Document of

The World Batik

FOR OFFICIAL USE JNLY

Report No. 7153

PROJECT COMPLETION REPORT

PHILIPPINES: SECOND MANILA WAV¶ER SUPPLY PROJECT

(LOAN 1615-PH)

March 4, 1988

Infrastructure DivisionCountry Department 2Asia Region

This document has a restictel dilbuto and may be used by is only in the performance oftheir official duties. Its contents may not othewise be disdosed without Wodd Bank authorization.

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CURRENCY EQUIVALENTS

(See Country Exchange Rates, Basic Data Sheet)

GOVERNMENT FISCAL YEAR

January 1 to December 31

MEASURES AND EQUIVALENTS

1 liter (1) = 0.26 gallons1 liter per capitaper day (lcd) = 0.26 US gallons

per capita per day1 megaliter per day (Mld) n 0.26 million US gallons per day

PRINCIPAL ABBREVIATIONs AND ACRONYMS

ADB = Asian Development BankRR = Rate of Return on Revalued Net Fixed AssetsGOP s Republic of the PhilippinesHRDO = Hmlan Resources Development OfficeIPRI 3 Integrated Program for Revenue ImprovementIRn Internal Rate of ReturnLWUA = Local Water Utilities AdministrationMKA = Metropolitan Manila AreaMWSS 3 Metropolitan Waterworks and Sewerage SystemNRW - Non Revenue Water

FOR OMCMIL Use ONLYTIE WORLD SANK

Washngton. DC 2043USA

Ofe fc Omtectnituwai

Mtarchi 4, 1988

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on the Philippines - SecondManila Water Supply Project (Loan 1615-PH)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on the Philippines - Second Manila Water Supply Project(Loan 1615-PH)" prepared by the Asia Regional Office. Further evaluationof this project by the Operations Evaluation Department has not beenmade.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their ofricial duties. Is contents may not otherwise be disclosed without World Bank authorintion.

FO OWFICUL USE ONLY

PHILIPPINES

SECOND MANILA WATER SUPPLY PROJBCT (LOAN 1615-PH)

PROJECT COMPLERTIO REPOBT

Table of Contents

Page No.

PREFACE .................................

BASIC DATA SHEET ............... ii

HICNLIGHTS ......... ... *00000 ................. @0.00................ * iv

Io INTRODUCTION. *.....***.**..*.**.*.*.........**O**e.*e.0** 1

II. PROJECT IDENTIFICATION AND PREPARATIOU................... 2

-III. PROJECT IMPLEMENTATION AND COSTS......................... 5

IV. INSTITUTIONAL PERFORMANCE AND DEVELOPENT ................ 10

V. OPERATINC PERFORMANCEt..........................*......... 12

VI. FINANCIAL ASPECr ........................................ 17

VII. BANK ROLE9...... ....... * 19

VIII. PROJECT JUSTIFICATION....* ........................... 20

IX. CONCLUSIONS AND LESSON$ EEARNED .......................... 21

ANNEXES

1. Project Description ... ** ........................... 242. Comparison Between Estimate (of Appraisal) Actual (for

currently estimated) Construction Periods ............. 263. Project Costs - Appraisal Estimate Versus Actual ........ 284. Compliance with Loan Covenants .......................... 295. Organization Chart (Effective September 1985) ............ 306. Schedule of Water Rates by Service Type (Peso) .......... 317. Summary of Unpaid Accounts by User Category (as of June

30, 1986 .......................................... 328a. Income Statement (P million) ............................ 338b. Balance Sheet (P million) *........................... 349. Internal Rate of Return *................................ 3510. MWSS Comments on PCR .................................. 3611. NEDA's Comments on PCR ...........................* 44

This document has a restrieted distributin and ay be ued by rciomnts onb in the performanceof their official dutius. Its contents may not othrwise be diacd wout wld WaBonk authoration.

PHILIPPINES

SECOND KANILA WATER SUPPLY PROJECT (LOAN 1615-PH)

PROJECT COMPLETION REPORT

Preface

This project completion report (PCR) presents the results of areview of the Second Manila Water Supply Project for which Loan 1615-PH ofUS$88.0 million was made in July 1978 to the Republic of the Philippines(GOP). US$85.0 million and US$2.5 million of the loan proceeds were to be on-lent to the Metropolitan Waterworks and Sewerage Services (MWSS) and LocalWater Utilities Administration, respectively. The balance of US$0.5 millionwas to be used by GOP to prepare a rural water supply project. The loan wasfully disbursed by August 1986, about two and half years later than originallyscheduled.

The report was prepared by the Urban and Water Supply Division ofthe East Asia and Pacific Regional Office. It is based on: (a) a review ofloan and project documents in Bank files, and a report prepared by MWSS oncompletion of the project; and (b) discussions with relevant Bank staff and,.in the field, with GOP and MWSS officials. The valuable assistance pr'videdby COP and MWSS in preparing this report is gratefully acknowledged.

In accordance with the revised procedures for project performanceaudit reporting, this PCR was read by the Operations Evaluation Department(OED) but the project was not audited by OED staff.

Following normal procedures, OED ser.t copies of the draft reportto the Government, Executing Agency and the Co-financier for commeits.Comments received fromq MWISS and NEDA have been reproduced as Annexes 10and 11 to the report.

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PHILIPPINES

MANILA WATER SUPPLY PROJECT (LOAN 1615-PH)

.PROJECT COMPLETION REPORT

Basic Data Sheet

Appraisal Actual orEstimated Current Est.

Total Project Cost (Peso million) 2,938.7 4,588.67Overrun Z - 56

Loan (USs million) 88 88.00Disbursed - 88.0

Date of Physical Completion 6/83 /a 12/86Time Overrun 9%) 60

Internal Rate of Return 12% Not applicable /aFinancial Performance SatisfactoryInstitutional Performance Satisfactory

Cumulative Disbursement (MS$ million)

Dec. 31 1978 1979 1980 1981 1982 1983 1984 1985 1986

(a) Estimated 7.1 31.9 67.4 82.1 86.8 88.0 88.0 88. 88.0(b) Actual - - 2.7 4.4 14.6 41.1 58.3 76.1 88.0(c) B/A (X) 0 0 4 5 17 56 66 86 100

/a IRR for the entire investment program is 6Z (see para. 8.5).

OTHER PROJECT DATA

AppraisalEstimated Actual

First Mention in Files 77Negotiations May 1978Board Approval July 25, 1978Loan Agreement July 26, 1978Effectiveness Oct. 24, 1978 Dec. 21, 1985Closing Dec. 31, 1983 Dec. 31, 1978Borrower Government of the PhilippinesExecuting Agencies Metropolitan Waterworks and Sewerage

SystemLocal Water Utilities Association

Follow-on Project Manila Sewerage and Sanitation Project

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MISSION DATA

Month/ No. of Man Date ofYear Persons Days Report

Preparation/Preappraisal 9/77 3 15 8/77Appraisal 11/77 3 16 7/78Post-Appraisal 5/78 3 10 6/78Sub-total 41

Supervision I 10/78 2 12 12/78Supervision 11 7/79 2 12 9/70Supervision III 6/80 2 12 7/80Supervision IV 2/81 2 14 4/81Supervision V 7/81 2 10 9/81Supervision VI 6/82 1 7 9/82Supervision VII 9/83 2 12 10/83Supervision VIII 9/84 2 14 11/84

Sub-total /a 93 /b

EXCHANGE RATES

Appraisal (1977) - US$1 = P 7.4Intervening years 1978-1986 US$1 = P 18 (est.)Completion (1986) US$1 = 20

/a Appraisal mission for Loan 2676-PH.(April 1985)also reviewed for the project under Loan 1615-PH.

