Document of

The World Bank

Report No. 15346-PH

STAFF APPRAISAL REPORT

REPUBLIC OF THE PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

APRIL 12, 1996

Infrastructure Operations DivisionCountry Department IEast Asia and Pacific Region

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CURRENCY EQUIVALENT(as of January 1, 1996)

Currency Unit = Peso (P)1.0 Peso = US$0.04US$1.0 = P 25.0

WEIGHTS AND MEASURES

1 meter (m) = 39.37 inches1 kilometer (km) = 1,000 meters or 0.62 miles1 square meter (m2) = 10.8 square feet1 square kilometer (km2) = 0.38 square miles1 hectare (ha) = 10,000 square meters or 2.47 acres1 cubic meter (m3) = 1,000 liters or 264 US gallons1 liter (1) = 0.26 US gallons1 liter/capita/day (lcd) = 0.26 US gallons/capita/day1 million liters/day (Mld) = 1,000 cubic meters/day1 metric ton (t) = 1,000 kilograms or 2,205 pounds

ABBREVIATIONS AND ACRONYMS

BOD = Biochemical Oxygen DemandCORPLAN = Corporate Planning Department, MWSSDPWH = Department of Public Works and

HighwaysECC = Environmental Compliance CertificateEIA = Environmental Impact AssessmentEIS = Environmental Impact StatementEMB = Environmental Management BureauEMP = Environmental Management PlanGovernment = Republic of the PhilippinesMM = Metro ManilaMMDA = Metro Manila Development AuthorityMWSS = Metropolitan Waterworks and Sewerage

SystemNCR = National Capital RegionNEDA = National Economic Development

AuthorityNGO = Non-governmental OrganizationNRW = Non-revenue WaterPCG = Philippine Coast GuardSSD = Sewerage System Department

MWSS FINANCIAL YEARJanuary 1 - December 31

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

ContentsPage No.

Loan and Project Summary .............................. iv

I. BACKGROUND

Metro Manila ..................... 1Wastewater ...................... 1Water pollution ...................... 1Institutions ...................... 1Development targets .. 2...................2Previous Bank lending .. 2...................2Rationale for Bank involvement ..................... 3

II. THE PROJECT AREA AND SERVICES

Project area ............................... 4Water supply service ... 4............................4Drainage, sewerage and solid waste disposal ............................... 4Water pollution control ... 5............................5Operation and maintenance ................................ 5Demand for the project ... 6............................6

HI. THE PROJECT

Project origin .................. 7Objectives .................. 7Description .................. 7Status of preparation .................. 8Cost estimate .................. 8Financing plan .................. 9Implementation ................. 10Land lease and acquisition ................. 10Procurement .................. 1 IDisbursement ................. 12Environmental impact ................. 13Supervision ................. 15

This report was prepared by Messrs. Anjum Altaf, Jaroslav Kozel, Albert Wright, John Nicholson and Ms. ManidaUnkulvasapaul who appraised the project in July 1995. Ms. Martha Ochieng and Ms. Kajal Jagatsing helpedprepare the report. The project was reviewed by peers Messrs. Edouard Motte and Rajagopal Iyer, and cleared byMr. J. Shivakumar, Chief, EAlIN, and Ms. Pamela Cox, Acting Director, EAI.

(ii)IV. THE IMPLEMENTING AGENCY

Implementing organization ................................. 16Metropolitan Waterworks and Sewerage System ................................. 16Organizational structure ................................. 16Staffing and training ................................. 16Performance and management ................................. 17Development programs ................................. 17Institutional issues ................................. 17Private sector involvement ................................. 18Project implementation ................................. 18

V. FINANCIAL ANALYSIS

Planning and budgeting .................... 19Rate structure and revenues ................... 19Accounting and auditing ................... 20Billing and collection ................... 20MWSS financial performance ................... 21SSD financial performance ................... 21Project financing ................... 22Monitoring and evaluation ................... 23

VI. PROJECT JUSTIFICATION

Project benefits ............... 24Rate of return ............... 25Least-cost solution ............... 26Data base establishment ............... 28Project risks ............... 28

VII. AGREEMENTS REACHED AND RECOMMENDATION

Agreements .30Recommendation .31

ANNEXES

1. Services in the project area .322. Project description .403. Project cost estimate .444. Implementation schedule .495. Summary of project implementation action plan .506. Estimated schedule of loan disbursement. 5 17. Environmental assessment .528. Project supervision plan .629. SSD financial statements .6510. Assumptions for financial projections .6811. Project performance monitoring .7012. Rate of return . 7613. Documents and data available in the project file .82

ORGANIZATION CHARTS

I1. Organization of MWSS .............................. 832. Organization of Sewerage System Department .............................. 843. Organization of Project Inplementation .............................. 85

MAP

IBRD No 27244: Location of the project

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(iv)

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Loan and Proiect Summary

Borrower: Metropolitan Waterworks and Sewerage System.

Guarantor: Republic of the Philippines.

ImplmentinAgency: Metropolitan Waterworks and Sewerage System.

Beneficiarv: Not applicable.

Poverty: Not applicable.

Amount: US$57.0 million equivalent.

Terms: 20 years, including 5 years of grace, at the Bank's standard variable interestrate.

Commitment 0.75% on undisbursed loan balances, beginning 60 days afterFee: signing, less any waiver.

FinancingPlan: See para. 3.10

Net Present Not applicable.Value:

Map: IBRD No. 27244

Project ID No: 4611

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1. BACKGROUND

Metro Manila

1.1 Metro Manila (MM), the National Capital Region, covers about 636 km2 along theeastern shore of Manila Bay. MM is the Philippines' primary administrative center, with aconcentration of commerce, industry and services. Its eight cities and nine municipalities had a1995 population of 8.9 million, about 30% of whom - mainly migrants from rural areas - live inabout 600 slums. Population pressures, ineffective control of industrial growth, and an absence ofdevelopment planning have overloaded the region's infrastructure and caused rapid environmentaldeterioration.

Wastewater

1.2 About 18% of MM wastewater is collected by a sewer network and discharged untreatedinto Manila Bay. The remainder is discharged into the public drainage system either directly orthrough approximately 1 million household septic tanks constructed under the Sanitation Code.Most of the septic tanks do not have on-site soil absorption systems and are rarely desludged.

Water Pollution

1.3 Most of the pollution generated from domestic, industrial, and commercial activities inMM eventually ends up in the three primary water bodies: the rivers and canal system, Laguna deBay, and Manila Bay - a large shallow coastal water supporting thousands of fishing families. Asa result, the river system in MM is biologically dead, Laguna de Bay increasingly turbid, and theeastern shoreline of Manila Bay is unsuitable for recreation. The daily water pollution loadgenerated in 1995 was estimated at about 980 tons of biochemical oxygen demand (BOD), ofwhich 40% was from residential wastewater, 38% from industries and 22% from solid wastedumped in rivers.

Institutions

1.4 Water supply and sewerage services in MM are provided by a government corporation,the Metropolitan Waterworks and Sewerage System (MWSS), which also provides water supplyand sanitation services to one city and 19 municipalities in neighboring Rizal and the northern partof Cavite provinces. Responsibility for drainage is divided between the Department of PublicWorks and Highways (DPWH), which develops and operates the main flood-control system, andthe cities and municipalities, which build and maintain street drains.

1.5 The responsibility for planning and coordinating several metro-wide services - transportand traffic management, solid waste management, pollution control, flood control, drainage,sewerage, land use planning, and zoning - was recently vested in the Metropolitan ManilaDevelopment Authority (MMDA) established in March 1995. Its policy-making and governingbody is a council composed of all MM mayors. The chairman of the council has the rank of acabinet member and is appointed by the President.

1.6 Other agencies involved in sector activities are DPWH, which oversees MWSS, theDepartment of Health, which monitors drinking water quality, the National Water Resources

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Board, which coordinates water resources development and management, and the EnvironmentalManagement Bureau (EMB) of the Department of Environment and Natural Resources (DENR),which plans environmental management, including enforcement of regulations. EMB is alsoresponsible for studies and programs aimed at reducing industrial pollution, and safe disposal oftoxic and hazardous waste. The National Economic and Development Authority (NEDA) is thecentral agency for national development planning and coordinates programs, projects and policiesinitiated by other government agencies.

Development Targets

1.7 Among the Government's key development objectives is economic development withoutenvironmental degradation. This is reflected in'the 1993-98 Medium-Term Development Plan(MTDP) and the MWSS Strategic Plan. The guiding principles in the MTDP includedecentralization, private sector-led development, public consultation, cost recovery, and socialequity. The MTDP provides a policy framework for MM water quality management strategy,which includes programs for (a) expanding and improving the quality of sanitation services, and(b) controlling the major sources of pollution in the area's waterways. It also provides theframework under which water supply and sewerage master plans are being prepared for MM.

Previous Bank Lending

1.8 The Bank has supported MWSS with four loans for water supply and one for sewerageand sanitation'. All projects have been completed and the completion reports (except for Ln3124, which closed on December 31, 1995) found the projects to have substantially achieved allphysical objectives. Bank strategy in the sector is to support Government investment programs toimprove sewerage and sanitation. The proposed project would be the Bank's second majorsewerage and sanitation operation in the MM area; the first was the US$63 million loan for theManila Sewerage and Sanitation Project (Ln 1814-PH, 1980), which was cofinanced by the AsianDevelopment Bank. The project constituted the first phase of the sewerage master plan andincluded rehabilitation of deteriorated sanitary sewers in the central area, extension of sanitarysewers in adjacent areas, construction of combined sewers in about 14 km2 of low-income areas,and upgrading of combined sewer and septic tank maintenance operations.

1.9 The start of the project coincided with the onset of economic difficulties in the Philippines.As a result project completion was delayed by five years, some components were not completedand others failed to have the anticipated impact because of the budgetary squeeze during theeconomic crisis. Two project sub-components in particular failed to measure up to expectations;the Sewerage System Department (SSD) was established under the project but was deprived ofresources resulting in premature decay of physical infrastructure; and the septic tank maintenancecould not be launched as the EMB failed to designate a landfill site for disposal of septage. Giventhe circumstances, the performance audit report (No. 13204) found that the project substantiallyachieved its objectives of extending the coverage of the sewer system and construction ofcombined drainage and sewer system in low-income areas.

Manila Metropolitan Water Supply Project, Ln 386-PH (1964); Manila Water Supply II, Ln 1615-PH (1978); ManilaSewerage and Sanitation Project, Ln 1814-PH (1980); Metropolitan Manila Water Distribution Project, Ln 2676-PH(1986); Angat Water Supply Optimization Project, Ln 3124-PH (1989).

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Rationale for Bank involvement

1.10 The proposed project is consistent with the Country Assistance Strategy2 which identifiedthe need for upgrading infrastructure and improving management of human and industrial waste inMM. In the improved economic situation, assistance can be resumed to MWSS to upgradewastewater infrastructure and take necessary steps in managing human waste consistent with theenvironmental objectives of the Philippines and of the Bank. The Bank is also consideringassisting the Government in preparing separate projects addressing MM's industrial pollution andsolid waste management problems.

1.11 Since 1970s the Bank has shared with the Government and MWSS a concern about thestatus of sewerage and sanitation services in MM and its funding of the first project puts it in anadvantageous position to support the agency's overall long-term development program. The Bankhas recently helped arrange assistance from the Japan International Cooperation Agency (JICA) informulating a long-term development program through updating the 1979 water supply andsewerage master plan. Studies on the new 1996 master plan were completed in early 1996. Theupdated plan envisages urgent renovation of the water distribution network to address the currentextremely high level of non-revenue water, development of a major new water source, and acomplementary distribution network. The plan also proposes changing from separate tocombined3 sewerage systems, and includes the construction of interceptor sewers, septage4

treatment plants, and wastewater treatment plants. The proposed project conforms with theprovisions of the master plan.

2 Memorandum of the President dated February 15, 1996.

3 Combined sewers provide one pipe for both surface water drainage as well as wastewater which is required to first passthrough a septic tank to remove solids. Hygienically superior separate sewers provide separate pipes for each service.

4 Septage is the septic tank contents, including the liquid and the solid matter settled in the lower part of the tank.

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2. THE PROJECT AREA AND SERVICES

Project Area

2.1 Metropolitan Manila ranges from low-density predominantly agricultural parts to highlycongested areas where a large informal sector coexists with the formal sector. While roughly56% of MM's population is employed, over 40% of households live below the poverty level inslums, some occupying strips of land alongside railroad tracks and rivers. Population growth hasoutstripped basic services, resulting in unhygienic and unpleasant living conditions, especially forthe poor. Annex 1 provides a detailed description of the project area and services.

Water Supply Service

2.2 Water supply is provided by MWSS. In 1994 the daily average production was 2.8million m3. Out of 815,000 service connections about 93% were residential using about 66% ofthe water sold. Most of the raw water (97%) comes from surface sources, and the rest from deepwells. The current production capacity of 2.9 million m3/d is being increased to 4.0 million m3/din 1999. The quality of distribution system is a cause of serious concern, as NRW, of which themajor part is believed to be leakage, amounted to about 59% of production.' So far, attempts todeal with the problem have been only marginally successful. Further improvements are to beundertaken following on-going extensive studies of the distribution network.

Drainage, Sewerage and Solid Waste Disposal

2.3 MM terrain is flat and subject to flooding. Natural drainage is provided by the Marikinaand Pasig Rivers and short streams and canals (esteros), many of them interconnected. Thenatural drainage system is complemented by an infrastructure network, divided into main andstreet drainage. The Flood Control and Drainage Division of DPWH maintains the rivers andmain drainage facilities; street drainage is maintained by cities and municipalities. Both systemssuffer from frequent blockages caused by solid waste dumped in the drains and smaller streams.

2.4 Sewer system coverage in MM is very low. The majority of the population (5.5 million)discharge wastewater into street drains via about 1 million septic tanks, and another 2 millionliving in blighted areas dispose of liquid and solid wastes directly into drains and rivers. Onlyabout 1.4 million people are served by the three separate sewerage systems, Central, Ayala, andDagat-Dagatan. The Central sewerage system covers 26 km2 or 70% of Manila city and serves apopulation of about 1.2 million. The Ayala and Dagat-Dagatan systems, in Makati and Malabonmunicipalities, cover areas of 6 km2 and 5 km2, respectively, and serve 0.1 million people each.The Central system discharges untreated wastewater into Manila Bay, the Ayala system has aconventional activated sludge plant and the Dagat-Dagatan system provides treatment in wastestabilization ponds. About 114 km of sewers in 41 minor sewerage systems provide simpletreatment in 39 communal septic and 2 Imhoff tanks. Except for the Central system, all othersdischarge their output into the nearest river.

1 In 1995 the NRW was reduced to 52% of production.

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2.5 Because of low priority accorded to sewerage and sanitation infrastructure maintenanceduring the period of the economic crisis, the existing facilities have deteriorated. The Centralsewerage system suffers from broken pipes and manholes and surcharges in wet weather. Liftstations are not adequately maintained, one of the twin pipes in the siphon under the Pasig river isblocked, several pumps at the main Tondo pumping station are not functioning, and the outfallpumping main into Manila Bay has restricted capacity, possibly because of blocked diffuseroutlets. Treatment at the newer plant at Dagat-Dagatan is satisfactory, but the performance ofthe Ayala treatment plant is inadequate. The MWSS program for desludging septic tanks startedunder the Bank-financed Manila Sewerage and Sanitation Project (para 1.8) cannot beimplemented due to absence of septage treatment facilities or designation of agricultural landsuitable for waste disposal.

2.6 The solid waste generated in MM, estimated in 1995 at 5,500 tons per day is partlycollected (about 75%) by the MMDA and private contractors and deposited in two sanitarylandfills. Some uncollected waste is buried or burned at source, but the majority of it is dumpedinto drainage and open waterways.

Water Pollution Control

2.7 Inadequate control of municipal and industrial liquid and solid waste over the last decade,combined with a large expansion of squatters and rural in-migration, have resulted in rapiddegradation of water quality and the Government has recently initiated corrective steps. Themunicipalities and non-governmental organizations (NGOs) are gradually resettling squatters fromthe strips along rivers and improving collection of solid waste. DENR has tightened control oftoxic and hazardous wastes, and commissioned studies aimed at finding ways to reduce industrialwaste and the resulting pollution of water and air. DENR's programs for pollution control willinclude enforcement of stricter effluent regulations and coordinated plans for joint industrialtreatment facilities.

Operation and Maintenance

2.8 The sewerage and wastewater facilities are operated and maintained by the SewerageSystems Department (SSD) of MWSS. Its facilities include (a) the Central system network,secondary boosting and the main Tondo pumping stations; (b) the Ayala system network andwastewater treatment plant; (c) the Dagat-Dagatan system network and waste stabilization ponds,and (d) minor sewerage systems with Imhoff and community septic tanks. Under the proposedproject, SSD would employ contractors to desludge septic tanks, maintain appropriate records,and operate a pilot septage treatment plant to be built at Dagat-Dagatan. Unscheduled cleaningof septic tanks on owner request will be provided by SSD's staff.

2.9 Maintenance of the network, equipment, and laboratory facilities is inadequate. Theproject would supply equipment to improve maintenance and introduce procedures needed tocorrectly estimate budgetary allocations for preventive maintenance.

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Demand for the Project

2.10 MWSS implemented the first phase of 1979 master plan during 1980-89 (ManilaSewerage and Sanitation project, para 1.8) and completed studies for the second phase of theplan. It became apparent, however, that the plan could not be implemented as envisaged, due toreluctance to bear the high cost of the conventional separate sewerage systems. Meanwhile,existing sewerage facilities fell into disrepair due to inadequate maintenance, the program forsewer house connection slowed, and the desludging of septic tanks practically stopped due to lackof facilities for septage disposal.

2.11 The proposed project is designed to address these problems. It would provide forcollection, treatment, and disposal of sludge collected from septic tanks (septage), rehabilitateexisting sewerage facilities, and accelerate provision of sewer house connections. It also includesprovision of specialized equipment to improve maintenance and design support for the follow-upcombined sewerage system that will make use of existing septic tanks.

2.12 The project's septage management component has widespread support among politicaldecision makers, the regulatory community, and the general public in Manila. The First Lady, asthe chairperson of the Pasig River Rehabilitation Committee, has endorsed the goal of raisingwater quality in the Pasig River. It is clearly understood by all parties concerned that this goal isnot achievable without the septage management component of the proposed project.

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3. THE PROJECT

Project Origin

3.1 The 1979 sewerage master plan envisaged a phased expansion of the conventionalseparate sewerage system, which now serves about 1 million people. Only a part of the plan wasimplemented, and follow-up works were discontinued because of prohibitive costs. Subsequentreviews have indicated that using the existing drainage network and about 1 million householdseptic tanks would be a less expensive alternative for the remaining population. This wouldrequire periodic removal of septage from the septic tanks, however, and MWSS now lacks thetreatment facilities or dump sites needed for septage disposal.

3.2 MWSS has, thus, developed a two-stage septage management plan. In the first phase(1996-99) MWSS would desludge some 300,000 tanks while building a pilot (200 m3/day)septage treatment plant. Most of the septage would be barged some 40 km off the Philippinecoast and dumped in the deep Pacific waters of the Marianas Trench.' Based on the data acquiredduring the first phase, the second phase (2000-07) would be used to build technically andinstitutionally appropriate land-based septage treatment plants, which would allow ocean dumpingto be terminated in 2003.

Objectives

3.3 The proposed project is intended to help the Government improve the quality of sanitationservices and enable MWSS to: (a) radically expand its septage management program and establishthe conditions needed for medium-term low-cost improvement of sewerage services in MM, and(b) reduce pollution in MM waterways and Manila Bay, thereby reducing the health hazardsassociated with human exposure to excreta.

3.4 Project performance monitoring will track the success of the project in accomplishing itsobjectives, review what worked and what did not, and ensure that results of dispersion modeling,ongoing environmental monitoring, and public consultations during the implementation of theseptage conveyance and disposal components are fully incorporated into future septagemanagement plans. Details of the monitoring and evaluation system and key project performanceindicators confirmed during negotiations are described in Annex 11.

Description

3.5 The project would include: (a) building three barge loading stations for septage disposal atsea under a private collection and disposal contract, (b) building a pilot septage treatment plant,(c) rehabilitating the Central and the Ayala sewerage systems, the Ayala treatment plant, andconstructing about 10,000 individual sewer connections, and (d) providing maintenanceequipment, tools, spare parts and laboratory instruments. Implementation support would include(a) construction supervision and environmental monitoring and management assistance, (b)

Deep ocean dumping of much larger quantities of septage has been carried out by Japan and other countries for manyyears, and is considered environmentally safe. See Para 3.27 and Annex 7

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preparing designs and documents for the follow-up expansion of the sewerage system and septagetreatment plants, and (c) preparing documents for the Manila Water Supply III project.

3.6 Private contractors would desludge 300,000 septic tanks during the project and transportthe septage to the treatment plant and to the barge loading stations for disposal at sea. The septictanks would be selected from areas in the vicinity of the Pasig River to yield immediate waterquality benefits and living condition improvements in low-income areas. Each of the three barge-loading stations (at Napindan, Estero de Vitas and Paranaque) would have the capacity to transferabout 500 m3/d of septage from collecting vehicles to barges. The pilot septage treatment plant(200 m3/d) would be located at Dagat-Dagatan. It would chemically separate the liquid and solidcomponents of septage, aerate the liquid portion in existing oxidation ponds, and dewater thesolid portion which would be disposed in the San Mateo sanitary landfill. Upgrading of theCentral sewerage system would include repairing defective pipes and pumping stations andminimizing the entry of rain water to the system; at Ayala, the pumping station and sedimentationtanks would be repaired to provide mechanical treatment. New sewer connections would increasethe population served by the Central system by about 80,000. The SSD would be strengthenedwith specialized equipment for sewer cleaning, vehicles, tools and spare parts; the MWSS centrallaboratory would obtain instruments to modernize operations. A detailed description of theproject is in Annex 2, and the locations of the works are shown on map IBRD No. 27244.

Status of Preparation

3.7 Detailed designs and draft bidding documents for the project were completed in January1995 by MWSS, assisted by the Original Engineering Consultants (Japan) and DCCD(Philippines), retained by MWSS and financed under the Japanese Grant Fund. MWSS wouldarrange for minor modification and completion of the documents, including environmentalmanagement plans.

Cost Estimate

3.8 Project cost is estimated at P 1,906 million (US$76.2 million). The foreign currencyrequirement is estimated at P 697 million (US$27.9 million) or 37% of the total. Base costsreflect end-1995 price levels. Physical contingencies are estimated at US$3.0 million, or 5% ofbase costs and price contingencies at US$12.9 million, or about 20% of base cost plus physicalcontingencies and assume the following annual rates of inflation: for local costs 7% for 1995,6.5% for 1996, 6% for 1997, 5.5% for 1998 and 5% for 1999-2000; and for foreign costs 2.6%for 1995 and thereafter. Exchange rates have been adjusted to reflect purchasing power parity onthe basis of inflation rates for local and foreign costs.

3.9 The total cost of implementation support is estimated at US$10.9 million representingabout 3,200 person months of which about 1,930 person months would be the cost ofconstruction supervision, environmental monitoring and management assistance, about 890person months would be the cost of detailed engineering designs of the follow-up expansion ofsewerage system and septage treatment plants, and about 380 person months would be the cost ofpreparing documents for the Manila Water Supply III project. The input of national consultants isestimated at 3,030 person months while the expatriate input is estimated at 170 person months.The cost estimates prepared by the consultants, based on similar works undertaken in recent

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years, were found satisfactory during appraisal. They are shown in Annex 3 and summarized inTable 3.1.

