Report and Recommendation of the President to the Board of Directors

Project Number: 46362-004 Loan Number: 3377-PHI May 2020

Proposed Loan for Additional Financing Metropolitan Waterworks and Sewerage System Angat Water Transmission Improvement Project (Guaranteed by the Republic of the Philippines)

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy.

CURRENCY EQUIVALENTS (as of 30 April 2020)

Currency unit – peso/s (₱) ₱1.00 = $0.0198 $1.00 = ₱50.90

ABBREVIATIONS

ADB – Asian Development Bank AQ7 – Aqueduct no. 7 COVID-19 – coronavirus disease km – kilometer m – meter m3/sec – cubic meters per second MWSS – Metropolitan Waterworks and Sewerage System O&M – operation and maintenance PAM – project administration manual ROW – right of way T4 – Tunnel no. 4 WUS – water and other urban infrastructure and services

NOTE

In this report, “$” refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Kelly Bird, Country Director, Philippines Country Office (PHCO), SERD Vijay Padmanabhan, Director, Urban Development and Water Division (SEUW), SERD

Team leader Siti Hasanah, Urban Development Specialist, SEUW, SERD Team members Ruby Alvarez, Senior Project Officer, PHCO, SERD Yukiko Ito, Senior Social Development Specialist, Social Development Thematic Group, Sustainable Development and Climate Change Department Shinsuke Kawazu, Principal Counsel, Office of the General Counsel (OGC) Baurzhan Konysbayev, Principal Counsel, OGC Michael John Lacambacal, Senior Operations Assistant, SEUW, SERD Lila Mallory, Senior Procurement Specialist, Procurement Division 2, Procurement, Portfolio and Financial Management Department Sunil Mitra, Lead Portfolio Management Specialist, SEUW, SERD Alain Morel, Principal Country Specialist, PHCO, SERD Aimee Orbe, Associate Project Analyst, SEUW, SERD Michiko Suga, Senior Social Development Specialist, Transport and Communication Division, SERD Peer reviewer Jingmin Huang, Director, Urban Development, Water Supply and Sanitation Division, Pacific Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE MAP I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 5 C. Outputs 5 D. Investment and Financing Plans 5 E. Implementation Arrangements 7 III. DUE DILIGENCE 7 A. Technical 7 B. Economic and Financial 8 C. Governance 9 D. Poverty and Social 9 E. Safeguards 10 F. Risks and Mitigating Measures 10 IV. ASSURANCES 11 V. RECOMMENDATION 11

APPENDIXES 1. Revised Design and Monitoring Framework 12 2. List of Linked Documents 15

Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 46362-004 Project Name Angat Water Transmission Improvement Department/Division SERD/SEUW Project (Additional Financing) Country Philippines Executing Agency Metropolitan Waterworks Borrower Metropolitan Waterworks and Sewerage and Sewerage System System

Country Economic https://www.adb.org/Documents/LinkedDocs/ Indicators ?id=46362-004-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/ ?id=46362-004-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million) Water and other urban Urban water supply 126.02 infrastructure and services Total 126.02 3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities Climate Change impact on the Low Accelerating progress in gender equality Project Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability ADB Financing Making cities more livable Adaptation ($ million) 4.00 Strengthening governance and institutional capacity Sustainable Development Goals Gender Equity and Mainstreaming SDG 6.1, 6.4 Some gender elements (SGE) SDG 13.a Poverty Targeting General Intervention on Poverty 4. Risk Categorization: Low . 5. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C

. 6. Financing Modality and Sources Amount ($ million) ADB 126.02 Sovereign Project (Regular Loan): Ordinary capital resources 126.02 Cofinancing 0.00 None 0.00 Counterpart 29.80 Project Sponsor 29.80 Total 155.82

Currency of ADB Financing: US Dollar

Source: Asian Development Bank This document must only be generated in eOps. 05052020172536469005 Generated Date: 05-May-2020 17:25:47 PM Dingalan

San Rafael PPHILIPPINESHILIPPINES

BaliuagAAngatngat WaterWater TransmissionTransmission ImprovementImprovement ProjectProject Angat additionaladditional financingfinancinAngatg Reservoir

MANILA Bustos Doña Remedios Trinidad Pulilan

Ipo Dam Reservoir Pandi Bigte Plaridel Basins AAngatngat WWaterater TransmissionTransmission Guiguinto ImprovementImprovement ProjectProject AAngatngat SantaWWaterat Mariaer TransmissionTransmission Malolos Balagtas ImprovementImprovement ProjectProject additionaladditional financingfinancing San Jose del Monte

Rodriguez

Bocaue

Bulacan Marilao

Meycauayan Novaliches North Portal Caloocan

Obando

La Mesa Dam San Mateo Valenzuela Reservoir RIZAL Navotas Malabon South Caloocan Marikina Antipolo

Manila San Juan Cainta Tanay Real Manila Bay Mandaluyong Teresa Pasig Taytay

Baras Pasay Makati Pateros Angono Morong

Taguig Santa Maria Cavite Parañaque Pililla Binangonan Famy Cardona LAGUNA Kawit Bacoor Las Piñas

Noveleta Siniloan Mabitac Pangil Laguna de Bay CAVITE Muntinlupa Pangil Rosario Imus Paete Jala-Jala Pakil

Tanza San Pedro General Trias Maynilad Water Services Inc. Maynilad Service Area Kalayaan Dasmariñas General Mariano Company Inc. Manila Water Service Area Alvarez N Shared Maynilad and Manila Water Service AreasBiñan River Lumban

