4.12) [X] [ ] Forests ( OP /BP 4.36) [ ] [X] Safety of Dams ( OP /BP 4.37) [ ] [X] Projects on International Waterways ( OP /BP 7.50) [ ] [X] Projects in Disputed Areas ( OP /BP 7.60) * [ ] [X]

10. List of Factual Technical Documents 1. Feasibility Study for North and South Pasig Sewerage System 2. Feasibility Study for Talayan STP 3. Feasibility Study for Pasay STP 4. Environmental Impact Assessment for North and South Pasig Sewerage System 5. Environmental Assessment Report for the Pasay Sewerage Treatment Plant 6. Environmental Assessment Report for the Talayan Sewage Treatment Plant 7. Environmental Assessment Report for the Ayala-Alabang STP

11. Contact point Contact: Sudipto Sarkar Title: Sector Leader, EASIN Tel: (202) 473-5575 Fax: Email: [email protected]

12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 8

Fax: (202) 522-1500 Email: [email protected] Web: http://www.worldbank.org/infoshop

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