asian development bank...currency equivalents currency unit – peso (p) at appraisal at project...

ASIAN DEVELOPMENT BANK PCR: PHI 23170

PROJECT COMPLETION REPORT

ON THE

UMIRAY–ANGAT TRANSBASIN PROJECT (Loan 1379-PHI)

IN THE

PHILIPPINES

October 2004

CURRENCY EQUIVALENTS

Currency Unit – Peso (P)

At Appraisal At Project Completion (31 July 1995) (19 November 2002)

P1.00 = $0.039 $0.0183 $1.00 = P25.56 P53.40

ABBREVIATIONS

ADB – Asian Development Bank AIEC – average incremental economic cost AQ-5 – aqueduct number 5 AWSOP – Angat Water Supply Optimization Project CAPEX – capital expenditure program COA – Commission on Audit EIRR – economic internal rate of return EMP – environmental monitoring program FIRR – financial internal rate of return IDC – interest during construction MSWDP – Manila South Water Distribution Project MWCI – Manila Water Company Inc. MWSI – Maynilad Water Services Inc. MWSS – Metropolitan Waterworks and Sewerage System NEDA – National Economic and Development Authority NIA – National Irrigation Authority NPC – National Power Corporation NRW – nonrevenue water O&M – operation and maintenance PCR – project completion report PMO – project management office PPAR – project performance audit report SSWP – Small-scale water providers TA – technical assistance TBM – tunnel boring machine UATP – Umiray-Angat Transbasin Project WACC – weighted average cost of capital

WEIGHTS AND MEASURES km – kilometers m – meter m3 – cubic meter m3/sec – cubic meters per second mcm – million cubic meters mld – million liters per day

NOTE In this report, "$" refers to US dollars.

CONTENTS

Page

BASIC DATA ii

MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 3

A. Relevance of Design and Formulation 3 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 5 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 7 K. Performance of the Borrower and the Executing Agency 7 L. Performance of ADB 7

III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Efficacy in Achievement of Purpose 8 C. Efficiency in Achievement of Outputs and Purpose 9 D. Preliminary Assessment of Sustainability 9 E. Environmental, Sociocultural, and Other Impacts 10

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 10 A. Overall Assessment 10 B. Lessons Learned 11 C. Recommendations 11

APPENDIXES 1. Project Framework 13 2. Project Cost at Appraisal and at Completion 15 3. Project Schedule as Appraised and Actual 16 4. Status of Compliance with Loan Covenants 17 5. Field Visits of PCR Mission 22 6. Water Supply Service Data 23 7. Water Production and Nonrevenue Water 26 8. Financial Evaluation 27 9. Economic Evaluation 31 10. Consumer Survey 37 11. Financial Analysis of Metropolitan Waterworks and Sewerage System 41

ii

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number

The Philippines 1379 Umiray-Angat Transbasin Metropolitan Waterworks and Sewerage System Metropolitan Waterworks and Sewerage System $92.0 million PCR:PHI 819

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

27 Mar 1995 12 Apr 1995 23 Aug 1995 28 Aug 1995 21 Sep 1995 27 Nov 1995 25 Feb 1996 28 May 1996 two 30 Jun 2000 19 Nov 2002 three Variable 25 4

8 Disbursements a. Dates Initial Disbursement

27 Jun 1996

Final Disbursement

19 Nov 2002

Time Interval

6.4 years

Effective Date

28 May 1996

Original Closing Date

30 Jun 2000

Time Interval

4.1 years

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b. Amount ($) Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance 01 CW – Part A 25,350,000 56,057,305 (30,707,305) 56,057,305 56,165,529 (108,224) 02 CW – Part B 2,985,000 0 2,985,000 0 0 0 03 E&M – Part A 13,410,000 0 13,410,000 0 0 0 04 E&M – Part B 24,060,000 17,746,033 6,313,967 17,746,033 16,711,749 1,034,284 05 IDC 14,900,000 14,900,000 0 14,900,000 14,900,000 0 06 Unallocated 11,295,000 0 11,295,000 0 0 0

Total 92,000,000 88,703,338 3,296,662 88,703,338 87,777,278 926,060 CW = civil works, E & M = equipment and materials, IDC = interest during construction.

10. Local Costs (Financed) - Amount ($) 0.00 - Percent of Local Costs 0 - Percent of Total Cost 0 C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 93.97 87.78 Local Currency Cost 45.19 45.71 Total 139.16 133.49

2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed 47.31 45.57 ADB-Financed 76.96 72.88 Total 124.27 118.45 IDC Costs Borrower-Financed 0.00 0.14 ADB-Financed 14.89 14.90 Total 14.89 15.04

ADB = Asian Development Bank, IDC = interest during construction.

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3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual Part A. Diversion Works Base Cost 55.37 69.53 Contingencies 10.03 0.00 Subtotal 65.40 69.53 Part B. Nonrevenue Water Control Program Base Cost 45.00 41.50 Contingencies 7.48 0.00 Subtotal 52.48 41.50 Part C. Consulting Services Base Cost 2.83 1.28 Contingencies 0.27 0.00 Subtotal 3.10 1.28 Total Base Cost 103.21 112.31 Total Contingencies 17.78 0.00 Project Cost 120.98 112.31 Interest During Construction (Bank Loan) 14.89 15.04 Right-of-Way 0.01 0.01 In-house Administration Cost 2.89 0.83 Taxes and Duties 0.40 5.31

Total 139.16 133.49 4. Project Schedule Item Appraisal Estimate Actual Consultant Recruitment Jan 1995 Jan 1995 Order, Manufacture, Shipping of TBM Equipment Jun 1995 Jan 1997 Haulage, Assembling of TBM Equipment Jul 1996 Jul 1997 Tunnel Excavation by TBM Sep 1996 Jan 1998 Construction of Precast Lining Segments May 1996 Jan 1997 Civil Works Diversion Umiray Jan 1997 Jan 1999 Construction of Mini-Hydro Jan 1998 Jan 1999 Haulage, Installation of E & M Dec 1998 Dec 2000 Procurement for NRW Control Jan 1997 Aug 1997 Implementation of NRW Control Jan 1997 Feb 1998 E & M = equipment and materials, NRW = nonrevenue water, TBM = tunnel boring machine.

v

5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

21 Sep 1995–29 Sep 1999 Satisfactory Satisfactory 30 Sep 1999–29 Apr 2000 Satisfactory Partly Satisfactory 30 Apr 2000–29 Apr 2001 Satisfactory Highly Satisfactory 30 Apr 2001–30 May 2001 Satisfactory Unsatisfactory 31 May 2001–29 Jun 2001 Satisfactory Highly Satisfactory 30 Jun 2001–29 Sep 2001 Satisfactory Satisfactory 30 Sep 2001–30 Mar 2002 Satisfactory Partly Satisfactory 31 Mar 2002–31 Dec 2002 Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Appraisal 27 Mar–12 Apr 1995 7 119 b,e,d,k,g Special Project Administration 22 Oct–28 Nov 1996 4 15 a,b,c,h,i Special Project Administration 23 May–29 Aug 1997 (intermittent) 4 8 b,c,h Midterm Review 1 Sep–18 Dec 1998 7 30 a,b,c,g,h,i Midterm Review 11-29 Jan 1999 7 10 a,b,c,g,h,i Review 1 Jul–30 Sep 1999 4 28 b,c,f,h Review 20 Oct–17 Dec 1999 3 15 b,f,h Review 26 Jan–30 Jun 2000 3 15 b,f,h Review 20 July –30 Nov 2000 3 23 b,f,h Review 19 Jan–16 Apr 2001 3 8 b,c,h Review 1–22 Oct 2001 3 5 b,c,h Project Completionb 12 Apr–30 Jun 2004 5 50 f,g,h,j a a - manager, b - financial analyst, c – project engineer, d – Counsel, e – country officer, f – urban development specialist,

g – staff consultant, h – project analyst, i - .project specialist, j – economist, k – environment specialist. b The project completion report was prepared by R. Frauendorfer, Urban Development Specialist/Mission Leader; D. Dole,

Economist; C. Fajardo, Project Officer.

B U L A C A N

Q U E Z O N

R I Z A L

UMIRAYDIVERSION SITES

TRANSBASINTUNNEL

Project Area

Sumag R.

Oyongan River

Bu

iliw

ayR

iver

Ravitan

R.

Tanga

Riv

er

Angat River

Mon

talb

aniRve

r

Pura

Riv

er

Boso

Boso

Riv

er

Mar

R

ikin

a

M

g

a

nra

aulC

reek

Um

ira

yR

ive

r

M a n i l a B a y

Polillo

Strait

L a g u n a d e B a y

Idlang

Cre

ek

Ina

nmi

a

Creek

Pasig River

Tui

llahaR

nver

0 5 10

Kilometers

N

Angat Water Supply

Optimization Project

Manila South Water

Project

Umiray-Angat

Project

National Capital

City/Town

Tunnel/Aqueduct

Road

River

Provincial Boundary

Boundaries are not necessarily authoritative.

Distribution

Transbasin

04-3167c RM

vii

121 00'E

121 00'E

o

o

121 40'E

121 40'E

o

o

14 30'No

15 50'N15 50'Noo

14 30'No

128 E120 Eoo

8 No

16 No

128 Eo120 E

o

16 No

8 No

PHILIPPINES

UMIRAY-ANGATTRANSBASIN PROJECT

(as completed)

Angat Water SupplyOptimization Project

Manila South WaterDistribution Project

Umiray - AngatTransbasin Project

LA MESATREATMENT

PLANTS

BALARATREATMENTPLANTS

ANGAT RESERVOIR

LA MESARESERVOIR

IPO DAMIPO-BICTI TUNNELS

BICTI-LA MESAAQUEDUCTS Bicti Basin

ANGAT DAM

L U Z O N

V I S A Y A S

M I N D A N A O

MANILA

UMIRAY

Baliwag

Bustos

San Rafael

Angat

Mt. Sumag

Mt. Mabitoan

Mt. Calangdang

Plaridel

Balagtas

Bocaue

Bulacan

San JoseDel Monte

Marilao

MeycauayanObando

Rodriguez

San Mateo

ValenzuelaMalabon

Navotas

PasayMakati

MANILA

Mandaluyong

San Juan

Pasig

Antipolo

Marikina

Quezon City

Caloocan

Taguig

Taytay

Angono

Teresa

Bosoboso

Baras

Tanay

Pililla

Morong

Binangonan

Parañaque

Las Piñas

Muntinlupa

Bacoor

Pateros

I. PROJECT DESCRIPTION

1. For the past 30 years, the Asian Develoment Bank (ADB) has played a major role in supporting water supply and sanitation projects for Metro Manila (Manila), Philippines, by providing the Metropolitan Waterworks and Sewerage System (MWSS) with nine loans for water supply and one for sewerage. Manila has a population of about 13 million. The main source of water for the city is the Angat Reservoir, which is about 27 kilometers (km) north of Manila and provides about 4,000 million liters per day (mld). The Umiray-Angat Transbasin Project (UATP),1 for which this project completion report (PCR) has been prepared, was approved on 21 September 1995 for $92 million.2 The project framework for UATP is in Appendix 1. 2. The immediate objectives of the UATP were to (i) augment the treated water supply of MWSS by about 9 cubic meters per second (m3/sec) (780 mld) by 1999, and (ii) improve the operational efficiency and revenue generation of MWSS through the implementation of a nonrevenue water (NRW)3 reduction program. The goal was to meet the backlog in demand for water in the MWSS service area by increasing coverage with piped water supply from 65% to 84% of the approximately 11 million population forecast for 1999 at appraisal. 3. The Project included three components, (i) to construct a tunnel, and facilities to divert water from the Umiray River to the Angat Reservoir, (ii) reduce NRW, and (iii) supervision of construction. UATP was estimated to cost $139.16 million equivalent, financed by ADB at $92 million, with the balance funded by MWSS. Table 1 shows the project components. 4. MWSS, the Executing Agency (EA), was created as a government-owned corporation in 1971, with responsibility for water supply and sanitation in Manila. In 1997, MWSS’s operations became privatized when the agency entered into concession agreements with Manila Water Company, Inc. (MWCI) and Maynilad Water Services, Inc. (MWSI). MWSS was reorganized into two independent entities: the MWSS Regulatory Office, charged with monitoring the concessionaires’ performance; and the MWSS Corporate Office responsible for administering and managing retained assets, administering existing loans, facilitating the provision of bulk water, and facilitating development of new water sources. The relationship between MWSS and ADB was governed by their loan agreements, even though the concessionaires became strongly involved in implementing the ongoing loan projects. 5. In view of the water shortage experienced in Manila in 1995, and the increasing demand due to growth of the population and the industry sector, MWSS had to continue expanding its services by implementing new capital investment projects and operating and managing the existing facilities more efficiently. MWSS had been implementing a number of major investment projects with the assistance of external aid agencies within the overall development framework set by a Master Plan.4 The UATP was conceived as the second stage of water source

1 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Republic of the Philippines for the Umiray-Angat Transbasin Project. Manila (Loan 1379-PHI, approved on 21 September 1995 for $92 million).