Trece MartiresThis map was produced by the cartography unit of the AsianCarmona Development Bank. The boundaries, 5 5 colors, denominations, and any other information shown on this map do not imply, on theSanta part Rosa of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information. Kilometers Cabuyao 190721B ABV Pila Pagsanjan Santa Cruz Cavinti

Silang

Magdalena Indang Calamba City Amadeo Victoria Luisiana

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to Metropolitan Waterworks and Sewerage System (MWSS), to be guaranteed by the Republic of the Philippines, for the additional financing of the Angat Water Transmission Improvement Project.1

2. The original loan for the ongoing project, approved by the Asian Development Bank (ADB) in 2016, supports MWSS in improving its water transmission system, by constructing a new upstream tunnel from the to the Bigte Basins, and reinforcing water security. The proposed additional financing will allow MWSS to expand the rehabilitation of the water transmission system, reduce water losses and increase the viability of the ongoing project by constructing a new aqueduct from the Bigte Basins to the Novaliches Portal to convey water to the downstream treatment plants that supply water to Metro Manila. The proposed additional financing will (i) increase the capacity of the Angat transmission system to meet increasing demands and (ii) mitigate the risk of a total loss of water supply to Metro Manila by building resilience.2 While this project had been planned since 2018 well before the coronavirus disease (COVID-19) pandemic, it will have significant benefits by improving overall health and hygiene of the population (para.5).

II. THE PROJECT

A. Rationale

3. Overview. While water resources are plentiful in the Philippines, they are unevenly distributed across the country due to rainfall variability and other geographic features of each region. The changing climatic conditions are exacerbating the situation. Growing population and migration to urban areas are further increasing the demand for clean water beyond the available supply. In many areas, groundwater resources have been over abstracted and are contaminated due to improper human waste management. Nationwide, urban population with access to safe water supply was 99% in 2017, but only 47% through a piped water supply system.3 Outside of Metro Manila, water infrastructure condition is generally poor with water losses typically at 25%– 50%, and service provision is inadequate requiring significant investment across the country.

4. Metro Manila city profile. Metro Manila comprises 17 cities and municipalities. It spans an area of 620 square kilometers and has 12.9 million inhabitants, about 12% of the country’s total population.4 Metro Manila’s population is increasing by 6.1% annually, a much faster pace than the national annual growth rate of 1.5%.5 As the commercial, financial and industrial center of the Philippines, Metro Manila accounts for 37% of the country’s gross domestic product. Sustainable delivery of basic urban services has a direct impact on Metro Manila’s economy and is critical for the region’s development.

1 Asian Development Bank (ADB). 2016. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of the Philippines for the Angat Water Transmission Improvement Project. Manila (Loan 3377-PHI). https://www.adb.org/projects/46362-002/main. 2 ADB provided technical assistance to help prepare the additional financing (ADB. 2014. Technical Assistance to the Republic of the Philippines for the Metro Manila Water and Sanitation Development. Manila [TA 8769-PHI]). 3 Joint Monitoring Program. 2017. Progress on household drinking water, sanitation and hygiene 2000-2017. New York. 4 Philippine Statistics Authority. 2015 Census of Population. http://www.psa.gov.ph/content/highlights-philippine- population-2015-census-population (accessed on 15 September 2019). 5 United Nations Secretariat. 2017 Revision of World Population Prospects. https://population.un.org/wpp/ (accessed on 15 September 2019).

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5. Institutional arrangements for water supply. MWSS, a government-owned corporation, is mandated to provide potable water and sanitation services to Metro Manila and the adjacent provinces of Rizal and Cavite. In 1997, MWSS awarded two concession contracts to two separate private corporations for water treatment and distribution and wastewater management,6 while retaining the responsibility for raw water supply. The private corporations significantly improved water supply services—the serviced population doubled since 1997 and more than 90% of the region’s inhabitants have 24-hour access to potable water. Nonrevenue water decreased from 45%–70% in 1997 to 12%–29% in 2018.

6. Water scarcity and impacts on personal hygiene during the pandemic. The seriousness of water insecurity in the city became apparent when a prolonged dry season led to a water supply crisis in 2019 (from March to May). During rationing, the worst hit neighborhoods had no water for several days and only a few hours of water for weeks. MWSS had assured raw water supply to the concessionaires and planned a series of projects to ensure bulk water was provided to meet the rapidly growing water demand in Metro Manila. Given the strong water- sanitation-hygiene linkage, any water shortage or deterioration in water quality will adversely impact the personal hygiene of Metro Manila’s communities, which could hamper efforts to battle the ongoing COVID-19 pandemic. Consequently, MWSS’s plan to enhance water security and water quality to Metro Manila is a practical response aligned with measures to arrest devastating health, social, and economic impacts of diseases including the current COVID-19 pandemic.

7. Sources of water. The Umiray–Angat–Ipo system (or the Angat water transmission system) serves as the source of more than 90% of Metro Manila’s water requirement. Water from the Angat Dam is discharged and stored at the Ipo Dam about 5 kilometers (km) downstream of the Angat Dam. Water from the Ipo Dam is then transmitted to the Bigte Basins through three parallel tunnels (the Angat upstream system) and on to the Novaliches Portal through six parallel aqueducts (the Angat downstream system),7 from where the two concessionaries treat and supply water to Metro Manila.8

8. The Angat upstream system and the scope of the ongoing project. The ongoing project comprises the construction of the urgently needed Tunnel no. 4 (T4) to supplement water transmission from the Ipo Dam to the Bigte Basins. This will enable the rehabilitation or decommissioning of the other tunnels (T1, T2, and T3). T4 will increase the Angat upstream system’s design capacity from 52.7 cubic meters per second (m3/sec) to 71.7 m3/sec. The civil works contract for T4 (the only works contract of the ongoing project) comprising construction of a 4-meter (m) finished internal diameter and 6.3 km long tunnel is substantially complete and is expected to be commissioned in June 2020, 3 months prior to its scheduled completion date.

