Angat Water Transmission Improvement Project (Additional Financing) (RRP PHI 46362-004)
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Angat Water Transmission Improvement Project (Additional Financing) (RRP PHI 46362-004) FINANCIAL MANAGEMENT ASSESSMENT A. Introduction 1. A Financial Management Assessment (FMA) has been prepared in accordance with Asian Development Bank’s (ADB’s) Guidelines for the Financial Management and Analysis of Projects (2005) and Financial Due Diligence A Methodology Note (2009) and the Financial Management Technical Guidance Note (2015). 2. The FMA considered the capacity of Executing Agency, the Metropolitan Waterworks and Sewerage System (MWSS), focusing on fund flows, staffing, accounting policies and procedures, internal controls, financial reporting and monitoring and internal and external audits. 3. MWSS was created by virtue of Republic Act 6234 passed on 29 June 19711. Its mandate is to ensure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes at just and equitable rates. In the same year when Republic Act 8041 (known as “The Water Crisis Act”) was passed in 1997, MWSS entered into a 25-year Concession Agreement with two private operators. This effectively transferred the operational responsibilities to Manila Water Company and Maynilad Water Services. Under Article 2 of the Concession Agreement,2 “MWSS grants to the Concessionaires, as contractor, to perform certain functions and as agent, the sole right to manage, operate, repair, decommission and refurbish the Facilities in the Service Area, including the right to bill and collect for water and sewerage services supplied in the service area (the “Concession).” MWSS-Corporate Office (CO) retained the management of Umiray-Angat Trans-basin Project3, monitoring, reporting and administering loans and other related functions while the MWSS Regulatory Office (RO) implements the provision of the Concession Agreement. 4. There are several projects currently on-going under the Water Security Legacy Program (WSLP) established by MWSS in 2011. The Governance Commission for Government-Owned and Controlled Corporations (GCG) has also approved the Project Management Office (MWSS- CO PMO) which will be responsible for implementing the following projects: (i) New Centennial Water Source – Kaliwa Dam Project (NCWS-KDP), (ii) Bulacan Bulk Water Supply Project (BBWSP_ and (iii) Angat Water Transmission Improvement Project (AWTIP). In the event of approval of the Aqueduct 7 Project, MWSS will seek the expansion of the PMO to add another division for the proposed Project. B. Brief Project Description 5. Aqueduct 7 construction is aimed at increasing the total capacity of the existing 5 aqueducts as recommended in previous studies which found the existing aqueducts having lower capacity compared to the 4 Tunnels. 6. Aqueduct 7 which shall have a capacity of 1,500 MLD is referred to as the BNAQ 7 or the Bigte-to-Novaliches Aqueduct. BNAQ 7 was proposed to replace AQ1&2 and will increase the 1 Republic Act 6234, Sec 2 of 1971 2 Concession Agreement, Article 2, 1997. 3 MWSS’ 2016 Annual Report, p. 10 described the Water Trail: “The Angat Dam/Reservoir is the main water source for the people of Mega Manila. The Angat Watershed provides the bulk of the water to the Angat Reservoir. The waters from the Umiray River provide additional water to Angat Dam through the Umiray-Angat Transbasin Tunnel (UATT). Conveyance is done basically by gravity from the source, into the plant and out into the distribution system” 2 total capacity of the aqueducts to 7,580 MLD. This capacity will be significantly higher and offers substantial safety factor to the water security of Metro Manila. 7. The Project will involve the construction of a 16km steel plate rolled and welded into a 3.6 m diameter pipe. This will be tunnelled through elevated portions of the approximately 3 km rights of way (ROW). The Project will also include all the associated civil works at the Novaliches Junction. C. Country and Sector Financial Management Issues 1. Public Financial Management Environment 8. The ADB’s Country Partnership Strategy4 identified the following challenges faced by the country in the area of public financial management: a. Recurrent fiscal imbalance. The Philippines needs to boost tax effort to up public expenditures level and rectify recurring fiscal deficits which result to the under provision of infrastructure and social services. b. Weak investment climate. Its failure to provide adequate infrastructure, corruption, poor tax and custom administration, high energy costs are some of the barriers that continue to hamper private sector growth. c. Weak public institutions and systems. Improving the investment climate is also affected by weak financial institutions and systems. Reforms in public procurement, public financial management and results-based management are in progress. However, many challenges remain to allow a satisfactory budget execution and reporting to deliver the desired public service. 