2 PCRs were prepared simultaneously for two interrelated water supply projects for Manila: (i) ADB. 1989. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Philippines for the Angat Water Supply Optimization Project. Manila (Loan 986-PHI, approved on 14 November 1989 for $130 million); and (ii) ADB. 1991. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Philippines for the Manila South Water Distribution Project. Manila (Loan 1150-PHI, approved on 19 December 1991 for $31.4 million). The location of the three projects is shown on the Map.

3 NRW is composed of (i) physical losses caused by leakages; and (ii) commercial losses resulting from illegal connections, mismeasurement, and billing inefficiencies.

4 The Water Supply, Sewerage and Sanitation Master Plan of the Philippines, prepared by an interagency task force of the Government in 1987, covers proposed development from 1988 to 2000.

2

development following the Angat Water Supply Optimization Project (AWSOP), and was to provide additional water to be distributed by Manila South Water Distribution Project (MSWDP) (footnote 2). The capacity of the Angat Reservoir to serve the growing needs of Manila was limited, but the untapped abundant water source in the Umiray River could be diverted to the Angat Reservoir for productive use, particularly during the critical dry season. 6. Aside from the proximity of the Umiray and Angat river basins and climatic factors that allow the runoff characteristics of the two basins to complement one another, water diversion from the upper basin of the Umiray River has other advantages. Since the catchment is at a high elevation, it permits diversion of streamflow by gravity to the Angat Reservoir through a tunnel in the Sierra Madre Mountain range. With the diversion, the refilling period of the Angat Reservoir can be shortened. Since the upper basin of the Umiray River is well preserved, it can not only provide water of high quality for Manila, but also carries minimal silt into the Angat Reservoir thus prolonging the economic life of the dam.

Table 1: Project Components

Components Part A. Diversion Works

(i) Excavation and lining of the main diversion tunnel about 13 kilometers (km) long, 4.3 meters (m) in diameter, plus two branch tunnels—one 155 m long, 2.5 m in diameter, and one 637 m long, 2.5 m in diameter, including a ventilation shaft 200 m high, 2.5 m diameter

(ii) Installation of a suspended railcar system inside the main tunnel for transporting operation and maintenance personnel and materials during the low-flow season

(iii) Installation of a mini-hydropower plant (970 kilowatts) at the outlet of the main tunnel

(iv) Installation of a 18 km long power transmission line (v) Construction of three permanent and one temporary diversion

weirs (vi) Construction of four houses and one office–warehouse at Umiray (vii) Training of Umiray River to maintain navigability

Part B. Nonrevenue Water Control Program (i) Replacement of 3,000 fire hydrants with underground type (ii) Installation of 900 public taps (iii) Installation of 150 km of new tertiary mains for the urban poor (iv) Replacement of 5 production meters (v) Replacement of 420,000 small size meters (vi) Leak detection and repair (vii) Replacement of 175,000 service connections (viii) Replacement of 2,500 large meters

Part C. Construction Supervision Supervision of construction of Part A component – 405 person-months (105 international, and 300 domestic)

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II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation 7. The UATP was in line with ADB’s country strategy and program, specifically regarding its emphasis on expansion of capacity and improvement of operational efficiency of the existing investments in the power, water supply, irrigation, and road sectors. It was also a response to the National Water Crisis Act of 1995 under which the President of the Philippines was empowered to revamp the executive leadership and privatize operations of MWSS within 6 months of approval of the Act. 8. The design and formulation of the Project were generally sound. The Project met an earlier ADB condition to fund the UATP water source development only if NRW5 had been brought under control, by a sizable investment aiming to achieve such improvement. Compared with estimates of NRW targets set under AWSOP (30% by 1995) and MSWDP (33% by 2000), the UATP target was more conservative (40% by 2000). 9. During project formulation, numerous consultations were held with local government officials, nongovernment organizations, and representatives of indigenous peoples to discuss concerns raised by local people about potential impacts of the project. Public consultations confirmed that diversion weirs to be constructed were only 3.5 m to 4.0 m high and would not have impacts like those of an impounding dam. A water right to withdraw an average annual flow of 15.7 m3/sec of water from the Umiray River for the lifetime of the Project was secured. MWSS would have the right to use at least 9 m3/sec of that amount, and the National Irrigation Authority (NIA) and the National Power Corporation (NPC) would share the balance. An important decision was made to construct the tunnel from one end only, avoiding construction of an access road linking the two portals, which would have greatly scarred the forests (para. 43). At that time, it was the longest tunnel in the world (13.1 km) excavated from one end only.

B. Project Outputs 11. Part A: Diversion Works. This part comprised the following activities.

(i) Excavating and lining the main diversion tunnel 13.1 km long and 4.3 m in diameter, plus two branch tunnels— one 155 m long with 2.5 m in diameter, and one 637 m long and 2.5 m in diameter— and a ventilation shaft 200 m high, 2.5 m in diameter. The main tunnel was successfully completed and commissioned on 21 June 2000. Construction of the two branch tunnels, which would have added another 13% of flow to the main diversion, were cancelled by MWSS.

(ii) Installing a suspended railcar system inside the main tunnel for transporting operation and maintenance personnel and materials during the low-flow season. This component was cancelled because it was considered difficult and expensive to construct and potentially hazardous for human transport.

(iii) Installing a mini-hydropower plant (970 kilowatts) at the outlet of the main tunnel to harness residual energy. This was successfully completed and commissioned in December 2000.

(iv) Installing an 18 km power transmission line. This was constructed with about 15 months delay due to the delayed permit for tree felling.

5 At appraisal, NRW was about 55% in the MWSS service area.

4

(v) Constructing three permanent and one temporary diversion weirs. Two permanent diversions weirs were cancelled.

(vi) Constructing four houses and one office-warehouse at Umiray. These were built as planned.

(vii) Training Umiray River to maintain navigability. With the deletion of the two branch tunnels [(i) above], MWSS decided there was sufficient water in the Umiray River to maintain navigability without river training.

12. Part B: NRW Control Program. This part involved the following activities. (i) Replacing 3,000 fire hydrants. This activity was cancelled. (ii) Installing 900 public taps. This activity was also cancelled.6 (iii) Installing 150 km of new tertiary mains for the urban poor. Only 40.64 km were

constructed. (iv) Replacing 5 production meters; 13 were replaced. (v) Replacing 420,000 small-size meters; 313,456 were replaced. (vi) Detecting and repairing leaks. The initial target was 44,000, but 305,548 leaks

were repaired. (vii) Replacing 175,000 service connections planned; 38,078 were achieved. (viii) Replacing 2,500 large meters planned; 3,099 were achieved.

13. By loan closing on 19 November 2002, only 87% of the NRW control program component was deemed completed. In March 2004, NRW in the MWSS service area was about 60%, compared to 36% planned at appraisal. 14. Part C: Construction Supervision. Supervision of construction in Part A was estimated at appraisal to require 405 person-months. The duration of consulting services was to be 24 months, but due to construction delays it was extended to 36 months. Consultant inputs of 268 person-months were initially contracted, but later extended to 365 person-months. The contract was completed on 30 November 2000. Consulting services were marred by the death of three supervising engineers, one pilot, and three contractor’s staff in a helicopter crash on 23 November 1999 while flying from Umiray to Macua.

C. Project Costs 15. At appraisal, total project costs were estimated to be $139.16 million. Actual project costs at loan closing were $133.49 million. There was a small cost overrun on the diversion works (tunnel) from an estimated $65.40 million to a final $69.53 million. The NRW component was less costly at $41.50 million, compared with the appraisal estimate of $52.48 million, mainly due to the devaluation of the peso. Table 2 summarizes the appraisal and actual project costs. A detailed comparison of the project cost at appraisal and at completion is given in Appendix 2.

6 Public taps have to some extent been replaced by the concessionaires’ programs for the urban poor including

Bayan Tubig (“water for the people”) by MWSI, and Tubig Para sa Baranggay (“water for the community”) by MWCI.

5

Table 2: Project Cost

Cost ($ million) Item

At Appraisal Actual Diversion Works 65.40 69.53 NRW Control Program 52.48 41.50 Consulting Services 3.10 1.28 Interest During Construction 14.89 15.04 Administration 2.89 0.83 Taxes and Duties 0.40 5.31 Right-of-Way 0.01 0.01

Total 139.16 133.49

D. Disbursements 16. As of 30 June 1998, about 2 years after loan effectiveness, the elapsed time of the Project was 73%, physical progress was 12%, and disbursement was $21.06 million. By January 2000, project implementation time had reached 129%, physical progress was 68%, and disbursement was $48.26 million. At this stage, nearly all the disbursements had been for the diversion works. In July 2000, an extension of the loan closing date to 30 June 2001 was approved. This was followed by another extension to 30 June 2002, achieving a total disbursement of $87.8 million.

E. Project Schedule 17. The loan became effective on 28 May 1996 and closed on 19 November 2002. A comparison between the planned and actual implementation schedule is in Appendix 3. Implementation of the diversion works was delayed by about 1 year. While the tunnel boring contract was awarded in early 1996, tunneling actually started only in January 1998 due to logistical problems: barge transport of materials was held up by the low level of water in the Angat Reservoir resulting from the El Niño drought. MWSS resorted to expensive airlifts to assist the tunnel contractor. However, once the tunneling got under way progress was good and the tunnel and diversion works were commissioned in June 2000. This was about 12 months later than was indicated in the concession agreements that stipulated an extra 780 mld of water from Umiray would be available for treatment and distribution. In the lead up to privatization in 1997, no activities were implemented of the NRW reduction component. It was not until the midterm review in January 1999 that the concessionaires firmed up their plans for NRW reduction.