Table 3.1: Project Cost Estimate.Item Local Forgn Total Local Forgn Total % of

l Totall _____________________ Peso Million US$ MillionSeptage management 169 177 346 6.79 7.05 13.84 23Central system 1/ 284 153 437 11.34 6.14 17.48 29Ayala Rehabilitation 129 95 224 5.16 3.80 8.96 15Support facilities 34 138 172 1.38 5.50 6.88 11Land lease & acquis. 114 0 114 4.56 0.00 4.56 8Implem. support 155 60 215 6.21 2.39 8.60 14

Base cost 886 622 1,508 35.43 24.89 60.32 100Phys. contg. 44 31 75 1.77 1.24 3.02 5Price contg. 279 43 322 11.16 1.74 12.90 21TOTAL COST 2/ 1,209 697 1,906 48.36 27.87 76.23 126I/ including P 250 million for construction of sewer connections2/ includes taxes and duties estimated at US$8 million

Financing Plan

3.10 The proposed Bank loan of US$57.0 million equivalent would finance about 75% of thetotal project cost or 100% of the foreign exchange requirements and 60% of local costs. Theremaining US$19.2 million or 25% of the total project cost would be financed by MWSS frominternal cash generation (Table 3.2). Retroactive financing equal to US$300,000 is recommendedfor expenses incurred after July 15, 1995, to reimburse MWSS for the cost of consulting servicesprior to loan signing on the basis of advanced contracting to be approved by the Bank. Thefinancing plan was confirmed at negotiations. The borrower would be MWSS and the Republic ofthe Philippines would be the guarantor. The proposed Bank loan would be for 20 years, includingfive years of grace, at the Bank's standard variable interest rate.

Table 3.2: Project Financing Plan

Source Local Forgn Total % of------ US$ million ----- Total

LoansIBRD 29.13 27.87 57.00 75%Capital ContributionsMWSS cash generation 19.23 0.00 19.23 25%TOTAL 48.37 27.87 76.23 100%

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Implementation

3.11 The project would be implemented by MWSS and carried out by contractors. The bulk ofthe implementation is expected between June 1996 and December 1999. Construction of newfacilities, rehabilitation works and sewer connections would be executed by four civil work supplyand install contracts supervised by the MWSS Construction Section. The collection of septageand its disposal would be managed by SSD and carried out under three contracts, one for eachbarge loading station; each of these contracts would combine the collection from a defined areawith sea disposal, the activities to be carried out by private contractors. Pilot operation of theseptage treatment plant at Dagat-Dagatan would be carried out by SSD staff. Collection andevaluation of data on septic tanks, on characteristics of septage and on pilot operation would bemanaged by the MWSS Applied Research and Quality Control Department.

3.12 The MWSS implementing units would be assisted by consultants, to be appointed for fouryears starting September 1996. The consultants duties would include (a) supervising contractorcompliance with specifications for new works and goods, adhering to construction schedules,testing and commissioning completed works; (b) supervising contractor compliance withspecifications for septage collection, transportation and sea disposal; (c) monitoring andevaluation of septage management; and (d) advising on training of staff to operate completedfacilities. Outline terms of reference are attached with the project implementation action planprepared by MWSS and appraised and accepted by the Bank in July 1995. In December 1996MWSS would also establish an advisory panel of technical, institutional, and managementspecialists to assist in guiding the pilot treatment operations and evaluating them in relation to thedesigns of future septage treatment plants. At negotiations, it was confirmed that the Governmentwill arrange for periodic independent audit of the monitoring and evaluation system (see para 38,Annex 7). The project implementation organization is shown in Chart 3.

3.13 Septage collection, barging at Napindan and Estero de Vitas loading stations, and seadisposal are expected to begin in January 1997; the Paranaque barge loading station is expected tooperate from May 1999. The Dagat-Dagatan treatment plant is expected to start pilot operationsin January 1998. The rehabilitation and upgrading of the Central and Ayala sewerage networksand the Ayala treatment plant is expected to start in January 1997 and be completed in December1998. Preparation of designs and bidding documents for septage treatment plants to be built aspart of the second phase of the septage management plan (para 3.2) is expected to be carried outfrom January 1998 through December 1999. The implementation schedule is shown in Annex 4.At negotiations, MWSS confirmed adherence to the project implementation action plan definingthe scope and timing of actions needed to carry out the project successfully. The action plan isavailable in the project file and is summarized in Annex 5. MWSS has experience with muchlarger contracts for civil works and equiptnent installation than contemplated under the proposedproject, and the proposed schedule for the septage management component is considered realistic;however, the sewer system rehabilitation component may encounter delays due to permissionsrequired in connection with excavation works in MM.

Land Lease And Acquisition

3.14 The units to be built under the project include the pilot septage treatment plant, whichwould be located next to the Dagat Dagatan oxidation ponds on MWSS land, and two of the

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barge loading stations, which would entail the use of existing facilities to be leased together with aplot of land from DPWH. Only minor additions would be made to the latter for protection againstseptage spill and for washing tankers and parking areas. Execution of the lease agreementbetween DPWH and MWSS would be a condition for loan effectiveness. The third loadingstation, to be constructed in 1998, would be located on land to be reclaimed in Manila Bay andprocured by MWSS when the reclamation is completed. All other rehabilitation-works would belocated on MWSS land so that no land acquisition or population relocation would be required bythe project.

Procurement

3.15 Procurement would be carried out in accordance with the Procurement Guidelines under]BRD Loans and IDA Credits, dated January 1995 (1996 reprint). Civil works for threegeographically distributed barge loading stations (US$1.6 million), unlikely to be of interest toforeign bidders, would be procured through national competitive bidding procedures acceptableto the Bank.

3.16 Civil works for construction of the pilot septage treatment plant and all rehabilitationworks (US$49.3 million) would be procured through international competitive bidding followingpre-qualification of bidders and using the Bank's Standard Bidding Documents (SBD). ICBprocedures and SBD would also be used for procuring the bulk of maintenance and laboratorymaterials and equipment (US$7.7 million). Materials and equipment packaged in individualcontracts that do not exceed US$200,000 each or US$1.0 million in aggregate amount, would beprocured through NCB procedures acceptable to the Bank. For procurement under ICBprocedures, domestic goods would be allowed a preference margin of 15% of C.I.F. bid price orthe amount of customs duties, whichever is lower for bid evaluation. Procurement arrangementsare summarized in Table 3.3.

3.17 The three major civil works contracts that comprise the bulk of procurement (US$49.3million) would include supply and installation of electrical and mechanical equipment. Thecontracts and estimated costs are: (a) construction of Dagat Dagatan septage treatment plant(US$15.9 million); (b) rehabilitation of Ayala sewerage network and wastewater treatment plant(US$11.4 million), and (c) rehabilitation of Central sewerage system (US$22.1 million).

3.18 Consultants to assist with supervision of construction, management and monitoring ofseptage operation, and various studies and designs (US$10.9 million) would be selected inaccordance with the Guidelines for Use of Consultants by World Bank Borrowers using theBank's Standard Form of Contract for Consultants' Services. Due to a tight project schedule,MWSS intends to employ a firm of consultants to help with minor modifications of biddingdocuments completed earlier, finalize environmental management plans for all components, andassist with starting the bidding process (para 3.7). Advanced contracting for these services,estimated in total at US$150,000, would be carried out in accordance with the Bank'sProcurement Guidelines.

3.19 Prior Bank review would be mandatory for civil works contracts estimated to cost morethan US$5.0 million, and contracts for goods estimated to cost more than US$1.0 million. Thiswould cover about 90% of the value of the goods contracts and about 95% of the value of the

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civil works contracts. All other contracts would be subject to Bank post review procedures. Allconsultancy contracts will be subject to prior review except for those estimated to cost less thanUS$100,000 for employment of consulting firms or US$50,000 for employment of individuals.For the exceptions, prior Bank review shall be required for terms of reference for such contracts,sole source procurement, assignments of critical nature, and amendments to contracts raising theirvalue above the threshold limits.

Table 3.3: Project Procurement Arrangements 1/ (US$ million)Project Element | Procurement Method NBF 3/ Total

| ICB | NCB | Other 2/ CoCivil Works 49.31 1.60 | _ 50.91

_____ (36.59) 1 (1.20) __(37.79)

Equipment 7.68 1.00 | | 8.68(7.68) (0.65) (8.33)

Implementation Support 10.88 10.88(10.88) (10.88)

Land Acquisition 5.76 5.76(0.00) (0.00)

Total 56.99 2.60 10.88 5.76 76.23(44.27) (1.85) (10.88) (0.00) (57.00)

1/ Includes contingencies; amounts in parentheses are to be financed by the Bank.2/ Includes engagement of consultants.3/ NBF (Not Bank-Financed).

Disbursement

3.20 The proceeds of the Bank loan would be disbursed against: (a) 100% of foreignexpenditure for civil works; (b) 50% of local expenditure for civil works; (c) 100% of localexpenditure (ex-factory) for locally manufactured equipment and materials, or 65% of localexpenditure for other equipment and materials procured locally, and (d) 100% of totalexpenditure for consultant services, training and studies. An amount of US$300,000 wouldretroactively reimburse expenditure for consulting services incurred after July 15, 1995.

3.21 Disbursements would be made on the basis of Statements of Expenditures (SOE) foractual expenditures against: (a) contracts of less than US$5.0 million equivalent for civil works,(b) contracts of less than US$1.0 million equivalent for goods, and (c) consultant's contracts ofless than US$100,000 equivalent for firms and US$50,000 equivalent for individuals. Supportingdocumentation for these expenditures would be retained by MWSS, made available for review byBank supervision missions, and regularly audited by auditors acceptable to the Bank.

3.22 To facilitate loan disbursement, MWSS may, for purposes of the project, open andmaintain in dollars a special deposit account (Account) in a commercial bank specificallyauthorized for this purpose by the Bangko Sentral ng Pilipinas on terms and conditions

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satisfactory to the Bank, including appropriate protection against set-off, seizure or attachment.The Account which would cover the Bank's share of eligible expenditures in all disbursementcategories would have an authorized allocation of US$2.0 million to be withdrawn from the LoanAccount and deposited in the Account, provided, however, that unless the Bank would otherwiseagree the authorized allocation shall be limited to an amount equivalent to US$1.0 million untildisbursements and outstanding commitments against the loan equal or exceed the equivalent ofUS$10.0 million. Applications for replenishment of the Account, supported by documentation,would be submitted regularly (not less than quarterly) or when the amount withdrawn equaled50% of the initial deposit. During negotiations agreement was reached whereby MWSS wouldestablish and hold the Special Account in a commercial bank acceptable to the Bangko Sentral ngPilipinas and IBRD.

3.23 Project implementation would extend over six years, starting from September 1996. Allmajor works would be substantially completed on December 31, 1999. To allow for completionof studies and rehabilitation works, which may experience delays, the loan will be closed onDecember 31, 2001. A schedule of estimated disbursements as well as a profile of disbursementunder previous Bank-assisted water and sewerage projects is shown in Annex 6.

Environmental Impact

3.24 The project would have a marked net positive environmental impact by: (a) reducing thelevel of human exposure to raw wastewater, with public health benefits; (b) reducing organicpollution of MM waterways and Manila Bay, and protecting groundwater from contamination,and (c) increasing MWSS capacity to control pollution. The project has an EnvironmentalCategory A rating because of sea disposal of septage but no adverse impact on the marineenvironment is expected (para 3.27). Relatively minor potential negative effects include: (a)traffic and noise during construction; (b) increased levels of noise and odor during septagecollection and shipping and operation of the pilot treatment plant, and (c) possible accidental orimproper discharge of septage. Mitigating actions to limit these and possibly other negativeimpacts are identified in the Environmental Impact Assessment (EIA) and Supplementary Reportsand would be implemented during project execution. Public consultations would be held asappropriate. No relocation of population is required by the project.

3.25 MWSS has submitted an Environmental Impact Assessment (EIA) for the project to theBank and complied with information disclosure and public consultation requirements. Thedocuments were distributed to the Bank's Public Information Center and the EIA summary wasmade available to the Board on June 2, 1995. In July 1995 MWSS also submitted to the Bank asupplementary EIA report containing outlines of environmental management plan (EMP) for eachproject component. In response to comments from the Bank and EMB, a revised supplementaryEIA report was submitted in December 1995. During project implementation, the environmentalimpact of each component would be monitored separately in accordance with the detailed EMPs(see Table A 7-2 for schedule). At negotiations, assurances were obtained that MWSS would (a)agree to completion of the detailed EMPs according to schedule, (b) submit annually, startingfrom December 31, 1996, a report summarizing the results of monitoring the compliance with theEMPs, and (c) submit annually, starting from June 1997, a report containing the independent auditof the septage management operation.

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3.26 In accordance with national environmental regulations, MWSS also submitted the projectEIA to the Philippine EMB for review. The receipt by MWSS of Environmental ComplianceCertificates (ECC) for collection, barging and sea disposal; Dagat-Dagatan pilot septagetreatment plant; and rehabilitation of the Central and Ayala sewerage systems and Ayala treatmentplant would be a condition for loan effectiveness.

3.27 The project would (a) reduce the BOD loading of the rivers and shoreline of Manila Bayby an estimated 30%, and (b) improve sanitary conditions within the project area, extending toabout 15 km2, thus reducing the level of human exposure to raw wastewater and improvingpublic health. It is estimated that from the total residential water pollution load of 390 t/d ofBOD about 30% or 130 t/d of BOD would be removed from MM's waterways by effectiveperformance of existing septic tanks and improved Central and Ayala sewerage systems. TheBank engaged an independent outside expert to visit the Philippines and evaluate the likelihoodthat deep sea disposal of septage might have an adverse impact on the marine environment. Theexpert concluded that on the basis of internationally available data, the environmental risk in thesea disposal of septage is minimal. This is due to both the relatively low levels of contaminants inseptage, and the exceptionally high dispersion characteristics of the disposal site, which is morethan 40 km from the nearest shoreline. Against this insignificant risk, the accelerated collectionand sea disposal of septage will give rise to significant and measurable benefits in the Pasig Riverand inner Manila Bay. The expert's report is available in the project file.

3.28 The sea disposal option was selected after extensive studies and evaluation of alternatives,including disposal in the 'lahar" lava remaining from the eruption of Mt. Pinatubo, incineration,and dewatering in combination with disposal in sanitary landfills, all in the context of the shorttime frame of several years for which the interim disposal site is needed to obtain basic data fordesigning land-based permanent treatment of septage. In addition to being the least-cost solutionamong the above alternatives, sea disposal presents an advantage in requiring relatively minorinvestments in permanent structures, as almost all costs are recurrent, and it allows disposal - withits important benefits for the urban environment - to begin quickly. Sea disposal also providesoperational flexibility to increase, decrease, or completely stop the collection and disposal ofseptage without the serious impact on operations that would occur using any other technology.

3.29 The identified sea disposal site is one of eight waste disposal sites designated by thePhilippine Coast Guard in 1991 in accordance with the London Convention2 . The site is locatedapproximately 115 km from the barging stations, outside normal fishing grounds, about 20 km offthe nearest navigation lane, with ocean depth about 2,300 m. During November to March, thecurrent flows westward away from the shores; from May to October, under the influence of thestrong southerly wind, it moves towards Luzon's west shores in a north to north-easterlydirection, the typical travel time to the nearest shore being approximately ten days. Confirmationof the environmental impact of sea-dumping through a mathematical model prepared by anindependent consultant would be a condition of loan effectiveness. Barging frequency is estimatedat 240 days a year, taking into account non-navigable conditions and mitigating reasons. Thecombined collection and disposal contracts would allow cessation of septage collection duringperiods of inclement weather thereby obviating the need for storage facilities. The proposed

2 The 1972 Convention on the Prevention of Marine Pollution by dumping waste and other matter was held in London on29 December 1972, entered into force on 30 August 1975 and was amended in October 1978, September 1980, andNovember 1993.

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monitoring and mitigating actions, revised in December, 1995, are summarized in Annex 7 andconsidered to be satisfactory.

3.30 Possible negative effects identified in the EIA report include increased levels of dust,noise, odor, traffic and water pollution during: (a) construction and operation of the pilot STP;(b) collection of septage, and (c) sea dumping. These impacts would be mitigated through properdesign and installation of pollution control facilities, and effective implementation of anenvironmental management plan, including provision of enclosed, ventilated buildings withdeodorizing equipment for transfer activities; installing buffer zones or noise barriers; usingvacuum trucks to collect septage; limiting working hours and vehicle speed; installing trafficsignals; providing tow trucks; and monitoring environmental quality. Dewatered sludge will bedisposed of at San Mateo sanitary landfill. Mitigating measures are included in detailed designsand contract documents.

Supervision

3.31 The proposed project would be supervised semi-annually in the field to reviewimplementation progress, technical matters, construction quality, compliance with loan covenants,and environmental requirements, and to discuss relevant matters with the Government andimplementing agencies. A mid-term review would be organized in October 1998 to evaluateproject implementation, tariff status and compliance with the EMP. The sea disposal of septagewould be evaluated at this review based on the results of the monitoring program and the need toadhere to the cessation timetable of 2003 would be reassessed. Activities at headquarters wouldinvolve reviewing progress reports and procurement actions and preparing various project-relatedcorrespondence. Supervision would require about 58 staff-weeks over the life of the project, ofwhich about 30 staff-weeks would be in Washington and 28 staff-weeks in the field. Supervisionwould require expertise in sanitary engineering, water and air pollution control, environmentalissues and financial analysis.

3.32 MWSS would forward to the Bank semi-annual progress reports, various annualenvironmental, financial and audit reports, and an evaluation report on project implementationwithin six months of project completion (para 5.21). The proposed supervision plan as well asoutlines of progress reports, water quality status report and the evaluation report are shown inAnnex 8. At negotiations, the format and content of these reports were agreed with MWSS.

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4. THE IMPLEMENTING AGENCY

Implementing Organization

4.1 The project would be implemented jointly by MWSS Construction, which would employand supervise respective contractors, MWSS Engineering, which would collect and evaluate dataon septage and guide environmental monitoring, and MWSS Operations, which would employand supervise contractors to collect and dispose of the septage. The SSD would operate thefacilities after construction of the septage treatment plant and rehabilitation of sewer networks. Aproject management office would be established within Engineering to coordinate projectimplementation. MWSS has carried out similar activities and is experienced in implementing thistype of project.

Metropolitan Waterworks and Sewerage System

4.2 MWSS is a government corporation established by charter in 1971 to develop, operateand maintain water supply, sewerage, and sanitation systems in and around MM. MWSS hasnon-profit status and is exempt from most taxes and duties. MWSS also has some quasi-regulatory functions, including setting bylaws relevant to its service functions. The MWSS Boardhas the power to set tariffs and ratify its budget after it is approved by the Office of the President.Like all government-owned corporations, MWSS is subject to: (a) NEDA approval of itsinvestments; (b) a rate-of-return limit of 12%; (c) civil service employment rules and salarystructures, and (d) public sector procurement rules.

Organizational Structure

4.3 Corporate powers and functions are vested in a Board of Trustees appointed by thePresident of the Philippines. The ex-officio Chairman of the Board is the Secretary of DPWH.The chief executive of the corporation, the administrator, is also appointed directly by thePresident. The administrator is assisted by a senior deputy administrator, six deputyadministrators (DA) responsible for engineering, construction, operations, customer services,finance, and administration, and the corporate planning and management information systemsgroups. Some customer service functions (metering, billing, collection, and minor leak repair) aredecentralized to eight geographical customer service sectors reporting to DA customer services.The MWSS organization structure is shown in Chart 1.

4.4 The SSD, under the deputy administrator for operations, is responsible for sewerage andsanitation services. The department has three divisions: operation and maintenance; sewerconnection extension and field investigation, and septic tank maintenance. Its organization isshown in Chart 2.

Staffing and Training

4.5 In 1995 there were 6,954 MWSS employees, including 2,154 casual workers. MWSS isoverstaffed compared to similar utilities elsewhere; the number of water-related employees perthousand water connections is 7.5 compared to 5.5 for the Bangkok Metropolitan WaterworksAuthority, while the number of sewerage-related employees per thousand sewerage connections is

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5.1, which is satisfactory. Employees are remunerated under the general civil servicesalary/benefits scale. MWSS contracts out some services, including delivery of water bills andcollection of payments, and regular desludging of septic tanks. Recently, the corporation hasbegun contracting out some distribution system leak repairs.

4.6 MWSS conducts in-house training in most technical areas relevant to its activities, andmanagerial and personnel development training. It also conducts an annual exchange of staff withthe Metropolitan Waterworks Authority of Bangkok.

Performance and Management

4.7 Most financial parameters continue to indicate adequate performance. In relation tocomparable utilities, its rate of return on assets and billing efficiency are high, and tariffs areaverage. However, service delivery is an area of concern. While the quality of water is good,pressure is low with frequent shortages and a significant percentage of the population remainsunserved or underserved. Sewer service coverage is very low, and most septic tanks have neverbeen desludged. The most financially threatening problem continues to be the high proportion ofnon-revenue water (NRW). After declining through the late 1970s from around 50% to around46% it has risen to an estimated 55% to 60% of production as new capacity has come on stream.This, and other evidence of premature decay of capital equipment, indicates deficientmaintenance. MWSS plans to reduce NRW to 30% by the 2000 through major investments innetwork rehabilitation and renovation. Data for the first seven months of 1995 show an NRWdecrease of 1% a month - to 53% in July - through intensive leak repairs.

Development Programs

4.8 MWSS needs to make major capital investments in the near future to reduce thepopulation without water and sanitation services, improve the unsatisfactory state of its facilities,and address significant environmental problems. While investment alternatives have been studied,adequate attention has yet to be given to their financing and management requirements.

Institutional Issues

4.9 While major capital investments are required, the very high level of NRW threatens theviability of future investments. While lack of maintenance over a prolonged period is theproximate cause of the situation, MWSS has not yet clearly identified the roots of its maintenanceproblems. Efforts to improve performance have focused on computerization to generatemanagement information, and training and capacity building to improve personnel skills; these donot seem to have made a significant difference in improving key performance indicators, inparticular NRW. The Water Supply and Sewerage Master Plan completed in early 1996 includesan institutional analysis to determine the underlying causes of the unsatisfactory performance andsuggest changes to enable the agency to successfully finance, build, and - most importantly -maintain its facilities.

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Private Sector Involvement

4.10 MWSS is considering a number of unsolicited proposals for increased private sectorparticipation in its operations. Most of these pertain to water supply; expressions of private sectorinterest involve offers for investments in source development and water treatment plants on abuild-operate-transfer basis. There has been one limited proposal for private participation inoperating a part of the sewerage system. Recently, MWSS, with strong support from theGovernment, has initiated studies, with the IFC as the lead advisor, to evaluate privateparticipation in the form of concessions to improve service levels and reduce NRW. Septic tankdesludging has been carried out by private contractors employed by MWSS and is to be greatlyexpanded under the proposed project. The proposed project is compatible with a privatizationscenario, as septage collection and disposal will be bid out to private contractors.

4.11 The exact scope of the proposed concession arrangements for MWSS have not beendetermined as yet. Responsibility for investment in and operation of the sewerage and sanitationsystems could be completely transferred to the private concessionaire or shared in some way withthe national Government, the newly formed MMDA and local government units. At negotiations,the Government confirmed that in the event of changes in the responsibility for providingsewerage and sanitation services in MM from MWSS to another entity during implementation ofthe project, it would consult the Bank prior to undertaking any such changes or restructuring.

Project Implementation

4.12 SSD's resources and organization are adequate to implement the proposed project, exceptfor the need to train the management and operational staff of the pilot septage treatment plant. Itsengineering department would provide the research support required during implementation of thepilot phase for collecting and evaluating data needed to design the subsequent phase of theseptage management plan. It would coordinate with agencies involved in water pollution control,such as the Pasig River Committee, and be assisted by consultants and professionally guided by anadvisory panel (para 3.12).

4.13 Land-based disposal of treated sludge would be required for the first time after operationsbegin in the pilot septage treatment plant, scheduled for 1998. The functions of the existingdisposal and contract service section of SSD septic tank maintenance division would need to beexpanded and staff trained to adequately undertake the new activity. The training would beprovided by the suppliers of equipment and would be included in contract documents.