/b Includes supervision of other projects in the sector.

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PHILIPPINES

SECOND MANILA WATER SUPPLY PROJECT (LOAN 1615-PH)

PROJECT COMPLETION REPORT

Highlights

i. The project was cofinanced by ADB. Its main components were sourcedevelopment works (financed by ADB) and extension of the distribution system(financed by the Bank). The objectives were to improve access to safe watersupplies for the population of Metropolitan Manila Arca (MMA), with particularemphasis on providing this basic need to lower income groups, and to assistthe Metropolitan Waterworks and Sewerage Services (MWSS) into becoming anefficient and financially viable public utility.

ii. Implementation of the project took some four years longer than theoriginal schedule. The ADB component was delayed by over two years. Becauseof this delay and also because MWSS and its consultants underestimated thecomplexities of implementation, the start-up of the distribution component wasdelayed by about two years. The implementation was further delayed during theperiod (1983-85) of severe economic/financial crisis in the country and theunprecedented increase in costs of materials and labor. The implementingagency had to take over many contracts from contractors who had financialdifficulties or even went bankrupt. These contracts were subsequently splitinto smaller sizes and re-awarded. Several of the contracts were carried overinto a later project (Loan 2676-PH).

iii. Water sales through 1986 have been substantially lower than thoseprojected largely due to delays in the implementation of the distributionworks, and to a large increase in the unaccounted-for-water (also referred toas non-revenue-water (NRW)). This increased from 47% in 1978 to 65% in 1986,in contrast to the appraisal expectation of a gradual decrease to 26% by1986. The actual volume sold in 1986 was less than half of that projected atappraisal (and only 23Z higher than that sold in 1978). Sales to, as well asthe number of, industrial customers in 1986 were lower than those in 1978, andsubstantially lower than those projected, reflecting the economic recession in1983-86, illegal consumption and high tariffs.

iv. MWSS was reorganized in 1985. Over the project period it hasdeveloped into a competent entity, and this is reflected in the quality of itsoperation and maintenance of major facilities, and in the preparation ofaccounts. The agency, however, has not been so successful in the operationand maintenance of its relatively old distribution system, and in controllingthe system particularly at the customer end. In recent years, there have beenseveral top management changes which have adversely affected staff morale,particularly at the senior level. Overall, however, the agency is wellmanaged and has competent professional staff, and has made remarkable progresswith regard to training of techanical and lower level staff.

v. The financial performance of MWSS was lower than the appraisalexpectations. However after taking into account the increase in the level ofNRW and the delays in project implementation, the performance was satisfac-tory. This was due mainly to the increase in tariffs; the tariff in 1986being about 1OOZ higher than the corresponding appraisal estimate. MWSS metin 1985 and in 1986, the rate of return covenant which was revised under Loan2676-PH.

vi. The Bank responded to the country's economic/financial crises with aSpecial Action Program (SAP); the disbursement percentage on civil works wasincreased and a Special Account established in order to reduce further delaysto project implementation arising from shortage of counterpart funds. Theproject achieved the objective of contributing towards improvements in healthand improving the piped water service to the population of MMA, though theactual results were short of the targets. It contributed to the institutionaldevelopment of MWSS, and enhanced the concept, within the Government and theMWSS, of the need for financial viability of the entity. Significant measuresincluding investment in rehabilitation of the distribution system and aspecial program are presently under way to reduce the high level of NRW. Theappraisal internal rate of return (IRR) of 12% was, on hindsight,unrealistic. The IRR for the entire investment program, based on somewhatconservative assumptions, is now estimated at 6%.

PHILIPPTNES

SECOND MANILA WATER SU.PPLY PROJECT (LOAN 1615-PH)

PROJECT COMPLETION REPORT

I. INIRODUCTION

1.1 The Philippines is well endowed with natural fresh waterresources. However, in the past, public investment in water supply andsanitation was very low, with the result that infrastructure for water supply,sewerage and drainage was inadequate throughout the country. Healthstatistics showed that the incidence of diseases related to unsatisfactorywater quality and inadequate excreta disposal methods was high and prevalentnationwide.

1.2 It was estimated that in 1977 only about 17 million (38X) of thecountry's population of about 44 million were served by public water supplysystems. Of the number served, 3.2 million were in the Metropolitan ManilaArea (MMA) (53% of the population of 5.2 million), 3.7 million were in otherurban areas and 10.1 million were in rural areas. Miny systems were old, hadhigh leakage rates and operated only a few hours a day. Recognizing the aboveproblems and other shortcomings in the sector, the Government of thePhilippines (GOP) assigned high priority to the development of the watersector in its Five-Year Development Plan for 1978-82.

1.3 Responsibility for water supply and sewerage in the MMA is vestedwith the Metropolitan Waterworks and Sewerage System (MiSS), established in1971. The Local Water Utilities Administration (LWUA), established in 1973,is responsible to provide technical assistance and loans to locally-controlledwater districts (WDs) in the provincial cities. Rural waterworks and sanita-tion are overseen by the Rural Waterworks Development Corporation.

1.4 The GOP has established financing and cost recovery policies in thesector. Investments of the MKA and other cities and towns are financedthrough foreign loans, GOP loans and equity contributions, and self-generatedfunds. COP also provides the WDs with grants for system development. Regard-ing cost recovery, tariffs in MMA are expected to provide a rate of return ofaround 8% on the utility's revalued water assets in operation and a positiverate of return on sewerage assets, while tariffs of WDs are expected togenerate adequate revenues to meet operation and maintenance costs and coverdebt service (or depreciation), whichever is greater.

1.5 Loan 1615-PH is the third of seven Bank operations in the sector.The first was in 1964 with a loan of US$20.2 million for the Manila WaterSupply Project (Loan 386-PH) to expand and improve the water supply systemserving the MMA. (It was envisaged as an interim operation which would leadto a larger Bank involvement in source development and distribution systemexpansion for the city). The project was completed after long delays, and keyloan covenants dealing with operational and financial performance were notmet. -The second operation was in 1977 with a loan of US$23 million for theProvincial Cities Water Supply Project (Loan 1415-PH), which was completedwith some delays. According to the Project Performance Audit Report(No.6422), the project's major-physical objectives were achieved, but expectedgoals for institutional development and financial performance wereunrealistic.

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II. PROJECT IDENTIFICATION AND PREPARATION

Origin

2.1 In 1974, the Asian Development Bank (ADB) provided MWSS with a loanof US$51.3 million to finance the preparation and part of the foreign exchangecost of a project for source development and construction of treatment anddistribution works. Development under the project was expected to result infull utilization of the yield of Angat River resources. MWSS had undertakento obtain financing for the remaining foreign exchange cost of the project by1976. During the detailed design phase of the project, it was concluded thatthe volume of the supply sources and the cost of their development had beenunderestimated, as had been the demand and the length of the pipelines todistribute the available water. The project was therefore revised to fullyutilize the available yield.

2.2 MWSS accepted the revised project and in April 1977 Governmentrequested Bank participation and further assistance from ADB for the enlargedwater supply project which consisted of source development (i.e., headworks)and transmission and distribution works. The project was prepared by MWSSwith the assistance of consultants financed under the ADB loan. The projectformed part of the water development program to improve the piped waterservice within HMA.

Preparation and Appraisal

2.3 A Bank preparation/preappraisal mission visited Manila in July-August 1977. The major findings of the mission were: (a) virtually noinvestment in the MMA water supply system had been made during the last 10years; (b) tariffs, which were last increased in May 1974, were totallyinadequate; (c) assets had been last revalued in 1971;'(d) limits imposed bythe MWSS charter regarding its authoriLzed capital and foreign borrowings wereinadequate, considering the magnitude of the proposed project; and (e) theorganization and management of MWSS needed strengthening.