9. Change in the original loan amount. In October 2019, ADB agreed to MWSS’s request to cancel $55.97 million of the original loan amount of $123.30 million, for a revised loan amount of $67.33 million. MWSS’s request for partial cancellation of the original loan amount was made in view of the substantial completion of the T4 civil works under the ongoing project and to reduce the financing charges that MWSS would accrue on the undisbursed loan savings, considering that all identified works were substantially complete. The cancelled portion of the original loan

6 Maynilad Water Services, Inc. (Maynilad) serves Metro Manila’s West Zone, and Manila Water Company, Inc. (Manila Water) serves Metro Manila’s East Zone. 7 Aqueducts (AQs) 1–6 were constructed between 1939 and 2012. AQ1 (built in 1939) and AQ2 (built in 1945) are the oldest, and AQ6 (built in 2012) is the latest. AQ1 and AQ2 can be deemed as one aqueduct because AQ2 branches serve only as parallel reinforcements of some segments of AQ1. 8 A Schematic Diagram of the Angat Water Transmission System (accessible from the list of linked documents in Appendix 2).

3 comprised savings from (i) unused allocations to civil works and consulting contracts ($30.37 million), (ii) unused contingency allocation ($22.00 million), and (iii) partial allocation to the financing charges during construction ($3.60 million).9

10. Ongoing project’s performance. The ongoing project is performing well; and all loan covenants, including the fiduciary and safeguard requirements, have been complied with.10 It is rated on track as per the project performance rating.11 As of 30 April 2020, physical progress stood at 99% for an elapsed loan period of 66%. The cumulative disbursement was $59.6 million, or 88.5% of the revised loan amount.

11. The Angat downstream system and water delivery. To ensure water from the Angat upstream system delivers continuous water to Metro Manila, the Angat downstream system must be in good condition. However, several aqueducts in the Angat downstream system are in a poor state. Of the existing six aqueducts, (i) structural assessments of AQ1 and AQ2 suggest they have deteriorated significantly and fittings are unserviceable resulting in water loss, and (ii) seismic assessments suggest that AQ3, AQ4, and the downstream part of AQ5 are weak and not earthquake resilient. Under the current condition, the Angat downstream system is expected to require operational interruptions or a total stoppage when leaks are being rectified. Rectification is expected every 5 years, and the supply-disrupting repairs are estimated to take about 60 days.

12. Construction of a new aqueduct and service continuity. The construction of a new aqueduct—aqueduct no. 7 (AQ7)— will add flexibility to the Angat downstream system and enable MWSS to rehabilitate the existing aqueducts without disrupting water supply. After the completion of AQ7, MWSS will decommission AQ1 and AQ2, and rehabilitate the following aqueducts during the specified periods: AQ4 (2025–2027), AQ3 (2028–2030), and part of AQ5 (2031–2032). Once the rehabilitation is complete, the risk of a system breakdown every 5 years will have been eliminated. The new aqueduct is a water security measure for Metro Manila and will match capacities of the Angat downstream and upstream systems to meet future water demands.12

13. Proposed change in scope and additional financing. To ensure service continuity, MWSS requested an expansion of the scope of the ongoing project to finance AQ7. The proposed additional financing for AQ7 will cover construction costs, construction supervision, and capacity

9 At the appraisal stage, the T4 works were estimated at $88.1 million (excluding taxes) while the actual contract awarded was for $60.1 million. The significantly lower contract amount was the result of a change in the tunneling method. The bidding document and cost estimates had been prepared based on the drill-and-blast method; however, the bidder proposed the use of a tunnel-boring machine, which proved to be cheaper and faster. The higher initial estimates were also based on the following considerations: (i) the absence of recent similar works in the country to serve as comparators; (ii) the remote project site, anticipated to result in higher mobilization costs; and (iii) unmanaged political risks that may have caused implementation delays and cost escalation. Further, the consulting services contract is about $2.4 million lower than the estimate because late consultant mobilization reduced the amount of required consulting inputs. The consultant team was mobilized in 2018, about 2 years later than scheduled. Since construction had started in 2016, MWSS had recruited consultants financed from its own resources to supervise the works. The contingency allocation was cancelled because the construction progress had reached 93% (when the cancellation was approved in October 2019); technically critical works had been completed; and no significant cost increases were anticipated until the targeted completion date in June 2020. 10 The review of the project performance is in accordance with the criteria specified in Table 1 of ADB. 2018. Staff Instruction on Business Process for Additional Financing (Sovereign Operations). Manila. 11 More details on the performance of the ongoing project are provided in the Summary of Project Performance (accessible from the list of linked documents in Appendix 2). 12 MWSS’s current water right is 46 m3/sec. In 2020, MWSS will be entitled to obtain 54.6 m3/sec (subject to the approval by the National Water Resources Board). If the new water right is fully used, and with the additional supply of 5.8 m3/sec from the Laguna de Bay system, the Angat water transmission system will be able to meet Metro Manila’s water demand until 2025, which is estimated at 59.8 m3/sec. Starting in 2023, the Kaliwa Dam system is expected to provide additional water to meet Metro Manila’s demand until 2031.