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5. FINANCIAL ANALYSIS

Planning and Budgeting

5.1 MWSS annual budgets are approved by its Board subject to approval by the Office of thePresident. The operational expenditure budget for sewerage operations is prepared by SSD.Assurances were obtained during negotiations that MWSS would prepare separate budgets forSSD, including income statements and balance sheets for FY97 and thereafter. In addition toannual budgets, the MWSS corporate planning group (CORPLAN) makes ten-year investment,financial and operational projections.

Rate Structure and Revenues

5.2 CORPLAN reviews the adequacy of water supply and sewerage charges each year. Itspolicy for tariff formulation considers the actual costs of operations and maintenance, includingdepreciation, and estimated future costs, plus a rate of return on net fixed assets in operation of atleast 8% to provide for improvement and expansion of the systems, and a margin to ensureperpetuation of the organization. The review, including requests for tariff increases, is submittedto the Board for approval.

5.3 All customers connected to MWSS water supply are metered and billed at progressiveblock rates. There are residential, commercial, and industrial bands. The residential bands havenine blocks ranging between 10 and 100 m3/month, and commercial and industrial users havethree blocks ranging from 25 to over 100 m3/month. Metered water supply is used as the basefor calculating sewerage and environmental charges. The sewerage charge - 50% of the water bill- is levied on consumers with sewer connections to cover costs of operation and maintenance ofsewerage systems. An environmental charge of 10% is levied on all water supply bills to coverthe cost of desludging septic tanks and other environmental protection measures.

5.4 Residential consumers pay 30% less than the average charge per/m3, while commercialand industrial consumers pay 45% and 70% respectively above the average. A significant subsidy,therefore, is provided to residential customers, with the greatest benefit going to low-consuming,low-income households. During 1996, both the MM water supply and sewerage master planstudy and the IFC-led privatization initiative are expected to recommend changes in the MWSStariff structure and levels, including charges for sewerage services.

5.5 Over 1989-92 MWSS increased water and sewerage and environmental charges in linewith annual inflation, but the Board has not approved an increase since May 1992. In December,1995, MWSS management submitted a request to its Board for a raise in the average water tarifffrom the current P 6.43/m3 to P 8.78/m3. SSD needs the revenues from this increase (arisingfrom accompanying sewerage and environmental charges) to carry out its sewerage systemdevelopment plans (Para. 5.18). Implementation of this water tariff increase, including indexedsewerage tariff and environmental charges would be a condition of effectiveness.

5.6 To compensate for revaluation of the peso against a basket of international currencies,MWSS introduced an automatic currency exchange rate adjustment (CERA) in 1984 that tracks

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MWSS's foreign debt service per cubic meter of water sold against 1984 reference values. TheCERA surcharge is equivalent to 15% of the current average tariff.

Accounting and Auditing

5.7 MWS S's accrual-based accounting procedures are generally satisfactory and are set by theCommission on Audit (COA), a separate constitutional body. Sewerage system accounts havebeen separated from water transactions since 1988. The SSD bank account pays direct operatingexpenses, while other costs are apportioned at the end of each month between the two servicesusing an inter-fund receivable/payable account. During negotiations, assurances were obtainedthat, commencing from FY97, cash transfer of the difference between the water and sewerageinter-fund receivable and payable accounts would be made at the end of each quarter, and theaccount closed at each year end. Billing, collections and payroll are computerized, and MWSS istransferring the balance of its accounting procedures, including SSD, to a new computerizedsystem which is expected to be in operation by the end of 1996. Project accounts would be keptby the finance office.

5.8 MWSS accounts, including for SSD, are audited by COA, and in recent years there havebeen no qualifications with significant implications for the financial statements. Duringnegotiations, assurances were obtained that the financial statements of MWSS, including separateones for SSD, will be audited by independent auditors acceptable to the Bank. These statementsand audit reports would also include a separate opinion on the Statement of Expenditures and theSpecial Account for the Bank loan, and would be submitted to the Bank within six months of theclose of each fiscal year.

Billing and Collection

5.9 Customers are charged for water supply and sewerage services on a combinedcomputerized monthly bill. At the end of 1994 there were 824,460 customer accounts, 90,510 ofwhich had sewerage connections. Meter reading is done by the eight decentralized sectors, andthe results are forwarded to the computer services center at the head office, which prepares billsand maintains the accounts receivable ledger. Bills are hand-delivered by contract collectionagents employed by customer services, who also collect payments from customers. Bills can alsobe paid directly to MWSS branch offices, and customers are required to pay within ten days ofdelivery. If bills are unpaid after one month, enforcement action, including disconnection, may betaken.

5.10 The present method for processing collections is based on an 'bpen-item" system underwhich receipts are matched to bills before posting to the accounts receivable ledger. This createsdelays of up to six months in updating the ledger, however, and MWSS recognizes that thesystem is inadequate and fails to provide timely, accurate information. A new computerizedbilling and accounts receivable system is being prepared for staged introduction in the eightsectors between September 1995 and March 1996. Bills showing total amounts due, includingarrears, should improve debt collection.

5.11 The net realizable value of accounts receivable is a problem area for MWSS. At the endof 1994 it equaled 110 days of S SD's sales, which is unsatisfactory. Assurances were obtained

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from MWSS that, commencing from FY96, its net accounts receivable would not exceed 90 daysof billing. The accounts receivable ledger was last reconciled in 1990. The new billing andaccounts receivable system will have reconciled and up-to-date customer balances transferred tothe new system during its introduction. The bad debt provision for 1994 was 2%, which will alsobe reviewed when balances are transferred to the new system.

MWSS Financial Performance

5.12 The audited financial performance of MWSS covering all its activities related to watersupply and sewerage indicate a satisfactory financial position from 1990 through 1994. Revenuesincreased by 10% a year, and expenses by 14.8%, over the same period. While net incomesteadily increased until 1992, a slight decline in 1993 was mainly caused by an increase in financialcharges; the decline continued in 1994 because of a jump in interest charges and non-cashexpenses, mainly higher depreciation, following the revaluation of assets. Although operatingresults deteriorated in 1994, there was a net income before taxes of P 667.24 million equivalent to18% of total revenues generated for the year, with a rate of return of 8%. Since 1990, total assetshave grown at 9% a year, mainly due to an increase in fixed assets from capital works projects.The current financial position is considered satisfactory.

5.13 Financial ratios similarly indicate adequate performance, with the current ratio rangingbetween 4.3 and 5.0 suggesting that MWSS has been very liquid; the operating ratio has averaged55%, and the debt equity ratio has ranged between 41% and 48%. Cash flow, however, has beena problem due to increased debt-service payments. In 1994 MWSS's long term debt was P 8.39billion, with a debt service ratio of 1.23%. A financial status study of MWSS prepared byDeloitte Touche Tohmatsu in November 1993, and comparative financial statements for the 1990-94 period, are available in the project file.

SSD Financial Performance

5.14 SSD's financial performance since 1988, when records started to be kept separately fromwater, has resulted in net operational surpluses each year. Since 1992, operational revenues haveincreased by 15% due to higher water volumes, and operational costs increased by only 3%.Other financial ratios are generally satisfactory, with a current ratio of 3.0 and an operating ratioat 47%. These results have, however, reflected less than adequate operation and maintenance,due to slow procurement procedures and cash restraints, and much of SSD's plant and equipmentis in a poor state. Cash flow continues to be a major problem due to debt service obligations andfailure to achieve revenue targets. SSD's total debt at the end of 1994 was P 820 million, with adebt service ratio of 1.5. SSD comparative financial statements for the 1990 to 1994 period areavailable in the project file.

5.15 SSD internal cash generation and loans finance capital projects and operations. Therevenue earning capacity of the sewerage charge, however, will always be limited to the numberof customers connected to the sewer network, while the environmental charge grows in directproportion to the growth in water revenue. The sewerage charge on its own is insufficient to fundall SSD's costs, and the environmental charge is, therefore, used to support sewerage operationsand service foreign loans.

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Project Financing

5.16 SSD's capital spending requirements and financial plan for 1995-99 are shown in Table5. 1, and include the commencement of the proposed third sewerage project. The Bank loan ofUS$57 million equivalent would finance 30% of SSD's financial requirements over the period.The SSD financial plan was confirmed during negotiations.

Table 5.1: SSD FINANCIAL PLAN 1995-99

Item Peso (Million) US$ (Million)

Sources

Gross Internal Cash Generation 3308.0 132.4 74Less: Debt Service 1384.0 55.4 30Net Internal Cash Generation 1924.0 77.0 44Loan IBRD-Second Sewerage P 1425 million+ Loan Third Sewerage P1150 million 2575.0 103.0 56Total Sources 4499.0 180.0 100

Requirements

Proposed Second Sewerage P 1906 million+ Proposed Third Sewerage P 1938 million 3844.0 153.8 85Interest During Construction 335.2 13.4 7Total Financing Requirements 4179.2 167.2 92Additions to Working Capital 319.8 12.8 8Total Requirements 4499.0 180.0 100

5.17 SSD financial projections are shown in Annex 10, and the assumptions used to preparethem in Annex 11. One of the goals of the project is to improve SSD performance; accordingly,MWSS has prepared operation and maintenance guidelines for its sewerage system as a basis forestablishing adequate annual budget allocations and evaluating SSD performance.

5.18 To achieve internal contribution targets for the proposed development of the seweragesystem, it will be necessary to double SSD's revenues from P 616 million achieved in 1994 to P1,367 million by the end of the implementation period in 1999. The projected increase inrevenues is based on assumed annual tariff increases and reductions in NRW as outlined in Annex10.

5.19 During negotiations, assurances were obtained that MWSS would take all necessarymeasures, including adjustments of the structure or levels of sewerage rates, to produce, for eachfiscal year starting in 1996, funds from SSD's internal sources equivalent to not less than 25% ofSSD's annual average capital expenditure.

5.20 To ensure payment of debt service obligations related to sewerage activities, assuranceswere obtained that MWSS would not incur any debt for its sewerage activity unless a reasonable

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forecast of SSD's estimated net revenues for each fiscal year during the term of the debt to beincurred is at least 1.2 times the estimate of sewerage activity debt service requirements.

Monitoring and Evaluation

5.21 Performance would be monitored against the implementation schedule (Annex 4) and theproject implementation action plan (Annex 5). The implementation agency's operational,financial, and management performance will be assessed against monitoring indicators (Annex11). During negotiations, assurances were obtained that MWSS would submit to the Bank (a) nolater than March 31 and September 30 of each project year, commencing on September 30, 1996,semi-annual project progress reports, including revised project cost estimates and implementingschedules, (b) no later than March 31 of each pr'oject year, commencing on March 31, 1997,SSD's annual updated financial projections, and (c) no later than six months after completion ofthe project the evaluation report on project implementation.

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6. PROJECT JUSTIFICATION

Project Benefits

6.1 The proposed project includes the following components: (a) a pilot septage managementprogram, which will test out options for improving the management of the approximately 1million septic tanks constructed through private financing in MN, (b) rehabilitation of the existingsewer infrastructure, and (c) addition of 10,000 new house connections to the existing sewersystem. The benefits from these programs will be in the form of abatement of fecal contaminationaround MM households and in neighborhood drains and canals. While most of these benefits arenot easily quantifiable, the impacts of such investments in terms of public health andenvironmental improvements are known to be significant.

6.2 Owing to the lack of prior experience in septage management, there is a need to test outoptions on a pilot basis before a full-scale septage management plan can be implemented. Thepilot program tests out how best incentive structures and investments can be matched with eachother so that septage is collected, conveyed and disposed in a sustainable and efficient manner.The experience gained from the interim solution of desludging, barging and ocean dispersal ofseptage will provide information on the number, condition, accessibility and average size of theseptic tanks and the characteristics of their content. Additional information would be gained onhow the private sector can be provided with incentives to participate in this operation. Theexperience gained from construction and actual operation of a pilot septage treatment facilitythrough public investments is expected to provide data for optimal technological design, sizingand location of septage treatment plants to be constructed in the future. Data from the two sub-components together provide the basis for the development of MWSS's long-term septagemanagement plan.

6.3 The scale of the proposed pilot exercise is large: 300,000, or approximately a third ofMM's septic tanks would be desludged over the life of the project. This effort is expected tosubstantially improve the performance of septic tanks which, with periodic desludging, function asfairly effective instruments for pollution abatement, reducing organic pollution between 30% and65% depending upon design, and removing up to 90% of suspended solids. Without desludging,the performance of septic tanks is severely compromised, and a maximum of 10% BOD removalcan be expected. While the health and amenity benefits are difficult to quantify, what is clear isthat there are significant benefits in the form of reduction in fecal contamination through theproper operation of these septic tanks.

6.4 In terms of overall scale, the approximately one million septic tanks in MM representhousehold investment equivalent to a current replacement value of about US$400 million.Without proper septage collection, conveyance and disposal, not only is this substantial privatesector investment not yielding benefits, but is aggravating public health risks by exposing MMresidents to fecal contamination at their homes and neighborhoods. The health risks are greatestfor the low-income residents, who reside in densely populated areas with poor drainage. Underthe project, a capital investment of US$14 million would restore approximately 300,000 septictanks to full effectiveness with significant public health benefits. Moreover, these 300,000 tankswould be selected in the proximity of the Pasig River to maximize the impact in terms of reducing

25

the pollution load in the river. Again, it is difficult to assign a monetary value to the resultinghealth and aesthetic benefits.

6.5 The second project component involves rehabilitation of the Central and Ayala seweragesystems. These systems, with a current replacement value of US$98 million, are under-performing due to cumulative lack of repair and maintenance. The project will invest US$17million to restore the benefit stream from these facilities in a sustainable manner in the future.Sustainable operation and maintenance of these systems would reduce overflow of sewage duringrain and floods in the service area, thereby resulting in positive health benefits.

6.6 The third project component would provide 10,000 new house connections to existingsewer systems at a cost of US$10.5 million. This is the only revenue generating component in theproject and would add an estimated US$1.5 million per year to SSD revenues in current prices by1999. Health and environmental benefits would result from the expanded coverage of the water-borne sewer system in MM, which is presently very low.

6.7 The project aims to improve health and environmental conditions throughout MM.However, low-income households will benefit disproportionately because they reside in the areascovered by the pilot project. These households appear to be having some of the most poorlymaintained septic tanks in the city despite paying the monthly environmental charge to MWSS.

Rate of Return

6.8 The benefits from the project in terms of environmental improvements and better health toresidents are difficult to value in monetary terms, though the physical impacts in terms ofreduction in neighborhood fecal contamination, abatement of pollution in urban drains and waterbodies are considerable. An economic rate of return based on a full cost-benefit analysis thuscannot be calculated for the project which is justified based on a least-cost analysis. However,lower-bound estimates for individual project components can be computed based on the followingsimplifying assumptions: (a) that existing charges levied by MWSS for sewer and sanitationservices reflect consumer willingness to pay and are a measure of total economic benefits (privateand public) to households; and (b) that without adequate maintenance and proper operation (to beensured through project investments), full economic benefits from existing assets are not realizedeven though the tariff charges are paid in full. The first assumption is conservative, as willingnessto pay for improved services may actually be higher than existing charges, and also becausehouseholds usually undervalue public benefits. Household willingness to pay would also notinclude the value of the information required to design the future sanitation system. Details of thestylized economic rate-of-return analysis are presented in Annex 12 and some of the key findingare summarized below.

6.9 The rate of return for new sewer connections is the simplest to compute since both costsand revenues are well defined. The IRR is 10%, assuming that there is no increase in SSD O&Mcosts because of higher personnel cost (MWSS is over-staffed); the IRR falls to 4% if it isassumed that these costs increase in proportion to the number of connections (10%).

6.10 The sewer system rehabilitation component has an economic rate of return of 8%,assuming that without the project only half of potential economic benefits (based on SSD

26

revenues as a proxy for consumer willingness to pay) are realized from existing assets and thatO&M costs increase by 50% after the project to maintain the full benefit stream. The IRR falls to4% if it is assumed that 60% of full benefits are being realized without the project.

6.11 The economic return of the septic tank maintenance component depends on the manner inwhich the collected septage is disposed of If ocean dumping of septage is chosen as a permanentdisposal method, the IRR would be 12%, assuming that septic tanks without the projectinvestments yield only 10% of full benefits; the IRR would fall to 9% if septic tanks without theproject are assumed to yield 20% of full benefits, and to only 5% if without the project they areassumed to yield 30% of full benefits. However, if ocean dumping of septage is chosen as aninterim solution, capital costs of the order of US$150 million and steady state recurring costs ofUS$35 million per year would be needed to replace sea disposal by land-based septage treatmentplants. This represents recurring costs of approximately US$3 per household per month. Recentstudies indicate that, at the present household income levels in the Philippines, this would exceedthe willingness to pay of most households in MM for this type of service. For this reason, theMWSS septage management plan proposes septage treatment capacity to be increased graduallyto full capacity only by 2003. By then, income levels are expected to have risen sufficiently toenable more of the costs to be covered through user charges.

6.12 For the proposed project as a whole, the only incremental revenues are from the 10,000new sewer connections. These revenues are not enough to cover the full costs of the projectresulting in a negative net present value. Therefore, if project implementation is justified on thebasis of its environmental and health benefits, either a subsidy from the government or a tariffincrease would be required to ensure full cost recovery for MWSS. The financial analysis showsthat a 7% increase in the water tariff would generate sufficient incremental revenues for MWSS tocover all costs of the entire project. However, if the cost is to be recovered entirely fromincremental revenues of the SSD (i.e., from incremental sewer and environmental charges) alarger increase in the water tariff would be needed. This follows because, while sewer andenvironmental charges are indexed to the water charge, the number of sewer connections issignificantly less than the number of water connections. The analysis in Annex 12 shows that theproject breaks even with a water tariff increase of 35% if only the incremental sewer andenvironmental revenues are used to defray project costs. Given that there has been no tariffincrease since May 1992, MWSS considers a water tariff increase of this magnitude to bepresently feasible and affordable.

Least-Cost Solution

6.13 The difficulties in quantifying economic benefits from environmental projects has usuallyled to objectives being defined to ensure achievement of relevant externally mandated criteria(e.g., minimum water and air quality standards) to protect public health and improve livingconditions. In MM, the Government, as part of its commitment to environmentally sustainabledevelopment, has adopted the target of reducing the existing pollution load in terms of BOD by20% and of significantly improving Pasig River water quality by the end of 1999. In suchsituations, the least-cost criterion is the operationally relevant one in guiding the choice of feasibletechnical options to achieve project objectives.

27

6.14 On-site disposal of domestic wastewater using private septic tanks connected tosoakaways or leaching pits is not feasible in MM due to high residential density. Three technicaloptions can be considered for off-site disposal: (a) extension of existing separate sewer systems;(b) conversion to combined drainage and sewer system without household septic tanks, and (c)conversion to combined drainage and sewer system with household septic tanks. The first optionin MM is unaffordable to most households; in addition, with only 10% of the MM area covered bywater-borne sewerage the additional investment costs are prohibitively high. The second option isfeasible only if all surface drainage segments in the service area are eliminated and replaced bysub-surface conduits; this is unlikely in the near future given the additional investment costsrequired. The third option, if properly operated, is the most viable in the present situation: itutilizes existing investments in private septic tanks; prevents untreated excreta flowing throughsurface drains; and allows the possibility of upgrading the system (i.e. bypassing septic tanks whensurface drains are eliminated and interceptors installed) in the future.

6.15 Septic tank management imposes higher recurring costs than piped sewerage, as itrequires the periodic collection and disposal of the septage accumulated in septic tanks. Thecollection of septage using vacuum trucks is common to all septage management options.However, various alternatives are possible for disposal including disposal at sea, land application,treatment at wastewater treatment plants, and independent septage treatment facilities.

6.16 All the above alternatives were considered in the project feasibility study. Landapplication was found to be cost-ineffective because of the distance to environmentally andsocially acceptable disposal sites. Complete treatment at wastewater treatment facilities was ruledout because the major existing facility at Ayala is too small and located in a high-incomecommercial and residential area unsuited to regular collection vehicle traffic. Sea disposal, whilefound to be the cheapest alternative, was considered environmentally unacceptable as a permanentsolution unless the project's implementation experience indicates otherwise.'

6.17 Given the above factors, and the assumption that the volume of septage will continue toincrease with the increasing number of septic tanks, a strategy on how best septage treatment canbe expanded in a sustainable manner is necessary. Under the project, a pilot septage treatmentplant is proposed to be constructed at the site of the existing Dagat-Dagatan wastewatertreatment facility. Sludge from Dagat-Dagatan and septage collected in excess of the capacity ofthe pilot plant would be disposed at sea. Sea disposal is scheduled to cease in 2003 by which timesufficient treatment capacity is planned to be in place. The combination of phased construction ofseptage treatment capacity, utilization of an existing wastewater treatment plant, and temporarysea disposal represents the most practical and least-cost option for the septic tank managementprogram if sea disposal is only available as a temporary solution.

6.18 Rehabilitation of the Ayala and Central sewerage systems represents delayed maintenanceand is the least-cost solution for that project component in the present circumstances. The Ayalasewerage system was built by a private developer in the early 1950s and ownership wastransferred to MWSS in 1991. The system is in need of extensive repairs. The Central sewerage

1 Five septage management options: treatment (physical, biological, chemical), sea disposal, lahar site disposal, dewatering, andincineration, were reviewed and their costs were estimated. Sea disposal is the least expesive option ($15,000/m3), followed bydisposal in the lahar lava fields resulting from the Mt. Pinatubo emption (18,000/m3-the practical application of this method is still inthe research stage) and land-based chemical/biomedhanical treatment ($11 5,000/m3).

28

system was built in 1904-11 and last rehabilitated over 1981-85. Since then its performance hasdeteriorated due to insufficient maintenance. Rehabilitation after cumulative neglect is not asubstitute for regular maintenance and repair, and the project loan covenants would ensure thatMWSS sets aside sufficient funds for adequate maintenance in the future. The sewerage masterplan currently under preparation will recommend the tariff structure and level and other measuresrequired for this purpose.

Data Base Establishment

6.19 As mentioned above, the proposed project is a learning-by-doing exercise with the idea ofgenerating sufficient information on institutional and technical options for future sewerage andsanitation strategy in the entire metropolitan area. Such a data base requires information on thenumber, location, and average size of septic tanks, their adequacy, repair, and accessibility, thecontents and characteristics of the septage, the efficiency of the treatment plant, and MWSS'scapacity to manage collection and treatment arrangements. The pilot project provides an effectivemechanism for gathering information to optimize the technical and institutional design of themajor investments planned for 1999 and beyond.

Project Risks

6.20 There is little risk of adverse impact on the marine environment due to sea disposal ofseptage; both the Government's Environment Management Bureau and an independent externalconsultant engaged by the Bank to evaluate the likely impact of sea dumping concluded that therisk was minimal due to the low levels of contaminants in domestic septage and the exceptionallyhigh dispersion characteristics of the disposal site, which is more than 40 km from the nearestshoreline. Confirmation of the environmental impact of sea-dumping through a mathematicaldispersion model prepared by an independent consultant would be a condition of loaneffectiveness.

6.21 There is some risk of short-dumping of the septage by contractors. Adequate supervisionand monitoring, including the presence of Coast Guard personnel on the vessels and randomchecking, and the presence of considerable traffic in Manila Bay should minimize this risk.Significant protection would also be provided by contractual clauses imposing strong sanctions,which should serve as a strong disincentive against violations.

6.22 There is also a risk of delays in building septage treatment plants and possible continuationof sea disposal beyond the stipulated period. The advantage of the sea disposal option, whichentails relatively low capital costs, is that it can be inexpensively terminated once the capitalinvestment has been recovered, whether the proposed septage treatment plants are ready or not.The proposed project includes financing for the design of future sewerage and sanitationinvestments required to phase out sea disposal of septage by the year 2003. At negotiations,MWSS confirmed its commitment to the cessation timetable (see para 3.13).