2.4 During project appraisal in November 1977, it was realized that MWSSwas embarking on a major expansion program requiring unprecedented efforts toreduce currently high levels of unaccounted-for water, and to provide newwater connecticns in order to fully utilize the large additional capacitywhich would come on stream in 1982. It was concluded that MWSS would need tohire consultants to provide :xpert advice and guidance.

2.5 Negotiations between the Borrower and the Bank took place duringMay 1-5, 1978. During negotiations, it was decided to make implementation ofagreed tariff increases a condition of Board presentation of the loan. Theloan amount was increased by US$3 million (from US$85 million to US$88 mil-

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lion) to assist MWSS in replacing leaking connections.!1 A Bank proposal tocreate a new position of Deputy General Manager to strengthen MWSS managementwas dropped, but a technical assistance package to strengthen MUSS institu-tionally and enhance its implementation capability was included in theproject. Appropriate loan covenants aimed at ensuring institutional, finan-cial and operational improvements and the successful implementation of theproject were agreed (para. 3.13). The execution of a loan agreement betweenADB and MWSS for US$49 million was a condition of loan effectiveness.

Project Objectives and Description

2.6 The main objectives of the project were: (a) to improve access tosafe water supplies to the population of MKA, with particular emphasis onmeeting the basic needs of the lower-income population; and (b) to assist MWSSin becoming an efficient and financially viable public utility. The projectwas expected to increase the number of persons served with piped water fromabout 3 million in 1977 to about 7 million by 1986.

2.7 The project had three parts:

Part A: Source development, including the construction of a dam,aqueduct, treatment plant, reservoirs, pumping stations,transmission lines and miscellaneous rehabilitation works; andthe provision of technical assistance for the institutionaldevelopment of MWSS and consultant services for project designand implementation;

Part B: Construction of distribution networks, deep wells, pumps,storage reservoirs, a training school, and branch offices; theacquisition and installation of meters; and the provision oftechnical assistance for the establishment of 21 offices forsystem operations and maintenance as well as a training programfor MWSS staff; and

Part C: The provision of technical assistance for the preparation offeasibility studies and detailed designs for water supplyprojects in provincial cities, and the preparation of a ruralwater supply project.

Part A of the project was to be financed by ADB (hereafter called the ADBproject), while Parts B and C were to be financed by the Bank (hereaftercalled the Bank project). A detailed project description is given in Annex 1.

2.8 The entire project was estimated to cost about 1 2,940 million(US$397 million equivalent). Construction and installation of all componentswere expected to be completed by December 1981, except the installation of

1/ The US$3 million was subsequently included in the amount allocated foracquisition of meters; MWSS was to carry out replacement of leakingconnections as part of its ongoing activities.

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meters and service connections which was expected to continue through December1983. The project was to be officialy completed by June 1983. The loan wasto be fully disbursed and closed by December 1983. The Office for SpecialProjects (OSP) - a special unit of MWSS Construction Department - assisted byconsultants vas responsible for project implementation.

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III. PROJECT IMPLEMENTATION AND COSTS

Effectiveness

3.1 A Bank loan (1615-PH) for US$88 million to the Government of thePhilippines was approved by the Board on July 25, 1978. US$85 million of loanproceeds were to be on-lent to MWSS on the same terms as those of the Bankloan, with MWSS bearing the foreign exchange risk. The Loan and ProjectAgreements were signed on July 26, 1978. The loan became effective onDecember 21, 1978, about two months later than envisaged.

Physical Progress

3.2 The project was implemented generally as designed with somewhatminor revisions (including changes in construction methods) and significantrescheduling. Estimated and actual (or currently estimated) constructionschedules for the major project components are given in Annex 2.

3.3 Part A. Start-up of construction of the ADB project components wasdelayed by several months to over a year. The 4DB project was essentiallycompleted over two years later than scheduled." The primary cause of thesedelays was Government's cumbersome procedures for the award of large con-tracts. The treatment plant capacity was increased by some 1,500 Mld (toabout 2,850 Mld) by September 1982, and at about the same time, the totalsupply of raw water (about 2,700 Mld) was available from the dam.,

3.4 Part B. Start-up of Part B of the project i.e. preparation ofdetailed design and tender documents was delayed by over two years. MWSS wasreluctant to start work on Part B until some progress was made on constructionof Part A. Furthermore, MWSS and the consultants also underestimated the timerequired to implement a complex and large distribution component in theconditions prevailing in MMA. During implementation, all components sufferedadditional delays due to the following:

(a) the Bank project was packaged in a large number of small contractsto encourage participation of local contractors, and thereby promotethe development of the local contracting industry. Several of thelocal contractors had difficulties with the contracts, some forfinancial reasons (attributed to underbidding), others because oftheir lack of technical capabilities (perhaps a reflection ofinadequate pre-assessment of their capabilities), and in the caseof one major contractor, overextension in his contractingactivities in the Middle East.

1/ Minor on-going works were expected to be completed by late 1986.

2/ This component was officially completed only in April 1984.

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(b) a shortage of counterpart funds arose due to the country's seriouslydeteriorating financial situation from 1983;

(c) the price escalation formula for contracts, which was determined byGovernment, became inadequate following the sharp increases ininflation and in the costs of labor and materials. As a result,many contractors had to give up contracts, and in some cases wentbankrupt. (These contracts were subsequently split into yet smallersizes and re-awarded - see para. 3.6).

3.5 Other factors of relatively less significance which contributed todelays were: (a) cumbersome bureaucratic requirements (sometimes politicallymotivated) for obtaining permits to excavate roads; (b) tight money situation,unprecedented level of inflation and devaluation of the peso; and (c) unsatis-factory quality of materials and equipment produced by overextended localmanufacturers and suppliers, and mounting traffic problems which.were compoun-ded by concurrent construction of other infrastructure projects.

Measures Taken

3.6 MWSS assisted contractors with financial difficulties by makingadvance payments and supplying major materials such as pipes and valves. Italso assisted the contractors to obtain excavation permits. However, therewas also a lack of firmness on the part of MWSS in dealing with and resolvingproblems in contract-execution and supervision. Eventually, MWSS strengthenedits own supervision teams and took over or terminated many contracts. Thelatter contracts were subsequently subdivided into smaller packages and re-awarded to qualified contractors under simplified bidding procedures agreedwith the Bank (para.3.7)

3.7 Faced with a severe economic/financial crisis affecting the entirecountry, the Bank proposed in 1983 a Special Action Program (SAP) in order toavoid further delays to projects under implementation arising from theshortage of local funds, which in turn would have increased project costs anddelayed expected benefits. Under SAP for this project, the loan disbursementsfor civil works were increased from the original 40% to 65%, a Special Accountwas opened with an advance of US$8 million and abbreviated bidding procedureswere approved for contracts which were taken over by MWSS and re-awarded.

3.8 Mainly because of shortage of funds and partly because of delays intheir implementation, uncomoleted portions of Part B components were carriedover in a follow-up project (Loan 2676-PH). A few components are still underimplementation, while in the case of others, the retention money would befinanced under Ln. 2676-PH. According to the most recent estimate, about 94%of the Bank project had been completed by June 1986 (see Annex 2).

3.9 Part C of the project, technical assistance financed by the Bank,provided the services of consultants to assist LWUA in the preparation offeasibility studies and detailed designs for 28 WDs, and to assist theMinistry of Public Works, Transportation and Communications (MPWTC) in thepreparation of a rural water supply project. All studies were completedsatisfactorily and led to the Second Provincial Cities Water Supply Project

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(Ln. 1710/Cr. 920-PH, approved in May 1979) and the Rural Water Supply andSanitation Project (Ln. 2206-PH, approved in October 1982).