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development. The proposal meets the eligibility criteria for additional financing13 because the overall project (i) remains technically feasible, economically viable, and financially sound; (ii) is considered a high priority by the government; (iii) is consistent with the ongoing project’s development objectives; and (iv) is consistent with ADB’s country partnership strategy, 2018–2023 for the Philippines.14

14. Additional financing is the suitable modality also because (i) T4 and AQ7 are integral parts of a unified system, and (ii) AQ7 will help the ongoing project achieve its outcome by strengthening the downstream water transmission capacity, which will ensure that the overall Angat transmission system keeps delivering adequate and reliable amounts of water to Metro Manila. Ultimately, this will further improve water supply services and meet growing demand.

15. The overall project will enhance Metro Manila’s water security and the benefits will be achieved for all residents. This was a fundamental requirement before the emergence of COVID- 19. Now, the overall project has an elevated importance and urgency as an essential part of the response to the COVID-19 pandemic (and other future health emergencies).

16. Strategic alignment. The proposed additional financing will further strengthen the ongoing project’s contribution to the achievement of the government target of 100% water supply coverage by 2025, as indicated in the Philippine Water Supply Sector Roadmap.15 The country partnership strategy lists water and other urban infrastructure and services (WUS) as one of five priority sectors for extended support in the Philippines. The overall project is also in line with ADB’s Strategy 2030 and its operational priorities 3 (building disaster-resilient infrastructure investments) and 4 (making cities more livable);16 and with the Water Operational Plan (2011–2020), which discusses ways for ADB to help fill the gap between water demand and supply.17

17. Development coordination. Key development partners in the Philippines’ WUS sector are ADB, the Japan International Cooperation Agency, and the World Bank. ADB has reengaged with the government on WUS in 2016, supporting water supply improvements in Metro Manila and provincial cities. After the new government was formed in 2016, Sulong Pilipinas replaced the Philippine Development Forum, which used to organize regular meetings with development partners. An annual consultative conference is organized under Sulong Pilipinas, bringing together business communities, development partners, and respective government agencies to exchange information and coordinate activities.18

18. Lessons learned. Major implementation issues of the ongoing project resulted from (i) delays in recruiting the construction supervision consultant and (ii) the retirement of a substantial number of experienced MWSS staff. To address these issues, the proposed additional financing will (i) assist MWSS in meeting its consulting needs by using the consultant engaged under the Southeast Asia Urban Services Facility; 19 (ii) strengthen project implementation support for procurement, disbursement, and environmental and social safeguard compliance; and (iii) train MWSS staff in operation and maintenance (O&M) and financial management.

13 ADB. 2018. Additional Financing. Operations Manual. OM H5. Manila. 14 ADB. 2018. Country Partnership Strategy: Philippines, 2018–2023—High and Inclusive Growth. Manila. 15 Government of the Philippines, National Economic and Development Authority. 2010. Philippine Water Supply Sector Roadmap, 2nd Edition. Pasig City. 16 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 17 ADB. 2011. Water Operational Plan 2011–2020. Manila. 18 Development Coordination (accessible from the list of linked documents in Appendix 2). 19 ADB. 2018. Technical Assistance for the Southeast Asia Urban Services Facility. Manila (TA 9554-REG).

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19. ADB’s value addition. Seismic and structural assessments supported by ADB informed the preliminary designs as well as the technical specifications in the bidding document for T4. The additional financing activities will follow a similar approach to the AQ7 technical assessments and in overseeing the bidding and management of the complex design–build contract. The proposed additional financing will help limit the adverse impact of natural hazards and environmental degradation and ensure the sustainability of the project through capacity building. The construction of T4 and AQ7 will support implementation of the water security road map for Metro Manila and address the growing water demand in the region.

20. ADB is a trusted partner for the Philippines in its efforts to engage with communities during implementation of public works projects. A well-prepared program of community engagement, with prominent partnership with groups led by women, will deliver support on the need for robust water, sanitation, and hygiene (or WASH), with a focus on ‘poor’ areas bearing a high burden of the COVID-19 pandemic.

B. Impact and Outcome

21. The project is aligned with the following impact: universal access to safe, adequate, and sustainable water supply by 2025. It will have the following outcome: adequate and reliable amounts of water supplied in Metro Manila.20 The aggregate impact and outcome of the overall project are unchanged, but new outcome indicators were added to reflect the performance measurement of a new output.

C. Outputs

22. Output 1: New tunnel constructed. Output 1 is unchanged.

23. Output 2: Capacity-building support provided. Output 2, while unchanged in essence, will include new activities under the proposed additional financing to (i) strengthen gender and development programs being implemented under the ongoing project; (ii) train MWSS staff on O&M of the tunnels and aqueducts; and (iii) expand the awareness programs on water conservation, hygiene promotion, and health-related risks.

24. Output 3: New aqueduct constructed. Output 3, a new output, includes the construction of a new aqueduct (AQ7), which will have a finished internal diameter of 3.6 m and a total length of about 15 km. Works will also include (i) three segments of tunneling works for a combined length of about 3.5 km, (ii) aqueduct crossings, (iii) a new receiving basin at the Novaliches Junction, (iv) two interconnections at the Bigte Basins and one interconnection at the Novaliches Portal, and (v) two blank flange ends for future connections to Bulacan areas.

D. Investment and Financing Plans

25. MWSS requested a regular loan of $126.0 million from ADB’s ordinary capital resources for the proposed additional financing. The loan, to be guaranteed by the Republic of the Philippines, will have a 25-year term, including a grace period of 6.5 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan and guarantee agreements. Based on the straight-line repayment method, the

20 The design and monitoring framework is in Appendix 1.

6 average maturity is 16 years, and the maturity premium payable to ADB is 0.10% per year. The COVID-19 pandemic’s impact on the project cost is estimated to be negligible. The overall project is estimated to cost $231.0 million (Table 1).