6.23 There are no other unusual risks associated with the project. Some resistance toconnecting to the sewer system is possible particularly if households are satisfied with existingarrangements and want to avoid paying the sewerage charge. However, the planned expansion of10,000 connections is small in a metropolitan area the size of MM. Further, it is expected that the

29

sewerage charge may be extended to all consumers in the future since wastewater from allhouseholds enters either the separate sewer system or the combined sewer and drainage system.This would eliminate the disincentive to connect.

6.24 The inability of MWSS to manage the increased scale of the septic tank managementprogram could also pose a project risk. This risk will be minimized by giving a contract for theoperation and management of the entire septage collection and disposal arrangement to theprivate sector. This would also increase private sector participation in MWSS operations, whichis considered desirable by the Government.

6.25 Continued inadequate maintenance of rehabilitated and newly constructed facilities wouldconstitute a risk to the project and undermine its economic justification. This problem would beaddressed by ensuring that revenue generated from sewerage and environmental charges issufficient and not diverted for other purposes and that the budgetary provision for maintenanceand repair is adequate. As part of project preparation, SSD has undertaken an asset inventory andproduced maintenance guidelines which would be used to ensure adequate budgetary allocationfor preventive and regular maintenance.

6.26 Another potential risk is the possibility of delayed implementation of rehabilitation ofseparate Central and Ayala sewerage networks by one to two years due to the uncertainties ofrehabilitation works and difficulties with excavation in MM under heavy traffic conditions. Theconcentration of all rehabilitation works in one contract would attract a larger and moreexperienced contractor, which would mitigate that risk.

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7. AGREEMENTS REACHED AND RECOMMENDATION

Agreements

7.1 During negotiations, assurances were obtained from the Government and the MWSS that:

(a) MWSS would establish and hold the Special Account in a commercial bankspecially authorized for this purpose by the Bangko Sentral ng Pilipinas on termsand conditions acceptable to the Bank (para 3.22);

(b) MWSS would submit a report summarizing the results of monitoring thecompliance with the EMPs annually starting from December 31, 1996 and a reportcontaining an independent audit of the septage management program annuallystarting from June 1997 (para 3.25);

(c) MWSS would prepare a separate budget for the overall sewerage activity includingthe income statement and balance sheet for FY97 and thereafter (para 5.1);

(d) Commencing during FY97, cash transfer of the difference between the water andsewerage inter-fund receivable and payable accounts would be made at the end ofeach quarter, and the account closed at each year end (para 5.7);

(e) MWSS financial statements, including separate ones for SSD, as well as SpecialAccount and Statements of Expenditure, will be audited by independent auditorsacceptable to the Bank, and will be submitted to the Bank within six months of theclose of each fiscal year (para 5.8);

(f) MWSS net accounts receivable would not exceed three months of billingcommencing from FY96 (para 5.11);

(g) MWSS shall take all necessary measures including adjustments of the structure orlevels of sewerage rates and shall produce, for each fiscal year starting in 1996,funds from SSD's internal sources equivalent to not less than 25% of annualaverage of SSD capital expenditure (para 5.19);

(h) MWSS shall not incur for its sewerage activity any debt unless a reasonableforecast of SSD's net revenues for each fiscal year during the term of the debt tobe incurred shall be at least 1.2 the estimate of the debt service requirements forthe activity (para 5.20);

(i) MWSS would send the Bank (a) no later than March 31 and September 30 of eachproject year, commencing on September 30, 1996, semi-annual project progressreports, including revised project cost estimates and implementing schedules, (b)no later than March 31 of each project year, commencing on March 31, 1996,SSD's annual updated financial projections, and (c) no later than six months aftercompletion of the project the evaluation report on project implementation (para5.21); and

31

(j) MWSS would adhere to the timetable for cessation of sea disposal of septage(para 6.22).

7.2 At negotiations, the Government and the MWSS confirmed (a) project financing plan(para 3.10), (b) adherence to the implementation action plan defining the scope and timing ofactions (para 3.13), (c) format and content of progress and project evaluation reports (3.32), and(d) SSD financial plan (para 5.16).

7.3 At negotiations, the Government confirmed that in the event of changes in theresponsibility for providing sewerage services in MM from MWSS to another entity duringimplementation of the project, it would consult the Bank prior to undertaking any such changes orrestructuring (para 4.11).

7.4 The following would be conditions of loan effectiveness: execution of lease agreementbetween DPWH and MWSS (para 3.14); receipt by MWSS of ECCs for collection, barging andsea disposal, Dagat-Dagatan pilot septage treatment plant, and rehabilitation of Central and Ayalasewerage systems and Ayala treatment plant (para 3.26); the implementation of water tariffincrease, including indexed sewerage tariff and environmental charge (para 5.5); and completionof mathematical modeling of septage dispersal at the ocean disposal site (para 6.20).

Recommendation

7.5 Subject to the above assurances and conditions, the proposed project constitutes a suitablebasis for a Bank loan of US$57.0 million equivalent, for a period of 20 years, including a graceperiod of five years, at the Bank's standard variable interest rate. The borrower would be MWSSand the Government would provide the loan guarantee.

32 ANNEX 1

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Services in the project area

General

1. Metro Manila (MM) covers an area of about 636 km2 along the eastern shore of ManilaBay. MM is the primary administrative and cultural center, with the highest concentration ofcommerce, industry, manufacturing, banking and education services. It comprises eight cities andnine municipalities' with total 1995 population of 8.9 million. The built-up area occupies about300 km2 or 47% of the total area. About 2.5 million or near 30% of the total, mainly migrantsfrom rural areas, live in about 600 slums. The combined effects of population pressures andineffective control of industrial growths, have contributed to the overloading of the existinginfrastructure and to a rapid deterioration of the environment.

2. The sewerage and street drainage services are provided by the Metropolitan Waterworksand Sewerage System (MWSS), a government corporation established in 1971, and by eachmunicipality, respectively. Canals, rivers and main drainage works controlling floods aremaintained by the Department of Public Works and Highways (DPWH). The responsibility forplanning and coordination of several metro-wide services, namely transport and trafficmanagement, solid waste management, pollution control, flood control, drainage, sewerage, landuse planning and zoning was recently vested in the Metropolitan Manila Development Authority(MvMDA) established in March 1995. Its policy-making and governing body is a councilcomposed of all MM mayors, the chairman of the council has the rank of a cabinet member and isappointed by the president.

Water Supply

3. Water in MM and neighboring Rizal and part of Cavite provinces is supplied by MWSSand about 2,200 private wells. In 1994 the MWSS daily average production was 2.8 million m3,of which 1.15 million m3 was sold (0.67 million m3 to residential users, 0.3 million m3 tocommercial users, 0.12 million m3 to government users and 0.06 million m3 to industries) and1.65 million m3 was non-revenue water. Water was sold through 815,000 connections of which93% were residential. The water supply system capacity is about 2.90 million m3/d. MWSS isexpanding its production and distribution capacity to 3.1 million m3/d in 1996 and 4.0 million m3/dby 1999.

4. Only specific areas of MM, plus some parts of Bacoor and Kawit in Cavite are served byMWSS's central distribution system; peripheral areas in the north, east and south and the otherparts of Cavite and Rizal rely predominantly on isolated MWSS or private groundwater systems.Water use through private wells in 1994 was estimated at 0.94 million m3/d, of which 0.46 million

The cities of Manila, Makati, Mandaluyong, Muntinlumpa, Pasay, Pasig, Quezon and Calookan and municipalities of LasPinas, Malabon, Marikina, Navotas, Paranaque, Pateros, San Juan, Taguig and Valenzuela.

33 ANNEX I

m3/d was residential, 0.40 million m3/d industrial and 0.07 million m3/d commercial use. Of thetotal, 0.64 million m3 /d was used in MM and the rest in Rizal and Cavite.

Sewerage Services

5. The physical infrastructure for the provision of sewerage and sanitation services in theservice area are separate sanitary sewerage systems, public (communal) sanitation facilities, andprivate septic tanks. There are five sanitary sewerage systems in operation in the area: (i) theCentral Sewerage System, (ii) the Ayala System, (iii) the Dagat-Dagatan System, (iv) the QuezonCity System, and (v) the National Housing Authority Systems.

Central Sewerage System

6. The Central Sewerage System (CSS) is designed Jo operate as a separate sanitarysewerage system to serve an area of 26.17 km2 or 70% of Manila city. In 1994, the number ofhousehold connections to the system was 85,000 and it was estimated that the system servesabout 930,000 people (based on the planning figure of 11 persons per water connection). In1991, about 21,000 households (pop. 230,000) within the system were not connected. The CSSwas originally constructed during 1904-11. It consists of two collection networks, north andsouth of the Pasig River, of about 187 km of sewer mains, initially covering an area of about 18.3km2 . Its trunk and main sewers are mostly made of cast-in-place concrete, while the majority ofsmaller lines (525 mm and below) are made of vitrified clay. It has a double barrel siphon underPasig River made of 2 x 600 mm diameter CI pipes encased in concrete.

7. The northern system includes the Legarda and Sta. Cruz lift stations and the southernincludes the Paco, Malate, Luneta and Port Area lift stations. Both systems terminate at theTondo station which pumps the wastewater through a 1050 mm outfall 3.8 km into Manila Bay.The Sta. Ana sewerage system, constructed in 1935-37, includes the collection system and a liftstation, initially discharging into a communal septic tank with an effluent pipe to the Pasig River.This system was connected to the CSS within the phase I expansion program (1981-85), underwhich the communal septic tank was abandoned, and the lift station discharge pipe connecteddirectly to the Paco trunk line.

8. The expansions carried out within the phase I increased the original service area by 7.87km2. Apart from the connection of the Sta. Ana system to CSS, the following major expansionsto the central service area have been made: a) Pandacan Catchment (3.61 km2) was provided witha separate sewerage system consisting of 31 km of sewer mains ranging from 200-900 mmdiameter; b) Dagupan Catchment separate system (2.76 kM2) consists of 59 km of sewer mainsand laterals of 200-1200 mm diameter; c) Tondo Foreshore Catchment separate sewerage systemwas developed by the National Housing Authority (NHA) during 1976-79 and was taken over byMWSS and connected to the central sewerage system in 1985. It covers an area of 1.5 km2.

9. The phase I rehabilitation works not only replaced the dilapidated facilities but alsoincreased their capacity to cope with the greater wastewater flows. The Tondo stationrehabilitated under phase I includes a bar-screen house, pump station building, four dry-pit typenon-clog centrifugal pumps with two variable-speed and two constant-speed drives, and electrical

34 ANNEX 1

and control equipment for automatic operation. The capacity of the station is 5.0 m3/s. The newBay outfall includes 3.9 km of 1800 mm diameter pipe of which 1.2 km are on-shore and 2.7 kmoffshore. Screened raw wastewater is discharged through this outfall into the Bay via a 350 mdiffuser section at a depth of 11 m.

10. A major objective of the phase I project was the rehabilitation of the collection system andof the seven lift stations. The original contract for sewer rehabilitation included a comprehensiveTV-inspection, as well as cleaning and rehabilitation of the entire central collection system. Itfurther included: (a) raising of manholes and replacement of all unserviceable and substandard CIframes and covers; (b) grouting of leaking pipe joints and repair of damaged pipes and (c)construction of overflows with flap valves and closing or plugging inflow sources such asdrainage bypasses without flap valves.

11. However, the project was substantially reduced due to shortage of funds. It was dividedinto smaller construction contracts with one providing equipment for MWSS's cleaning andrehabilitation unit. Further, the additional manholes were reduced to 93. The construction ofoverflows with flap valves was limited to six and design was greatly simplified to further reducecost. TV-inspection was reduced to selected pipes below 450 mm diameter. The TV inspectionrevealed many badly cracked sewer pipes, leaking pipe joints, misaligned pipe sections, andsagged lines with considerable siltation. Examination of the Pasig River twin-pipe inverted siphonrevealed an obstruction in the eastmost pipe. The reduced capacity of the siphon causes backingof sewage to the Luneta lift station. The obstruction could not be removed during the program.Similarly, a majority of various defects was not repaired due to lack of funds. The rehabilitationprogram of the seven lift stations included converting the existing dry pits to wet pits, repairingsub- and super- structures, constructing external by-pass structures, installing new non-clogsubmersible sewage pumps and electrical equipment. There are three to five identical pumps ineach station with one unit providing stand-by capacity. The proposed external by-pass structureswere not implemented during the rehabilitation program due to limited outside space at the Pacoand Legarda lift stations.

12. Despite the rehabilitation carried out within the phase I, the collection and lift functions ofCSS are in poor condition. While the system is designed to be operated by gravity with severalintermediate lift stations, most of the time, it is operated under surcharged conditions due to: (a)heavy surface water inflows from esteros and drainage canals during times of high tide; (b)reduced capacity of the Tondo station since the two variable speed pump-sets have wornimpellers and are out-of-operation and (c) clogged and broken sewer pipes which allow the liftstations to operate for only a few hours daily.

13. Other defects and deficiencies are: (a) thirty overflows to drainage lines or esteros arewithout flap valves; (b) twenty-eight major defects on sewer lines are on record but neverrepaired; (c) about 21,000 house connections are still to be installed in the expanded centralservice area. Homeowners are reluctant to connect for two reasons (i) reluctance to pay for theinternal house and plot pipe relocation and (ii) despite the fact that service connections are madefree of charge, the beneficiaries of the Tondo Foreshore and Leveriza NHA projects refuse toconnect due to deficient sewer lines (silted and obstructed lines, overflowing manholes); (d) SSD

35 ANNEX I

maintenance equipment is dilapidated or not operational; and (e) vital spare parts formechanicalUelectrical equipment (a pre-requisite for smooth operation) are not in stock.

Ayala System

14. The Ayala Sewerage System covers an area of 6.0 km2, of which 3.7 km2 are high-incomeresidential areas, 1.8 km2 are used by commerce (Makati Commercial Center and the high riseoffice blocks in Salcedo and Legaspi Villages), and 0.2 km2 are occupied by institutions (hospital,colleges and churches). The rest is open space (parks). The system has 3,009 house connections.The population equivalent of the commercial/institutional service is estimated at 85,000.

15. It is located in a part of Makati known as the Ayala sub-division, and development wasstarted in the early 1950 by the Makati Development Corporation, now called Ayala LandCorporation (ALC). During 1958-64, the ALC constructed a separate sanitary sewerage systemalong with a trickling filter wastewater treatment plant (WTP); all subdivisions developedthereafter were provided with a sanitary sewerage network connected to the treatment plant.During 1977-79, the trickling filters were abandoned and replaced by an activated sludge plant,and expanded to its present capacity of 40,000 m3/d. The Ayala Sewerage System was operatedby the ALC until July 1991 when the ownership was transferred to MWSS.

16. The sewerage network is operated by gravity with the flow being collected at the WTPsituated in the low lying south-western tip of the service area adjacent to the high-incomeresidential neighborhood. The sewerage system has 69 km of sewer pipes from 200 mm-1050mm, all made of reinforced concrete. The WTP has a designed capacity to provide primary andsecondary treatment for an average flow of 40,000 m3 per day. Secondary treatment uses anactivated sludge process. The final effluent from the plant is discharged into the MaricabanCreek. Sludge from both the primary and secondary treatment is conveyed in primary andsecondary anaerobic digesters for stabilization. Digested sludge is dried in beds and collected byfarmers and used as soil conditioner/fertilizer.

17. The plant is overloaded and periodically overflows to surface streams. There are twomain reasons for the surcharged conditions: first, the network capacity is reduced due to pipedefects and clogging, the most critical being the trunk line along EDSA highway which is the mainartery of the scheme. Second, unauthorized surface water connections have been made, resultingin large volumes of surface water entering the separate sewer network. Eliminating these defectswould reduce wastewater flows to below the present capacity of the two trunk sewers enteringthe WTP. The plant is presently under-performing for the following reasons: (a) the plant is inpoor state of repair; (b) some of the mechanical equipment has been removed from service; (c)most, if not all, of the existing mechanical and electrical components are worn out, making areliable and continuous operation impossible; (d) spare parts for the old equipment cannot beobtained; (e) all the measuring and control equipment is either removed from service orinoperable; (f) several concrete structural components' systems and many of the electrical conduitsystems are severely corroded; (g) blowers serving the secondary aeration processes are operatedonly a few hours during daytime, when nearby residents are least likely to complain about odors.To avoid complaints about noise, blowers are not operated during night hours. In order to keep a

36 ANNEX I

certain level of aeration, floating aerators are operated and (h) the digester gas piping system andgas flare have been removed; gas generated in digesters is discharged directly to the atmosphere.

Dagat-Dagatan System

18. Dagat-Dagatan is one of the major sites and services housing projects developed by theNHA during 1979-86. It covers parts of the municipalities of Navotas, Malabon, and the cities ofCaloocan and Manila. It has an area of 3.32 kM2, which was reclaimed by an average landfill of2.5 meters. The sewerage system comprises about 18 km of sanitary sewers, a pumping stationand wastewater treatment in oxidation ponds. The ponds cover an area of approximately 5 ha. Ofthe three modules initially planned, each having an aerated, facultative and polishing pond, onlytwo have been constructed. The site of the third module has been occupied by squatters. In 1991MWSS took over the facilities.

Quezon City System

19. Quezon City has 41 minor sub-divisional sewerage systems covering a total service area ofabout 13 km2. The total sewer length is about 114 km ranging in diameter from 200 mm to 600mm. Of the 41 systems, 39 have a communal septic tank and two are provided with Imhoff tanks.As of 1994, 23,300 households were connected. Some of the communal septic tanks havebecome inaccessible due to obstructions by illegal buildings. Desludging of the treatment facilitiesis not done regularly.

National Housing Authority Systems

20. The National Housing Authority has nine sub-divisional sanitary sewerage systems built aspart of their housing projects which they are expecting to turn over to MWSS. One of these, theKarangalan sewerage system in Cainta (Rizal), has just been turned over to MWSS. The othersare: Martin de Porres sewerage system in Cubao, Quezon City, Tangos sewerage system inTangos, Navotas, Capri sewerage system in Novaliches, Quezon City, Maricaban seweragesystem in Pasay City, Maharlika Village sewerage system in Taguig, Leverita sewerage system inMalate, Manila City, Juan Luna sewerage system in Tondo, Manila City, Bangong-Nayonsewerage system in Antipolo, Rizal.

Public Sanitation Facilities

21. There are 25 community-managed public sanitation facilities (PSF) in MM. The facilitiesin each unit incrude: public faucets, toilets, bathrooms and laundry areas. Wastes from thesefacilities are collected and treated in septic tanks.

Private Septic Tanks

22. Most of the population in MM rely on private individual septic tanks for their sanitationservices. While it is estimated that there is about one million the actual number is not known.One of the goals of the proposed Manila Second Sewerage Project is to acquire information onthe number of such private individual septic tanks during the first phase (1996-98) of the project.

37 ANNEX 1

In later projects, several septage treatment plants (with an aggregate capacity of 3,000 m3/d)would be constructed.

23. As a rule, the septic tanks have no soil absorption systems, nor are they regularlydesludged. Consequently, the effluent is discharged, along with the sludge (septage), into theinland waterways, typically through the existing storm drains. Unserviced septic tanks areestimated to contribute at least 150 tons of BOD per day into the inland waterways.

24. Desludging services are provided under a special program known as STAMP, an acronymfor Septic Tank Maintenance Program. It was developed under METROSS I which providedfinancing for collecting vehicles. There are two parallel septic tank emptying services inoperation: scheduled and unscheduled. Scheduled services, provided by private contractorsretained by MWSS, were initially expected to achieve desludging of about 120,000 tanks annuallyor each septic tank once in a five-year period. Each contractor serving a specific service area wasalso responsible for transporting the septage and securing suitable sites for its disposing. Becausemost contractors had difficulty in securing sites acceptable to the Environmental ManagementBureau, only two operate at present. Both discharge the collected septage at a stone quarryleased from a private owner about 65 km north of MM. The MWSS monitors the contractor'soperations both at the pick-up point and at the disposal site. Arrangements are under way toengage four additional septage collection contractors.

25. Unscheduled services, designed to meet customer emergencies as well as desludgingcommunal septic tanks, are provided by staff of the Septic Tank Maintenance Division of SSD.The collected septage is discharged into the Luneta lift station from where it is pumped along withother wastewater to the Tondo Pumping Station for final disposal through the marine outfall. TheMWSS uses six 11.7 cubic meter tanker trucks and three portable gasoline-driven diaphragmpumps.

26. Households are charged separately for the unscheduled service; the scheduled services arecovered by a 10% environmental charge levied on all MWSS water bills. From 1981 to June1992, 17,144 septic tanks, or on an average 1,550 tanks annually, were desludged under thescheduled maintenance program. In 1991, however, only 1,160 septic tanks were serviced, farbelow 120,000 annually to meet the MWSS target of five-year cycle of desludging. From 1981 toJune 1992, 5,183 septic tanks were desludged under the unscheduled program, with 212 beingserviced from January to June of this year.

27. The key constraints to acceptable servicing of septic and Imhoff tanks in MM are: (a)difficulty in identifying sites to meet the Environmental Management Bureau's requirements forthe disposal of the great volume of septage; (b) lack of access to many septic tanks, and (c)necessity and difficulty in liquefying septage, which involves diluting it with water adding volumeto the septage. To address the constraints, it has been proposed that: (a) MWSS should provideadequate treatment facility to facilitate final disposal of septage; (b) regulations and enforcement(for septic tank location) be more rigorous for those obtaining building permits and (c) the use ofconcrete mix vibrators, rather than adding water for liquefying sludge.

38 ANNEX 1

Drainage

28. Drainage is one of the most important infrastructure systems in MM since a considerablepart of the area is flat and its river system is charged with high flows originating in higher reachesduring the five-month rainy season. The drainage system in MM covers most of the built-up area;however, Rizal and Cavite provinces have only very limited facilities. The drainage system hastwo components: (a) the flood control and main drainage system, and (b) the local street drainagesystem.

29. The flood control and main drainage system represents the primary collection for floodcontrol. It includes a network of 450 km of rivers and open canals 2.0 m to 60 m wide, about 41km of box culverts and closed conduits of large diameters, 835 km of collecting drains of variousdiameters and 12 flood control pumping stations (capacity 172 m3/s in total), flood gates andretention ponds. The main drainage facilities are provided, operated and maintained by the FloodControl and Drainage Division of DPWH.

30. The local street drainage system consists of several thousand kilometers of open andcovered drains and pipes with diameters less than 750 mm. It represents the secondary andtertiary collection network, which empties itself into the primary or main storm drainage system.The Local Government Code of 1991 assigns the responsibility for the street drainage system (andpublic sanitation) to MM cities and municipalities; these responsibilities are usually carried outwithin the city engineers department in connection with road construction and maintenance.While the main drainage system is reasonably well maintained, the street drains are generallypoorly constructed and inadequately maintained. The technical documentation on the type, size,length, location, etc. of street drains is available in the city engineers departments but is usuallyincomplete.

31. By default, though not by design, the drainage system serves as a combined storm andsanitary sewer system. This is because, in addition to functioning as conduits for storm waterdrainage, they also carry sanitary wastewater effluent from septic tanks which are generallydesigned without any soil absorption systems. This is deemed to be one of the major sources ofpollution of the inland waterways in MM.

Solid Waste Management

32. The responsibility for solid waste management and disposal in Metro Manila, rests withthe newly established Metro Manila Development Authority (MMDA). This includes theformulation and implementation of policies, standards, programs, and projects for proper andsanitary collection and disposal. It also includes the implementation of alternative programs toreduce, reuse and recycle solid wastes.

33. The amount of solid waste generated in MM was estimated in 1995 to be about 5,500 tonsper day. Of the quantity generated, about 75%-80% is collected. Some of the rest is partlyburied or burned at source, but the majority is deposited into drainage systems, esteros and rivers,thereby making a significant contribution to the pollution of inland waterways. In 1995 therewere two open dumping stations, one transfer station, and two sanitary landfill sites. The two

39 ANNEX 1

sanitary landfill sites are the San Mateo landfill located in the north, and the Carmona landfill inthe south. They are being operated provisionally, pending detailed designs and an environmentalimpact assessment. It is envisioned that the landfills, planned to be completed in 1998, wouldaccept dewatered sludge from future septage or wastewater treatment plants.