Costs and Financing

3.10 The total project cost (including the actual or currently estimatedcost of those components being carried out under Loan 2676-PH) is P 4,588million which is 57% higher than the appraisal estimate of P 2,938.7 mil-lion. The total cost of Parts A and B of the project is estimated at overP 4,570 million, an increase of nearly 60% over the appraisal estimate ofabout P 2,916 million.

3.11 The cost of the ADB project in peso increased by about 25 X over theappraisal estimate, mainly due to delays in its implementation. The cost ofPart B of the project is currently estimated at P 2,798 million, an increaseof nearly 90% over the appraisal estimate. The large cost increase was mainlydue to the delayed start-up of implementation which carried the project into aperiod of unprecedented inflation which resulted in steep increases in thecost of labor and materials, and as a result in some contract failures. Theproject cost in US dollars was not significantly higher than the appraisalestimates because of several devaluations of the peso, from US$1 = P 7.4 in1978 to around US$1 = P 20 in 1986. Changes to the construction methods andhigher than expected costs of obtaining right-of-way and of restoring roadsalso contributed to the increase in project costs. A comparison of the esti-mated and actual (or currently estimated) project costs is given in Annex 3.

3.12 The ADB loan was expected to be fully disbursed by December 1986.By increasing the disbursement percentage on civil works from 40X to 65%(para. 3.7) the proceeds from the. Bank loan have been fully utilized. Theunfinished works from the project valued at about US$ 30 million were carriedover into the follow-up project (Ln. 2676-PH).

Compliance with Covenants

3.13 Annex 4 summarizes compliance with the major Loan Agreementcovenants. Compliance was generally satisfactory, although somewhat laterthan stipulated and, in a few cases, not completely as specified. Thefinancial covenant requiring an 8% rate of return by 1982 was modified underLn. 1814-PH and again under Ln. 2676-PH (8% to be achieved by 1988). A largeportion of uncollectible accounts is still in the process of being writtenoff.

Loan Disbursement

3.14 Because of project implementation delays, actual disbursementslagged far behind appraisal estimates (details in Basic Data Sheet).Reflecting the lack of physical progress on the Bank project, no disbursementtook place through 1979, although nearly 40% of the loan was expected to bedisbursed by that time. Only 47% of the loan was disbursed by December 1983,the original closing date. The loan was fully disbursed by August 1986.

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Procurement

3.15 All contracts for equipment supply and for construction were open toICB. The equipment suppliers were mainly from overseas. The two distributionmains civil works contracts were won by a joint venture of a foreign and amajor domestic contractor. Overseas contractors showed little interest in therest of the construction contracts, which were of relatively small value. Forcontracts taken over by MWSS due to contractor failures (paras. 3.4 - 3.6),the Bank approved simplified re-bidding and re-award procedures (permissibleunder Presidential Decree 1594, governing procurement in the Philippines).Only one award was disapproved by the Bank under the simplified procedures;MWSS made an award to a cont-actor who was not one of the bidders and in facthad been the original contractor from whom MIWSS had taken over the originallarger contract.

Reporting

3.16 MWSS regularly provided reports on the progress of the project, andon annual accounts. The reports were of good quality, were provided on time,and allowed close monitoring of project implementation.

Performance of Consultants, Contractors and Suppliers

3.17 The engineering consultants, a consortium of two foreign and onelocal firms, were employed to carry out detailed desi g7 and constructionsupervision of the project through December 31, 1982.' Thereafter, theircontract was renewed/extended but their role was progressively reduced fromdirect supervision to advisory responsibilities (except for supervision of IpoDam construction). While .d and MWSS were generally satisfied with theconsultants' performance, the latter were partly responsible for delays tothe Bank component by underestimating the complexities associated with itsimplementation; this led to delays in the preparation of the detailed designand tender documents for the component (para. 3.4). Furthermore, theconsultants appeared reluctant to make firm recommendations, and generallyadopted routine rather than innovative techniques and approaches.

3.18 The management consultants (a joint venture of foreign and localfirms), hired under ADB project, provided expert advice on MWSS operationsbetween July 1980 and August 1982. MWSS accepted almost all of theirrecommendations, e.g., for preventive maintenance, an assessment of equipment,an improved organizational structure, and programs for metering and for

2/ The consultants were paid out of ADB loan amount to carry out detaileddesign for the entire project. For construction supervision theconsultants were paid out of ADB and Bank loan amounts for the respectiveparts of the project.

3/ MWSS has some reservations on the consultants performance regardingdetailed design of the distribution component.

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reducing unaccounted-for water. The consultants did not, however, fullyaddress the principal thrust of their terms of reference, i.e., a review ofMWSS staffing in relation to its work load and functions. In addition, someof the recommendations on reorganization were made without accompanyingjustification. After a further review, MWSS introduced a reorganization in1985, mainly based on the above recommendations.

3.19 All but two civil works contracts in the Bank project were awardedto local contractors (those two were awarded to a joint venture of a local anda foreign contractor). The performance of several local contractors wasdisappointing, mainly due to: (a) financial and technical shortcomings; (b) aninadequate price escalation formula imposed by Government and thus beyondtheir control; and (c) for one major contractor, overextended manpower andfinancial resources, due to contractual activities in the Middle East.

3.20 Procurement from foreign suppliers became very difficult during1983-85 when the peso was devalued substantially and Covernment imposed severerestrictions on the opening of letters of credit. The performance of localmanufacturers and suppliers, who were overextended, was on occasions less thansatisfactory both in terms of quality and timeliness.

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IV. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT

MUSS

4.1 On the recommendation of consultants engaged under the project, anda Bank review of the recommendations, the organization structure of MWSS wasmodified in September 1985. The new organizational structure (Annex 5)appears reasonable for a large public utility. The main features of thereorganization were: (a) creation of the position of Senior DeputyAdministrator; (b) an increase in the number of Deputy Administrators fromfour to six; (c) creation of six Sectoral (area) Offices which were providedwith the capability to install service connections, repair leaks and provideother customer services; and (d) separation of construction and engineeringactivities.

4.2 Over the years MWSS has developed into a competent entity. This isreflected in the quality of its operation and maintenance of major facilitiesfor the production and treatment of water and in the preparation of accounts.MUSS has not been so successful, however, in operating and maintaining therelatively old distribution system during a period of rapid system expansion,and in controlling the system particularly at the customer end. MWSS staff,especially at professional and senior/middle-management levels are qualifiedand competent, although their performance is to some extent diminished bycumbersome bureaucratic procedures endemic in the country.

4.3 During the project period, MWSS developed and institutionalizedcapacities for (a) development planning and implementation through projectoffices; (b) investment planning and programming through the computerizedCORPLAN model; (c) management information systems; and (d) staff training. Inrecent years, however, there have been several changes in the administrationand in the style of management, including three changes in the six monthsfollowing the change in Government in February 1986. These changes haveresulted in an apparent lack of trust between the administration and some ofthe professional staff, and created an aura of uncertainty and indecisivenessin the direction of MUSS. Such factors have-adversely affected staff morale,particularly at the senior level, thereby diminishing the efficiency andesprit de corps within the organization.

4.4 While there are obviously areas within the institution requiringimprovement in efficiency and effectiveness, MWSS management has correctlygiven top priority to reducing unaccounted-for water and thus maximizingbenefits and improving reveues (see paras. 5.3-5.8).