Table 1: Project Investment Plan ($ million) Original Additional Item Amounta Financingb Total A. Base Costc 1. New tunnel constructed 67.4 0.0 67.4 2. Capacity-building support provided 3.6 10.0 13.6 3. New aqueduct constructed 0.0 121.2 121.2 Subtotal (A) 71.0 131.2 202.2 B. Contingenciesd 0.0 19.7 19.7 C. Financing Charges During Implementatione 4.2 4.9 9.1 Total (A+B+C) 75.2 155.8 231.0 a The ongoing project cost of $75.2 million is financed by (i) $67.3 million from ADB loan proceeds (after the partial cancellation); and (ii) $7.9 million in counterpart funding from the government and MWSS for taxes and duties (cash), and financing charges during construction. b Includes $16.5 million for taxes and duties (cash), $0.2 million to finance resettlement compensations, and $8.2 million for price contingencies, which will be financed by MWSS. c In mid-2019 prices as of 15 September 2019. d Consists of physical contingencies, computed at 10% for civil works, consulting services, and capacity-building activities; price contingencies computed at 1.5% on foreign exchange costs and 3.0% on local currency costs; provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. The original loan’s contingencies of $22 million were cancelled in October 2019. The estimated contingency is currently sufficient to cover possible cost increases due to the COVID-19 pandemic. e Includes interest and commitment charges. Interest during construction for the regular OCR loan has been computed at the 5-year United States dollar fixed swap rate plus effective contractual spread of 0.50% and 0.10% maturity premium. Commitment charges for a regular OCR loan are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates.

26. ADB will finance the expenditures in relation to civil works, consulting services, and capacity development. MWSS will provide $29.8 million, i.e., $16.5 million for taxes and duties, $0.2 million for resettlement costs, $8.2 million for price contingencies, and $4.9 million for interest during construction and commitment charges. The climate change adaptation is estimated to cost $4.0 million and will be 100% financed by ADB.21 A summary of the financing plan is in Table 2 and detailed financing plans are in the project administration manual (PAM).22

Table 2: Financing Plan Originala Additional Financing Total Amount Share of Amount Share of Amount Share of Source ($ million) Total (%) ($ million) Total (%) ($ million) Total (%) ADB OCR (regular loan) 67.3 89.5 126.0 80.9 193.3 83.7 MWSS 7.9 10.5 29.8 19.1 37.7 16.3 Total 75.2 100.0 155.8 100.0 231.0 100.0 ADB = Asian Development Bank, MWSS = Metropolitan Waterworks and Sewerage System, OCR = ordinary capital resources. a Refers to the original loan amount after the partial cancellation of loan proceeds. Source: Asian Development Bank estimates.

21 Climate Change Assessment (accessible from the list of linked documents in Appendix 2). 22 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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E. Implementation Arrangements

27. The implementation arrangements are summarized in Table 3 and described in detail in the PAM.

Table 3: Implementation Arrangements Aspects Arrangements Implementation period July 2020–July 2023 Estimated completion date 31 July 2023 Estimated loan closing date 31 January 2024 Management (i) Oversight body Department of Finance, National Economic and Development Authority, and Governance Commission for Government Owned or Controlled Corporations (ii) Executing agency MWSS (iii) Implementing agency Deputy administrator for engineering and operation, MWSS (iv) Implementation unit Project Management Office, MWSS Procurement International open competitive 1 contract $105.7 million bidding Consulting services QCBS (90:10) 1 contract 275 person-months $8.8 million Advance contracting Bidding documents for the design–build contract were prepared during project preparation. Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2017, as amended from time to time). ADB = Asian Development Bank, MWSS = Metropolitan Waterworks and Sewerage System, QCBS = quality- and cost- based selection. Source: Asian Development Bank.

28. Project readiness. Technical bids for the sole civil works package have been evaluated and the financial bids of qualified bidders will be opened once the enhanced community quarantine is lifted. Contract award is expected at the time of loan effectiveness.

III. DUE DILIGENCE

A. Technical

29. Aqueduct alignment. All six existing aqueducts are contained within the 60 m wide right of way (ROW) of MWSS, and AQ7 will also be laid within this ROW. Trial routes revealed that the spaces between the aqueducts are very narrow, which carries a risk that the AQ7 construction works might damage adjacent aqueducts. Therefore, the most logical solution for AQ7 is to follow the current alignment of AQ1 and AQ2 (which will be decommissioned and removed because of their age and poor condition) from the Bigte Basins to the Novaliches Portal. This will significantly reduce the risk of damaging other aqueducts during the construction of AQ7.

30. Consideration of technical options. Detailed hydraulic analysis was carried out for AQ7 using various scenarios experienced by the existing aqueducts, such as failure, repair, and rehabilitation. With AQ7 following the current alignment of AQ1 and AQ2, six technical options were considered for managing the water flow from T4, including different pipe configurations and construction of a common basin at the Bigte Basins compound. The evaluation criteria included (i) system flexibility, (ii) flow capacities, (iii) ease of construction, (iv) least disruption to services, (v) capital and operational costs, and (vi) operational flexibility at the basins. Based on these criteria, the selected option will have T4 supply AQ7 through a T4 transition basin, and AQ5 and AQ6 through a T4 interconnection basin.

31. Optimum aqueduct size. The optimum size for AQ7 is a diameter of 3.6 m, calculated to carry an ultimate capacity of 17.4 m3/sec to match the tunnel capacity (after the completion of T4

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under the ongoing project). Further, the following two extreme failure scenarios were analyzed: (i) a powerful earthquake destroying AQ3 and AQ4, the weakest among the existing aqueducts (once AQ1 and AQ2 are removed); and (ii) a powerful earthquake destroying all of the Angat water transmission system except T4 and AQ7. The analysis indicates that a smaller aqueduct size (3.3 m) will not be able to deliver the potential flow from T4, while a larger size (4.0 m) will be impractical since its excess capacity would not be used.