40 ANNEX 2

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Project description

General

1. The improvement of wastewater services in Metro Manila (MM), outlined in the 1979sewerage master plan, envisaged a phased expansion of the conventional separate seweragesystem. Only a part of its first phase, however, was implemented and foliowing phases had to bediscontinued on account of prohibitive costs. Subsequent reviews have indicated that adoption ofa combined sewerage system which would utilize the existing drainage network and the largenumber of household septic tanks would allow a gradual, and less expensive alternative forwastewater services and reduction of pollution. Based on these findings, MWSS' consultantsunder JICA financing are now preparing a new (1996) sewerage master plan which will proposephased upgrading of existing facilities into a combined sewerage system.

2. Properly operated septic tanks could remove from wastewater at least 30% of thepollution expressed in BOD, a key condition for which is periodic removal of the sludge from thetanks; an adequate desludging program, however, has never been implemented in MM due tounavailability of any treatment facility or sites suitable for disposal of septage.

3. A septage management plan developed within the project addresses that deficiency. Theplan aims at desludging during 1996-2010 each of the one million septic tanks estimated to existin MM. Since current data necessary for locating and constructing a large-scale septage treatmentplant are not available the plan proposes to acquire in the first phase (1996-1999) the necessarydata through (a) providing a pilot septage treatment plant with the capacity of 200 m3/day and (b)desludging about 300,000 tanks. In the second phase (1999-2005) and the third phase (2006-2010), which would both essentially coincide with the phased upgrading of the sewerage system,the master plan proposes the construction of several septage treatment plants with an aggregatedcapacity of over 3,000 m3/d, and desludging about one million tanks. The plants will be designedon the basis of one year operation of the pilot plant and evaluation of data on characteristic andspatial distribution of septage acquired during desludging of the 300,000 tanks. The septagecollected during the data acquisition and the treatment plants construction will be disposed of atan allocated dumping site in the sea. The dumping of septage will start in early 1996 with aquantity of about 1,000 m3/d, which will increase to 1,500 m3/d during 1999-2001 and decreaseto 600 m3/d in 2003. The sea dumping will be terminated at the end of 2003.

Project components

4. The project will: (a) construct three barge loading stations for temporary disposal ofseptage at sea under a private collection and disposal contract, (b) construct a pilot septagetreatment plant, (c) rehabilitate the central and Ayala sewerage systems, Ayala treatment plant,and construct about 10,000 sewer house connections in the MWSS service area and (d) providemaintenance equipment, tools, spare parts and laboratory instruments. The technical assistance

41 ANNEX 2

will (i) help implement the project including support for environmental monitoring andmanagement, (ii) prepare designs and documents for the follow-up expansion of the seweragesystem and the septage treatment plants, and (iii) prepare documents for implementation of thenext water supply project.

5. The proposed project is intended to help the Government improve the quality of sanitationservices and to enable MWSS to radically expand its septage management program in order to:(a) quickly reduce the pollution of Metro Manila waterways and Manila Bay, (b) reduce the healthhazards associated with human exposure to sewage, and (c) establish the conditions needed forgradual low-cost improvement of sewerage services in Metro Manila.

Septage management

6. The septage management represents pilot operation which covers three aspects namely: (i)collection and hauling of septage from septic tanks, (ii) sea dumping of septage, and (iii) pilotseptage treatment plant. Based on the estimated distribution of septic tanks, the Metro Manilaarea is subdivided into collection areas, first two and the third later, served by three barge loadingstations (Napindan, Estero de Vitas first and Paranaque) and by the Dagat Dagatan pilot septagetreatment plant. The collection, hauling and sea dumping of septage will also include extensivedata gathering on the quality and quantity of septage, types and state of repair of tanks. Theseactivities will be aggregated into one contract for each barging location and treatment plant andcarried out by contractors employed by MWSS. The specification for collection will require thatpriority be given to the Pasig River area and that at least 80% of septage be pumped by vacuumpumps provided with deodorizing chamber for vacuum exhaust in order to protect theenvironment during the collection.

7. The barge loading stations are: Napindan, located at the confluence of the Napindan andthe Pasig rivers, Estero de Vitas, located at the Manila Bay shore adjacent to the mouth of theEstero de Vitas in Navotas, and Paranaque, to be located on land to be reclaimed along theParanaque Channel. The on-going reclamation is to be completed in 1997 and includes deepeningof the Channel to six meter depth. The stations will operate as typical load transfer stations andwill consist of: pipes to convey the septage from the septage tanker to the barge, water flushingfacility to clean the tanker with the river or Bay water, small office to monitor the stationoperations, parking place for septage tankers, and barge berthing with appropriate moorings.

8. The dumping area for septage designated by the Philippine Coast Guard is located 68 kmoff Corregidor Island at the inlet to Manila Bay from Luzon Sea. In the initial three years only thebarge loading stations at Napindan and Estero de Vitas will be operational. The third station atParanaque will be constructed in 1999 after the ongoing land reclamation in the area is completed.The dumping cycle is approximately 44 hours consisting of loading (12 hours), navigation (12hours one way) and spread dumping (8 hours). The vessel could be either a tanker-type bargetowed by a tugboat or a tanker ship. In either case the vessel draft must be low to conform to theshallow conditions in the barge loading stations. The sea dumpsite environment will be monitoredjointly by the barging contractor, MWSS and the Coast Guard with results to be submitted to theEnvironmental Management Bureau.

42 ANNEX 2

9. The treatment will be provided at the existing plant at Dagat-Dagatan where septage willbe delivered by collection vehicles. The treatment will be provided by one module of 200 m3/dcapacity. Septage will pass through grit removal and screening to a coagulation tank and, from aholding tank, pass through a 15 m3/hr centrifuge. The filtrate from the centrifuge will be pumpedthrough a dilution tank to the existing lagoons for treatment. Sludge from the centrifuge will bere-dosed with polymer and passed through a secondary centrifuge. Thereafter, de-wateredsludge, grit and screening will be disposed of at San Mateo sanitary landfill.

Rehabilitation of central sewerage system

10. The works to be carried out under the project will include: (a) pipeline and manholerenovation; (b) installation of flap valves; (c) pumping station and lift station improvements; (d)provision of standby equipment; (e) cleaning the Pasig River siphon and Tondo outfall diffuseroutlets; (f) construction of about 10,000 new house connections to sewers.

11. These components are aimed at restoring the system to its designed capacity with gravityflow conditions being maintained between pumping stations. To attain this, backflow fromesteros and inland rivers into the sewerage system must be eliminated and pumping stations willbe upgraded to ensure continuous operation. The Pasig river crossing will complement theexisting twin-pipe syphon under the river. At present one of the pipes is blocked and will becleared under the project.

12. The activities included are as follows: (a) pipeline renovation: repair of 28 identifiedmajor, and 100 minor defects, construction of (i) 30 overflow structures with flap valves toprevent backflow, (ii) 30 new manholes and procurement of 2000 manhole frames and covers and(iii) new by-pass structures at Paco and Legarda pumping stations, (b) upgrading of pumpingstations: installation of new screens of stainless steel and grit traps at Tondo pumping station andseven lift stations, provision of spare parts for pumping stations; provision of standby pumps andgenerator at each pumping station; removal of blockages from the siphon and diffusers at the endof the Tondo outfall sewer; and new sewer connections as required.

Rehabilitation of Ayala sewerage and treatment

13. The project will: (a) replace a defective sewer in EDSA with 486 m of 1050 mm pipe; (b)repair about 30 sewer defects; (c) construct 20 new manholes; procure 200 manhole frames andcovers; construct 30 m of 2 x 600 mm syphons on Amorsolo Street, and (d) construct three newoverflow sewer lines 30 m long and 900 mm diameter with manholes and flap valves, alongAmorsolo Street.

14. Since the on-going Master Plan studies will propose changes affecting the role of the plantwithin the overall system in Metro Manila, the project proposals have been limited toreinstatement of the mechanical pretreatment, i.e. of inlet works and primary sedimentation tanks.The inlet pumps will be replaced and the grit tank's mechanical equipment comprising a gritcollector, grit pump, rotary blowers and an air diffuser will be replaced. The primarysedimentation tanks require new inlet baffles, sludge scrapers and effluent weirs for each of thefour tanks.

43 ANNEX 2

Laboratory and maintenance equipment

15. Equipment to be provided under this component of the project will include vehicles,machinery and tools needed for improved maintenance of the sewerage system and pumpingfacilities and specialized furniture, equipment, apparatus and materials to upgrade MWSS'laboratories.

Institutional Support

16. The project support will include consulting services for: (a) construction supervision; (b)implementation of pilot septage management program, (c) design of programs to assess andminimize environmental impacts, and (d) preparation of follow-up sewerage and water supplydevelopment projects.

17. Consultants will assist MWSS in day-to-day supervision of the construction program.Their duties will include verifying compliance with specifications for works and goods,supervising adherence to construction schedules, testing and commissioning completed works andequipment, advising on training of staff to operate completed facilities, preparing procurementdocuments and preparing progress reports and other documents needed for carrying out theworks.

18. With regard to the pilot septage management program, consultants will assist MWSS in(a) training, licensing and selecting collection and barging contractors; (b) identifying data to begathered by (i) the contractors on septic tanks' volume, design, location, state of repair,accessibility and users, and volume of septage disposed in the sea, and (ii) MWSS on operation ofseptage treatment plant at Dagat-Dagatan, such as BOD, SS and daily quantity of incomingseptage and performance of treatment units; (c) identifying parameters to assess environmentalimpacts of these activities; and (d) ensure compliance with contracts specifications. On the basisof comments received from various agencies and during public consultations on the environmentalimpact assessment report consultants will help MWSS in preparing final environmentalmanagement plans.

19. Consultants will prepare designs and documents for implementation of the seweragemaster plan now under preparation (third sewerage project), the second phase of septagemanagement plan (fourth sewerage project), and for the proposed Manila water supply III projecton basis of TOR to be prepared upon completion of respective studies.

44 ANNEX 3

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Project cost estimate

List of tables:

1. Table A 3.1 Base cost and contingencies,annual expenditures in US$.

2. Table A 3.2 Base cost and contingencies,annual expenditures in Peso.

3. Table A 3.3 Total cost including contingencies,annual expenditures in US$.

4. Table A 3.4 Total cost including contingencies,annual expenditures in Peso.

45 ANNEX 3

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

PROJECT COSTTable A 3.1: Base Cost and Contingencies, Annual Expenditures in USS

-- MILLION PESO --- % Of - MILLION USS -- Phys. % - MILLION US$--WORKS Base Contin- Foreign

Local Foreign Total Cost Local Foreign Total gencies 1995 1996 1997 1998 1999

1. Septage ManagementCivil Works 126 32 158 10.5% 5.06 1.26 6.32 5.0% 20.0% 0.00 2.72 2.84 0.63 0.13Equipment 43 145 188 12.5% 1.73 5.79 7.52 5.0% 77.0% 0.00 2.86 3.76 0.75 0.15

2. Central System 2/Civil Works 257 64 321 21.3% 10.27 2.57 12.84 5.0% 20.0% 0.00 2.05 4.37 3.60 2.82Equipment 27 89 116 7.7% 1.07 3.57 4.64 5.0% 77.0% 0.00 1.39 2.32 0.79 0.14

3. AyalaCivil Works 109 27 136 9.0% 4.35 1.09 5.44 5.0% 20.0% 0.00 1.80 2.01 1.47 0.16Equipment 20 68 88 5.8% 0.81 2.71 3.52 5.0% 77.0% 0.00 1.06 1.23 1.16 0.07

4. Maint. Equip. ,Labor.Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0.00 0.00 0.00 0.00 0.00Equipment 34 138 172 11.4% 1.38 5.50 6.88 5.0% 80.0% 0.00 3.10 3.10 0.69 0.00

5. Implem. SupportStudies 66 44 110 7.3% 2.64 1.76 4.40 5.0% 40.0% 0.00 0.00 1.10 1.54 1.76Supervision 89 16 105 7.0% 3.57 0.63 4.20 5.0% 15.0% 0.08 1.30 1.30 0.97 0.55

6. Land AcquisitionCompensation 50 0 50 3.3% 2.00 0.00 2.00 5.0% 0.0% 0.00 1.00 1.00 0.00 0.00Lease 64 0 64 4.2% 2.56 0.00 2.56 5.0% 0.0% 0.00 1.28 1.28 0.00 0.00

BASE COST 886 622 1508 100.0% 35.43 24.89 60.32 41.3% 0.08 18.55 24.31 11.59 5.78PHYSICAL CONTINGENCIES 44 31 75 5.0% 1.77 1.24 3.02 41.3% 0.00 0.93 1.22 0.58 0.29PRICE CONTINGENCIES 279 43 322 21.4% 11.16 1.74 12.90 13.5% 0.01 2.70 4.93 3.16 2.09

TOTAL PROJECT COST 1/ 1209 697 1906 126.4% 48.36 27.87 76.23 36.6% 0.10 22.18 30.46 15.33 8.16

1/ Includes taxes equivalent to about USS8.0 million; 2 includes sewer house cornectionsDue to rounding the last digit in totals may appear different than the sum of digits

46 ANNEX 3

PHLIPPINESMANILA SECOND SEWERAGE PROJECT

PROJECT COSTTable A 3.2: Base Cost and Contingencies, Annual Expenditurs in Peso

-MILLION PESO--- % Of - MIUON USS- Phys. % ---- MILLON PESO--WORKS Base Contin- Foreign

Local Foreign Total Cost Local Foreign Total gencies 1995 1996 1997 1998 1999

1. Septage ManagementCivil Works 126 32 158 10.5% 5.06 1.26 6.32 5.0% 20.0% 0 68 71 16 3Equipment 43 145 188 12.5% 1.73 5.79 7.52 5.0% 77.0% 0 71 94 19 4

2. Central System 2/Civil Works 257 64 321 21.3% 10.27 2.57 12.84 5.0% 20.0% 0 51 109 90 71Equipment 27 S9 116 7.7% 1.07 3.57 4.64 5.0% 77.0% 0 35 58 20 3

3. AyalaCivil Works 109 27 136 9.0% 4.35 1.09 5.44 5.0% 20.0% 0 45 50 37 4Equipment 20 68 88 5.8% 0.81 2.71 3.52 5.0% 77.0% 0 26 31 29 2

4. Maint. Equip.,Labor.Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0 0 0 0 0Equipment 34 138 172 11.4% 1.38 5.50 6.88 5.0% 80.0% 0 77 77 17 0

5. Implem. SupportStudies 66 44 110 7.3% 2.64 1.76 4.40 5.0% 40.0% 0 0 28 39 44Supervision 89 16 105 7.0% 3.57 0.63 4.20 5.0% 15.0% 2 33 33 24 14

6. Land AcquisitionCompensation 50 0 50 3.3% 2.00 0.00 2.00 5.0% 0.0% 0 25 25 0 0Lease 64 0 64 4.2% 2.56 0.00 2.56 5.0% 0.0% 0 32 32 0 0

BASE COST 886 622 1508 100.0% 35.43 24.89 60.32 41.3% 2 464 608 290 145PHYSICAL CONTINGENCIES 44 31 75 5.0% 1.77 1.24 3.02 41.3% 0 23 30 14 7PRICE CONTINGENCIES 279 43 322 21.4% 11.16 1.74 12.90 13.5% 0 68 123 79 52

TOTAL PROJECT COST 1/ 1209 697 1906 126.4% 48.36 27.87 76.23 36.6% 2 555 762 383 204

i/ Includes taxes equivalent to about USSS.0 million; 2/ include sewer house connectionsDue to rounding the last digt in totals may appear different than the sum of dpits

47 ANNEX 3

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

PROJECT COSTTablc A 3.3: Total Cost Including Contingencies, Annul Expenditures in USS

---- - - - - ------- -- MILLION PESO ---- %Of -- MILLIONUSS- Phys. % --- Million USS -WORKS Total Contin- Foreign 1995 1996 1997 1998 1999

Local Foreign Total Cost Local Foreign Total gencies

1. Septage ManagementCiifl Works 168 35 204 10.7% 6.74 1.41 8.14 5.0% 20.0% 0.00 3.37 3.72 0.87 0.18Equipment 58 161 219 11.5% 2.31 6.44 8.76 5.0% 77.0% 0.00 3.24 4.41 0.91 0.19

2. Central System 2/Civil Works 359 73 432 22.7% 14.36 2.92 17.28 5.0% 20.0% 0.00 2.55 5.71 4.95 4.08Equipment 36 100 136 7.1% 1.44 3.99 5.43 5.0% 77.0% 0.00 1.58 2.72 0.96 0.17

3. AyalaCivil Works 147 30 178 9.3% 5.90 1.22 7.12 5.0% 20.0% 0.00 2.22 2.63 2.02 0.24Equipment 28 76 104 5.4% 1.10 3.04 4.14 5.0% 77.0% 0.00 1.20 1.45 1.41 0.09

4. Maint. Equip.,Labor.Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0.00 0.00 0.00 0.00 0.00Equipment 46 153 198 10.4% 1.83 6.11 7.94 5.0% 80.0% 0.00 3.49 3.61 0.83 0.00

5. Implem. SupportStudies 95 51 146 7.7% 3.81 2.03 5.84 5.0% 40.0% 0.00 0.00 1.39 2.03 2.42Supervioio 122 18 140 7.3% 4.88 0.71 5.58 5.0% 15.0% 0.10 1.63 1.72 1.34 0.80

6. Land AcquistionCompensaon 66 0 66 3.5% 2.63 0.00 2.63 5.0% 0.0% 0.00 1.28 1.36 0.00 0.00Lease 84 0 84 4.4% 3.37 0.00 3.37 5.0% 0.0% 0.00 1.63 1.74 0.00 0.00

TOTAL PROJECT COST I/ 1209 697 1906 100.0% 48.36 27.87 76.23 36.6% 0.10 22.18 30.46 15.33 8.16

1/ Inchldes taxes equivalent to about USS8.0 milion; 2/ includes sewer house connectionsDue to rounding the lst digit in totas may appear different than the sum of digits

48 ANNEX 3

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

PROJECT COSTTablc A 3.4: Total Cost Including Contingencies, Annuil Expenditures in Peao

--- - ---------- M11-M0LLION PESO--- % Of -MILLION USS--- Phys. % -- MljimO PESO-WORKS Total Contin- Foreigp 1995 1996 1997 1998 1999

Local Forign TotAl Cost Local Forign Total gencies

1. Septage ManaementCivil Works 168 35 204 10.7% 6.74 1.41 8.14 5.0% 20.0% 0 84 93 22 5Equipment 58 161 219 11.5% 2.31 6.44 8.76 5.0% 77.0% 0 81 110 23 5

2. Central System 2/Civil Works 359 73 432 22.7% 14.36 2.92 17.28 5.0% 20.0% 0 64 143 124 102Equipment 36 100 136 7.1% 1.44 3.99 5.43 5.0% 77.0% 0 39 68 24 4

3. AyalaCivil Works 147 30 178 9.3% 5.90 1.22 7.12 5.0% 20.0% 0 56 66 51 6Equipment 28 76 104 5.4% 1.10 3.04 4.14 5.0% 77.0% 0 30 36 35 2

4. Maint. Equip.,Labor.Civil Works 0 0 0 0.0% 0.00 0.00 0.00 5.0% 20.0% 0 0 0 0 0Equipment 46 153 198 10.4% 1.83 6.11 7.94 5.0% 80.0% 0 87 90 21 0

5. Implem. SupportStudies 95 51 146 7.7% 3.81 2.03 5.84 5.0% 40.0% 0 0 35 51 61Supervision 122 I1 140 7.3% 4.88 0.71 5.58 5.0% 15.0% 2 41 43 34 20

6. Lind AcquisitionCompenation 66 0 66 3.5% 2.63 0.00 2.63 5.0% 0.0% 0 32 34 0 0Lease 84 0 84 4.4% 3.37 0.00 3.37 5.0% 0.0% 0 41 43 0 0

TOTAL PROJECT COST 1/ 1209 697 1906 100.0% 48.36 27.87 76.23 36.6% 2 555 762 383 204

1/ Includes taxes equivment to about USS8.0 milion; 2/ includes sewer house connectionsDue to rounding the last digit in totals may apper different than the sum of digits

49

PHILIPPINES ANNEX 4

MANILA SECOND SEWERAGE PROJECT

IMPLEMENTATION SCHEDULE

COMPONENT/YEAR 1996 1997 1998 1999 2000 2001

Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

Treatment plant (200 m3/d) BBBAAACCCCCCCCCCCCCCCCCCZCZZZCz3ZZ3ZCtZCZCZZ3Z3333ZU

Barge transfer: Napindan BBAACCC

Est. de Vitas BBAACCCOOOOOOO

Paranague BBAACCCCCOOOOOOOOOOOOOOOOOOOOO

Upgrading Central i/ BBAACCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC

Upgrading Ayala BBAACCCCCCCCCCCCCCCCCCCCCCCCCC

Maint.& laborat. BBBAALh L T.T.TLLLTLTT..

Impl. support: Constr. superv DDDDSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS

Monitoring & eval. - E-----E-----E-----E-----E-----EEEEEEE

Studies & designs for

follow up projects DDDDDDDDDDDDDDDDDDDDDDDDDDD

Land Acquisition XXXX

Lease

Legend:

AAA - Contract award

EBB - Bidding, invitation and evaluation

CCC - Construction of facilities

DDD - Studies, designs and preparation of documents

EEE - Monitoring and evaluation of data

LLL - Delivery and installation of laboratory and equipment

000 - Operations of septage pilot facilities

SSS - Construction supervision

XXX - Land acquisition and lease

1/ includes sewer house connections

50 ANNEX 5

PHELIPPINES

MANILA SECOND SEWERAGE PROJECT

Summary of project implementation action plan

Start End Months

Activity

Sevage management

1) detailed designs and documents N/A 12/95 N/A

2) bidding, evaluation, award civil works Napindan & De Vitas 07/96 09/96 3

3) construction Napindan, De Vitas 10/96 12/96 3

4) bidding, evaluation, award civil works Dagat Dagatan plant 07/96 12/96 6

5) construction and installation Dagat Dagatan 01/97 04/98 16

6) testing, c9nunissioning Dagat Dagatan 02/98 04/98 3

7) land acquisition barging transfer Paranaque 01/98 05/98 5

8) bidding, evaluation, award civil works Paranaque 05/98 09/98 5

9) construction Paranaque 11/98 04/99 6

10)bidding, evaluation, award collection and barging transfer 07/96 10/96 4Napindan, De Vitas (incl. Dagat Dagatan later)

Rehabilitation

1) detailed designs and documents N/A 12/95 N/A

2) bidding, evaluation, award central, Ayala 07/96 10/96 4

3) construction central and Ayala 11/96 06/99 32

Laboraton and maintenance eguipment

1) detailed designs and documents N/A 01/95 N/A

2) bidding, evaluation, award 07/96 10/96 4

3) delivery and installation 11/96 03/98 17

Implementation sunnort

1) construction supervision, monitoring septage management, 09/96 12/99 39evaluation

2) designs follow up projects 09/97 12/99 28

51 ANNEX 6

PHILIPPINES

MANELA SECOND SEWERAGE PROJECT

Estimated schedule of loan disbursement(in US$ million)

Year and Loan Loan Loan SectorBank's Semester Disbursement in Disbursement Disbursement DisbursementFiscal Ending Semester Cumulative Percent of Total Profile

Year

1996 30-June 0.0 0.0 0 1

31-Dec 5.0 5.0 9 6

1997 30-June 6.0 11.0 19 14

31 -Dec 8.0 19.0 33 23

1998 30-June 9.0 28.0 49 35

31-Dec 8.0 36.0 63 44

1999 30-June 7.0 43.0 75 55

31-Dec 6.0 49.0 86 58

2000 30-June 4.0 53.0 93 64

31-Dec 2.0 55.0 96 71

2001 30-June 1.0 56.0 98 75

31-Dec 1.0 57.0 100 80

2002 30-June 0.0 57.0 100 86

31 -Dec 0.0 57.0 100 91

2003 30-June 0.0 57.0 100 97

31-Dec 0.0 57.0 100 100

Note: The sector disbursement profile has been developed on the basis of several typical water supplyand one sewerage project which do not reflect the civil works contract involved in construction of thepilot septage treatment plant (two 5-story buildings) and concurrently executed contract forrehabilitation of sewerage network.