F. Implementation Arrangements 18. The organizational and institutional arrangements for project implementation were similar to those under previous ADB loans to MWSS. The Construction Department of MWSS was in charge of project construction under the supervision of the deputy administrator for construction management. The overall implementation of the Project was under the general guidance and control of the senior deputy administrator and the administrator. A project management office (PMO) with a project manager and eight professional staff members experienced in construction supervision and contract administration was set up at the Angat Dam. MWSS seconded about 20 qualified engineers to assist. The NRW control program was assigned to the sector offices except for centralized procurement and replacement of large meters. MWSS was supported by a team of international and domestic consultants, and

6

provided logistical support, including airlifts to the tunnel portal in times of restricted access by barges. 19. In 1997, the concessionaires MWCI and MWSI became responsible for operating and developing water supply and sanitation services in the west and east of the MWSS service area, respectively. The relationship between MWSS and the concessionaires with respect to the ongoing projects was set forth in the Agreements on the Supervision of Existing Projects, which stipulated that MWSS remained the EA and the Borrower of ongoing loan projects, while the concessionaires would be responsible for implementing these projects, including UATP. However, although this applied to the NRW control program it did not apply to the Umiray transbasin diversion works and tunnel, for which MWSS continued to have day-to-day responsibility for supervision. An early retirement package introduced before privatization, and transfer of most of the MWSS staff to the concessionaires after privatization reduced MWSS staff from about 7,600 to about 160.7 This drastic reorganization may also have affected the effectiveness of the PMOs responsible for implementing projects financed by ADB and other sources. 20. In July 1999, ADB introduced monthly coordination meetings between MWSS, MWSI, MWCI, and ADB to accelerate implementation. This move was well-received by all parties and proved to be a very effective mechanism to promote procurement activities and resolve issues. MWSI increasingly experienced financial difficulties and was unable to cover the cost of the planned investment programs. Subsequently, MWSI stopped full payment of the concession fees in March 2004.

G. Conditions and Covenants 21. The status of compliance with loan covenants is given in Appendix 4. Of the 37 loan covenants, 26 were complied with or were subsumed by privatization, 7 were partly complied with, and 4 were not complied with. 22. Covenants that MWSS did not comply with related to tariffs, NRW, watershed management, and project benefit monitoring and evaluation. MWSS was to carry out annual reviews of the level and structure of the water and sewerage tariffs and other charges. While this task may have been subsumed by privatization, annual tariff reviews were not submitted to ADB and the structure of the tariffs was fixed under the concession agreements. NRW should have been reduced from 55% in 1994 to below 40% by 2000, which was not achieved. In 2004, the level of NRW has climbed to 60%. 23. Covenants that were partly complied with were those related to the environmental monitoring program, progress reporting, annual update of customer projections and classifications, excavation permits, service connection targets, and records and accounts. At appraisal 1,244,000 connections had been assumed by 2003, which compares with the actual 983,000 official and 1,130,000 total connections by that date.8 MWSS did not fully comply with reporting requirements under the loan agreement. From July 1999 until project completion, monthly coordination meetings were held. Information provided at these meetings effectively replaced submission of quarterly progress reports. In 2000, audited loan accounts for 1999 and 2000 were submitted, with a qualified opinion from the Commission on Audit (COA). MWSS, in consultation with COA and ADB, developed and implemented a time-bound action plan to

7 Consisting of regular and contractual staff. 8 The difference between official and total connections is recognized by the Regulatory Office as those connections

downstream of bulk metered connections. In other words, official connections are those for which the concessionaires are directly responsible for operation and maintenance (O&M), whereas total connections include those for which O&M is the responsibility of subdivisions or homeowner associations.

7

address the issues raised. In March 2002, COA confirmed that MWSS had substantially complied with audit recommendations.

H. Related Technical Assistance 24. ADB provided advisory technical assistance (TA) for $582,000 for MWSS to introduce private sector participation in operation and management.9 The TA was designed to further promote privatization activities initiated under the TA for the MWSS Operational Strengthening Study approved in December 1994, and included 38 person-months of consulting services (12 international and 26 domestic).10

I. Consultant Recruitment and Procurement 25. Consultants were recruited in time to assist in construction supervision of the Umiray diversion works. No consultants were employed on the NRW control program as this component was implemented directly by the concessionaires. There were procurement difficulties under the NRW control program in terms of bid evaluation and award of contract delays with MWSI. Also, procurement of domestic water meters under MWSI was delayed due to prolonged discussion with MWSS over the specifications. In implementing the UATP, MWCI was able to utilize more ADB loan funds before using the company’s own funds. MWSI persisted in using primarily its own funds apparently because it did not feel comfortable with ADB’s guidelines on procurement.

J. Performance of Consultants, Contractors, and Suppliers 26. The contractor for the 13.1 km tunnel construction performed very well. A number of technical difficulties were encountered during construction, including heavy groundwater inflows, but the contractor had the expertise on hand to deal with these situations and completed the works on time. A number of Filipinos developed tunneling skills under this contractor and later got overseas employment with the same contractor. The consultants performed satisfactorily.

K. Performance of the Borrower and the Executing Agency 27. During implementation, MWSS tried its best to keep the Project on track. Particularly noteworthy was the action taken by MWSS to assist the tunnel contractor with airlifts (para. 17). Overall, given the difficulties of adjusting to privatization and the complexity of the Project, the performance of MWSS is rated satisfactory.

L. Performance of ADB 28. Between 22 October 1996 and 22 October 2001, ADB staff conducted six review missions (94 person-days), two special project administration missions (23 person-days), and a midterm review (40 person-days). Monthly coordination meetings were held from July 1999 until October 2002. There was no evidence that ADB failed to act promptly on matters of procurement or disbursements. Field visits conducted during the PCR Mission are in Appendix 5.11 The performance of ADB is rated satisfactory.

9 ADB.1995. Technical Assistance for the Republic of the Philippines for MWSS Privatization Support. Manila. 10 Records about the implementation of the TA for MWSS Privatization Support could not be located. It must be

assumed that it was not implemented presumably because other activities in preparing for privatization overtook the function of this TA.

11 The PCR Mission attempted also to visit the Umiray site, which was only accessible by helicopter. As the Mission took place during the monsoon season, inclement weather prevented the Mission from moving beyond the Angat Dam site.

8

III. EVALUATION OF PERFORMANCE A. Relevance 29. Following completion of the AWSOP headworks, average water production from the Angat Reservoir increased from 2,200–2,500 mld to 3,200–3,500 mld. After commissioning of the UATP, water production further rose to 4,000 mld. The UATP design was relevant in that it provided for an extra 780 mld of treated water into the MWSS service area at a time when the population served with piped water was effectively under 50%. However, even though the development of a new water source from the Umiray River was successfully accomplished, only about 40% of the treated water benefits consumers because NRW continued to be high. The inclusion of the NRW reduction component was meant to address this perennial problem (para. 8,12). 30. It was 4 years into the Project before significant effort were made to address NRW. The meter replacement targets of UATP (420,000) and AWSOP (156,650) were only 63% met with 362,790 meters replaced between 1997 and 2002. However, if 7 years is a benchmark time for replacement of domestic water meters, then the concessionaires should be replacing about one million meters every 7 years. 31. Overall, based on its consistency of project goals, purposes, and outputs with the Government’s development strategy, ADB’s lending strategy for the Philippines, and ADB’s strategic objectives at the time of appraisal, the design of UATP was highly relevant.

B. Efficacy in Achievement of Purpose 32. The objectives of the UATP to provide another 780 mld of treated water for Manila was successfully achieved. Another objective was to reduce NRW from 55% to 40% by year 2000. In 2000 NRW was about 57%; in 2004 it is about 60% of production, demonstrating that this objective was not achieved. The goal was to meet the demand for water by increasing coverage with piped water from 65% to 84% of the population. In 2004, an estimated 13 million people are in the MWSS service area. About 800,000 domestic connections are serving some 920,000 households. Assuming 7.5 persons per household, this equates to about 53% of the population.12 So the broader development goal has not been achieved and the main reason for that is the failure to reduce NRW. Water supply service data are in Appendix 6. 33. The UATP was appraised on the assumption that water production in the Angat Reservoir through AWSOP and UATP would rise from 2,990 mld in 1995 to 4,540 mld in 2002. At the same time it was assumed more water would become available with reduction of NRW to about 38% in 2002. In reality, production never exceeded about 4,000 mld, and NRW increased to about 60% in 2002. Table 3 shows the effect of lower production and higher NRW in the MWSS service area. Data on water production and NRW are in Appendix 7.

Table 3: Water Availability at Appraisal and Actual

Item Water Produced (mld)

NRW (%)

Water Billed (mld)

Appraisal 4,450 38 2,759 Actual 4,000 60 1,600 Difference (water not billed) (1,159)

mld = million liters per day.

12 The official census estimate is 4.6 persons per household. The concessionaires calculate service coverage

assuming 9.2 persons per household, on which the concession tender was based.

9

34. Regarding achievement of its immediate objective and the likelihood that it will contribute to realizing the wider development goals, UATP is rated less efficacious.

C. Efficiency in Achievement of Outputs and Purpose 35. The ADB loan was originally scheduled to close on 30 June 2000, but was finally closed on 19 November 2002. The diversion works to bring water from the Umiray River to the Angat Reservoir were scheduled for completion by mid-1999, but were actually accomplished in mid-2000. Given the logistic problems associated with the low levels of the Angat Dam water under the El Niño drought, this was a commendable achievement (para. 17). The implementation of NRW reduction did not begin until 4 years after the loan approval, mainly because of delays caused by privatization. 36. Assumptions made at appraisal regarding incremental water produced, NRW reduction achieved, incremental water sold, and level of tariffs did not materialize. Financial analysis based on actual figures gives a financial internal rate of return (FIRR) of 7.7%. While this is lower than the FIRR of 19% at appraisal, it is higher than the weighted average cost of capital (WACC) of 1.01%, which was estimated at 4% at appraisal. The significant difference between the appraised and actual FIRRs is primarily due to the lower volume of water sold, high NRW, and low tariffs. 37. Economic analysis of the UATP focuses on the increased water supply capacity developed under the Project. The cost of water obtained from the UATP at P1.22/m3 is higher than the cost of the next best source of raw water for Manila at P0.45/m3. The added cost of the UATP— P0.77/m3 —is only 5% of the total cost of water, so using the higher cost source has little if any impact on the economic basis for expanding water supply. Manila's water supply system is currently running at full capacity, with an unmet demand for new connections, and not all existing connections getting 24-hour water supply. The average incremental economic cost of treated water supplied by the Project is P15.95/m3. At usage charges above that cost, total water use is 6.54 m3/sec, below the project's increment to water supply of 9 m3/sec. Without the Project, 6.54 m3/sec of demand would either not be served or be served at higher cost, so 70% of the increased supply of raw water generated by the Project is clearly justified. This analysis is based on the best available information on demand, but reflects a very conservative estimate of demand above the project's cost. The remaining 2.46 m3/sec increase in capacity may be justified by a more detailed analysis of commercial and industrial demand. 38. The detailed financial evaluation is given in Appendix 8, and the economic evaluation is in Appendix 9. Overall, based on the implementation process, and a FIRR of 7.7%, the UATP can be rated efficient.

D. Preliminary Assessment of Sustainability 39. The Umiray tunnel was designed to have a suspended railcar system, but this was not installed (para. 11). Therefore, access to the Umiray portal of the tunnel is only possible by helicopter, subject to weather conditions, or through the tunnel by shutting down the flow. This weakness incurs an extra operational cost, and also increases the risk that a potential problem cannot be addressed immediately. 40. Half of the water provided by the Angat Reservoir is transported via aqueduct no. 5 (AQ-5) built under the AWSOP, which is leaking badly. A new aqueduct (AQ-6) will need to be constructed, before AQ-5 can be repaired. The benefits of the UATP depend on this action to ensure sustainability. 41. The sustainability of water services in any city depends to a large extent on tariffs sufficient to cover O&M costs, debt service, and new development. The timely manner in which

10

production volume is increased, NRW reduction effected, and tariff increases made will always be critical to the long-term sustainability of the water supply service of Manila. Risk assessment and management must continually take these interrelated matters into consideration. 42. Taking into account a well-engineered diversion tunnel and works, and the dependence of both NIA and NPC on this source of water, the sustainability of the main project component in terms of providing water to Manila can be rated as likely.