9. Despite the foregoing challenges, the Philippines is currently among the fastest growing economies in Southeast Asia, with upgrades to sovereign investment ratings confirming improvements in the country’s macroeconomic fundamentals5. The Philippines has also been credited for having strong banking and service sectors. According to ADB, the Philippine economy continued to perform strongly with GDP growing 6.4% year-on-year in the first half of 2017. For 2018, the forecast of GDP per capita (%, year) is at 4.9%.6 10. A Public Financial Management (PFM) Reform Program under Executive Order No. 55 was signed for implementation by President Benigno S. Aquino in September 2011 with the aim to ensure the effective delivery of public services especially to the poor through improved efficiency, transparency and accountability in public fund use. The key projects under the PFM reforms are the Budget Reporting and Performance Standards, Accounting and Auditing Reforms, Capacity Building, Government Integrated Financial Management Information System (GIFMIS), Improved Treasury Management Operations and Liability Management.7 11. Efforts made are deemed successful with (i) fiscal reporting being comprehensive, frequent and timely, (ii) forecasting and budgeting being generally good and (iii) fiscal risk analysis and management being better than other countries. 8 On the other hand, investment climate and fiscal adequacy still need improvement. It is expected that this can be achieved through the 4 Country Partnership Strategy 2011-2016, ADB, October 2011 5 ADB and Philippines Factsheet 2015 6 ADB, Asian Development Outlook, April 2017 7 DBM Circular Letter 2014-5, June 27, 2014 8 Philippines Fiscal Transparency Evaluation, IMF, June 2015 3 scaling up of transport and energy infrastructure investments and through support for policy reforms that (i) improve the quality of competition and regulation, (ii) enhance fiscal policy and expenditure management, and (iii) strengthen legal and judiciary reforms.9 Corruption should be further reduced, and governance strengthened. 12. To address, fiscal inadequacy, ADB will support fiscal policy and public expenditure management, in particular tax administration reforms; reforms aimed at addressing fiscal risks; and performance-based budget allocation, execution, and control at the sector level. 2. Management and Skills 13. The World Bank made a comprehensive skills report10 for the Philippines which found the Philippines achieving a dramatic increase in educational attainment. However, focus is needed on critical skills: (1) combination of job specific and generic skills, (2) higher level skills applicable to the service sector and (3) skills supporting a more competitive manufacturing sector. The report sees emerging skills gap and mis-matches with documentation of difficulties of employers in finding the right skills in the manufacturing and service sector, longer period required to fill professional positions and gaps in generic skills, among others. 14. ADB11 on the other hand reported water and sanitation projects require specialized skills which are scarce in remote places. Factors that weaken the capacity of executing agencies include the simple lack of qualified technical staff in often remote locations, inappropriate match of staff skills and job requirements, underpayment of staff, failure to fill vacancies, demoralization caused by political interference, corruption, lack of incentives to take field posts, and the short tenure of senior staff. When new projects are implemented, operating agencies may be given additional responsibilities but not additional staff, resources, or powers. The World Bank made policy recommendations addressing the skills gap problem to (i) strengthen generic or life skills, create flexibility in curriculum and academic decisions and continuous participation of the private sector and support closer linkages between post-secondary and tertiary education and industries by intensifying collaboration in curriculum design, training and R&D. 3. ADB Country Profile 15. The Country Assistance Program Evaluation (CAPE) evaluation findings include among others: 16. Overall Performance. ADB assistance program over the past 5 years (2003–2007) has been successful in meeting its more selective objectives, despite a need for improvements. However, the larger context for the next country strategy continues to be daunting. 17. Strategic Alignment. ADB’s plans and programs are strategically focused to attain certain purposes as follows: • To address the fiscal policy problem, ADB, in cooperation with other development