52 ANNEX 7

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Environmental Assessment

Introduction

The proposed Manila Second Sewerage Project is expected to have a beneficial effect on MetroManila's environment by significantly reducing water-borne pollution, which would have positivepublic health benefits for its 8.9 million residents. By rehabilitating the Central and Ayala sewersystems, providing 10,000 additional individual sewer connections, and evacuating some 300,000septic tanks, it is expected to reduce BOD pollution of Manila's waterways by some 30%.Disposing of treated septage from those tanks through deep-sea dumping - a temporary measureuntil adequate land based treatment and disposal facilities come on-line - is not expected to havean adverse effect on the marine or coastal environments.

All project components have been reviewed by the Philippine Department of Environment andNatural Resources (DENR) under the Environmental Impact Statement Law, and discussed withcommunity organizations and non-governmental organizations (NGOs). DENR ruled that a fullEconomic Impact Assessment (EIA) was required for the construction of the Dagat-Dagatanseptage treatment plant (STP) while Project Descriptions (PDs) that briefly describe potentialenvironmental impact were adequate for septage collection, construction of barge loadingstations, sea disposal, and rehabilitation of the Central and Ayala systems. MWSS carried outimpact assessment studies with assistance from consultants in 1994 and submitted them to DENRin May 1995. DENR issuance of Environmental Clearance Certificates (ECCs) will be a conditionof loan effectiveness. A separate EIA report complying with Bank format was submitted to theBank, and a summary was circulated for Board review in June 1995. The report and the summaryare available in the project file.

During appraisal, the EIA reports and other related documents were reviewed and an overallenvironmental management plan (EMP) was prepared. The EMP will be implemented by MWSS,assisted by contractors and project supervision consultants. The plan will be integrated intobidding and contract documents, and the contractors responsible for project activities will beresponsible for environmental monitoring. MWSS will be responsible for monitoring andreporting compliance. A revised EIA report, including the EMP, taking into accountBank/ASTEN comments was submitted to the Bank in January 1996 and was found satisfactory.These reports are available in the project file.

The Dagat -Dagatan Septage Treatment Plant

The Dagat-Dagatan STP component was subjected to a full environmental assessment, includingconsultation with local residents. The proposed STP (2 ha) will be built on a vacant area ofMWSS's 15 ha wastewater treatment plant site. The plant is located along a stagnant creek, andis surrounded by a concrete wall to prevent encroachment by squatters. The low-lying area is

53 ANNEX 7

subject to frequent flooding and is about 1 km from the Smokey Mountain open dump site. Thearea is a low-income community with a high density of squatters and poor environmental quality.

Eighty-two percent of residents surveyed in the perception study reacted positively to the projectand viewed it as a possible source of employment. Some raised issues of inadequate piped watersupply in the area, decreases in land values, increases in odor and noise, and traffic congestion dueto septage collection tankers. Measurements suggested that apart from dust, air quality in thearea is within the standards for commercial/industrial areas. Noise levels (61-75 dBA) are withinthe 75 dBA maximum, and traffic appears to be the main source of noise. Noise levels at theplant site are about 61 dBA, but those at roadside are 72-75 dBA. Traffic on most of the mainroads is heavy.

The EIA showed that the STP, if properly operated, would raise pollution levels only marginally,as the daily effluent level would be increased by less than p.25% (from 8,300 m3/d to 8,500m3/d). Most of the impact during construction (noise, vibration, and traffic) would be temporaryand localized and the EMP includes measures to minimize these effects.

Existing lagoons treat about 8,300 m3/d of wastewater and the effluent-6 mg/l BOD, 33 mg/lsuspended solids (SS)-is discharged into Maypajo creek. Measurements showed a high level ofwater pollution in the canal, especially BOD, SS, COD, oil/grease, and coliform bacteria. TheBOD level upstream of the discharge point is 42 mg/l while that at downstream is 29 mg/l.

To comply with the effluent standards, the STP was designed to remove about 87% BOD and98% SS from the incoming septage (5,500 mg/l BOD, 15,000 mg/l SS) and the supernatant (733mgfl BOD, 244 mg/l SS) will be further treated in the existing treatment lagoon which will beupgraded by aeration. The final effluent (40 mg/l BOD and 35 mg/l SS) will be discharged (8,500m3/d) into Maypajo River; this is equivalent to about 340 kg/d BOD and 300 kg/d SS. The mainpotential environmental problems and EMP mitigation measures are summarized in Table A 7-1.

54 ANNEX 7

Table A 7-1: Environmental Problems and Mitigation Measures for Dagat Dagatan STP

Potential Problems Proposed mitigationDuring construction:a) higher levels of dust, noise, soil erosion, a) erect temporary sound-barrier around workflooding, waste, and traffic: noise level from sites and avoid simultaneous use of heavyequipment would be 70-79 dBA at 10 m, 50- equipment; limit daytime work, 20 km/hr69 dBA at 30 m from the source; with proper speed; provide regular watering, goodsound-barrier, noise at the property line (10 maintenance of equipment, and temporarym) would be about 60 dBA and vibration drainage and storage facilities for filling andwould be 55-69 dBA; at 20 km/hr traffic noise excavation soil; improve access roads to workwould increase by 8.5 and 5.5 dBA at 0 and 5 sites; complete drainage works immediatelym distance from the road; the heaviest volume during initial phase of construction; andof traffic would be 60 trucks/d. monitor noise level.During operation:b) Odors (organic and sulfur compounds) b) treat odor in a carbon absorption tower-,mainly from the trucks inside loading zone and collect and treat all air inside the plant; carryseptage treatment units; noise from equipment out all operations in the well ventilatedwould be 65-85 dBA; with proper housing building; install double wall for plant facilities;and insulation about 15 dBA can be reduced; cover the units generating noise and odor;possible flooding; traffic load would be 60 plant shrubs and trees in the area; designcollection vehicles per hour. drainage for a 20 year storm frequency; design

plant layout for effective flow of traffic.c) generate 22 m3/d of dewatered sludge; c) dispose of waste at San Mateo sanitarycreate potential health hazard to workers; landfill; ensure good ventilation and hygienicincrease dust, but this would be small and operation of the facilities and STP and goodmostly confined within the plant boundary (15 maintenance of equipment and machinery;ha); spill of septage; accumulation of septage establish emergency plan; avoid parking ofwhen STP is not in operation. collection trucks along the roads and public

areas; suspend desludging when STP is not inoperation.

d) malfunction of STP operation can increase d) monitor effluent and receiving waters,the level of water pollution in the receiving noise, and odor; treat all wastewaterstream, noise, and odor. generated within the plant.

Under the EMP, the measures proposed in Table A 7-1 b) were included in the detailed design ofthe STP while those proposed in a) and c) will be included in bidding and contract documents.MWSS staff will be responsible for operating and monitoring the STP. A plant operation manual,including details for housekeeping and prevention of accidents, will be prepared and strictlyfollowed.

Odor and noise levels in the STP and water quality (BOD, COD, dissolved oxygen (DO), SS,oil/grease, total coliform) in receiving water will be monitored. Effluent characteristics will bemonitored as part of the treatment performance monitoring program.

55 ANNEX 7

Septage Collection and Sea Disposal

The proposed project's septic tank evacuation and sea disposal component involves minimalenvironmental risks and is the least-cost method of reducing urban pollution until the requiredseptage treatment capacity comes on line'

While septage collection and hauling would increase noise, odor, and other nuisances to residents,these effects are expected to be minimal, and operational guidelines are being prepared definingdetailed work to be taken by the contractors at each stage of collection and hauling to minimizethese effects and ensure proper data collection. The guidelines will cover data collectionmethods, necessary equipment and chemicals, data recording forms, health precautions, andprocedures for giving advance notice to residents. Noise during suction of septage can rise toabout 73 dBA, which is considered tolerable, and would be of short duration. A study to assessthe impact of septage hauling on the traffic in Estero de Vitas and Dagat Dagatan areas, takinginto account future road development and expansion, concluded that the impact would be smallgiven existing traffic levels of 1,000-5,000 cars/hr and would not increase average delays pervehicle and cycle times or greatly decrease operating speeds along the roads leading to the sites.

The guidelines will ensure that septage with high concentrations of heavy metals and toxicsubstances will not be collected during the first two years, but data on locations and types of landuse (industries, households, etc.) will be recorded. Contaminated septage would be collected andtreated in the pilot STP after it is in operation.

Contractors would be required to (a) use trucks, at least 80% of which would be equipped withspecial vacuum cars, and provide periodic inspection and maintenance; (b) follow the operationalguidelines; (c) ensure safe driving and adequate training of drivers and crews to deal with spill ofseptage; (d) plan work schedules and route selection to avoid rush hours and minimize collectiontime; (e) have available tow trucks and effective communication systems, and (f) establish aspecial team with equipment and chemicals to deal with septage spills. Training would berequired to ensure that the guidelines are followed.

Barge loading stations will be built at Napindan, Estero de Vitas, and Paranaque. Each of thethree stations would serve about 48 vehicles (mostly 4 m3 and 10 m3 vacuum trucks) a day andeach truck would bring in two to three loads of septage a day. The Napindan and Estero de Vitasstations will be built in early 1997.

The Napindan station is located about 16 km from the Pasig river mouth; it is being used as anequipment depot and berthing facilities are available. Construction will be limited to surfacepaving and minimal excavations for site development and drainage, concreting, and pipe works.The proposed site for Estero de Vitas at Manila North harbor.is part of R-10 road right-of-wayand is presently in temporary use as a solid waste transfer station. Construction will involve site

Five septage managent options: tmataent (physical, biological, chemical), sea disposal, lahar site disposal, dewataing, andinineration, we revieved and teir costs re estmated. Sea disposal is the least expensive option (S15,0001m3), followed bydisposal in the lahar lava fields resulting from the Mt Pinatubo auption (I 8,000/m-the pactical applicatiom of this mehod issdll in the research stage) and land-based cemicalibiomnhaical frebent (S115,000/n3).

56 ANNEX 7

grading, excavation, filling, and concreting works. Measurements suggested that dust levels inthe proposed sites often exceed standards, but noise levels are within standards.

The proposed sea disposal site is more than 40 km from the nearest shoreline and the water depthis about 2,300 m. This is not a normal fishing area and is about 20 km from the nearestnavigation lane. Over November-March, the current moves (0.4-1.5 km/hr) westward away fromshore. From May to October, it moves (0.7-1.8 km/hr) toward the west coast of Luzon.Navigation is often not possible during July-September. Sea water temperature is about 16-38 C;density is 1.02 ton/m3; and salinity is 33.3 parts per thousand.

Deep-sea disposal of relatively benign septage is not covered by the 1972 London Convention onthe Prevention of Marine Pollution by Dumping of Wastes and Other Matters (LDC, ratified bythe Philippines in 1973) which controls the dumping of toxic and hazardous chemicals. Theproposed dumping site, however, meets the LDC criteria for hazardous waste disposal, and wasdesignated an allowable dumping site by the Philippine Coast Guard in 1991. The site is wellwithin Philippine national waters, and there is no question of trans-boundary pollution.

Deep-ocean disposal of septage is not unusual in industrialized countries. Japan has been usingthis alternative since the mid-1930's, and dumped more than 3 million tons offshore in 1993, thelast year for which information is available. The United States and the United Kingdom also makeuse of deep-ocean septage and sewage disposal.

A review of the literature on deep-ocean septage disposal - available in the project file - showsthat treated sewage disposal into open waters with high flushing characteristics has relatively littleimpact on the receiving environment. Even within the mixing zones themselves, coliform andother bacteria die off within 15 minutes of disposal. Some authors have noted that disposal mayimprove the productivity of nutrient-deficient waters.

The disposal method will be similar to that being used in Japan (spread disposal), wherebyseptage is pumped out (at a speed less than 0.5 m3/sec) through submerged outlets (5-7 m belowwater surface) while the vessel is moving (at a speed not less than 4 knots) along a 10-km radius.Barges would make one trip every two days.

The environmental impact during construction of barge loading stations is expected to be minor.Under the EMP, contractors will be instructed to carry out the works with due attention to:providing advanced notice to residents and the public before beginning construction and takingmeasures to reduce noise and other impacts, including installation of proper embankments;erecting sound-barriers around work sites; prohibiting night work, the use of large machines,construction vehicle parking on public roads, and disposal of solid waste and other constructionmaterials into waterways and public places. These requirements will also be included in thebidding and contract documents for Paranaque when it is built in 1998.

Under the proposed project, it is expected that short term aesthetic impacts (color, turbidity,smell) will occur in the disposal area during disposal of septage. Given the water depth andturbulence in the area, biodegradability of the septage, and the spread disposal operation, noadverse long-term impact is likely. During the most critical period in August when the surface

57 ANNEX 7

currents move landward at a speed of about 1.0 knot, septage would take 10 days to reach thenearest shoreline (Bataan) which is about 45 km from the disposal site. Over December-March,the septage may never reach the shore as the current is outward to sea. Deposition of solidswithin a 20 km radius (1,256 km2) would be 0.04 mm after 65,000 ton of septage are dischargedduring the first 3 years. Some positive benefits on fish and other marine life can be expected dueto the availability of organic matter and nutrients. Water samples were collected along Bataanand southern part of Zambales in November 1995 and tested (for oil, grease, COD, transparency,SS, N, P, plankton, etc.) to provide background data for monitoring the impact of sea disposal.

It is anticipated that single contracts covering septage collection, hauling, and sea disposal wouldfacilitate smooth operation and provide flexibility to adjust work programs that would obviate theneed for costly storage facilities at the three barge loading stations.

To minimize potential barge loading problems, the stations were designed to operate as typicalload transfer stations, with pipes to convey septage from tanker trucks to barges, flushing facilitiesto clean tankers with river or bay water, small offices to monitor station operations, parkingplaces for tankers, and barge berthing with appropriate anchorages; the layouts were designed tofacilitate smooth traffic flow and operation. The barge loading station will be the key check pointto inspect the performance of the contractors. Septage quantities would be recorded and samplestaken for laboratory analysis. The septage would be transferred to the barge through securelyfastened hoses and wastewater from washing of collection trucks would be discharged intoreceptacles for eventual discharge to the barge or tanker vessel. Discharge of solid and liquidwastes into the river would be strictly prohibited.

To ensure acceptable barge loading and sea disposal, monitoring of noise, odor, and water qualityat the barge loading stations will be carried out, as will monitoring of water quality at the disposalsite and along Bataan and southern Zambales shoreline. Appropriate actions will be taken ifadverse impacts occur. Under the EMP, routine monitoring of sea conditions (winddirection/speed, current direction/speed) and water quality (color, transparency, oil/grease,floating materials) will be carried out at the disposal site before and after disposal. Periodicmeasurements of water quality (pH, temperature, salinity, DO, COD, oil, grease, SS, N, P,plankton, transparency, color) and a release of drift cards at the disposal site and along the nearestshorelines will be carried out.

An operational manual will be prepared to identify steps to be taken and the equipment requiredduring loading and sea disposal of septage to ensure the following: maintaining hygienicconditions of operation and safety of workers, minimizing noise and odor impacts; prohibitingdischarge of solid and liquid wastes into the waterways and Manila Bay; proper operation andrecording of septage disposal and monitoring of possible adverse effects. An administrator will beassigned permanently to each barge loading station to ensure efficient transfer operations,including proper record keeping and septage sampling. Disposal of septage will be carried outunder close supervision by the Philippine Coast Guard.

58 ANNEX 7

Contractors will be required to comply with the following:

* Vessels must be of low draft to conform to the shallow conditions in the barge loadingstations; have closed decks to prevent odor and other nuisances; and be multi-compartmentedand properly equipped to ensure stability and safety;

* Make available clean-up facilities to take care of accidental spillage due to ship collision orother accidents and other equipment to carry out the water quality monitoring program;

* Follow operational guidelines for barge loading and sea disposal, carry out the disposaloperation under close supervision of PCG, and submit the record/results to MWSS;

* Adjust the collection and barging schedule to minimize potential adverse effects.

Sewer System Rehabilitation and Upgrading

The Central and Ayala systems are old and conditions and performance are very poor. Thesystems would be rehabilitated over three years, and civil works are expected to be limited. TheAyala plant (40,000 m3/d capacity) now operates about 8 hrs a day and about 20,000 m3/d ofinfluent (230 mg/l BOD, 150 mg/l SS) is treated; the effluent (62 mg/l BOD, 50 mg/l SS) isdischarged into the nearby receiving water. Measurements suggested that BOD and SS levels inthe receiving water during January to May are about 62 mg/l and 50 mg/I, respectively.

The main impacts include traffic, air, noise, vibration, odor, and water pollution duringrehabilitation. To minimize these impacts, contractors will be instructed to carry out the workswith due attention to: providing advanced notice to residents and the public before constructionbegins and taking actions to minimize traffic congestion and other impacts, including immediateresurfacing after completion of works; limited use of noisy jack hammers and daytime work; andproperly trained workers. These conditions will be included in the bidding and contractdocuments.

After rehabilitation, collection capacity and efficiency of the Central system would be improved,thus improving sanitary conditions and reducing water pollution in the service area. This would,however, increase the level of BOD loading at the outfall area in Manila Bay. The EMP indicatedthat the existing water quality monitoring at the outfall area will be continued with closecoordination with other related activities. Implementation of the sewerage and sanitation masterplan (updated in 1996) would significantly reduce BOD loading into Manila Bay.

After rehabilitation of the primary treatment unit of Ayala wastewater treatment plant, the effluentwould be 126 mg/l BOD (26% removal) and 98 mg/l SS (38% removal). Existing secondarytreatment, however, will be in operation and the final effluent wili not exceed the standards andthe water quality in the receiving water will not be worse off. Rehabilitation works will ensurereliable operation of the primary treatment facilities which are presently in poor condition.Rehabilitation of the secondary treatment facilities will be considered during implementation ofthe master plan. Water quality in the receiving water will be monitored.

59 ANNEX 7

Public Information And Consultation

As part of the EMP, it is anticipated that successful and timely implementation of the project willrequire close consultation and coordination among concerned parties and cooperation of residentsand the public. During preparation of the project, consultation activities (publication, meetings,hearing) were used to obtain views and comments on the project. MWSS held consultativemeetings with concerned local government officials in June 1995 and with local NGOs inDecember 1995. These activities will be continued during implementation of the project withemphasis given to (a) promoting knowledge on septic tank management and cooperation ofhomeowners and (b) providing advance notice to residents and the public before the beginning ofcivil works. The latter would be included in bidding and contract documents.

Implementation of Environmental Actions

The environmental actions (Table A 7-2) would be carried out by MWSS with assistance of aconsultant.

60 ANNEX 7

Table A 7-2: Schedule of Environmental Actions

Activity Start Completion1) Public information and consultation:* advertisement, meetings 06/95 contin.* consultation ordered by EMB 01/96 contin.* prepare plan for public information 01/96 04/96* periodic consultation 01/96 contin.2) Construction Napindan and E. de Vitas:* prepare final EMP 04/96 06/96* obtain ECG 01/96 06/96* monitor and report on compliance 05/96 semiannual3) Septage collection, barging, dumping:* sea water monitor, 01/96 annual* prepare data base 01/96 04/96* prepare final EMP 04/96 06/96* prepare guidelines (method, forms) 04/96 06/96* obtain ECC/permit 01/96 06/96* training 06/96 12/96* monitor and report on compliance 08/96 12/994) Construction Dagat-Dagatan STP:* prepare final EMP 04/96 06/96* obtain ECG 01/96 07/96* monitor and report on compliance 07/96 semiannual5) Operation of Dagat-Dagatan STP:

prepare final EMP 04/96 06/96prepare guidelines for housekeeping 01/97 04/97

* training 05/97 12/97* monitor treatment performance 01/98 12/98* monitor and report on compliance 01/98 12/006) Rehabilitation of Central and Ayala:* prepare final EMP 04/96 06/96* obtain ECC 01/96 06/96* monitor/report on compliance 07/96 semiannual7) Operation of the Central and Ayala:* prepare final EMP 04/96 06/968) Construction of Paranaque:* prepare EIA report 01/98 04/98* prepare initial EMP 04/98 05/98* obtain ECC 05/98 10/98* monitor and report compliance 11/98 04/999) Planning of follow up projects:

prepare TOR for DD 01/99 06/99*prepare EIA for proposed facilities 01/99 06/99

Legend: EMB=Env. Management Bureau, EMP=Env. management plan, ECC=Env. certificate of compliance, BD=-Biddingdocuments, DD=Detailed designs, WQ=Water quality

61 ANNEX 7

Environmental Clearance Certificates

DENR is expected to issue ECCs for the project (for septage collection and disposal, includingconstruction of barge loading stations; for the Dagat-Dagatan STP;and for rehabilitation of theCentral and Ayala sewer systems) by early 1996.

Deep sea disposal of septage at the proposed site will require vessel permits from the PCG. Thepermits would be issued to the contractors and septage discharge would be supervised andmonitored by PCG. An operational record of the locations, amounts, and types of dumping willbe maintained by the PCG.

Monitoring and Institutional Capacity

MWSS, with the assistance of consultants and oversight by the advisory panel, would monitorcompliance with the ECCs and carry out the data collection programs for septage management.Monitoring results would be submitted to DENR/EMB and the World Bank periodically.

The technical and laboratory capacity of MWSS would be strengthened under the project. Thecentral laboratory would be appropriately equipped for sample collection and analysis and thelaboratory at Dagat-Dagatan would be upgraded for routine analysis of STP performance.

DENR would periodically monitor and audit compliance with the ECCs, assisted by independentcontractors. Compliance with the sea-dumping permit would be monitored by PCG, DENR, andMWSS.

62 ANNEX 8

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Project Supervision Plan

Bank Supervision Input into Key Activities

1. The staff input indicated in the table below is in addition to regular supervision needs atheadquarters to review progress reports, procurement actions, correspondence, etc., which isestimated at 5 staff weeks during FY96, 5 staff weeks during FY97 through FY99 and 10 staffweeks in FY 2000. Accordingly, the total Bank supervision input is estimated at 56 staff weeks,of which 30 staff weeks would be at the headquarters and 26 staff weeks in the field.

Bank Field Supervision Input into Key Activities

ApproximateDates Expected Skill Staff Input(month/year) Activity Requirements (staff weeks)

Oct/1996 Supervision mission(work progress, pro- Project Engineercurement, financial Financial Analystperformance) Environmental Specialist 4

1997/1998 Supervision mission (3 missions)(work progress, fi- Project Engineernancial performance) Financial Analyst 8

Oct 1998 Supervision missionMid-term (work progress, fi- Project Engineerreview nancial performance, Financial Analyst

environmental aspects) Environmental Specialist 61999 Supervision missions (2 missions)

(work progress, Project Engineerenvironmental Financial Analystaspects, evaluation) Environmental Specialist 8

Borrower's Contribution to Supervision

2. Overall coordination of the project would be the responsibility of MWSS. This wouldinclude inter alia (i) providing guidance on timing and form of reporting implementation progress;(ii) arranging meetings with government officials during mission's field visits; (iii) chairingmission's opening and wrap-up meetings; and (iv) ensuring timely information to the Bank andproposals for satisfactory resolution of any unexpected issue occurring during implementation.