E. Environmental, Sociocultural, and Other Impacts 43. Environmental Impact. The decision to construct the 13 km tunnel from one end was a noteworthy one. Not only was it at the time the longest tunnel of its kind excavated from one end; it also avoided the construction of some 25 km of access roads that would have opened forests to illegal loggers. In addition, the tunnel contractor chose to use portable generators to power the tunnel-boring machine instead of constructing a power transmission line along the full length of the tunnel. This also preserved the environment. A field visit by an ADB Mission in August 1998 reviewed issues on the environment and indigenous peoples and the findings were positive. 44. An environmental monitoring program (EMP) associated with the Umiray site was set up at loan appraisal. MWSS failed to submit reports on the EMP during implementation, but reported in April 2004 as follows: (i) operation staff are strictly adhering to the minimum ecological flow in the river; (ii) no complaints regarding reduced navigability in the Umiray River have been received; (iii) permanent staff on the diversion intake site was limited to eight personnel plus six security guards; a military contingent was also employed for safety and forest protection; (iv) disposal of solid waste and sanitary waste was adequately taken into account during the design of the local facilities; (v) a separate team is assigned for the task of preserving the upper watershed; MWSS staff are not allowed to stray from their work site because of safety and security restrictions; and (vi) no adverse impact on fisheries have been reported. 45. Indigenous Peoples. MWSS reports that some indigenous people living in the vicinity of the diversion works were employed during construction. Subject to weather conditions, a helicopter trip to the Umiray River should be arranged to interview people living near the river and assess the impact of the Project on their livelihood. This should be included in a future project performance audit report (PPAR) mission. 46. Impact on the Poor. The urban poor have benefited from the Project. Both concessionaires are successfully implementing programs to connect poor households. A survey conducted for the PCR Mission shows that the Project significantly improved the situation of families with low income. Cost of water for the unserved areas is up to 13 times more than the cost in the served areas. With the lower cost of water per m3, households tend to consume more, which may also have positive impacts on health. Details of the consumer survey are in Appendix 10. 47. A financial analysis of MWSS is in Appendix 11. The improved ability of MWSS to make effective and efficient use of its human, financial, and natural resources in pursuing economic, environmental and social activities prompted by the Project, as well as other positive development impacts is rated moderate.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment 48. In terms of relevance, the UATP was highly relevant although the project approach to NRW reduction was shown to be ineffective. In terms of efficacy, the immediate objective was

11

achieved, but the overall goal was only partly achieved; thus the UATP is rated less efficacious. Even though the NRW reduction component was not efficiently executed, the main component of the diversion works was successfully implemented, and a positive FIRR achieved. The UATP is therefore rated efficient. Sustainability is rated likely. Environmental, sociocultural, and other impacts are rated moderate. The overall assessment is that UATP can be rated successful.

B. Lessons Learned 49. The Project provided some important lessons including the following:

(i) Program management. In cases where several, independent projects are implemented and serve a similar purpose, it is advisable to have one senior person responsible for program management, critical path monitoring, and risk management. Supervising the interrelationship of various components can facilitate decision making, especially limiting the damage caused by delays. Outsourcing of project management should be considered if there is a risk that the size or complexity of interrelated projects could exceed the capacity of the EA.

(ii) NRW reduction. NRW reduction is a more complex and difficult task than it initially appears (paras. 8, 22, 29, 32, 33). Projections of NRW reduction need to be conservatively estimated at appraisal to avoid overestimating project benefits. A project approach alone is not sufficient to reduce NRW. The utility must take responsibility for NRW reduction in terms of a routine operational activity. Experience shows that covenanting NRW reduction should be done with caution, as drivers for NRW are often difficult to get under control.

C. Recommendations

1. Project-Related 50. Future Monitoring. The Umiray River and the effect of the diversion on people living near the river downstream of the diversion needs to be monitored, especially in dry season. NRW needs to be monitored monthly using report of the same format submitted by both concessionaires. The consolidated report should include, among other things, analysis of the large consumers, allowance for NRW beyond bulk metered supply, replacement of meters, amount of assessed consumption, analysis of both domestic and nondomestic consumption, coverage with 24-hour supply, number and size of hydraulic zones for which NRW can be measured, and NRW per connection in each zone. For domestic and nondomestic consumers separately, the number of connections, billed volume, and billed amount need to be monitored. 51. Covenants. A project performance monitoring system should be implemented. Tariff reporting should become mandatory and the tariff level and structure rationalized. While the Loan Agreement calls for an annual review of tariff structure, the concession agreement adopts the previous MWSS tariff structure. A review may be needed to simplify the tariff structure and make it easier to monitor compliance. 52. Further Action or Follow-Up. UATP is closely interlinked with, and related to, AWSOP and MSWDP. All three projects concern water supply in Manila, are based on the same master plan prepared by the Government, linked with ADB’s county strategy and program, and were simultaneously implemented by the same EA (paras. 5, 7). Further actions proposed are therefore identical for all three projects, and should include:

(i) Water Source Development. Besides continued efforts to reduce NRW, additional water source projects will need to be developed to meet future water demand.

12

(ii) MWSS Financial Management and Planning. MWSS’ responsibility is changing from engineering to financial management and planning. MWSS will need both, high-level in-house staff skills and long-term consultancy support to succeed in its new role.

(iii) NRW Reduction. A new approach to NRW reduction should include: (a) A water audit of the MWSS service area should be conducted through a

representative sample of consumers and water providers, including the concessionaires, small-scale water providers (SSWPs), water vendors, and bottled water suppliers. The audit would focus on water sources, and consumer costs and consumption. It would help to better assess the coverage with piped water, revenue generation, and incentives for NRW reduction. Audit results could also support formulation of a new government policy on water supply in Manila.

(b) Activities and results of MWSS and the concessionaires to reduce NRW should be closely monitored. Licensing of SSWPs and water vendors should be considered, and consistent use of hydraulic zoning, caretaker approach, and metering of production and consumption should be implemented.

(c) Special focus should be given to monitoring the increase in piped water connections for the urban poor, which is closely connected to the issue of NRW reduction.

53. Additional Assistance. ADB has been assisting Manila’s water supply and sanitation development for 30 years. In 2003, ADB approved a TA loan for the MWSS New Water Source Development Project,13 and is considering financing a new aqueduct that will bypass the leaking AQ-5 (para. 40). 54. Timing of the Project Performance Audit Report. It is recommended that one PPAR be prepared for all three projects —AWSOP, MSWDP, and UATP— because their benefits are interrelated and privatization has become a critical factor affecting the outcome of all three. It may be useful to prepare the PPAR during 2006 to follow up on these PCR findings.

2. General 55. For appraisal purposes, ADB staff should assess technical as well as other risks and, if necessary, propose an independent panel of experts. Insisting on critical path or similar management techniques in monitoring and reporting of large projects or programs is highly recommended. 56. For implementation purposes, ADB staff should

(i) undertake a regular review of constraints and risks; (ii) insist on timely submission of audited financial statements and project accounts,

and progress reports; and (iii) consider outsourcing of project management by the EA.

13 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Technical

Assistance Loan to the Philippines for the MWSS New Water Source Development Project. Manila.

Appendix 1 13

PROJECT FRAMEWORK

Design Summary Appraisal Targets Project Achievement Key Issues and

Recommendations

Goals Enhanced water supply volume and coverage in Metropolitan Waterworks and Sewerage System (MWSS) service area and thereby enhance living standard

Increase coverage from 65% (1994) to 84% (2000)

Coverage of about 53% in 2004

Consumers’ willingness to pay for connection fee

Assumptions for nonrevenue water (NRW) reduction should have been more conservative.

Purpose To increase water production

To help MWSS reduce NRW through leak detection and repair

Increase of 780 million liters per day (mld)

NRW 35-38% by project completion

780 mld.

60% NRW (2004)

15.7 cubic meters per second (m3/sec) at appraisal vs 12-13 m3/sec actual water from Umiray, but 9 m3/sec used by MWSS as appraised

Identification of major underground leaks and availability of internal funds

Assumption should have been conservative.

Outputs Diversion weirs

One main and two branch tunnels

Mini-hydropower plant

NRW control program

Diversion of 15.7 m3/sec from Umiray into Angat

Generation of 970 kilowatts

Replace 3,000 fire hydrants

Replace 5 production meters

Replace 2,500 large meters

Replace 420,000 small-size meters

Replace 175,000 connections

Undertake 44,000 leak repairs

Install 900 level II

Actual 12-13 m3/sec diverted from Umiray

Only one tunnel built

Branch tunnels diversions deleted

Completed

Cancelled

13 replaced 3,099 replaced

313,456 replaced

38,078 replaced

305,548 repairs

Cancelled

Timely procurement of materials and equipment and adequate provision of counterpart funds were not fully achieved.

Continued on next page

14 Appendix 1

Design Summary Appraisal Targets Project Achievement Key Issues and

Recommendations

MWSS Privatization Support Study

services

Install 150 km tertiary lines

40.64 km installed

Apparently not implemented

Inputs Financial Resources: Asian Development Bank (ADB) loan

MWSS and Government support

Human resources:MWSS staff

$92 million Ordinary capital resources

$48 million (MWSS & Govt.)

MWSS provides 3,888 person-months for implementation

$87.8 million $45.7 million Human resources (MWSS, Manila Water Company Inc., Maynilad Water Services Inc. [MWSI]) not a constraint

ADB loan approval and Govt. budgetary support and no unforeseen cost escalation

MWSI financial status a constraint

Appendix 2 15

16 Appendix 3

PROJECT SCHEDULE AS APPRAISED AND ACTUAL Activity

NRW = nonrevenue water, Seg. = segment, TBM = tunnel boring machine.Appraisal Schedule

Actual Schedule

1998

Consultant Recruitment

Order/Build/Ship TBM

1999 2000 2001 20021995 1996 1997

Construct Mini-Hydro

Procure for NRW Control Program

Implement NRW Control Program

Haulage Assembly TBM

Tunnel Excavation TBM

Construct Precast Lining Seg.

Civil Works Diversion at Umiray

Appendix 4 17

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference in

Loan Agreement

Status of Compliance

1. The Borrower will make available the funds, facilities, services, land, and other resources required in addition to the proceeds of the loan for carrying out the Project and the operation and maintenance of the project facilities.

Section 4.02 Complied with

2. In carrying out the Project, the Borrower will employ competent and qualified consultants and contractors acceptable to the Asian Development Bank (ADB).

Section 4.03 (a) Complied with

3. The Borrower will take out and maintain with responsible insurers insurance against such risks and in such amounts as will be consistent with sound practice.


4. The Borrower will maintain records and accounts of the goods and services and other expenditures financed out of the proceeds of the loan and record the progress of the Project (including the cost).

Section 4.05 Partly complied with; incomplete record of project progress.

5. The Borrower will furnish ADB quarterly reports on the execution of the project and on the operation and management of the project facilities. The last quarterly report of any given year will be an annual performance report.

Section 4.06 (b) Partly complied with; some reports provided but incomplete record

6. After physical completion of the Project, but not later than 3 months, the Borrower will provide ADB with a project completion report.

Section 4.06 (c) Complied with

7. The Borrower will have its accounts and financial statements audited annually and present to ADB certified copies of the audited accounts as well as the auditor’s report related to them.


8. The Borrower will enable ADB upon request to discuss the Borrower’s financial statements with the Auditor.

Section 4.07 (b) Complied with

18 Appendix 4


Loan Agreement


9. The Borrower will enable ADB’s representative to inspect the Project.


10. The Borrower will maintain its corporate existence.


11. The Borrower will at all times conduct its business in accordance with sound administrative, financial, environmental and public utility practices, and under the supervision of competent and experienced management and personnel.