32. Safe working under the COVID-19 conditions. The impact of the disease is evolving, and project implementation will be responsive and flexible in meeting emerging needs and new guidance. The project will strictly follow government guidance on safe working in COVID-19 conditions, adhering to the most robust medical and scientific advice. The project parties will be required to assimilate emerging international construction best practice on distancing (where practical for works of this nature), implementation methodologies, effective use of forced air ventilation systems and personal protective equipment. This is vital for works in deep trench and other confined spaces, where person-to-person transmission of COVID-19 disease is a high risk.

33. Operation and maintenance. Because the Angat water transmission system will be operated using gravity, no pumping or power is required. Being a raw water bulk transmission system, it will not involve any chemicals. Treatment will be undertaken downstream of the system by the concessionaires. As AQ7 will replace the existing AQ1 and AQ2, no additional staff will be needed to operate the system. In accordance with the concessionaire agreements, MWSS will own the assets, but the two concessionaires (Maynilad and Manila Water) will be responsible for O&M. Lessons learned from the project under COVID-19 conditions will be collated in an O&M manual to document best practices and synthesize approaches for future health emergencies.

B. Economic and Financial

34. Economic analysis. The economic assessment was carried out in accordance with ADB’s Guidelines for the Economic Analysis of Projects.23 The calculation of project benefits considered the non-incremental benefit from savings in the cost of purchasing alternative water supply. The “failure rate” approach was used to assess the benefit.24 The economic net present value of the project is $48.0 million, and the economic internal rate of return is estimated at 14.8%, higher than the threshold rate of 9.0%. According to the sensitivity analysis, the project remains economically viable with an economic internal rate of return of 9.0% even under the worst-case scenario of three downside risks occurring at the same time: (i) 20% increase in construction costs, (ii) 20% increase in O&M costs, and (iii) 20% decrease in benefits.

35. Financial analysis. Since MWSS is not expected to generate income from the completion of AQ7, the financial assessment considered the financial sustainability based on proper system O&M. The two concessionaires will cover the incremental O&M cost. MWSS also has sufficient cash reserves to manage the O&M cost if the concessionaires fail to cover it. The financial sustainability of the project is satisfactory because MWSS is assured of recovering the full cost of debt service and the O&M cost, under the terms of the concession agreements with Maynilad and Manila Water.25

23 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 24 The failure rate assessment was based on experts’ opinion, estimating a system failure once every 5 years, which would reduce the water flow by one-third of the system’s full capacity and require 60 days to restore full capacity. Economic Analysis (accessible from the list of linked documents in Appendix 2). 25 Financial Analysis (accessible from the list of linked documents in Appendix 2).

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C. Governance

36. Financial management assessments. MWSS’s financial management risk is moderate. Although the agency has demonstrated adequate capacity to manage projects financed by development partners such as ADB, Export-Import Bank of China, the Japan International Cooperation Agency, and the World Bank, the potential risk is that regular staff currently involved in ongoing projects will avail of MWSS’s early retirement program. The measures to mitigate this risk involve (i) training, including on-the-job-training, for new MWSS staff on ADB’s disbursement procedures and international best practices; and (ii) improvements to project budgeting and accounting systems, including the computerization of the accounting system.

37. Procurement capacity assessments. MWSS’s procurement risk is rated moderate. Its Bids and Awards Committee is responsible for all its procurement activities, and its staff receive regular training on the government’s procurement policies, regulations, and guidelines. However, it has limited experience in managing large procurement packages through international open competitive bidding, particularly those with design–build contract forms. To mitigate procurement risks, (i) the number of contracts was reduced to a minimum and (ii) ample training and support on ADB’s procurement policies and regulations will be provided. The procurement of works and the recruitment of consulting services will be conducted in accordance with ADB’s Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time).

38. Anticorruption. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and MWSS. The specific policy requirements and supplementary measures are described in the PAM. An integrity due diligence was undertaken. No significant integrity risks were identified.

D. Poverty and Social

39. The project is classified as a general intervention since it will indirectly target poverty reduction among water end-users in Metro Manila and the communities residing near the project sites. A socioeconomic survey, carried out as part of project preparation, indicates that more than 30% of residents of the communities residing near the project sites are poor and that some households are unable to connect to the water supply system because of the high connection fees. The survey also revealed gender inequality because traditional gender roles still prevail.

40. The two concessionaires, Maynilad and Manila Water, have programs to ensure that their services are accessible to the poor communities of Metro Manila.26 The project’s poverty and socially inclusive design features include (i) prioritizing communities residing near the project sites for construction-related employment especially for unskilled labor; (ii) referring poor households to the livelihood and skills programs in the project area; (iii) implementing proper traffic route planning and management to mitigate road safety risks during construction; and (iv) implementing information, education, and communication campaigns to promote awareness of social and health risks. These approaches will be strategically aligned with Metro Manila’s emerging responses to the COVID-19 pandemic and will help to ease the burden on heavily stressed healthcare systems.

41. The communities affected by the project’s construction work will receive support in building greater grassroots awareness and practical understanding of the principles of WASH, and how this can help in curtailing the spread of COVID-19 and other diseases. The community outreach

26 Maynilad’s Samahang Tubig Maynilad and Manila Water’s Tubig Para Sa Barangay.

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program will recognize that WASH is a key element of public health and a central part of the United Nation’s Sustainable Development Goal 6. Targeted outreach to people deemed vulnerable to COVID-19, including the aged and those with medical conditions will be supported by the full engagement of local government units, barangays, community groups, and nongovernmental organizations. It will draw on guidance from the Departments of Health, Public Works and Housing, and Education, and best international practice, including from neighboring countries.