63 ANNEX 8

3. The following reports on implementation progress would be submitted to the Bank:semiannually: (a) project status reports on implementation, including monitoring of state ofenvironment; annually: (b) monitoring the compliance with EMPs; (c) annual updated SSDfinancial projections; (d) audited SSD financial statements, including a separate opinion onStatement of Expenditures and the IBRD Special Account for the Bank loan; and other: (e)evaluation report on project implementation.

Outline of semi-annual component status report

4. The semi-annual component status report will be prepared by MWSS. The report shouldcomprise a descriptive part and appendices; the descriptive part should not exceed twenty pagesand should cover the following items:

(a) General description of the project. A concise summary of project objectives,description, financing, initial and latest estimated costs, initial and latest schedule,key data of loan and project agreements and of various amendments;

(b) Project overview and physical accomplishment. Status of implementation progressfor each part of the project, procurement, information on inspection ofmanufacturing, input of supervising consultant; monitoring of ECC compliance andevaluation of septage operation during the reported period;

(c) Financial status. List of awarded contracts with dates of award, start andcompletion of contract, allowed time extensions and variations, contract amountsin various currencies and status of disbursement for contracts, projected and actualdisbursement S-curve for the total and the loan;

(d) Problems affecting implementation. Description of problems and proposed ortaken actions.

5. App2ndices will list personnel provided by MWSS, by the consultant and by contractors,key meetings, important visits on site, photographs, location plan of the project showing plannedand achieved progress and monitoring indicators.

Outline of the evaluation report on project implementation

6. The evaluation report will be prepared by MWSS. It should not exceed ten pages and theperformance judgments and analyses should cover the following specific aspects:

(a) Project objectives. A concise statement and evaluation of major objectives aspresented in the SAR, including any changes made during implementation. Theevaluation will assess the clarity of the objectives, their realism, and whether theyare important for the country and sector.

(b) Achievement of project objectives. An assessment of the project's success(substantial, partial, negligible) in achieving its major objectives - e.g. sector policy

64 ANNEX 8

improvements, financial objectives, institutional development, physical objectives,other social objectives, environmental objectives, and public sector managementand private sector development.

(c) Implementation record and major factors affecting the project. An analysis of thefactors that affect implementation. The factors are divided into those not generallysubject to government control, those subject to government control, and thosesubject to MWSS control.

(d) Bank performance. An assessment of the Bank's performance (highly satisfactory,satisfactory, deficient) in project identification, preparation assistance, appraisal,and supervision.

(e) MWSS performance. An assessment of the performance of MWSS (highlysatisfactory, satisfactory, deficient) in preparing, implementing, and operating theproject.

(f) Assessment of outcome. A rating of outcome (highly satisfactory, satisfactory,unsatisfactory, or highly unsatisfactory) based primarily on how well the projectachieved its objectives and how sustainable it is likely to be.

(g) Future operation. A description and assessment of the plan for the project's futureoperation, including understanding the measures to maximize the project benefits,and the indicators for monitoring and evaluating future operations.

(h) Key lessons learned. A discussion of the most significant positive and negativelessons learned from the project's implementation, showing how they are reflectedin the arrangements for its future operations. This section also identifies thoselessons most relevant to similar ongoing and future projects in this sector in thePhilippines.

7. MWSS will submit the evaluation report to the Bank not later than six months aftercompleting the project.

65 ANNEX 9

PHILIPPINESMETROPOLITAN WATERWORKS AND SEWERAGE SYSTEM

SEWERAGE SYSTEM DEPARTMENTINCOME STATEMENT 1992-2002

(Millions of current PESO)<---- - - Actual -> <-- ----- Forecast- -------- >

YearendedDecember31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

WATERCONS.BYSEWERCONN.(M 60.98 67.47 71.09 81.00 82.55 84.32 86.51 88.70 90.89 93.08 94.18AVE.SEWERAGE CHARGE (PESO/m 3.417 3.812 3.781 4.226 5.628 6.032 6.420 6.881 7.110 7.480 7.862INCREASE IN SEWERAGE TARIFF 11.58% -0.83% 11.77% 33.18% 7.190/o 6.42% 7.18% 3.33% 5.20% 5.11%WATERBILLED(Mm3/Y) 382.99 397.11 418.94 445.53 466.01 479.54 527.74 549.29 628.53 683.00 740.28AVE.ENVIRONMENT CHARGE (PES 0.683 0.762 0.756 0.845 1.126 1.206 1.284 1.376 1.422 1.496 1.572INCREASEINENV.TARIFF 11.58% -0.83% 11.77% 33.18% 7.19% 6.42% 7.18/o 3.33% 5.20% 5.11%

OPERATIONAL REVENUESSeweage charge 271.41 290.75 307.27 342.27 464.55 508.64 555.38 610.33 646.21 696.22 740.39Envirornenal chrge 262.00 289.28 307.81 376.52 524.49 578.51 677.j6 755.87 893.71 1021.70 1163.94Otheroperationl revenue 0.88 1.31 0.93 0.88 0.89 0.89 0.89 0.89 0.89 0.89 0.89

TOTAL OPERATIONAL REVENUE 534.29 581.34 616.01 719.66 989.93 1088.04 1233.82 1367.09 1540.81 1718.81 1905.21

OPERATIONAL COSTSWages 99.76 111.69 100.47 164.64 175.75 186.74 197.48 207.84 218.23 229.15 240.60Power 12.00 14.64 22.30 21.74 24.37 25.89 28.68 30.88 32.42 34.04 37.33Supplies &materiak 6.09 6.53 5.45 6.75 10.81 11.48 12.14 12.78 13.42 14.09 14.80Othercosts 29.72 41.14 23.15 33.77 68.76 73.06 77.26 88.10 92.50 97.13 101.98Septage collection/haulage 0.00 0.00 0.00 0.00 44.70 94.98 100.44 179.72 188.70 198.14 208.04Septage sea disposl 0.00 0.00 0.00 0.00 27.63 58.72 49.68 98.04 102.94 108.09 90.78septage trement 0.00 0.00 0.00 0.00 0.00 0.00 81.56 85.84 90.14 94.64 163.68

TOTALDIRECTCOSTS 147.57 174.00 151.37 226.90 352.02 450.87 547.25 703.19 738.35 775.27 857.21

Provisionforbaddebts 10.08 11.57 12.28 29.07 49.50 54.40 61.69 68.35 77.04 85.94 95.26Franchise tax 0.00 0.00 0.00 9.20 19.78 21.74 24.66 27.32 30.80 34.36 38.09Real popertytax 0.00 0.00 0.00 0.00 2.85 3.38 4.80 6.33 8.49 11.90 15.01Franchise tax subsidy 0.00 0.00 0.00 -9.20 -19.78 -21.74 -24.66 -27.32 -30.80 -34.36 -38.09

TOTAL COSTS 157.65 185.57 163.65 255.97 404.36 508.66 613.74 777.88 823.88 873.11 967.49

INCOME BEFORE DEPRECIATION 376.64 395.77 452.36 463.69 585.56 579.39 620.09 589.20 716.93 845.70 937.73Depreciation 159.16 174.67 123.08 58.02 83.78 103.12 138.S8 177.38 214.72 289.84 371.91

INCOMEBEFORE INTEREST 217.48 221.10 329.28 405.67 501.79 476.26 481.21 411.82 502.21 555.86 565.81

Interestexpense 152.70 211.38 185.36 306.62 56.00 45.53 33.63 24.75 117.83 106.23 259.20Interet income 0.00 0.00 0.00 1.67 5.22 11.31 14.99 20.79 13.09 12.70 13.45

NETTAXABLEINCOME 64.78 9.72 143.92 100.72 451.01 442.05 462.57 407.86 397.47 462.33 320.07

Income tax 0.00 0.00 0.00 0.00 157.85 154.72 161.90 142.75 139.12 161.82 112.02Tax sbidy 0.00 0.00 0.00 0.00 -157.85 -154.72 -161.90 -142.75 -139.12 -161.82 -112.02

NET SURPLUS 64.78 9.72 143.92 100.72 451.01 442.05 462.57 407.86 397.47 462.33 320.07

WORXINGRATIO 27.62% 29.93% 24.57% 31.53% 35.56% 41.44% 44.35% 51.44% 47.92% 45.11% 44.99%AVERAGENETFASSETSINOPERA 2569 2996 2558 1809 1983 2383 3286 4532 5763 7656 10347RATE OF RETURN 2.52% 0.32% 5.63% 5.57% 22.74% 18.55% 14.08% 9.00% 6.90% 6.04% 3.09%

66 ANNEX 9

PHILIPPINESMETROPOLITAN WATERWORKS AND SEWERAGE SYSTEM

SEWERAGE SYSTEM DEPARTMENTSOURCE AND APPLICATION OF FUNDS 1992-2002

(Millions of current PESO)<-- -- Actual <--- <--- ---------------- Forecast ---- - ---- >

YcareendedDecember31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

SOURCE OF FUNDSINTERNAL CASH GENERATIONNetincomebeforeint.expense 217.48 221.10 329.28 407.34 507.01 487.57 496.20 432.61 515.30 568.56 579.26Depreciation 159.16 174.67 123.08 58.02 83.78 103.12 138.88 177.38 214.72 289.84 371.91Othernon cash debits &credits 10.08 11.57 12.28 29.07 49.50 54.40 61.69 68.35 77.04 85.94 95.26Incidental revenue 0.00 0.00 0.00 2.98 9.17 26.74 47.32 66.83 91.03 123.33 163.09

INTERNAL CASH GENERATION 386.72 407.34 464.64 497.41 649.45 671.84 744.09 745.18 898.09 1067.68 1209.53

CAPITAL CONTRIBUTIONSGovernment contribution 0.00 0.00 18.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

GOVERNMENT SUBSIDY 0.00 0.00 0.00 9.20 177.63 176.46 186.56 170.08 169.91 196.17 150.11GRANT 0.00 0.00 24.55 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

LOANSProposed IBRD Second Sew.Proj 0.00 0.00 0.00 0.00 500.00 500.00 375.00 50.00 0.00 0.00 0.00Proposed Third Sew.Proj 0.00 0.00 0.00 0.00 0.00 0.00 575.00 575.00 575.00 575.00 300.00Proposed Fourth Sew.Proj 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1250.00 1250.00 1250.00

TOTAL LOANS 0.00 0.00 0.00 0.00 500.00 500.00 950.00 625.00 1250.00 1825.00 1550.00

TOTAL SOURCE OF FUNDS 386.72 407.34 507.59 506.61 1327.08 1348.30 1880.65 1540.25 2318.01 3088.85 2909.64

APPLICATION OF FUNDSDEBT SERVICEAmortization 103.54 110.20 128.10 109.63 126.28 129.58 160.40 56.43 155.25 154.58 352.81Interest 152.70 211.38 185.36 306.62 73.75 98.78 138.06 184.53 262.20 378.36 477.95

TOTAL DEBT SERVICE 256.24 321.58 313.46 416.25 200.03 228.35 298.46 240.95 417.45 532.93 830.75

CAPITAL EXPENDITUREProposed Second Sewerage Proj. 0.00 0.00 0.00 2.00 555.00 762.00 383.00 204.00 0.00 0.00 0.00Interest during construction 0.00 0.00 0.00 0.00 17.75 53.25 84.31 99.40 0.00 0.00 0.00Proposed Third Sewerage Proj. 0.00 0.00 0.00 0.00 0.00 388.00 775.00 775.00 775.00 775.00 387.00Interest during construction 0.00 0.00 0.00 0.00 0.00 0.00 20.13 60.38 100.63 140.88 0.00Proposed Fourth Sewerage Proj. 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1656.00 1656.00 1656.00Interest during construction 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 43.75 131.25 218.75

TOTAL CAPITAL EXPENDITURE 0.00 0.00 0.00 2.00 572.75 1203.25 1262.44 1138.78 2575.38 2703.13 2261.75CHANGE IN WCAPITAL EXCEPT C 0.00 0.00 166.20 -73.81 -35.13 -23.79 -20.49 -40.27 5.21 -6.79 -285.41

TOTAL 256.24 321.58 479.66 344.44 737.64 1407.81 1540.41 1339.46 2998.04 3229.27 2807.09CASH INCREASE (DECREASE) 130.48 85.76 27.93 162.18 589.44 -59.51 340.23 200.80 -680.03 -140.42 102.55

TOTAL APPLICATION OF FUNDS 386.72 407.34 507.59 506.61 1327.08 1348.30 1880.65 1540.25 2318.01 3088.85 2909.64

0 0 0 0 0 0 0 0 0 0 0DEBT SERVICE RATIO 1.5 1.3 1.5 1.2 3.2 2.9 2.5 3.1 2.2 2.0 1.5AVE-INTERNAL CONT.TO INVEST 0.0 0.0 108.7% 62.3% 46.7% 41.0% 29.9% 24.3% 22.3% 36.3% 43.2%

67 ANNEX 9

PHILIPPINESMETROPOLITAN WATERWORKS AND SEWERAGE SYSTEM

SEWERAGE SYSTEM DEPARTMENTBALANCE SHEET 1992-2002

(Mfillions of cunent PESO)<------ Actual ---- > <--- --------- ----- ----- Forecast ---- --------

AltDecember 31 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

ASSETSREVALUED FIXED ASSETSFixed assetsain operation 3631.08 4814.75 2811.01 2990.81 3335.03 3903.33 5152.41 6530.65 8405.40 11288.64 14057.04Accumulated depreciation 917.86 1402.83 987.52 1109.67 1265.58 1444.64 1662.97 1923.50 2234.39 2635.95 3139.66

NET REV.FASSETS IN OPERATION 2713.22 3411.92 1823.49 1881.14 2069.46 2458.70 3489.45 4607.15 6171.01 8652.69 10917.37WORK IN PROGRESS 99.60 73.52 61.27 165.93 572.75 1203.25 1262.44 1138.78 2575.38 2703.13 2261.75

TOTALFIXDCPDASSETS 2812.82 3485.44 1884.76 2047.07 2642.21 3661.95 4751.88 5745.92 8746.39 11355.81 13179.12

CURRENT ASSETSCash 10.20 18.47 12.15 133.44 722.88 663.37 1003.60 1204.40 524.37 383.95 486.49Gross Accounts receivable 349.97 480.20 626.38 576.32 635.72 701.00 775.03 857.05 949.50 1052.63 1166.94Less:Allowance for bad debts 58.13 69.60 81.86 103.43 152.93 207.33 269.02 337.37 414.41 500.36 595.62Net accounts receivable 291.84 410.60 544.52 472.89 482.79 493.67 506.01 519.68 535.09 552.28 571.33Inventories 3.42 3.32 2.65 2.82 3.10 3.69 5.23 6.91 9.25 12.97 16.37Other assets 3.45 3.93 3.91 4.13 3.44 3.44 3.44 3.44 3.44 3.44 3.43

TOTAL CURRENT ASSETS 308.91 436.32 563.23 613.28 1212.21 1164.17 1518.28 1734.43 1072.15 952.63 1077.62

TOTAL ASSETS 3121.73 3921.76 2447.99 2660.35 3854.42 4826.11 6270.17 7480.35 9818.53 12308.45 14256.74

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00

CUJRRENT LIABILITIESAccounts payable 103.69 111.32 78.35 80.92 125.54 160.80 195.17 250.78 263.32 276.49 305.71Current portion of L/Tdebt 110.18 112.90 109.63 129.80 129.58 160.40 56.43 155.25 154.58 352.81 0.00

TOTAL CURRENT LIABILITIS 213.87 224.22 187.98 210.72 255.12 321.20 251.59 406.03 417.90 629.30 305.71

FOREIGN LOANS 861.82 859.25 690.46 586.14 994.10 1333.70 2227.28 2697.03 4367.45 5839.64 7389.64LOCAL LOANS 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34 20.34

TOTAL LIABELITIS 1096.03 1103.81 898.78 817.20 1269.56 1675.24 2499.21 3123.40 4805.69 6489.28 7715.69

EQUJITYAsset revaluation surplus 803.83 1578.34 417.86 577.04 699.31 824.45 971.87 1166.47 1425.06 1742.78 2190.67Operational surplus 1221.87 1239.61 1106.81 1213.96 1664.97 2107.02 2569.59 2977.45 3374.93 3837.26 4157.33Grant-in-aid 0.00 0.00 24.55 24.55 24.55 24.55 24.55 24.55 24.55 24.55 24.55Govermnent subsidy 0.00 0.00 0.00 9.20 177.63 176.46 186.56 170.08 169.91 196.17 150.11Government equity 0.00 0.00 0.00 18.40 18.40 18.40 18.40 18.40 18.40 18.40 18.40

TOTAL EQUITY 2025.70 2817.95 1549.22 1843.15 2584.86 3150.87 3770.96 4356.95 5012.85 5819.16 6541.05

TOTAL LIABELITIS AND EQUTITY 3121.73 3921.76 2448.00 2660.35 3854.42 4826.11 6270.17 7480.35 9818.54 12308.44 14256.74

CUTRRENT RATIO 1.4 1.9 3.0 2.9 4.8 3.6 6.0 4.3 2.6 1.5 3.5L/T DEBT AS % OF CAPrTALIZATIO 27.6% 2 1.9% 28.2% 22.0% 25.8% 27.6% 35.5% 36.1% 44.5% 47.4% 5 1.8%DEBT/EQUITY RATIO 42.54% 30.49% 44.57% 31.80% 38.46% 42.33% 59.06% 61.90% 87.13% 100.35% 112.97%

68 ANNEX 10

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Assumptions for financial projections

1. The financial statement projections are in current Philippine Pesos. Figures for 1992through 1994 are actual. Local inflation rate of 7.0% per annum has been added for 1995, 6.5%for 1996, 6.0% for 1997, 5.5% for 1998, and 5.0% from 1999 through to the end of theprojection period in 2002. The assumed Peso to US Dollar exchange rate for the projectionperiod was set at Peso 25.00 equals US$1.00.

Income Statement

2. Revenues: Sewerage charges have been projected to increase in line with estimatedincreased water supply volumes, plus 10,000 additional sewer house connections, and annualincreases of sewerage tariffs. Environmental charges have been projected to increase in line withestimated increased water supply volumes, and annual increases of sewerage tariffs. Water supplyvolumes are projected to increase with additional production facilities; NRW is projected to be53.5% in 1995, 53.0% for 1996 and 1997, 50.0% for 1998 and 1999, 49.0% for 2000, and reduceby three percent per annum thereafter. Tariffs Average water supply and sewerage tariffsincluding CERA are assumed to increase by 12% in 1995; by 33% in 1996, and by local annualinflation thereafter.

3. Operational Costs: Wages The projections include wages and benefits for SSD staff, andan apportionment of MWSS staff costs relative to the work performed on behalf of sewerageoperations. Power Projected to increase in line with new barge stations operation, and new STPoperation. Supplies and materials/other costs Projected expenses increased in line with additionaloperation and maintenance activities to be undertaken by SSD. Septage collection/disposal/seadumping The projections cover the contractors' costs of desludging septic tanks and disposal ofthe septage at sea and at STP. Septage treatment The projections include all costs to coverseptage treatment and final disposal of the sludge. Provision for bad debts Based on pastexperience, this has been estimated at 5% per annum. Franchise and income taxes MWSS hasbeen exempt these taxes since inception, but exempt status is presently under review by GOP.Based on the present position of negotiations between GOP and MWSS, the projections assumethat these taxes will be levied effective from FY96 and the amounts will be returned by GOP inthe form of a government subsidy. Depreciation The calculation of 2.50% per annum has beenmade on the weighted average of all fixed assets in operation.

Balance Sheet

4. Fixed assets Include network, pumping station, lift stations and wastewater treatmentplant, with additions of plant and equipment when new assets are placed in service, and arerevalued at annual projected inflation rates. Accounts receivable Based on past experience andnew measures already in hand, it is assumed that accounts receivable will reduce from an averageof 110 days to 90 days sales by 2002. Accounts payable Historical figures have been projected to

69 ANNEX 10

increase in line with operational costs. Government equity Assumed no government equity forMSSP.

Source and application of funds

5. Loans - IBRD The US$57.0 million (Peso 1425 million) Bank loan for MSSP would beon-lent by the government over 20 years including 5-year grace, at the Bank interest rate assumedat 7.1 %. The yet to be identified loans for the Third and Fourth sewerage projects are assumed tobe with the same conditions and on the same terms as the IBRD loan.

6. Interest during construction Capitalized interest charged at 7.1% per annum on the IBRDloan from 1995 through 1999, a yet-to-be identified loan for the Third sewerage project from1998 through 2001, and a yet-to-be identified loan for the Fourth sewerage project starting in1999:

Million Peso

1996 1997 1998 1999 2000 2001 2002

2nd Sewerage Pr. 17.8 53.2 84.3 99.4 0.0 0.0 0.03rd Sewerage Pr. 0.0 0.0 20.1 60.4 100.6 140.9 0.04th SeweragePr. 0.0 0.0 0.0 0.0 43.8 131.2 218.8Total 17.8 53.2 104.4 159.8 144.4 272.1 218.8

70 ANNEX 11

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Project Performance Monitoring

The Manila Second Sewerage Project Monitoring and Evaluation (M&E) system - which will beconfirmed at negotiations - is designed to provide project managers with information on progresstoward project objectives, impact on beneficiaries, and information on institutional, technical andfinancial aspects that could be useflul in developing a long-term sewerage and septagemanagement plan for MWSS. It has two basic components:

* On-the-ground monitoring of septage collection and conveyance in consultation withstakeholders;

* More traditional tracking of project milestones in terms of measuring progressachieved against specific targets proposed in the project implementation action plan(Annex 5);

Monitoring Septage Management and Disposal

One measure of project success will be the extent to which neighborhood residents and the largerenvironmental community find the cleaning of septic tanks and removal/disposal of septagebeneficial to the urban environment. A possible model for involving beneficiaries and otherstakehoiders in project monitoring could be the December 1995 round table meeting organized byDENR and MWSS with Philippine NGOs. The meeting discussed project design and its possibleenvironmental impact and debated the issues until a consensus on the benefits from the projectemerged.

At the neighborhood (barangay) level, the consultative role is equally significant as a means ofmonitoring the performance of the private contractors who will collect and remove septage fromneighborhoods and secondary drainage systems. Service quality in terms of reliability and speed,absence of short-dumping in neighborhood drains, etc. need to be periodically checked withcommunity groups. Socio-economic data on the residents of the project area will also becollected, so that indicators of residents' access to, use of, and payment for water and septageremoval services are available. These indicators could be evaluated with reference to baselinesocial and economic conditions of the community (such as tenurial status, income levels,occupational data, health information etc.) so that the question of whether equitable distributionof benefits is taking place is closely monitored.

Monitoring performance on the septage management components will include:

* Close monitoring of performance under the Environmental Management Plan (seeAnnex 7);

71 ANNEX 11

* MWSS establishmnent of a Technical Review Panel to evaluate septage data generatedby the project;

* Annual roundtable meetings with NGO groups on the format of the first meeting heldin December 1995; and

* Semi-annual consultations with beneficiaries at the neighborhood level;

Monitoring Physical and Financial Progress

Table 1 describes performance indicators for monitoring financial and physical progress, Table 2shows the monitoring responsibilities of various stakeholders, Table 3 shows numerical targets forproject performance indicators and Table 4 shows the key performance indicators agreed duringproject negotiations. The indicators, which can be either numeric or qualitative, are classified inthe following categories:

(a) Input or process indicators describe how and when resources provided through the project aretranslated into investment activities.

(b) Output indicators describe the measured results in terms of improved sewerage and septagedisposal services

Table 1 lists these indicators for the Project.

(c) Outcome indicators assess how far actual project performance compares against projecttargets. Table 3 lists the project target indicators against which these outcomes can be evaluated.The outcome indicators, which will be partly quantitative and partly qualitative, would evaluatesuccess and failure in relation to the target indicators.