Section 4.09 (b) Complied with

12. The Borrower will at all times operate and maintain its plants, equipment, and other property and from time to time promptly as needed make all necessary repairs and renewals, all in accordance with sound administrative, financial, engineering, environmental, and public utility and maintenance and operations practices.

Section 4.09 (c) Partly complied with, because NRW reduction is inadequate.

13. The Borrower will take all steps necessary to ensure that its operations generate revenues to achieve an annual rate of return of not less than 8% on net revalued fixed assets in operation.


14. The Borrower will not incur new debt unless internal cash generation exceeds 1.2 times total debt service.


15. The existing project management office (PMO) of the Borrower will be responsible for the day-to-day implementation of the Project.

Schedule 6, para. 1 (a)

Complied with

16. The Borrower will make land etc., available in a timely manner.

Schedule 6, para. 2

Complied with

17. The Borrower will take action as necessary to issue or cause to be issued all necessary licenses, permits, approvals and other documents required for construction and operation of the project facilities.


Complied with

Appendix 4 19


Loan Agreement


18. The Borrower will have excavation permits made available in a timely manner.

Schedule 6, para. 3 (b)

Partly complied with. After privatization, this was left to concessionaires.

19. The Borrower will carry out an environmental monitoring program in the project area during implementation of the Project and operation of the project facilities, and submit the results to ADB on an annual basis.

Schedule 6, para. 4

Partly complied with. Due to security restrictions this was not practicable at all times.

20. The Borrower will monitor and evaluate on an annual basis the implementation of the Project.

Schedule 6, para. 5

Not complied with

21. The Borrower will consult ADB on any plan for the reorganization of the Borrower, which may affect the Project and the Borrower’s operations.

Schedule 6, para. 6

Complied with

22. The Borrower will cooperate and coordinate with other concerned government agencies

Schedule 6, para. 7

Complied with

23. The Borrower will by 31 December 1996 (i) formulate in conjunction with other concerned agencies and corporations of the Government a water allocation plan for economic and equitable sharing of water among the users of Angat Reservoir, and (ii) submit such plan and operational rule for the Angat Reservoir to NWRB for its consideration and adoption as appropriate.

Schedule 6, para. 8

Complied with

24. The Borrower will in conjunction with DENR ensure that all watersheds within the project area are protected and managed to the satisfaction of ADB. The Borrower will prepare a watershed conservation scheme in the immediate vicinity of the project facilities .

Schedule 6, para. 9

Not complied with. This has been difficult to implement because of the security problems.

25. The Borrower will take all reasonable precautionary measures for safety and security of personnel in the project area.

Schedule 6, para. 10

Complied with

20 Appendix 4


Loan Agreement


26. The Borrower will carry out annual reviews of the level and structure of its water and sewerage tariffs and other charges and furnish the results of such reviews to ADB.


Not complied with, since the tariff structure is fixed under concessionaire agreements.

27. The Borrower will take steps to reduce its accounts receivable to no more than the equivalent of 3 months of billing.


Complied with

28. The Borrower will settle overdue water and sewerage charges from Government agencies or corporations.

Schedule 6, para.12 (b)

Complied with

29. Operations area of the Borrower will be responsible for O&M of project facilities.

Schedule 6, para.13

Complied with

30. The Borrower will introduce measures to reduce operating expenses and reduce staffing.


Complied with

31. The Borrower will review and revise its existing policies and practices for charging fees for service connections with a view to making service connections more affordable to low-income consumers.


Complied with

32. The Borrower will update annually its capital investment and financing plan for increasing water production capacity and augmentation of distribution.


Complied with

33. The Borrower will review and update annually projections for the customer population and classification of customers by water consumption for the MWSS service area and furnish the results to ADB for comment.

Schedule 6, Para. 17

Partly complied with. No regular submission but supplied to ADB on request

34. The Borrower in consultation with ADB will implement a sector and organization reform program.


Subsumed by privatization

35. The Borrower will take into consideration the proposals for MWSS Institutional Strengthening (TA 2254) and the MWSS Privatization Support Project.


Subsumed by privatization

Appendix 4 21


Loan Agreement


36. The Borrower will continue to install annually an appropriate number of service connections and public standpipes consistent with availability of water to achieve the population served targets in the MWSS service Areas agreed to by ADB and MWSS.


Partly complied with. Due to high NRW, achievement was less than expected.

37. The Borrower will reduce NRW for the MWSS service area to 50% by end of 1995 --- to 40% by 2000.


Not complied with. NRW has since 1995 never been less than 50% for the MWSS service area. In early 2004, it was about 60%.

22 Appendix 5

FIELD VISITS OF PCR MISSION

Date Location Subject/Purpose Main Participants 29 Apr 2004

MWSS Kick-off meeting ADB, MWSS, MWSI, MWCI, RO

6 May 2004 MWSS Santa Ana

NRW reduction MWCI Zero NRW

ADB, MWSS, MWCI

7 May 2004 MWSS Manggahan

Coverage, MWCI New connections

ADB, MWSS, MWCI

12 May 2004 MWSS/RO Policy bulk supply

ADB, MWSS, RO

14 May 2004 Marikina MWCI subdivisions

ADB, MWSS, MWCI

19 May 2004 MWSS MWSS Quezon City

NRW reduction, MWSI Coverage, MWSI NRW reduction

ADB, MWSS, MWSI

20 May 2004 MWSI/ HQ La Mesa North Area

Telemetering La Mesa WTP Connections

ADB, MWSS, MWSI

25 May 2004 Bicti Basin Aqueduct No. 5

ADB, MWSS, MWSI

31 May 2004 MWSS Aqueduct No. 5

ADB, MWSS

29 Jul 2004 MWSS Wrap-up meeting

ADB, MWSS, MWSI, MWCI, RO

ADB = Asian Develoment Bank, MWCI = Manila Water Company Inc., MWSI = Maynilad Water Services Inc., MWSS = Metropolitan Waterworks and Sewerage System, NRW = nonrevenue water, PCR = project completion report, RO = regulatory office, WTP = water treatment plant.

Appendix 6 23

WATER SUPPLY SERVICE DATA

Table A6.1: MWSS Service Area Total Connections 1986 1987 1988 1989 1990 1991 1992 1993 1994

Official 469,000 518,160 569,170 588,460 667,800 709,800 746,100 — 748,736

1995 1996 1997 1998 1999 2000 2001 2002 2003

Officiala 752,801 779,380 792,732 772,677 830,633 887,371 930,619 942,893 982,731 Totala 792,732 808,682 908,748 980,175 1,030,179 1,068,838 1,127,070

— = data not available. a Difference between official and total connections are connections downstream of bulk-metered connections. Source: Metropolitan Waterworks and Sewerage System.

Table A6.2: New Connections, MWCI Service Area 1998-2003 (as of 31 December 2003)

Item Customer Accounts Equivalent Households

Subdivision Bulk 172 20,000 Subdivision Individual 8 512 Individual 48,077 48,077 Tubig Para sa Barangay 33,833 100,669 Industry, Other 8,866 —

Total 90,956 169,258 — = data not available. Source: Manila Water Company Inc.

Table A6.3: New Connections MWSI Service Area, 1998-2003

(as of 31 December 2003)

Item Customer Accounts Equivalent Households

Individual 49,188 49,188 Bayan Tubig 68,781 68,781 Public Faucets 178 8,455 Industry, Others 29,396 —

Total 147,543 126,424 — = data not available. Source: Maynilad Water Services Inc.

24 Appendix 6

Table A6.4: Average Monthly Consumption/Water Bill in 2004 MWSI Service Area

Average Monthly Household Consumption (m3)

Water Bill (P net of VAT)

Individual Service Connection 31 402 Subdivisions 40 615 Bayan Tubig 21 289 Public Faucets 7.5 54

Service Connection Fee P4,246

Down Payment P500

Balance Terms 12 months

Domestic Consumption (%) 66

Domestic Revenue (%) 45

Served 24 hours (%) 60 m3 = cubic meter, VAT = value-added tax. Source: Maynilad Water Services Inc.

Table A6.5: Average Monthly Consumption/Water Bill in 2004

MWCI Service Area

Average Monthly Household Consumption (m3)

Water Bill (P net of VAT)

Individual Service Connection 30 233 Subdivisions 44 520 Tubig para sa Barangay 20–25 135 Public Faucets — —

Service Connection Fee P6,236.15

Down payment P1,420

Balance Terms 6 months

Domestic Consumption (%) 62

Domestic Revenue (%) 45

Served 24 hours 83 — = data not available, m3 = cubic meter, VAT = value added tax. Source: Manila Water Company Inc.

Appendix 6 25

Table A6.6: Connections, Consumption, and Coverage

Item MWSI MWCI Combined

Total Service (end of 2003) Official Connections 585,953.0 396,778.0 982,731.0 Total Connections 611,833.0 515,237.0 1,127,070.0 Billed Volume (mcm), 2003 261.7 275.9 537.6 NRW (%) 69.0 52.1 62.1

Domestic Service (2004) Domestic Connections 436,219.0 337,975.0 774,194.0 Equivalent Householdsa 462,099.0 456,434.0 918,533.0 Domestic Consumption (m3 per month) 13,466,725.0 14,879,748.0 28,346,473.0 Average Household Consumption 29.1 m3 32.6 m3 30.9 m3

m3 = cubic meter, mcm = million cubic meter, MWCI = Manila Water Company Inc., MWSI = Maynilad Water Services Company Inc., NRW = nonrevenue water. a Equivalent households are defined as official connections plus those households served beyond a bulk meter. Source: Manila Water Company Inc., Maynilad Water Services Inc.

26 Appendix 7

WATER PRODUCTION AND NONREVENUE WATER Table A7: Water Production in the Angat Reservoir

Year 1993 1994 1995 1996 1997 1998

Appraisal 2,550 2,740 2,990 3,080 3,170 3,240

Actual 2,580 2,770 2,700 — 3,100 2,500

Year 1999 2000 2001 2002 2003 2004

Appraisal 3,440 4,330 4,490 4,540 4,540 5,260

Actual 3,400 3,600 3,900 4,000 4,100 —

— = no data available, mld = million liters per day, MWSS = Metropolitan Waterworks and Sewerage System. Source: Asian Develoment Bank and Metropolitan Waterworks and Sewerage System.

Figure A7.1: Water Production in the Angat Reservoir

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Year

mld Appraisal

Actual

mld = million liters per day. Source: Metropolitan Waterworks and Sewerage System.

Figure A7.2: Nonrevenue Water

0

10

20

30

40

50

60

70

1987

1989

1991

1993

1995

1997

1999

2001

2003

Year

NR

W (%

)

ActualAppraisal

Source: Metropolitan Waterworks and Sewerage System.

Appendix 8 27

FINANCIAL EVALUATION

1. Costs and benefits are expressed in 1996 price levels and estimated on an incremental basis using a 40-year economic life of the Project. A. Incremental Revenues 2. The major objective of the Umiray-Angat Transbasin Project (UATP) was to provide an additional 9 cubic meters of water per second (m3/sec) over and above the existing 37 m3/sec from the Angat Reservoir to meet the demand in Metro Manila. The Project was implemented almost simultaneously with the Angat Water Supply Optimization Project (AWSOP) and the Manila South Water Distribution Project (MSWDP). All three projects aimed at increasing volume sold through either increased production, or reduction of nonrevenue water (NRW). Although short of projection, billed volume increased, which is now considered the major financial benefit of the projects. The financial evaluation assumed that the incremental revenues generated by the three projects would start to accrue as follows: (i) AWSOP – 1993, (ii) MSWDP – 2001, and (iii) UATP – 2000. The incremental revenues were assumed to increase until 2004 and remain constant for the remainder of the 40-year period. 3. Based on the assumptions, the incremental volume sold attributable to the three projects would be 17 million cubic meters (mcm) in 1993, increasing to 180 mcm in 2004. Separating the benefits accruing to each project is difficult, considering that the three were implemented almost simultaneously. From billing records of Maynilad Water Services Inc. (MWSI), it appears that of the incremental volume sold for the three projects, only 6.4 mcm were distributed in the MSWDP area in 2001 and 1.63 mcm by 2004. 4. The remaining incremental volume sold was allocated to AWSOP and UATP based on the following assumptions: (i) timing of the benefits of each project, and (ii) proportion of actual volume sold between Manila Water Company Inc. (MWCI) and MWSI, and physical flow of water (50% each from AWSOP and UATP). 5. From the assumptions, 77 mcm (50% of the incremental volume for the three projects of 153 mcm in 2000) would be attributable to UATP. This would increase to 89 mcm (49.5% of the incremental volume for the three projects of 180 mcm) in 2004, remaining constant from then on. Average tariffs are calculated at P7.84/m3 in 2000 to about P16.19/m3 in 2004. Table A8.1 shows the allocation of benefits to the three projects.