4.5 Although MWSS is a competent utility compared to many such utilitiesin developing countries, it is relatively overstaffed. In 1986 it had apermanent staff of around 7,100 which corresponds to about 14.5 employees per1,000 connections. [A realistic comparison between the numbers of staff in1978 and 1986 cannot be made because in 1978 MWSS had a large number of casuallabor who were subsequently absorbed into the entityl. Improvements inproductivity are expected, however, as a result of a recently initiatedprogram to expand the number of new connections and through retraining andredeployment of staff.

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Training

4.6 Prior to the project, MWSS had not developed a systematic capabilityfor providing in-house training nor for determining staff training-needs.Nevertheless, the senior management was fully cognizant of the benefits of andwere keen to establish and institutionalize training facilities andprograms. A major aim of the project was therefore to establish andinstitutionalize training facilities and programs. The project providedassistance to (a) create a separate training division by June 1979 with itshead reporting directly to KWSS's Chief Executive; (b) construct and equip atraining school; and (c) develop training programs which would includeclassroom and on-the-job training, as well as overseas training for thetrainers.

4.7 MWSS has made remarkable progress in training technical and othernon-managerial staff since 1979. It has established a Human ResourcesDevelopment Office (HRDO) - the equivalent of a training division - and hasbuilt an excellent training facility with accommodations for 60 trainees.HRDO has progressively improved and now provides excellent training programswhich are based, among other things, on identification of training needs byconsultative panels representing major functional areas. It currently has 22full-time trainers, and in 1984, 1985 and 1986 it conducted 96, 71, and 108courses attended by 1,699, 1,199 and 1,564 participants, respectively, theaverage duration of each course being around 40 hours. According to a reportof the Bank's Training Division, HRDO probably provides the miost comprehensivetraining service of any Bank-assisted metropolitan water authority in anyregion. For its senior level staff, MWSS has provided overseas training on anad hoc basis.

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V. OPERATING PERFORMANCE

System Operation

5.1 As mentioned above (para. 4.2), MWSS's major facilities, e.g.,source works, treatment plants and pumping stations, are well maintained andcompetently operated. However, its operation and maintenance of distributionfacilities has been neglected and needs serious attention, partly because thesystem in some areas of the city is old and needs repair and partly becausethe system developed in an uncontrolled fashion. In addition, there is a lackof accurate records on the location, size and other details of pipes andvalves. The system has suffered from inadequate maintenance, and someelements have even fallen into disuse. Since the reorganization in 1985,MWSS's Sectoral Offices have been engaged in preparing detailed records of thetertiary systems and house connections within their areas, which would assistin systematic maintenance. The Operations Department should now be able toconcentrate on operation and maintenance of the primary and secondary systems.A Distribution Network Computer Model for system design and operation has beenprepared but is not yet fully operational.

Customer Services

5.2 As part of its reorganization (para.4.1), MWSS established sixSectoral Offices and some 20 Branch Offices. 't is now in the process ofdecentralizing most customer services, including billing, collection, leakrepair, etc. This would improve collections, and the efficiency andeffectiveness of MWSS at the customer level.

Unaccounted-for Water or Non Revenue Water (NRW)

5.3 In a fully metered system unaccounted-for or non-revenue water (NRW)represents the difference between the water produced and the amount of waterbilled for during a specified period, and is presented as a percentage ofwater produced. This difference reflects leaks in the system, illegal con-sumption, legal but unbilled consumption (e.g., to extinguish fires or watergardens), under-reading of production and consumer meters, and meter-readingand billing errors.

5.4 MWSS has a history of high NRW. In the late 1970s, however, NRW hadreduced from around 552 in the early 1970s to around 47% in 1978. The projectappraisal report projected a progressive improvement of NRW to 28% by 1985.This expectation was not unrealistic, because the project provided for thereplacement of consumer meters and, more importantly, for the large expansionof the distribution system. (By the time the project was fully implementedalmost half of the entire system would have been new).

5.5 In actuality, the situation became progressively worse. NRWincreased to around 60% in 1985 and to 65% in 1986, largely because of thefollowing:

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(a) a greater than expected increase in leakage, mainly in thedeteriorated, older parts of the distribution system which could nothandle higher pressures introduced under the project (also the waterwas now supplied on a more continous basis);

(b) an increase in illegal connections, a large proportion of whichcomes from industrial/commercial consumers and more affluenthouseholds (recent surveys reveal that many such customers have onelegal connection and one or more illegal connections);

(c) tampering with meters, faulty zustomer and production meters, errorsin meter reading and deficiencies in billing;

(d) influence peddling whereby some influential illegal (and delinquent)consumers avoided disconnection or legal action. (Making an illegalconnection, often on a pressurized water pipeline, is a skilledprocess; it is therefore likely that individuals able to carry outsuch skilled tasks without being easily detected by the authoritiesor by the public at large may well have working experience in awater utility); and

(e) absence of an adequate deterrent in the form of stiff penaltiesapplied promptly and effectively for illegal consumption anddelinquency, reflecting a weakness in the legal and administrativesystem.

5.6 MWSS has tried several measures to reduce NRW, but they have notbeen particularly effective. MWSS offered monetary rewards (50% of the amountcollected) to informers on illegal consumers, but without significantsuccess. On two occasions MWSS offered amnesty to illegal consumers tolegalize their connections, but the response to the amnesties was less thansatisfactory, and at the end of the amnesty period, MWSS did not take vigorousactions (technical and legal) to flush out illegal consumers. On the fewoccasions when legal action was taken on illegal or delinquent corsumers, muchtime and effort was needed to obtain judgement because of the bureaucraticnature of the legal process in the country, and MWSS was able to recover onlythe value of the estimated water consumed illegally, or the actual amountowed.

5.7 More effective measures are now under way to reduce NRW. Arehabilitation project financed by ADB was launched in October 1983 (Loan 645-PHI for US$39.3 million) to rehabilitate 56 distribution system zones (out ofa total of 120) with the highest recorded NRW. The obiective is to reduce NRWin these zones to 25Z-30% by 1988. Although the project had a slow start, thefew zones already rehabilitated show substantial improvement, with NRWdeclining from about 65% to around 302. The project is now expected to becompleted in 1989.

5.8 In addition, MWSS instituted in 1986 an Integrated Program forRevenue Improvement (IPRI). This well designed, comprehensive programcomprises 48 tasks, some of which also cover areas such as operationalefficiency. The program's original goals were to reduce NRW to 52% in 1986,45% in 1987, and to 30% in 1990. These targets are under review.

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5.9 While substantial reduction in leakage can be expected from theabove program/projects, it may take a longer time to achieve improvements inareas such as illegal consumption, meter tampering, delays in paying bills,etc. which are influenced by socio-economic and political factors. (Accordingto some sources, in recent years the general public has shown less concern topay for, or to pay on time for, goods and services provided by government-owned institutions and agencies.) Therefore, even with vigorous efforts byMWSS to identify and take legal action against illegal consumers, a substan-tial overall reduction in NRW could well take some time to accomplish - longerthan that targetted in IPRI. Because of the prevailing political instabilitytn 1986 and the changes in MWSS top management, progress in the implementationof IPRI tasks he, been slow. Recent projections by MWSS estimate a reductionof NRW to 502 by 1990.

Operating Results

5.10 Largely because of delays in implementation of the Bank project,operational results of the system have fallen far short of expectations. Thefollowing table presents a comparison of estimated and actual key indicators.

