3 ASIAN DEVELOPMENT BANK RRP:PHI 35379 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED TECHNICAL ASSISTANCE LOAN TO 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