Table A8.1: Allocation of Benefits to Three Projects

Benefits (%)

Project 1993–1999 2000 2001 2002–2003 2004 AWSOP 100 50 48.5 49.0 49.5 UATP 50 48.5 49.0 49.5 MSWDP 3.0 2.0 1.0

AWSOP = Angat Water Supply Optimization Project, MSWDP = Manila South Water Distribution Project, UATP = Umiray Angat Treatment Plant. Source: Consultant estimate.

28 Appendix 8

B. Incremental Costs 6. Cost streams include capital costs1 and incremental operation and maintenance costs.

C. Financial Internal Rate of Return (FIRR) Calculation 7. Assumptions made at appraisal for incremental water produced, NRW reduction achieved, incremental water sold, and levels of tariff did not materialize. The financial analysis based on actual figures results in a FIRR of 7.7% (Table A8.2). While this is lower than the appraisal FIRR of 19%, it is higher than the weighted average cost of capital (WACC) in real terms of 1.01% (Table A8.3). At appraisal, the WACC in real terms was estimated at 4% primarily due to the higher estimated financing for local costs, using the Treasury Bill rate of 12.6%. Actual financing is based mainly on dollar-denominated loans with average interest rates of 4%. 8. The significant difference between the appraisal and actual FIRR is primarily due to the lower volume sold and lower tariffs. More specific causes are the following:

(i) High actual NRW of 63% during the initial benefit years of 2000−2004, compared with NRW figures of 41% at appraisal decreasing to 36% by 2004; and

(ii) Lower tariffs. Appraisal tariffs were estimated at P11.43/m3 in 2000 and rising to P13.26/m3 in 2004 compared with actual tariffs of P7.84/m3 to P16.19/m3. Actual tariffs caught up with appraisal levels only in 2002.

Table A8.2 Financial Internal Rate of Return (in 1996 P million)

Year Capital Costs

Incremental Operating

Costs Incremental

Benefits Net Cash Flow

1996 372 (372) 1997 141 (141) 1998 655 (655) 1999 724 (724)

1 2000 863 425 464 (823) 2 2001 949 574 546 (976) 3 2002 795 508 845 (457) 4 2003 0 536 897 360 5 2004 557 979 421

40 2039 557 979 421

FIRR 7.74%

1 Capital costs include capex funded from internal funds of MWSS, MWCI, and MWSI. Annual disbursement figures

were estimated from the implementation schedule due to unavailability of data.

Appendix 8 29

Table A8.3 Weighted Average Cost of Capital

Source Amount (P million)

Weight (%)

Cost(%)

After Tax (32%)

Total Cost (%)

ADB Loan 3,766 66 7 5 3.02 Local Costs (counterpart, progress billing)

MWSI (dollar loans) 754 13 4 2 0.33 MWSI (peso loans) 189 3 14 10 0.32 MWCI (dollar loans) 105 2 4 2 0.04

Local Costs (MWCI internal funded capex) 913 16 4 2 0.38 WACC, nominal 5,727 100 4.09 Inflation rate 3.05 WACC, real [(1+.0409)/(1+.0305)]-1 1.01

ADB = Asian Development Bank, capex = capital expenditure program, MWCI = Manila Water Company Inc., MWSI = Maynilad Water Services Inc., WACC = weighted average cost of capital.

D. Tariff Analysis 9. Average tariffs were calculated on the basis of data received on operating revenues and volume sold. Before privatization, MWSS appeared to have been cautious in terms of raising tariffs. The result was a widening gap between appraisal and actual tariffs as shown in Figure A8. With privatization in 1997, both concessionaires reduced tariffs significantly, from a basic charge/m3 of P8.78 to P2.32 for MWCI and P4.96 for MWSI.

Avg. = average, m3 = cubic meter, P = peso..Source: Metropolitan Waterworks and Sewerage System.

Figure A8: Average Tariff

0.002.004.006.008.00

10.0012.0014.0016.00

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Year

Tarif

f in

Peso

s

Avg. Water Tariff (P/m3) AppraisalAvg. Water Tariff (P/m3) Actual

10. The low tariffs, the low volumes resulting from high NRW, and delayed increase in production volume were probably responsible for the need for an increase in 2002. Actual tariffs were able to catch up with appraisal tariffs during this year as a result of the rate rebasing exercise in 2002. However, although it was allowed to, MWSI did not implement the increase to a basic charge of P15.46/m3 in 2003. By that time MWSI had already handed in its Termination Notice.

30 Appendix 8

11. Delayed project implementation resulted in delayed benefits. Before privatization, MWSS revenues fully recovered operating costs including depreciation. However, recovery of debt service became increasingly difficult from 1993 to 1996. During the initial privatization years, the much reduced tariffs failed to fully recover operational costs as both concessionaires registered operational losses. While MWCI recovered, MWSI’s revenues continued to achieve only partial cost recovery, with depreciation charges and debt service not fully recovered.

E. Affordability 12. Data from the field survey indicated that the average monthly household bill of P816 (or annual bill of P9,792)2 is about 5.7% of the annual family income of P171,078.3 However, given that the field survey was based on a limited number of interviews, and not on a representative sample, this affordability figure could be misleading. From data provided by the concessionaires, the average monthly consumption is about 30 m3 per household. This would result in an average monthly water bill of P486 and affordability level of 3.4% of the average household income.

2 Based on results of a consumer survey conducted in May 2004 as part of the project completion report. See

Appendix 10. 3 Based on average annual family income in the National Capital Region (National Statistics and Coordination Board

data) of P144,049 in 2000 inflated to P171,078 in 2004.

Appendix 9 31

ECONOMIC EVALUATION

A. Scope and Method of Analysis 1. The economic analysis of the Umiray-Angat Transbasin Project (UATP) focuses on the increased water supply capacity developed under the Project. Figure A9 shows that the UATP increased Manila's supply of raw water by 9 cubic meters per second (m3/sec). The economic analysis presented here considers only this component of the UATP.

27.76 m3/sec (2,400 mld) 18.52 m3/sec (1,600 mld)

Figure A9: Project Components

AWSOP UATP(ANRP) (NRW)

UATP(NRW)

Concession Area East - MWCI

Connections

MSWDP

NRW

AWSOP UATP

SOURCES

Concession Area West - MWSI

Connections

AWSOP UATP

WTP

DISTRIBUTION

NRWAWSOP(ANRP)

ANGATDAM

28 m3/sec

AWSOP9 m3/sec

UATP9 m3/sec

WTPBalara No. 19.26 m3/sec(800 mld)

WTPBalara No. 29.26 m3/sec(800 mld)

WTPLa Mesa No. 117.36 m3/sec(1,500 mld)

WTPLa Mesa No. 2

AWSOP10.4 m3/sec(900 mld)

ANRP = Accelerated Nonrevenue Reduction Project, AWSOP = Angat Water Supply Optimization Project, m3 = cubic meters, mld = million liters per day, MSWDP = Manila South Water Development Project, MWCI = Manila Water Company Inc., MWSI = Maynilad Water Services Inc., NRW = nonrevenue water, sec = second, UATP = Umiray Angat Transbasin Project, WTP = water treatment plant.

2. The UATP components that are not considered here are new connections and efforts to reduce nonrevenue water (NRW). New connections were the primary focus of the Manila South Water Distribution Project (MSWDP), and so are considered in that project completion report (PCR). Since there are no new connections that are obviously or necessarily associated with the UATP alone, an analysis of new connections for the UATP would merely repeat the analysis for MSWDP, with inputs and outputs scaled down by an arbitrary proportion. NRW increased under the Project, so the most generous interpretation of the NRW program is that it prevented a more serious deterioration. No credible estimates are available, though, on how much worse NRW would be.

32 Appendix 9

3. The analysis consists of two parts. First, the increase in raw water is evaluated by comparing the average economic cost of raw water obtained under the Project with the average economic cost of alternative sources. This kind of analysis shows only whether the UATP increased Manila's raw water supply at least cost, and does not indicate whether the increase in raw water was justified. 4. Second, the average incremental cost of treated water obtained under the Project is compared with existing usage charges. Manila's water supply system is currently running at full capacity, with intermittent supply in many service areas and an unmet demand for new connections. Under such conditions, expanding the water supply capacity (including both raw water supply and treatment capacity) is justified if the average incremental economic cost (AIEC) of extra capacity (or long-run marginal cost) is below the usage charge. 5. This kind of analysis helps determine the optimal scale of production for the water supply system: expansion is justified if the current scale is below the optimal. It does not determine, however, whether an investment in water supply is the best among all other opportunities for public investment. An estimate of the economic internal rate of return (EIRR) could serve that purpose. If expanding scale is justified, the EIRR will be above the opportunity cost of capital used in estimating the average cost, but the analysis here does not produce a specific EIRR. At appraisal the EIRR was forecast at 37%.

B. General Assumptions and Parameters 6. The Angat Water Supply Optimization Project (AWSOP) and UATP are closely integrated, so an economic analysis focusing on the UATP alone is necessarily limited. For example, Figure A9 shows that both AWSOP and UATP increased Manila's supply of raw water by 9 m3/sec (18 m3/sec total). Since the UATP was already in the plans when the AWSOP was initiated, some of the works installed under the AWSOP were designed presumably for the combined capacity of both projects. Assigning all of the costs to the AWSOP will overestimate the cost of water obtained under that project, and underestimate the cost of water for the UATP. 7. The economic analysis therefore allocates a share of the capital costs incurred under the AWSOP to both AWSOP and UATP, assuming that costs are directly proportional to each project’s share of capacity. Since AWSOP and UATP increased the raw water supply by equal amounts, the capital costs for raw water incurred under the AWSOP are allocated equally between the two. Based on 60% of water generated by UATP allocated to water supply, the same share of cost of the components for diversion works and consulting services has been allocated to the cost of the municipal raw water. 8. La Mesa Treatment Plant No. 2, built under the AWSOP, expanded treatment capacity by 10.42 m3/sec, but the plant ran at only 1.16 m3/sec until raw water from the UATP was obtained, after which it began to run at full capacity. Although the treatment plant was funded under the AWSOP, apparently it was primarily designed and intended for water from the UATP. Since water from the UATP consumed 9.26 m3/sec (800 mld) of the total capacity of 10.42 m3/sec (900 mld), 89% of the capital cost of the treatment plant under the AWSOP is attributed to the UATP. 9. To estimate the variable costs, the analysis assumes that the system runs at constant marginal cost up to its maximum rate of production. In this case, average variable costs are constant, and the variable costs incurred under the UATP can be estimated as the average variable costs of the system as a whole. 10. Estimates of both the capital and operating costs are based on the actual financial costs, after excluding transfers and costs accounted for elsewhere. All taxes were assumed to be

Appendix 9 33

transfer payments, and so were excluded from both the capital and operating costs. Transfers to Metropolitan Waterworks and Sewerage System (MWSS) were excluded from the costs of Maynilad Water Services Inc. (MWSI), and Manila Water Company Inc. (MWCI), since MWSS's costs were estimated separately. The economic cost of capital was also estimated separately, as discussed below, and so interest, depreciation, and any other expenses associated with capital or investments are excluded. 11. The remaining financial costs were converted to economic costs by applying conversion factors, as follows. The tradable component of capital expenditures was based on appraisal estimates or actual expenditures for imports. The tradable component of operating expenditures was estimated as 30% for chemicals, 50% for power, and 40% for all other expenditures, following the practice of local water utilities administrations. The peso values of tradables were converted to economic costs by applying a shadow exchange rate factor of 1.2, following the guidelines of the National Economic Development Authority (NEDA) for project analysis.1 Unskilled labor was valued at 60% of financial cost, also following NEDA's guidelines. The amount of unskilled labor was estimated as 11% of capital costs and 77% of the payroll, following an example in the water supply handbook of the Asian Development Bank (ADB).2 12. The resulting capital costs were annualized as follows. The present value of all capital expenditures was calculated in 2004 values, by applying the observed inflation rate per year and a real cost of capital of 15%, following NEDA's guidelines. Assuming an indefinite life span of the capital, the annualized capital cost is 15% of the present value. 13. Table A9.1 lists the main assumptions used in the economic analysis.