42. Gender. The project is classified as some gender elements. It will strengthen the gender and social development programs being implemented under the ongoing project. Proactive gender features of the project design include (i) integrating the needs of women, children, and the elderly in traffic route management and road safety programs; and (ii) providing public awareness and training to communities residing near the project sites on social and health risks (gender- based violence, sexually transmitted diseases and HIV/AIDS, COVID-19, gambling, and drug and alcohol abuse).

E. Safeguards

43. In compliance with ADB’s Safeguard Policy Statement (2009), the safeguard categories of the project are as follows:

44. Environment (category B). The project is not expected to cause irreversible adverse environmental impacts. An initial environmental examination report was prepared in accordance with ADB’s Safeguard Policy Statement (2009). Most environmental impacts are expected during construction and arise from the removal of trees and other vegetation types, modification of terrain, potential siltation of nearby waterways, noise and dust, increased site traffic, and greater risks to occupational and public health and safety. These impacts will be limited within the designated 25 m wide construction area and within MWSS’s existing ROW.27

45. Involuntary resettlement (category B) and indigenous peoples (category C). No land acquisition is needed, but 11 informal structures inside the designated 25 m wide construction area and MWSS’s existing ROW will be permanently affected (demolished prior to construction). Six households will be affected, five of which will have to relocate. Losses of residential and commercial structures and crops will be compensated at replacement costs.28 No indigenous peoples and ancestral domain areas will be affected by the proposed additional financing.

F. Risks and Mitigating Measures

46. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.29

27 Public consultations were carried out during the preparation of the initial environmental examination report consistent with the requirements of ADB’s Safeguard Policy Statement (2009). The grievance redress mechanism set up under the ongoing project will continue to help address any grievance from project-related environmental impacts. Initial Environmental Examination (accessible from the list of linked documents in Appendix 2). Measures to mitigate the impacts are included in the environmental management plan, which have been incorporated in the bidding documents for civil works. 28 A resettlement plan was prepared in accordance with ADB’s Safeguard Policy Statement (2009) and the Philippines national law and posted on the ADB website. Resettlement Plan (accessible from the list of linked documents in Appendix 2). The affected households and structure owners will also be provided with compensations related to the transfer of movable properties and will be eligible for business or wage loss allowances. 29 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures Risks Mitigation Measures MWSS’s financial system is partially The project consultant will support MWSS in developing Strategic computerized, and the project management Information Systems Planning. An information technology-based office staff use MS Excel for recording and working environment will be established, especially in the accounting. This is prone to errors and may Financial Department, by hiring more information technology staff ultimately lead to inaccurate financial and equipping them with access to computerized systems or tools statements. and exposure to training. MWSS’s Internal Audit Department is weak The Internal Audit Department will be strengthened with the because of limited human resources and recruitment of four new staff. The capacity development program inadequate job descriptions. will include training on audits to strengthen staff capacity. Parts of the as-built drawings of the existing A competent contractor with expertise in hydraulic and tunnel aqueducts are missing and information on the design and construction will be procured. Proper surveys will be conditions of the aqueducts is limited, which carried out during the detailed design phase to confirm the quality make construction planning highly uncertain, of the existing aqueducts and to inform construction planning. and could lead to a longer-than-anticipated construction period. MWSS’s 2018 financial statement was given MWSS will improve its fixed assets validation system in a qualified opinion by the auditor because of accordance with the Philippines Public Sector Accounting MWSS’s inability to reconcile its fixed assets. Standards. COVID-19 impacts adversely on the The contractor will maintain vigilance in the management of contractor’s workforce, subcontractors, COVID-19 health risks in all siteworks to allow for a safe working suppliers, consultants, government and ADB environment, including in adjacent areas used by the general staff, and general public (particularly public. Health and safety protocols will be enforced for working in vulnerable people). trenches and other confined spaces. COVID-19 = coronavirus disease, MWSS = Metropolitan Water Works and Sewerage System. Source: Asian Development Bank.

IV. ASSURANCES

47. The government and MWSS have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. The government and MWSS have agreed with ADB on certain covenants for the project, which are set forth in the loan and guarantee agreements.

V. RECOMMENDATION

48. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $126,020,000 to Metropolitan Waterworks and Sewerage System, to be guaranteed by the Republic of the Philippines, for the additional financing of the Angat Water Transmission Improvement Project, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 25 years, including a grace period of 6.5 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.

Masatsugu Asakawa President 22 May 2020

12 Appendix 1

REVISED DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with Ongoing project Universal access to safe, adequate, and sustainable water supply by 2025 (Philippine Water Supply Sector Roadmap, 2nd Edition)a Overall project Unchanged

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks Outcome Ongoing project Ongoing project Time and/or Adequate and By 2023: cost overruns a. Final completion reliable amounts a. Tunnel system provides at least 46 because of the report, flow and level of water supplied m3/sec of raw water with any one of occurrence of measurements, and in Metro Manila the four tunnels decommissioned natural hydraulic calculations (2016 baseline: not applicable) hazards done by contractor and

verified by the PMO

Overall project Overall project Unchanged a. Unchanged a. Unchanged

b. By 2025: Raw water supplied by b–c. Final completion Angat system increased to at least report, flow and level 66 m3/sec (2019 baseline: 50 m3/sec) measurements, and hydraulic calculations c. By 2025: Raw water supplied by done by contractor and Angat system increased to at least 53 verified by the PMO m3/sec with any one of the existing aqueducts closed (2019 baseline: not applicable) Outputs Output 1 Ongoing project Ongoing project New tunnel 1a. By 2022: Civil works completed for 1a. Monthly progress PMO staff constructed (i) intake structure at Ipo Dam; (ii) reports filed by contractor have limited tunnel works of 6.3 km in length and and verified by the PMO experience in Overall project with a finished internal span of 4 m; (iii) procuring large Unchanged new transition basin at Bigte, civil work connection of the new transition basin contracts to the existing transition basin no. 3 at