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1978 1985 1986

Total Connections ('000)Estimated 269 659 682Actual 265 454 500

Act/Est. (Z) - 69 73

Industrial Connections ('000)Estimated 2 9.2 10.2Actual 2 1.5 1.0

Act/Est. (Z) - 15 10

Water Sales (cu m million)Estimated 248 666 696Actual 252 302 311

Act/Est. (Z) - 45 45

Water Produced (cu m million)Estimated 472 925 928Actual 468 790 905- Act/Est. (Z) - 85 98

Unaccounted-for water (Z)Estimated 48 28 25Actual 46 62 65

Population Served (million)Estimated 3.1 6.6 6.9Actual (current estimate) 3.1 n.a. 5.3(June 1986)

Industrial Water Sales (cu m million)Estimated 20 113 119Actual 20 14.6 14.5

Act/Est. (Z) - 13 12

- 16 -

5.11 Since late 19C2 the additional production capacity provided underthe ADB project has been available for consumption. However, construction ofthe distribution mains was substantially delayed and the number of additionalconnections provided under the project has been far below appraisal esti-mates. ConsequentLy, the volume of water sold in 1985 was only about 45% ofthe appraisal estimate, and the actual volume sold in 1986 was only 23%greater than that sold in 1978. A contributory factor, albeit small, todecreased water sales is the increase irn NRW, which grew from about 48% in1978 to around 65% in 1986 (in contrast to the appraisal expectation of 28%).The volume of water produced in 1985 was about 85% of the appraisal projectionand in 1986 production approached full system capacity. (However, in late1986 MWSS revised its operating strategy by reducing operating pressures; thishas resulted in a reduction in NRW to about 58% and a reduction in productionby about 15%).

5.12 Water sales have increased, mainly from residential consumers. Theincrease from commercial consumers has been negligible; sales voiume toindustrial consumers decreased from about 20 million cu m in 1978 to about14.5 million cu m in 1986. The latter represented only about 5% of MWSS totalsales volume, and is estimated to be less than 30Z of total water usage byindustry. During the same period, the number of industrial connectionsdecreased from around 2,000 to just over 1,000. The economic recession andbusiness failures in 1984-86, and other factors such as tariff levels,increase in illegal consumption, etc. have contributed to the decline in watersales to industry.

5.13 Because the system is producing at near full capacity, there ispiessure on MWSS to start implementing another project (Water Supply III).However, a thorough analysis of water demand, reductions in NRW, financialresources generation, and lead times necessary would be made in 1987/88 beforea decision is made on a new supply source project.

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VI. FINANCIAL ASPECTS

6.1 A major project objective was to ensure MWSS's financial viabil-ity. In support of this objective, MWSS was required to earn specific ratesof return (RRs) on its revalued net fixed assets in operation, and to be ableto finance from internally generated funds a reasonable proportion of itscapital expenditure.

Financial Results

6.2 The financial performance of MWSS during 1978-85 was lower thanprojected at appraisal, but has, nevertheless, been satisfactory, sonsideringthat delays in project implementation have adversely affected sales volume,and NRW has increased substantially durirg the above period. Annualprofitability, i.e., total annual net income, has increased from P 54 millionin 1978 to P 346 million in 1985 (compared to P 23 million and P 500 million,respectively, projected at appraisal). This satisfactory performance has beendue mainly to tariff increases. Average tariff increases were higher thanthose projected (para. 6.4) and in 1985 reached P 3.1/cu m, compared to theappraisal forecast of P 1.8/cu m (Annex 8).

6.3 In the expectation that the project (including the large number ofadditional service connections) would be essentially completed by mid-1983,the loan covenant required MWSS to achieve specific annual RRs, on itsrevalued net fixed assets in operation, progressively increasing to not lessthan 8% in 1982 and thereafter. This target was slightly modified under Loan1814-PH and, because of project implementation delays, was deferred to 1988under Loan 2676-PH. Actual RRs have been lower than those originally requiredunder the loan covenant, reaching just over 4% in 1983 and 1984. In 1985 theRR wits 8%, and provisional figures indicate that it would be about 9% in 1986.

Tariffs

6.4 As agreed during negotiations, an avetage tariff increase of about60% was introduced in October 1978. Tariffs were increased in subsequentyears and, in response to high inflation in the country'and to meet theincrease in MIWSS debt service charges (arising from devaluation of the peso),Government approved a number of tariff increases in 1985-86. The MWSS tariffschedule effective in April 1986 is given in Annex 6. A questionable featureof the tariff structure (that was also present in the earlier structures) isthe large number of tariff blocks for domestic consumers. Also questionableare the relatively low tariffs for large domestic consumers who are probablysubsidized by industrial and commercial users who pay higher rates. Theseissues are addressed under Loan 2676-PH which require MWSS to carry out annualreviews of the level and structure of its tariffs and other charges. Thefirst such comprehensive review was due in 1987.

Accounts Receivable

6.5 Under the Loan Agreement MWSS was required: (a) to write off andremove from its books all customer receivables which it considereduncollectible; and (b) beginning in 1980, to restrict receivables at the endof the year to below four months billings.

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6.6 For various (bureaucratic) reasons, action to write off theuncollectibles has been delayed and they are still carried on MWSS's books(Annex 7). Uncollectibles or doubtful accounts receivable represented morethan half of total accounts receivable in 1983 and 1984, and nearly half in1985. MWSS has, however, been able to limit its current receivables (orcollectibles) to below four months billings.

6.7 Until recently, receivables from government agencies represented ahigh proportion of total receivables, even though water sales to governmentagencies comprise only a small proportion of MWSS total sales. Under Loan2676-PH, it was agreed that Government would take action to ensure thatamounts owed to MWSS would be settled by government agencies and localgovernments in accordance with a satisfactory action plan, and that Governmentwould take all necessary actions to write off uncollectible accountsreceivable.

Billing and Collection

6.8 New procedures for _t._r reading, billing and collection prepared bymanagement consultants under the project have been implemented. Meter readingis carried out monthly, and billing, which is computerized, is done atHeadquarters. For smaller, mainly residential consumers, the bills are hand-delivered by collection agents, who also collect payments. For this, theyreceive a commission. At present there is a lag of some two to three weeksbetween meter reading and bill preparation due to the inadequate capacity ofthe computer system. Funding to increase this capacity is included under Loan2676-PH. Until this is introduced, MWSS is implementing an interim upgrade insystem capacity to reduce the backlog of bills to be prepared and to improvethe speed and accuracy of billing. Improvements are also expected in meterreading, collections and customer services as a result of the recentlyimplemented organizational decentralization.

6.9 In 1985, collection efficiency (total amount collected in the yearagainst total amount billed that year) was around 87%, which is reasonableconsidering the 60% increase in revenues between FY84 and FY85.

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VII. BANK ROLE

7.1 The Bank responded adequately to the country's severe financial/economic crisis which started in 1983 and which would have delayed theimplementation of on-going projects. Under the Special Action Program (SAP),the percentage of disbursement on civil works contracts was increased and aSpecial Account was established. The Bank also permitted, as a special case,simplified bidding procedtires for the re-award of those contracts terminatedby MWSS and split into smaller packages. A considerable amount of Bank stafftime was justifiably spent in closely monitoring these simplified proceduresto prevent abuse.

7.2 Prolonged dialogue between the Bank and Government resulted in anincrease in maximum allowable price escalation payments, from 12% p.a. to 30%p.a. in 1985. The effects of this change on project implementation, however,were at best marginal due to, among other factors, the tardiness in making duepayment to the contractors.

7.3 The Bank assisted MWSS in the creation of a very successful trainingdivision (HRDO) and provided support and guidance in its institutionaldevelopment and financial performance.