(d) Impact indicators evaluate how far the development objectives were accomplished. Theseevaluations, which are generally qualitative in nature, will analyze causes of successes and failuresas indicated by the outcome indicators, and explain impacts in terms of what worked and what did

not work in the project. This exercise will involve all the key stakeholders reporting on theirrespective areas of M&E responsibility (see Table 2). Project supervision and review meetings

will provide an opportunity to assess impacts during the project implementation cycle, so that theproject design could be altered or modified in case some project rules appear to be unworkable.

72 ANNEX 11

Table 1. Proiect Performance Indicators

INPUT OR PROCESS INDICATORS OUTPUT INDICATORSSource: Standard MWSS Physical/Financial Source: Water and Sanitation data from MWSSReports (see Annex 5) Collected by: MWSS and World BankCollected by: Project Consultants; Contractors;MWSS; World Bank

Funding: Sewer network. Sources of funds; budgets; legal documentation; Total water capacity Mm3/y. Authorization for release of funds; Water produced Mm3/y. Workplans; Physical works report; . No. of sewerage conns.'000. Fund mobilization by contractors; Population w/sewer connection '000Procurement: . Sewage billed MPesos/yDates when . Sewage billed per conn. Pesos/month. Contracts proposed; Number of sewer connections rehabilitated. Company registrations; long list; . Execution of investment (%). Decree for bidding committee; Septic Tanks. TOR; . Number of septic tanks desludged p.a.. Notice to Proceed; . Septage disposed at sea m3/d. Completion certificates received; Septage disposed at treatment plant m3/d. Physical works document; Wastewater/septage treatmentTechnical Assistance: Performance of Ayala STP M3/D. CVs received; Biochemical oxygen demand - outlet mg/l. TORs completed; Suspended solids - outlet mg/l. Work plans; Performance of septage treatment plant at Dagat-. Contracts; Dagatan. Reports on consultant performance. . De-watered sludge '000 m3 p.a.

. Biochemical oxygen demand - outlet mg/l

. Suspended solids - outlet mg/lOperational. Number of sewer connections (000). Permanent SSD Employees/1000 connections. SSD Permanent and Temporary Employees/1000connections. SSD Personnel Cost/Operating CostFinancial. No. of days accounts receivableAverage contribution to investment

. Rate of return. Working ratio. Average sewerage charge (Peso/m3). Average environmental charge (Peso/m3). Debt Service ratio (times). Debt Equity ratio (times). Internal Cash Generation/Investment (%)

73 ANNEX 11

SUMMARY OF M&E RESPONSIBILITIES

Table 2 below shows how M&E responsibilities can be shared among the different stakeholders atthe national, project and community levels. This division of responsibilities provides a useful basisto organize stakeholder meetings during the project cycle, particularly during the outcome andimpact evaluation stages.

The first row represents how information could flow to the policy level on an annual basis. Thiscould be based on annual reports on project performance, Bank supervision missions and annualroundtable meetings with NGOs. The second row represents the responsibilities of the project'sprimary stakeholders; the project management team in MWSS and the beneficiaries in the projectareas at the neighborhood levels. Beneficiaries will provide feedback to not only ensure localownership, but also to ensure that the interests of different social g-oups (such as squatterhouseholds, women's groups etc.) are adequately represented. The third row indicates theresponsibilities of other agencies and individuals who could also provide useful feedback onspecific aspects of project performance and impacts. Implementation details of the feedbackmechanisms will be discussed and finalized at negotiations.

Table 2. M&E Resionsibilities

National/Project Management Level Community/Stakeholder LevelNEDA/DPWH/DENR NGO Roundtables-Policy and overall guidance - Annual feedback on project performance,

particularly with reference to environmentalrisks (see Annex 7)- Discussions on future options for septagemanagement

MWSS Barangay/neighborhood meetings- Operational management of project, - Semi-annual consultations and feedback onensuring project implementation in accordance contractor performancewith Loan Agreements - Consultations on future septage disposal and- Administration of Monitoring and sewerage development plansEvaluation system l

Other Agencies (Coast Guard. MMDA. Consultants/contractorsLGUs) - Semi-annual feedback on project experiences- Feedback on project performance in terms of - Findings from project-specific studiesmonitoring "short-dumping" by contractors, - Assistance in implementing participativemonitoring health impacts etc. planning exercises

74 ANNEX 11

Table 3. Proiect Tareet Indicators 1994-2000

Actual (-----------------------Forecast-----------------------

Year ended December 31 1994 1995 1996 1997 1998 1999 2000The following indicators will be included inprogress reports sent to the Bank

1. Physical IndicatorsTotal water production capacity Mm3/y 1213 1308 1385 1440 1550 1732 1732Water produced Mm3/y 1009 957 991 1020 1055 1098 1232Population w/sewer connection '000 731 741 751 772 792 812 822No. of sewerage conns. '000 90.5 92.5 93.8 96.3 98.8 101.3 103.8Sewage billed 'OOOm3/y 71.1 81.0 82.6 84.3 86.5 88.7 90.9Sewage billed per conn. m3/p.m 9.4 10.5 10.5 10.5 10.5 10.5 10.5

2. Management EfficiencyNo. of days accounts receivable 318 237 176 164 148 137 125No. of SSD employees 468 469 470 470 477 477 478SSD Employees/lOO sewer connections 5 5 5 5 5 5 5

3. Financial ParametersAve. Contribution to Investment (%) 108 62 47 41 29 25 23Rate of return (%) 5.6 5.5 22.7 18.5 14.0 9.0 6.9Working ratio 24.5 31.5 35.6 41.4 44.4 51.4 47.9Average sewerage charge Peso/m3 3.78 4.23 5.63 6.03 6.42 6.88 7.11Average environmental chargePeso/m3 0.76 0.85 1.13 1.21 1.28 1.38 1.42Debt service ratio 1.5 1.2 3.2 2.9 2.5 3.1 2.2Debt/equity ratio (%) 44.6 31.8 38.5 42.3 59.1 61.9 87.1

4. Septic TanksNumber septic tanks desludged p.a. 3000 3000 20000 60830 60830 103420 103420Septage disposed at sea m3/d 0 0 1000 1000 800 1500 1500Septage disposed at treatment plant m3/d 0 0 0 0 200 200 200

5. Performance of existing waste waterTreatment plant Ayala m3/d 40000 40000 40000 40000 40000 40000 40000Biochemical oxygen demand--outlet mg/l 62 62 62 62 62 60 60Suspended solids--outlet mg/l 50 50 50 50 50 50 50

6. Performance of septage treatmentplant at Dagat DagatanModule 200 m3/dDe-watered sludge '000 m3 p.a.Biochemical oxygen demand--outlet mg/ - - - - - 40 40Suspended solids--outlet mg/l - - - - - 35 35

75 ANNEX 11

Table 4. Key Performance Indicators

Project Key Baseline Mid-term ICR Year Full ImpactObjective Performance Year Year Year

Indicators 1996 1998 2001 2003Expand 1. No. of Nil 150,000 400,000 750,000septage septic tanksmanagement emptiedprogram

2. Amount of Nil 1,000 1,700 2,000septagedisposed m3/d

3. Progress Nil Start of pilot Designs Constructiontowards operations at ready for completed ofcompletion of Dagat- start of Quezon anddevelopment Dagatan construction Taguig STPsprogram Septage of Quezon

Treatment and TaguigPlant (STP) STPs

76 ANNEX 12

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Rate of return

Economic rate of return

1. The three project components (septage management program, sewer system rehabilitationand new sewer connections) yield benefits in terms of information required for future systemdesign and improvements in public health and urban environmental and living conditions. Themajority of these benefits cannot be adequately quantified in physical or monetary terms. As such,an economic rate of return based on a full cost-benefit analysis cannot be calculated for theproject and the investment is justified based on a least-cost analysis.

2. However, stylized analysis can be carried out to yield order-of-magnitude estimates ofeconomic rate of return based on simplifying assumptions. The key assumption pertains to themonetary value of economic benefits. It is assumed that (a) existing charges levied by MWSS forsewer service and septic tank maintenance (sewerage and environmental surcharges on the waterbill) reflect consumer willingness to pay and are a measure of total economic benefits (private andpublic) to households; and (b) that without adequate maintenance and proper operation (to beensured through project investments), full economic benefits from existing assets are not realizedeven though the surcharges are paid in full. The first assumption is a conservative one becausehouseholds may be expected to undervalue public benefits. Nor will household willingness to payinclude the value of the information obtained to design the sewerage system in the future.Therefore, the computed economic rates of returns would be under-estimated. Separate analysesare carried out for the three project components.

3. For purposes of the stylized analysis, it is not necessary to be overly precise. Table A.12.1 shows the rounded base values used in the analysis. Latest full year (without project) costsand revenues for SSD are taken from 1994 accounts. O&M costs total P 150 million; budget dataare used to allocate P 100 million to sewer services (col. a) and P 50 million to septic tankmaintenance services (col. b). Revenues total P 600 million of which P 300 million come from100,000 sewer connections (col. c) and P 300 million from environment charges paid for byhouseholds with 1 million water connections (col. d). The Table also shows the capital andrecurring costs related to investments in the proposed project. Capital costs of the new sewerconnections and the sewer system rehabilitation are indicated in columns e and f Columns gthrough j represent the costs associated with the septage management component: Column gshows the recurring costs due to septage collection and haulage; column h shows the recurringcosts of barging which terminates in year 7 (2003); column i shows the capital costs of the pilotSTP and the other STPs to be constructed later to replace sea disposal; and column j shows therecurring costs of operating the STPs. Capital investments required for treatment plant capacity,in addition to the pilot plant to be constructed as part of the proposed project, are assumed to bemade one year before the capacity is scheduled, i.e, in 2001, 2002, 2003 2005 and 2007. Bothcapital and recurring costs are extrapolated from cost estimates used for the pilot treatment plantincluded in the proposed project, allowing for reasonable economies of scale.

77 ANNEX 12

4. All rates of return are computed using the with and without project costs shown in TableA. 12.1. The economic rate of return for the 10,000 new sewer connections is simple to computesince both costs and revenues (additional revenue from sewer surcharge is prorated based on theexisting average revenue per sewer connection) are well defined. It is assumed that incrementalrevenues start to accrue after all investment is complete. Two alternative assumptions are maderegarding O&M costs. If costs are assumed not to increase (because MWSS is over-staffed), theIRR is 10%; if costs are assumed to increase in proportion to the number of new connections, i.e.,by 10%, the IRR falls to 4%.

5. For the sewer rehabilitation component, alternative scenarios are based on assumptionspertaining to percentage of economic benefits realized without the project (i.e., percentage ofcolumn c) and increase in O&M costs required to maintain the full benefit stream after the project.Incremental revenues are assumed to start accruing after completion of investment. If costsincrease by 25%, the IRR is 19%, 16% or 12% depending upon whether 40%, 50% or 60%,respectively, of the full economic benefits were being realized without the project. Thecorresponding values for the IRR in the scenario where costs are assumed to increase by 50% are12%, 8% and 4%. The rate of return is fairly sensitive to the extent of inefficiency caused by lackof adequate maintenance.

6. For the septic tank maintenance component, the economic rate of return is computed forthe case where sea dumping is used as the disposal method on a permanent basis. Sinceapproximately one-tenth of existing septic tanks are to be desludged annually, the full benefits arerestored linearly over a ten year period. Depending upon whether existing septic tanks areassumed to be yielding 10%, 20% or 30% of full benefits (i.e. percentage of column d),restoration of full benefits after the project yields an economic rate of return of 12%, 9% or 5%,respectively. The rate of return becomes negative if septic tanks are assumed to be yielding 40%of full benefits without the project.

7. Cessation of sea dumping in 2003 and recourse to septage treatment plants causes costs toexceed benefits as measured by existing household payments. If consumers agree with thecessation of sea disposal, the excess cost could be interpreted as the cost society is prepared topay to avoid the any risk of marine pollution. The steady state O&M costs would be of the orderof US$3 .0 per household per month compared to existing payments of approximately US$1.0 perhousehold per year.

8. For both the sewer rehabilitation and septic tank maintenance components, it would bereasonable to assume that the life of the existing assets, and therefore the length of the benefitstream, would be prolonged after the project investments. However, the economic rate of returnswere not much affected by assumptions regarding such changes.

Financial break-even analysis

9. The assumptions and data supporting the financial analysis are presented in Table A 12.2.The computation of the financial break-even analysis is shown in Table A 12.3. The calculationshows that an increase of 35% in the water tariff (and of indexed sewerage tariff and

78 ANNEX 12

environmental charge), results in sufficient incremental revenue for the SSD, in addition to therevenue from the 10,000 new sewer connections, to fully cover the costs of the project. Seadisposal of septage is assumed to continue throughout the period of analysis in order to computethe tariff increase necessary to recover the costs due to the proposed project. Further tariffincrease would be required when sea disposal is fully replaced by treatment and disposal insanitary landfills in the second phase of the septic tank maintenance program.

79 ANNEX 12

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

Table A 12.1: DATA FOR CALCULATION OF ECONOMIC RATE OF RETURN(Million Peso)

NEWSSD SSD SEWER SEWERCOSTS W/O I'COME W/O CONN. REHAB SEPTIC TANK COMPONENTPROJECT PROJECT COSTS COSTS COSTS

a b c d e f g h icoll+ stp stp

Year Sewer Septic Sewer Septic capt'l capt'l haul b'ing capt'l recur

0 150 50 300 300 60 100 100 50 175 01 150 50 300 300 60 100 100 50 175 02 150 50 300 300 60 100 100 50 0 753 150 50 300 300 60 100 100 50 0 754 150 50 300 300 0 0 100 50 0 755 150 50 300 300 0 0 100 50 350 755 150 50 300 300 0 0 100 50 750 1507 150 50 300 300 0 0 100 50 750 3008 150 50 300 300 0 0 100 0 0 4509 150 50 300 300 0 0 100 0 500 450

10 150 50 300 300 0 0 100 0 0 55011 150 50 300 300 0 0 100 0 1300 55012 150 50 300 300 0 0 100 0 0 75013 150 50 300 300 0 0 100 0 0 75014 150 50 300 300 0 0 100 0 0 75015 150 50 300 300 0 0 100 0 0 75016 150 50 300 300 0 0 100 0 0 75017 150 50 300 300 0 0 100 0 0 75018 150 50 300 300 0 0 100 0 0 75019 150 50 300 300 0 0 100 0 0 75020 150 50 300 300 0 0 100 0 0 75021 150 50 300 300 0 0 100 0 0 75022 150 50 300 300 0 0 100 0 0 75023 150 50 300 300 0 0 100 0 0 75024 150 50 300 300 0 0 100 0 0 75025 150 50 300 300 0 0 100 0 0 75026 150 50 300 300 0 0 100 0 0 75027 150 50 300 300 0 0 100 0 0 75028 150 50 300 300 0 0 100 0 0 75029 150 50 300 300 0 0 100 0 0 75030 150 50 300 300 0 0 100 0 0 750

80 ANNEX 12

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

Table A 12.2 DATA FOR CALCULATION OF FINANCIAL RATE OF RETURN

Investment Cost ExcludingPrice Contingencies and Taxes Million Peso

Septage managementCivil Works 173Equipment 186

Central systemCivil Works 367Equipment 116

AyalaCivil Works 151Equipment 88

Maint.equip.laborEquipment 168

Project SupportStudies 124Construction Supervision 119

Land AcquasitionCompensation 56Lease 71

Total Investment 1550Phasing of Annual Investment: %

Year I 02 293 404 205 11

Total 100Operational Costs Million Peso per annum

Additional SSD Operational Costs 16.89

Collection & Haulage 1000 m3/d 83.74Collection & Haulage 800 m3/d 67.00

Barging & Sea Dumping 1000 m3/d 51.77Barging & Sea Dumping 800 m3/d 41.42

Pilot Septage Treatment 200 m3/d 68.00

Income

(i) incremental revenue from 10,000 new house sewer connections(ii) 35% increase in sewerage charge and environmental charge

Notes to financial rate of return calculation

Income and costs are expressed in constant 1995 prices.The project life is assumed to be 30 years.

81 ANNEX 12

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

Table A 12.3: FINANCIAL BREAK-EVEN ANALYSIS*(Million Peso)

< ------- ----OUTFLOWS--------------------------> <---INFLOWS----->

YEAR INVEST <----------------O&M----------------------------- > NEW TARIFF NETSSD COLLECT B'GNG T'MENT CONN +35% FLOW

-4 0.00 0.00-3 495.03 15.81 41.87 25.89 0.00 0.00 0.00 -578.60-2 682.80 15.81 83.74 51.77 0.00 4.01 232.72 -597.39-1 341.40 16.89 83.74 41.42 68.00 12.02 232.72 -306.711 187.77 16.89 83.74 41.42 68.00 20.00 232.72 -145.102 0.00 16.89 83.74 41.42 68.00 27.98 232.72 50.653 16.89 83.74 41.42 68.00 31.99 232.72 54.664 16.89 83.74 41.42 68.00 31.99 232.72 54.665 16.89 83.74 41.42 68.00 31.99 232.72 54.666 16.89 83.74 41.42 68.00 31.99 232.72 54.667 16.89 83.74 41.42 68.00 31.99 232.72 54.668 16.89 83.74 41.42 68.00 31.99 232.72 54.669 16.89 83.74 41.42 68.00 31.99 232.72 54.6610 16.89 83.74 41.42 68.00 31.99 232.72 54.6611 16.89 83.74 41.42 68.00 31.99 232.72 54.6612 16.89 83.74 41.42 68.00 31.99 232.72 54.66.13 16.89 83.74 41.42 68.00 31.99 232.72 54.6614 16.89 83.74 41.42 68.00 31.99 232.72 54.6615 16.89 83.74 41.42 68.00 31.99 232.72 54.6616 16.89 83.74 41.42 68.00 31.99 232.72 54.6617 16.89 83.74 41.42 68.00 31.99 232.72 54.6618 16.89 83.74 41.42 68.00 31.99 232.72 54.6619 16.89 83.74 41.42 68.00 31.99 232.72 54.6620 16.89 83.74 41.42 68.00 31.99 232.72 54.6621 16.89 83.74 41.42 68.00 31.99 232.72 54.6622 16.89 83.74 41.42 68.00 31.99 232.72 54.6623 16.89 83.74 41.42 68.00 31.99 232.72 54.6624 16.89 83.74 41.42 68.00 31.99 232.72 54.6625 16.89 83.74 41.42 68.00 31.99 232.72 54.6626 16.89 83.74 41.42 68.00 31.99 232.72 54.6627 16.89 83.74 41.42 68.00 31.99 232.72 54.6628 16.89 83.74 41.42 68.00 31.99 232.72 54.6629 16.89 83.74 41.42 68.00 31.99 232.72 54.6630 16.89 83.74 41.42 68.00 31.99 232.72 54.66

Financial rate of return = 0.00

* Showing that a 35% increase in water tariff yields sufficient SSD revenues for the project to break-evenfinancially.

82 ANNEX 13

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Documents and data available in the project file

No Name of the document Prepared Prepared datel ~~~~~~~~~~~~~~~by

AOI Project implementation action plan MWSS 07/10/95A 02 Manila second sewerage project-preliminary reports OEC 07/01/94

Volume 1-Project synopsisVolume 2-Septage management

l_____ Volume 3-Upgrading Ayala and central systemsVolume 5-Laboratory and equipment support Institutional framework and financial studies _

_______ Environmental impact assessment (draft) A 03 Manila second sewerage project-final reports OEC 11/01/94

_______ Project environmental impact assessmentEnvironmental impact statements:

Dagat Dagatan septage treatment plantSea dumping of septage

Project descriptionInstitutional frameworkFinancial studiesLaboratory strengtheningStreet drainage improvement (prel. designs)Project summary

A 04 Design reports 12/01/94Barge loading stations Dagat Dagatan septage treatment plant -

Ayala sewage treatment plant rehabilitation l

Manila central sewerage system rehabilitation - -

Fort Santiago pumping station (basic design) lA 05 Supplementary report to environmental assessment MWSS 07/30/95A 06 Expert's report on ocean disposal of septage Fenviron 12/15/95B 01 Annual budget guidelines for 1995 MWSS 06/21/94B 02 Consolidated financial statements 1990-1994 MWSS lB 03 Financial statement 1990-1994 MWSS l

B 04 MWSS financial status study Deloitte 11/01/94Touche

MWSS= Metropolitan waterworks and sewerage systemOEC = Original engineering consultants

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

CHART 1: MWSS ORGANIZATION

BOARD OF TRUSTEES I

I BOARD SECR-ETARIAT|

ADMINISTRATORSR. DEPUTY ADMINISTRATOR

| PUHLl( ' INE ORMAllON l | GROUP l L ~~~~~MIS GROUP

|MONITORING & EVALUATION

D PLJI5'ALAILNIS'lIKA!TOR AEPU>' STRATOR DEPUTY ADUSTRAPDR ADMINI STR/bR DElT ADNSTRATFOR DPr TAO

ENGINEERING CONSTRUCTION OPERATIONS CUSTOMER SERVICE FINANCE _ADMlNISTRATION

PLANNING & PROJECT l |WATER RESOURCE NORTH FINANCIAL CONTROL RSONNEL

H PR(xiRAMMlNG l 1 AWSOP III l & TR-EATMENT & BUD)GET l AAGENENT l

PROJECT WATERDISTRIMELTION NORTHWEST ACCONGSOURCE

H | H ~~~~~~UATP MAINTENANCE 1 |DEVELOPMENT

|PLEDRSARH|PROJEC'' |CENTRAL MECHANICAL CENTRALTH &

H QUALITY ONTROL | H MWSRP II NlAMNI-'ENANCE | SAFETY

PROJECT |

MMW.DP

PROJECT l AT l2GNRAL SERVICES|

I MSW DP

PR()JECl S TXRRI:…-MEN'I'

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PROJECT lH SEHVS

LPPD

r r------------____ i PROJECT I_ SUF

MSSP _

PHILIPPINESMANILA SECOND SEWERAGE PROJECT

CHART 2: SEWERAGE SYSTEM DEPARTMENT ORGANIZATION

SEWERAGE SYSTEMDEPARTMENT

TOOLS & EQUIPMENT

SECTION_

OPERATION & SEWER CONNECTION, EXTENSION SEPTIC TANK MAINTENANCEMAINTENANCE DIVISION REPARIT & FIELD INVESTIGATION DIVISION

DIVISION

SEWER MAINTENACE FIELD INVESTIGATION DESLUDGING OPERATION

SECTION SECTION SECTION

_$ SEWAGE PUMPING _ SEWER CONNECTION, EXTENSION I DISPOSAL/CONTRACT SERVICES

S REPAION 1SCTIN SECTION

SEAEPMIGS3 EPI ETO ___ ____________EQUIPMENT & BUILDING | WASTEWATER TREATMENTMAINTENACE SECTION SECTION

.......................... ...... .......I........,.......... ......................... .. . ... . ... ........., " .I.... ..

85

PHILIPPINES

MANILA SECOND SEWERAGE PROJECT

Chart 3: Oreanization of proaect implementation

Activity Septage Dagat Dagatan Central system Ayalacollection, pilot treatment rehabilitat. system rehabilitat.barging and connections

I ~~~~dumpingBidding and Engineering/ Engineering/ Engineering/ Engineering/evaluation SSD/ SSD/ SSD/ SSD/

l_________________ consultant consultant consultant consultantContract execution Contractor Contractor Contractor ContractorContract SSD/ MWSS MWSS MWSSsupervision consultant Construction/ Construction/ Construction/

consultant consultant consultantOperation of Not applicable SSD SSD SSDfacilityData collection Contractor SSD/ARD SSD/ARD SSD/ARDData storing and ARD/ ARD/ ARD/ ARD/evaluation consultant consultant consultant consultantEnvironmental Contractor SSD/ SSD/ SSD/sampling ARD ARD ARDEnvironmental ARD/ ARD/ ARD/ ARD/monitoring consultants consultant consultant consultant

Legend:ARD =Applied research and quality control departmentSSD = Sewerage system departmentNote: Construction of barging stations will be carried out within civil works contract for centraland Ayala systems.

IBRD 27244

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Report No: 15346 PHType: SARi