Bigte; and (iv) necessary modifications to transition basin no. 3 at Bigte (2016 baseline: no civil works)

1b. By 2021: 50% of unskilled laborers 1b. Contractor’s record hired by the contractor are people from the source communities and indigenous people, with equal pay and job conditions (2016 baseline: not applicable)

Appendix 1 13

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks Overall project 1a. Unchanged 1a. Unchanged

1b. Unchanged 1b. Unchanged Output 2 Ongoing project Ongoing project Capacity-building 2a. By 2022: 10 PMO staff with 2a. Annual report on Longer support provided improved skills in contract MWSS’s Strategic construction management (2016 baseline: not Performance period required Overall project applicable) Management System because of Unchanged limited 2b. By 2018: 2 gender-awareness 2b.–2c. Quarterly information on promotion and training sessions for progress reports and the conditions MWSS staff completed and attended attendance sheets of the existing by 30 people each (2016 baseline: not aqueducts and applicable) their alignments

2c. By 2018: 200 local people trained

on water conservation, hygiene promotion, livelihood opportunities, and awareness of health-related risks

(with 50% women meaningfully participating) (2016 baseline: not applicable)

Overall project 2a. Unchanged 2a. Unchanged

2b. Unchanged 2b. Unchanged

2c. Unchanged 2c. Unchanged

2d. By 2024: (i) Gender awareness 2d.–2f. Program orientation, and (ii) training on gender materials, attendance mainstreaming and on establishing sheets, and end-of- and monitoring a sex-disaggregated training survey conducted database, for at least 30 MWSS staff by the PMO completed (with at least 40% female

participants) (2019 baseline: 0)

2e. By 2024: Training on contract and/or project management, operation, and maintenance of the tunnels and aqueducts for at least 30 MWSS staff conducted (with at least 40% female participants) (2019 baseline: none)

2f. By 2024: Awareness programs on water conservation, hygiene and WASH promotion, and health-related risks (including for COVID-19) for at least 100 persons conducted (with at

14 Appendix 1

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks least 40% female participants) (2019 baseline: none)

Output 3

Ongoing project Ongoing project

None None

Overall project Overall project 3a. Monthly progress 3a. By 2024: Civil works completed for New aqueduct reports by contractor, water conveyance of 15 km in length constructed verified by the PMO with a finished internal diameter of 3.6 m, which includes above-ground and tunnel segments, crossings, interconnections, a receiving basin, and blank flange ends (2019 baseline: none)

Key Activities with Milestones 1. New tunnel constructed 1.1 Approve the bidding document (completed in 2015) 1.2 Award the civil works contract (completed in 2018) 1.3 Complete civil works (unchanged, by 2020) 2. Capacity-building support provided 2.1 Award contracts for the consulting service package (added, overall project by 2020) 2.2 Implement gender-awareness training (completed in 2017) 2.3 Implement community consultation and training (completed in 2018) 2.4 Review the existing gender development program and develop activities to support them (added, by 2020), and implement these activities (added, by 2024) 2.5 Assess the needs to raise awareness on water conservation, hygiene promotion, and health- related risks (added, by 2020); develop awareness programs (added, by 2021); and conduct awareness programs (added, by 2024) 3. New aqueduct constructed 3.1 Approve the biding document and issue the invitation for bids (added, by 2019) 3.2 Award the design–build civil works contract (added, by 2020) 3.3 Complete the detailed engineering design (added, by 2021) 3.4 Complete civil works (by 2024) Project Management Activities Conduct needs assessment for specific skills and knowledge areas (added, by 2020) Deliver and evaluate training on disbursement, procurement, safeguard, and project management (added, by 2024) Inputs

ADB MWSS $67,330,000 (original) $7,900,000 (original) $126,020,000 (additional) $29,800,000 (additional) $193,350,000 (overall) $37,700,000 (overall)

Assumptions for Partner Financing Not applicable. ADB = Asian Development Bank, COVID-19 = coronavirus disease, km = kilometer, m = meter, m3/sec = cubic meters per second, MWSS = Metropolitan Waterworks and Sewerage System, PMO = project management office, WASH = Water, Sanitation and Hygiene. a Government of the Philippines, National Economic and Development Authority. 2010. Philippine Water Supply Sector Roadmap, 2nd Edition. Pasig City.

Source: Asian Development Bank.

Appendix 2 15

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=46362-004-3

1. Loan Agreement 2. Guarantee Agreement 3. Sector Assessment (Summary): Water and Other Urban Infrastructure and Services 4. Project Administration Manual 5. Summary of Project Performance 6. Contribution to the ADB Results Framework 7. Development Coordination 8. Economic Analysis 9. Financial Analysis 10. Country Economic Indicators 11. Summary Poverty Reduction and Social Strategy 12. Climate Change Assessment 13. Initial Environmental Examination 14. Resettlement Plan 15. Risk Assessment and Risk Management Plan

Supplementary Documents

16. A Schematic Diagram of the Angat Water Transmission System 17. Financial Management Assessment