7.4 Project supervision missions and Bank inputs were adequate; it seemsunlikely that more frequent missions would have helped reduce delays. Banksupervision staff also maintained regular informal contacts with their ADBcounterparts and the consultants to overcome delays in the preparation ofdetailed design and tender documents for the distribution component.Nevertheless, priority continued to be given to construction of the sourcedevelopment (para. 3.4).

7.5 Bank staff maintained a close dialogue with MWSS senior managementon the need to improve operational efficiency and to reduce NWR, and supportedthe implementation of the reorganization in 1985 and IPRI in 1986. Bank staffalso provided full support to the establishment of a Corporate Planning Group(CORPLAN) under the Administrator's Office and to the introduction of methodi-cal and computerized long range projections. The evolution of the corporateplanning function has now resulted in a valuable tool being available tosenior management and the Government to plan for the future and to monitorand evaluate performance.

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VIII. PRdJECT JUSTIFICATION

8.1 The *.roject contributed to improvements in the standard of personalhygiene and health of Manila's population by improving service to existingcustomers and extending service to new customers, including those in the lowerincome. The actual number of customers served was, however, smaller than thatenvisaged at the time of appraisal.

8.2 Project construction created about 300,000 man-months ofemployment. The project also diminished the depletion of groundwater sourcesthrough overpumpage.

8.3 Source development, including the construction of a dam, was theleast-cost alternative to provide the additional water supply capacity neededto meet the envisaged growth in demand. Because implementation of thedistribution component took longer than estimated, in hindsight, MWSS wouldhave benefitted financially if expansion of treatment plant capacity had beencarried out in two phases.

8.4 At appraisal, the internal rate of return (IRR) on the project wasestimated at 12%. An assumption made at the time, which had a significanteffect on the IRR calculation, was that NRW would gradually decline from 47%in 1976 to 26% in 1986. During project implementation, however, it becameclear that relatively large additional investments in system rehabilitationand in implementation of IPRI tasks would be necessary to reduce NRW. It isalso now quite clear that, even with the additional investments, the reductionin NRW would be achieved at a much slower rate than envisioned at appraisal.Therefore, the benefits from the above investments would take that much longerto be realized, and in contrast to appraisal expectations which attributed alladditional benefits to the appraised project, these benefits would now have tobe attributed to the entire investment program.

8.5 It would therefore not be useful and might even be somewhat meaning-less to attempt to apportion project benefits to individual investments,solely to determine (for the purpose of comparison with the correspondingappraisal estimate) the IRR for each investment. The recalculated IRR on theentire investment, using somewhat conservative assumptions, is about 6%(Annex 9).

8.6 The project has justified itself additionally in that it has:(a) enhanced the concept, within the Government and MWSS, of the need forfinancial viabililty of the utility; and (b) contributed to the development ofa well-managed and structured public utility. MWSS now has a highly trainedand competent staff capable of meeting present and future challenges, and tosupply piped water economically and efficiently to MMA -- one of the world'smajor metropolises.

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IX. CONCLUSIONS AND LESSONS LEARNED

Conclusions

9.1 The project achieved its physical objective of improving service toexisting customers and extending service to new customers, including thepoorer sections of the community who live in blighted areas of MMA. Theactual results were, however, short of the targets.

9.2 The project enhanced the concept, within Government and MWSS, ofthe need for satisfactory financial performance of the entity. Even thoughthere were changes in top MWSS management, the institution has retained itscompetent higher and middle management and professional staff, and is now amore competent entity than in 1978. MWSS operation and maintenance of themajor production facilities and its financial activities are consideredgood. Only in areas related to distribution, particularly in the pursuit ofillegal consumers and the replacement of older distribution lines, has itsperformance been inadequate.

9.3 Partly because the complexities associated with implementation ofthe distribution component were underestimated, the preparation of detaileddesign and tender documents was delayed by about two years. This delay, inturn, resulted in extending construction activities into the period of steepinflation which started in 1983. Had the Bank project started on appraisalschedule, it is probable that its implementation would have been completedbefore the 1983 crisis. Again, had the price escalation formula for contractsbeen increased earlier and the contractors paid in a timely manner, theproject would have been completed earlier and for a lower final cost. In theevent, not only did the project's construction cost and implementation periodsubstantially exceed appraisal estimates, but part of the water productionfacilities constructed with ADB financing were underutilized for about threeyears, resulting in an economic loss to the country and a financial loss toMWSS.

9.4 MWSS efforts to achieve financial targets, e.g., the rate of returnon revalued assets, has thus far been accomplished mainly by increasingtariffs, while the level of NRW has steadily increased, and thereby imposed aprogressively heavier burden on the paying consumers. Furthermore, thereseems to be a growing perception among consumers that MWSS's attempts to iden-tify illegal consumers and to take legal actions against illegal or delinquentconsumers are not vigorous enough. The above factors, particularly thesuccessive tariff increases, may have led a significant number of previouslypaying consumers to become illegal consumers or delinquent customers.

9.5 Changes to the present legal and administrative systems should beconsidered because a considerable time and effort is currently needed toobtain judgement against illegal consumers and deliquent customers and alsobecause the existing penalties appear inadequate to serve effectively as adeterrent to those activities. Administrative changes are also needed tostreamline the existing cumbersome bureaucratic procedures to obtain permitsfor street excavation.

-22 -

9.6 MWSS also needs to determine why its water sales to industrialconsumers are so low, and to take appropriate measures to increase themsubstantially.

9.7 MWSS should likewise make its customers aware of the progressiveincrease in the cost of supplying water, and therefore the need to avoidwastage of water. This might be done by improving its customer relationshipswith the objective that customers (as well as employees) -would be observantand alert, and promptly report water leakages and theft to MWSS.

9.8 MWSS has developed excellent training progams for technical andlower level staff. For its senior level staff, for which MWSS has providedtraining overseas on an ad hoc basis, MWSS should now consider providingtraining on a more formal basis within or outside the institution.

9.9 MWSS senior management is fully aware of the need to reduce thelevel of NRW, and is making efforts in that direction. The degree of progressmade on reducing the level of NRW within the next year or two would partlydetermine the amount of time MWSS has to plan and to construct additionalwater production capacity (the present capacity being almost fully utilized)which would be needed to meet future demand. More importantly, the degree ofprogress made could well be the yardstick used by financial institutions todetermine their participation in future projects.

9.10 The concentration of MWSS investment on source development (tomaximum available yield) and associated distribution system expansion was notmatched by parallel investments in rehabilitating the older parts of thesystem and modernizing system control facilities. These needs were identifiedand addressed only in 1983/84, some five years after the start of the project.

Lessons Learned

9.11 Contract Packages. The packaging of the Bank project into a largenumber of relatively small contracts was intended to obtain participation oflocal contractors, and thereby contribute toward development of the localcontracting industry. However, partly because of inadequate assessment oftechnical and financial capabilities of the contractors prior to contractaward and subsequently because of the country's political and economic crisis,some contractors failed to perform or went bankrupt. This indicates the riskof construction delays when a project is split into an unduly large number ofcontracts, and procedures for pre-qualifying contractors are not fully adheredto.

9.12 Consultant Accountability. Because the costs of preparation ofdetailed design and tender documents for the entire project were financed fromthe proceeds of the ADB loan, Bank supervision missions were unable todirectly supervise and control the consultants on those activities. As aresult, implementation of the Bank project was substantially delayed. Aproblem of this nature, in which Bank staff have no direct control over theactivities of consultants financed by another entity, could arise in otherprojects cofinanced by the Bank. One solution, though not always practical,would be for each donor agency to finance the cost of consultants' services

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for the components it has financed. An alternative solution would be for thedonor agencies to come to a clear understanding between themselves and theconsultants on the latter's role, responsibility and accountability to eachagency.