Table A9.1: Main Assumptions in the Analysis

Item Umiray-Angat Transbasin Project incorporated in design of AWSOP Constant short-run and long-run marginal cost in water production Indefinite economic life span of capital All taxes as transfers Opportunity cost of capital: 15% Standard exchange rate factor: 1.2 Opportunity cost of unskilled labor: 60% of wage

C. Alternative Sources of Raw Water 14. There are at least five comparable alternative sources of raw water for Manila. New sources for surface water could be developed on Laguna Lake or on the Laiban Dam. The raw water supply from the Angat Reservoir could be increased by diverting water from irrigation, or by diverting water from the Umiray Basin, as done under the project. 15. The analysis here focuses only on comparing the water diverted from irrigation. New source development on Laguna Lake and on the Laiban Dam is still being studied and cannot be considered here.

1 Investment Coordination Committee Project Evaluation Procedures and Guidelines, NEDA. 2 ADB. 1999. Handbook for the Economic Analysis of Water Supply Projects. Manila.

34 Appendix 9

16. The average cost of the raw water obtained under the UATP was estimated by dividing annualized capital costs of the diversion works by the increment to the raw water supply obtained under the Project. The total annualized costs amount to P298.04 million. Dividing by increased water supply, 9 m3/sec, or 283 million cubic meters (mcm) gives an average economic cost of P1.05/m3. 17. The average cost of water diverted from irrigation was estimated under an ADB-funded study.3 The estimate was obtained by comparing the annual income per hectare for irrigated and rain-fed agriculture in the areas supplied by the Angat reservoir. Dividing the incremental income of irrigated agriculture by the volume of irrigation water gives an estimate of the opportunity cost of irrigation water. The National Irrigation Administration updated the values to 2004, giving an estimate of P0.45/m3.4 18. The average cost of raw water obtained under the Project, P1.05/m3, is higher than the cost of diverting water from irrigation, P0.45/m3.

D. The Demand for Increased Capacity 19. The average incremental economic cost of water provided under the project consists of the sum of four components:

(i) opportunity cost of raw water, (ii) production cost of raw water, (iii) cost of treating and distributing water, and (iv) cost of disposing of wastewater.

20. The opportunity cost and production cost are as described in paras. 16-17. Presumably, irrigation is the best alternative use of water from Angat reservoir, which has an estimated value of P0.45/m3. The average cost of producing UATP's incremental water is P1.05/m3. 21. The average incremental cost of treating raw water consists of two parts: the annualized capital costs of the treatment plant divided by the annual increment to treated water production, plus the average operating costs. The annualized capital costs of the plant are P71 million, and the annual increment to treated water is 10.42 m3/sec, or 328.5 mcm, giving an average capital cost of P0.22/m3. Since this analysis does not consider new connections, the capital cost of the existing distribution system is not incremental, and is excluded. 22. The cost of wastewater disposed of either the monetary cost of treating wastewater or the environmental cost of discharging untreated wastewater (assuming wastewater is treated to eliminate significant environment costs). When treatment occurs, the cost of treating wastewater is presumably less than the environmental cost of discharging untreated wastewater. Assuming that the environmental impact of untreated wastewater is the same throughout Manila, the fact that some wastewater is treated indicates that the cost of treatment is a lower bound for the environmental cost of untreated wastewater. The cost of treatment is therefore taken as an estimate of the cost of wastewater disposed of. 23. The preferred treatment technology in Manila is through small package plants. The average cost of treatment was estimated as the average cost of several plants recently installed: P10.61/m3.

3 NEDA. 2000. Economic Pricing of Raw Water, National Strategy and Action Plan for the Water Supply and

Sanitation Sector, Volume V. 4 The proposed compensation for farmers and the National Irrigation Administration (NIA) due to reallocation of

water from Angat Dam was estimated at P1.06/m3 (dry cropping season) and P1.05/m3 (wet cropping season) based on the NIA letter to the National Water Resources Board dated 3 October 1997.

Appendix 9 35

24. The AIEC of water provided by the Project is therefore P15.95/m3. Table 9.2 summarizes the estimates.

Table A9.2: Average Economic Cost

Item P/m3

Average cost of raw water (capex/m3 incremental production)

1.05

Opportunity cost of raw water (irrigation water/m3) 0.45 Additional capex for treatment ( capex/m3 incremental treated water)

0.22

Average operating costs of treatment (annual O&M/m3 annual production)

3.62

Average cost of disposal (capex + operating cost/m3 production)

10.61

Average incremental economic cost (AIEC) per m3 15.95 capex = capital expenditure program, O&M = operation and maintenance. Source: Asian Develoment Bank.

25. The usage charges for both MWCI and MWSI consist of increasing blocks for each of four customer classes. Since the usage charge increases with use, it is sufficient to compare UATP's cost of water with usage charges above the cost. The amount of water charged at that rate or higher indicates the amount of demand that users are willing to pay for the additional water supply. 26. Table A9.3 shows the average monthly water consumption by each customer class at charges in excess of the cost of water, for the period March and September 2000 for MWSI and January to 1 May 2004 for MWCI. The demonstrated demand for water at charges above the AIEC totals 15.54 m3/sec. The average economic cost of raw water from the AWSOP (P15.20/m3) is close to that from the UATP, and so the usage above cost is the same for AWSOP and UATP. Analysis for the AWSOP claimed 9 m3/sec, of the 15.54 m3/sec demand, leaving 6.54 m3/sec established demand for UATP's water.

Table A9.3: Usage above Average Incremental Economic Cost

MWCIa MWSI b Total Charge Usage Charge Usage Usage Customer Class

P/m3 m3/sec P/m3 m3/sec m3/sec Residential 20.44 4.53 23.02 4.35 8.88 Semicommercial 18.27 0.61 20.54 0.40 1.01 Commercial 38.50 2.40 43.59 2.20 4.60 Industrial 41.73 0.46 47.10 0.59 1.05 Total 8.00 7.54 15.54 MWCI = Manila Water Company Inc., MWSI = Maynilad Water Services Inc. a January to May 2004 average monthly consumption. bT March and September 2000 average monthly consumption.

27. Demand for the additional 2.46 m3/sec from the UATP could be accounted for by commercial and industrial users, and by additional future demand from both new and existing connections. The usage charge for commercial and industrial users is much higher than the

36 Appendix 9

AIEC of water from the UATP, so the observed usage for these two customer classes excludes much demand above the project's cost. Table A9.4 shows usage in the blocks at the same level as the project's AIEC.

Table A9.4: Usage at Average Incremental Economic Cost

MWCIa MWSIb Total Charge Usage Charge Usage Usage Customer Class P/m3 m3/sec P/m3 m3/sec m3/sec

Residential 11.63 1.06 12.94 0.65 1.71 Semicommercial 17.60 0.01 17.60 0.01 0.02 Commercial 17.60 0.01 17.60 0.02 0.03 Industrial 17.60 0.01 17.60 0.00 0.01 Total 1.09 0.68 1.77 MWCI = Manila Water Company Inc., MWSI = Maynilad Water Services Inc. a January to 1 May 2004 average monthly consumption. b March and September 2000 average monthly consumption.

E. Conclusions

28. The cost of water obtained from the UATP, P1.05/m3, is higher than the cost of the next best source of raw water for Manila, P0.45/ m3. The next best source though, is water diverted from irrigators. It's not clear if decision makers were aware of the size of the cost difference, but diverting water from rural to urban areas is always politically difficult, not only in the Philippines but worldwide. The added cost of the UATP, P0.60/m3, is only 4% of the total cost of water, so using the higher cost source has little if any impact on the economic basis for expanding water supply. 29. Manila's water supply system is currently running at full capacity, with an unmet demand for new connections. The AIEC of treated water supplied by the Project is P15.95/m3. At usage charges above that cost, total water use is 6.54 m3/sec below the project's increment to water supply of 9 m3/sec. Without the Project, 6.54 m3/sec of demand would either not be served or served at higher cost (for example, through self-supply). Therefore, 70% of the increased supply of raw water generated by the Project is clearly justified. 30. This analysis is based on the best available information on demand, but that information gives a very conservative estimate of demand above the project's cost. The remaining 2.46 m3/sec increase in capacity may be justified by a more detailed analysis of commercial and industrial demand.

Appendix 10 37

CONSUMER SURVEY (Summary Results)

A. Background and Objectives 1. A household survey based on a standardized questionnaire was conducted as part of the Project Completion Review Mission for the three projects Angat Water Supply Optimization Project (AWSOP), Manila South Water Distribution Project (MSWDP), and Umiray-Angat Transbasin Project (UATP). The main goal of the survey was to complement information gained from the Executing Agency (the Metropolitan Waterworks and Sewerage System [MWSS]), the concessionaires, and available documentation, with interviews and discussions with project beneficiaries and consumers. While the field survey provided very useful information to assess the project benefits, it was not a representative sample due to the limited number of people that could be interviewed. 2. Among the specific objectives of the survey were to assess

(i) the perceived benefits from and degree of satisfaction of the different classes of consumers with the water supply service before and after project completion;

(ii) the status of the water supply service in the unserved areas; (iii) the consumer profile in both the served and unserved areas; and (iv) other problems related to water supply service in the served and unserved areas.

B. Methodology 3. A total of 40 sites and five respondents per site from the combined concessionaire areas of Manila Water Company Inc. (MWCI) and Manila Water Services Inc. (MWSI) were selected. For MWCI, 20 sites were selected from the Taguig-Pateros, Balara, Pasig, and Rizal business areas representing 10 served areas and 10 unserved areas. For MWSI, 20 sites were selected from the south, northeast, and northwest business areas, representing 10 served areas and 10 unserved areas. Survey sites were identified to capture the high-, medium- and low-income groups. Sites that were already identified at appraisal as areas to be served were preferred. The household survey questionnaire was used to interview respondents chosen at random.

C. Findings 1. Served Areas

4. Average household size was 9, 8, and 6 persons for the high-, medium- and low-income groups, respectively. Combined data from all three groups indicate an average household size of about seven persons. 5. The high-income users consume an average of 63 cubic meters water per month (m3/month) compared with the 57 m3/month for medium-income users, and 32 m3/month for low-income users (Table A10.1). Average monthly consumption for the three groups is 45 m3. The monthly water bill in the high-income group averages P934 as against P808 for the medium-income group, and P434 for the low-income group. These costs are significantly much lower than before they were connected to piped water supply (Table A10.2).

38 Appendix 10

38 Appendix 10

Table A10.1: Served Areas Summary

With Water Supply Before Project Without Water Supply Before Project Total

Item High

Income (subdi-visions)

Medium Income (formal

settlements)

Low Income (informal

settlements)

HighIncome (subdi-visions)


settlements


settlements)

HighIncome (subdi-visions


settlements


settlements

All Categories (average)

Household Size 9 8 6 8 9 6 9 8 6 7Average Monthly Bill (P)

870 902 218 986 637 460 934

808 434 816Average Monthly

Consumption (m3)

67

72

27 62

28

34 63

57

32

45 24 Hours Service

Beforea 4/1 16/3 1/3Aftera 5/0 21/0 2/3 1/5 4/14 19/5 6/5 25/14 21/8 52/27

Pressureb 5/0/0 12/4/5 5/0/0 0/2/3 3/5/1 28/4/12 5/2/3 15/9/6 33/4/12 53/15/21Qualityb 3/2/0 12/7/7 0/5/0 2/3/0

4/7/3 40/2/2 5/5/0

16/14/10 40/7/0 61/26/10

Response to Complaintsb

2/3/0

13/13/4

0/0/0 0/1/1

2/0/0

7/4/4 2/4/1

13/14/5

7/4/4

22/22/10

Costc 2/2/2 8/4/2 0/1/1 — — — 2/2/0 8/4/7 0/1/1 10/7/8

— = data not available, m3 = cubic meter. a 24 hours service/Not 24 hours service. b Better/Just the same/Worse service. c Higher/Just the same/Lower cost. Source: Household surveys conducted May 2004.

Table A10.2: Comparative Consumption/Expense in Served Areas

Water Consumption Water Expense Group (m3/month) (P/month) Before After Before After High-Income 13 63 1,870 934Medium-Income

11 57 2,400 808Low-Income 4 32 1,520 434

Average 7 45 1,495 816

m3 = cubic meter. Source: Household surveys conducted May 2004.

Appendix 10 39

6. While the average monthly water consumption in the unserved areas is only around 12 m3 and consumers spend P1,166 per month, those served by the water system consume around 45 m3 and pay only an average of P816 per month. It appears that water from alternative sources is roughly six times more expensive than water from the water companies. 7. Roughly 34% of all the respondents in served areas still do not enjoy 24 hours water supply, particularly those who got their service connections only after the Project.1 At least 60–63% of the respondents, find the water pressure and quality better, whereas around 40% claim that the response to complaints improved after the Project. 8. Only one out of five respondents in La Vista did not have water supply service before the project; only La Vista from among the sites selected in the high-income category had water services before the projects of MWCI. All five respondents in the La Vista subdivision enjoy 24-hour water supply and improved water pressure. Three of the five also observed better water quality, while two of the five noted better response to complaints. 9. In the medium-income category, Villa Lourdes, De la Paz, San Vicente, and Villa Beatriz in the MWCI service area, and Bricktown in the MWSI service area had been served by MWSS. All the respondents in the said subdivisions presently enjoy 24-hour water supply, indicating reasonable improvement compared with the situation before the Project where only 84% of the respondents had a 24-hour water supply. The majority of the respondents also find their water supply service better in water pressure, water quality, and responding to complaints. Like the respondents in the high-income group, the majority noted the increase in the cost of water. 10. In the low-income category, only Krus na Ligas in the MWSI area had previous water service from MWSS. Only one out of five respondents reported 24-hour service before the Project, and that increased to two after the Project. All, however, noted better water pressure, but claimed that the water quality was the same.

2. Unserved Areas 11. At least 25% of the total respondents in the unserved areas buy mineral water for drinking purposes, but the majority still rely on delivered water for drinking and other purposes (Table A10.3). Those relying on mineral water for drinking are as high as 45% in the subdivisions and as low as 15% in the informal settlements, and spend as much as P784 (in subdivisions) and as low as P507 per month (in formal settlements).

1 “After the Project” refers to the period after completion of specific infrastructure improvement in the area, as in

connection to primary and secondary lines.

40 Appendix 10

Table A10.3: Unserved Areas Survey Summary

% % %A.

1. 20 100 40 100 40 100 100 100a. Delivered Water 9 45 22 55 28 70 59 59b. Bought Mineral Water 9 45 10 25 6 15 25 25c. Household Pump 2 10 7 18 6 15 15 15d. Free Water from PGMAa 0 0 1 3 0 0 1

2. Household Uses 20 100 40 100 40 100 100 100a. Delivered 14 70 26 65 16 40 56 56b. Village Water 5 25 0 0 0 0 5 5c. House Pump/ Deep Well 1 5 12 30 24 60 37 37d. Free water from PGMAa 0 0 2 5 0 0 2

B.1. 0.35 0.35 2. 7.22 7.38

6.57 6.66 C.

1. Drinking2.

0.48 14.01 11.49

616.20 670.80

1,165.20 1,266.30 788.40 507.00 597.60

696.30 1,047.60 Total

Number

0.94 33.90 34.80

784.20 472.20

1,218.00

High - Medium Income

(subdivision)Item

Water Consumption (m

1

23/month)

(average)Number %Number Number

Source of WaterDrinking

DrinkingHousehold Uses

Total Water Expense (P/month)

Household Uses

Medium Income Low Income All Categories

(formal settlements) (informal settlements)

a Free water was distributed in depressed areas for a limited period through the free water program of President Gloria Macapagal-Arroyo.

Source: Household surveys conducted in May 2004.

12. The low-income group, specifically the formal and informal settlers, appear to be paying the most for water, P152–P192/m3, whereas those in the subdivisions pay only around P35/m3.

13. Only around 7 m3/month on the average is consumed by formal and informal settlers⎯ presumably because of the high cost of water⎯as against 35 m3/month for those living in subdivisions.

Appendix 11 41

FINANCIAL ANALYSIS OF METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM

A. Metropolitan Waterworks and Sewerage System: Financial Performance 1. For the period from the appraisal of the Angat Water Supply Optimization Project in 1989 to preprivatization in July 1997, the financial performance of MWSS as an operator of water supply and sewerage facilities appeared to be satisfactory. Liquidity was generally high, with the current ratio at one point even reaching the 5:1 mark as a result of high accounts receivable. The net income ratio was at its highest levels at 66% of revenues in the early 1990s, but then declined to a low of 4% in 1996. By August 1997, MWSS transferred the operation and management of the water supply and sewerage operations to Manila Water Company Inc. (MWCI) and Maynilad Water Services Inc. (MWSI), generating revenues from concession fees. MWSS total revenues subsequently increased, reaching a net income ratio of 32% in 2003. 2. The projections are based on the following assumptions:

(i) The proposed corporate rehabilitation plan1 of MWSI, including recommended debt-to-equity swap, whereby P5.247 billion of the P8 billion unpaid concession fees will be turned into 63% equity for MWSS. MWSS would receive $50 million of the $120 million performance bond posted by MWSI;

(ii) Bridge financing loan of $220 million is fully disbursed in 2004; (iii) Planned Laiban Dam and Wawa Dam Project is undertaken on a build-operate-

transfer basis; and (iv) MWSI resumes regular payment of concession fees in 2004.

3. MWSS’s financial performance depends mainly on the financial soundness of its two concessionaires. MWSI’s present situation stands out as the highest risk factor in MWSS’ financial sustainability. In March 2001, MWSI stopped full payment of the concession fees, which also cover repayment of existing loans of MWSS. To bridge the financing gap, MWSS from 2001 to 2003 availed itself of various short-term loans totaling P15.5 billion, of which P7.5 billion was utilized for paying off earlier loans. Based on projections, MWSS’s critical problem beyond 2003 will be liquidity, and annual cash deficits would be expected starting 2005, potentially resulting in negative cash positions from 2009 onward (Table A11).

B. Manila Water Company: Financial Performance 4. A review of MWCI’s financial performance reveals it is financially sound, with net profit ratio reaching 30% of revenues in 2003. The company’s way forward is backed up by its 2002 business plan, which was also the basis for the 2002 rate rebasing exercise. The rate rebasing exercise resulted in the establishment of key performance indicators (KPIs) and business efficiency measures (BEMs), which are regularly monitored by the MWSS Regulatory Office. Based on those, it is likely that MWCI will perform within targets and the resulting sound financial condition will be sustained and will ensure MWSS of continued collection of the concession fees.

C. Maynilad Water Services Company: Financial Performance 5. MWSI’s deteriorating financial performance ultimately resulted in nonpayment to MWSS of full concession fees amounting to P8.7 billion by 30 June 2004. MWSI’s failure to pay the concession fees resulted in a dispute that was brought to an international arbitration panel (IAP). On 7 November 2003, the IAP rendered a decision in favor of MWSS, which provided, among others, for MWSS to draw on the $120 million performance bond posted by MWSI. On

1 Based on the proposed Amendment No. 2 of the Concession Agreement.

42 Appendix 11

13 November 2003, MWSI filed a petition for rehabilitation and a request for suspension of actions and proceedings against the petitioner. 6. While MWSS expects release of the decision regarding Amendment No. 2 and the rehabilitation plan by the third quarter, it is not certain that the decision will result in immediate payment of concession fees by MWSI. The 2002 business plan of MWSI is no longer relevant and the rehabilitation documents, which are in court, are not available for analysis. Nevertheless, MWSS should ensure that MWSI addresses problems related to tariff increase, reduction of operating expenses, and increase in billed volume through reduction of nonrevenue water.

Table A11: Cash Flow Statement ($)

Actual2003 2004 2005 2006 2007 2008 2009 2010

Cash Balance, Beginning 3,797 3,288 8,369 4,641 3,490 2,312 1,107 (120) Cash Inflows

Operating Receipts 694 1,807 3,698 5,379 6,967 3,640 3,675 3,459 Dividend from New Maynilad 0 0 0 0 0 0 0Proceeds from Loans 8,395 13,474 421 1,928 2,863 830 0 0Drawing from Performance Bond 2,818 Transfer of Fund 28 Collection from Other Sources of Income 124 139 125 125 125 125 125 125 Collection of Receivables 15 FOREX Gain/Loss 99 0

9,355 18,238 4,244 7,432 9,955 4,595 3,800 3,584 Cash Outflows

Operating Expenses 180 238 233 240 248 255 263 271 Dividend to National Government 51 Capital Investments 671 2,175 1,258 3,935 6,495 1,404 297 297 Debt Service 2,474 2,554 3,248 2,980 2,828 2,740 3,037 2,807 Bridge Financing Loans Principal Repayment 6,106 8,106 0 0 0 0 0 0Interest and Other Charges on Bridge 542 1,371 1,320 1,346 1,373 1,401 1,429 1,457 Financing Loans Interest and Other Charges on Loan for NWS 0 81 188 0Arbitration Expenses 130 35 Prior Years Expenses and Other Disbursements 304 76 1 1 1 1 1 1 Adjustments/Reconciling Items and Revaluation (78) 0 0 0 0 0 0

9,864 13,157 4,740 7,237 9,760 4,400 3,598 4,833 Increase/(Decrease) in Cash (509) 5,081 (1,815) (1,151) (1,178) (1,205) (1,227) (1,249) Cash Balance, Ending 3,288 8,369 4,641 3,490 2,312 1,107 (120) (1,369) Less Estimated Restricted Cash 1,641 1,106 1,105 1,104 1,103 1,102 1,101 1,100 Estimated Free Cash 1,647 7,264 3,536 2,386 1,209 5 (1,221) (2,469)

Item

Total

Total

Projected

FOREX = foreign exchange; NWS = new water source. Source: Metropolitan Waterworks and Sewerage System.

asian development bank...currency equivalents currency unit – peso (p) at appraisal at project...

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