9.13 Training. The positive approach taken by MWSS senior managementtowards staff training, and the quality of training facilities and programsfor technicians and lower-level staff developed by the utility, could serve asa model for utilities in other developing countries.

9.14 Overemphasis on Construction. A specific project lesson is that amajor investment in additional production capacity must be accompanied by acareful assessment of the capabilities of the existing distribution system toabsorb the new supply without undue stress. More general lessons are: (a) inmost utilities construction activities receive more attention from managementand attract better qualified staff than do operation, maintenance andrehabilitation activities; and (b) investment in large discrete works ( e.g.,dams, treatment plants, etc.) receives greater attention from management thandoes concurrent investment in dispersed works (e.g., distribution lines).

- 24 - . Annex I

Page 1

PHILIPPINES

MANILA WATER SUPPLY PROJECT II (LOAN 1615-PH)PROJECT COMPLETION IPORT

Project Description

Part A (ADB Financed)

(i) source development to increase water production capacityfrom about 1,400 million liters per day (mld) to about 3,000mld including modifications to the existing Angat powerhouse and transmission tunnel, construction of a dam at Ipo,aqueducts and treatment plant at La Mesa and upgrading ofthe existing Balara treatment plant;

(ii) construction of about 63 km of transmission pipelines;

(iii) construction of five new service reservoirs and three newpumping stations, rehabilitation of 11 existing pumpingstations, installation of about 20,000 new serviceconnections, 160 standpipes, 3,000 fire hydrants, 140,000meters and replacement of 5,000 existing valves;

(iv) supply of operations and maintenance equipment andconstruction of a water meter workshop;

(v) technical assistance for institutional development andpreparation of a program to reduce unaccounted-for wattand

(vi) consultant services for project implementation.

Part B (Bank Financed)

(i) construction of about 150 km of primary networks and about520 km of secondary networks, including river crossings,pipe rehabilitation, tertiary network and serviceconnections;

(ii) construction of about 50 deepwells, including pumps andstorage reservoirs;

(iii) acquisition and installation of 520,000 domestic and 18,000industrial/commercial water meters;

(iv) construction and provision of equipment, vehicles and toolsfor eight operations and maintenance branch offices andupgrading of 13 existing branch offices;

(v) construction and equipping of a water supply trainingschool; and

(vi) technical assistance for project implementation (180 manmonths) and staff development (36 man months).

Annex 1Page 2

- 25 -

Part C (Bank Financed)

(i) detailed des4.gns for water supply projects in provincialcities for which feasibility studies are being carried outunder Loan 1415-PH of May 13, 1977;

(ii) feasibility studies for water supply projects in provincialcities; and

(iii) preparation of a rural water supply project.

.

ANNEX 2-26 - Page 1

PHILIPPINES

MANILA WATER SUPPLY PROJECT 1I (LOAN 1615- PHL)

PROJECT COMPLETION REPORT

Comparison Between Estimate (of Appraisal)Actual (for Currently Estimated) Construction Periods

Part A - ADB-Financed Components

Start Up CompletedEstimated Actual Estimated Actual

DO-I F (P 192.14 million) New Ipo Dam 05/78 12/04/78 09/81 04/30/84AQ-1 F (P 299.42 million) Aqueduct #4 03/78 08/20/78 03/81 12/31/81LP-2 La Mesa TP 07/78 08/20/79 08/81 06/24/84BP-1 Balara TP 02/78 03/16/78 08/79 10/24/85RS-2 iasig Pump Station 10/78 05/19/81 08/80 02/28/84RS-3 F (P 115.50 million) Bagbag Res. 10/78 01/20/81 08/80 04/21/83RS-5 F (P 92.98million) Fort Bonifacio & 01/79 04/06/84 (Ongoing)

Noveleta PSPG-2 Water mains for DS 08/78 10/02/79 01/80 09/30/84PG-3 Water mains for DS 09/78 10/02/79 02/80 10/31/83PG-4 Fire hydrants 07/26/79 12/01/80PG-S F (P 189.10 million) Water mains for 09/78 .04/12/80 04/81 12/29/82

transmission

Part B - World Bank-Financed Component

Start Up CompletedEstimated Actual Estimated Actual

PG-6 J Water mains for 10/78 09/25/80 04/81 03/31/86transmission

PC-7 J * o so 10/78 02/08/82 04/81 05/31/86PG-8 Water mains for DS 11/78 11/04/80 04/80 03/29/85PG-9 11/78 10/23/80 04/80 09/30/84PG-10 *o 01/79 02/20/81 06/80 12/31/86PG-Il I 02/79 01/26/81 07/80 12/31/84PG-12 *o 02/79 03/11/81 07/80 (ongoing)

27 ~~~~~~~~~ANNEX 2-. 27 -Page 2

Part B - World Bank-Financed Component (cont'd)

Start Up CorpletedEstimated Actual Estimated Actual

PG-13 * Water mains for DS 02/79 04/27/1E 07/80 03/03/R4PG-22 05/79 06/19/82 10/80 09/31/86PG-23 * 05/79 06/10/81 10/80 01/25/85PG-24 05/79 05/11/81 10/80 05/31/84PG-25 06/24/81 04/30/84PG-26 Water mains for OA 08/79 08/04/81 01/81 03/15/85PG-27 08/79 06/24/81 01/81 09/13/85PG-28 Water mains for DS 08/79 08/06/81 01/81 01/15/86

PG-29 * 11/79 08/06/81 04/81 08/16/85PG-30 * 05/79 09/30/82 02/81 12/15/86PG-31 05/79 03/29/82 02/81 07/30/85PG-32 * 11/69 02/22/82 04/81 09/30/86PG-33 * 11/79 05/05/82 04/81 08/31/86PG-34 * 05/79 08/06/81 02/81 (one pack-

age notyetstarted)

PG-35 12/79 10/03/81 05/81 12/15/86

Legend:* Contracts which were taken over by MWSS and reawarded.

Components which were reduced in scope/sizeComponents which were carried over into the follow-up orojects (Loan 2676-PH).Contracts awarded to foreign contractors.Contracts awarded to joint venture of foreign and local contractors.

(P) Total cost in f million.

286- Annex 3

PHILIPPtNES

MAtILA WATER SUPPLY PROJECT It (LOAN 1615-PH)

PROJECT COMPLETION REPORT

Project Costs - Appraisal Estimate Versus Actual(or CurrentlY Estimated Final) C;osts

(P million)

Estimated ActualForeign Local Total Foreign Local Total

Part A - ADB-financed 742.3 689.8 1,432.1 852.02 921.50 1,773.52

Part B - World Bank-Financed /aPrimary network, km (150 vs't74) 221.8 234.1 455.9 261.80 295.23 557.n3Secondary network, km (520 vs 494) 36.3 85.7 122.0 89.52 173*78 263.80Tertiary network. km (700 vs 742) 1n.3 25.2 35.5 52.95 102.79 155.74River crossings 11.1 5.5 16.6 26.31 29.67 55.98Wells (50 vs 23/b) 7.2 14.1 21.3 11.95 23.21 35.16Service connections, '000 (251 vs 234) 74.0 175.0 249.0 70.57 181.47 252.04Meters, 000 (638 vs 485) 89.5 29.4 11R89 46.46 119.47 165.93Vebicles 3.2 - 3.2 - 5.43 5.43Branches offices and training school- 3.3 3.6 6.9 - 27.00 27.00Operational equlpment 3.8 3*4 7.2 - - -

Subtotal 460.5 576.0 1,036.5 359.56 958.05 1,527.61

Training 4.1 36.0 40.1 - - -Construction supervision 13.4 40.0 53.4 42.74 145.08 187.82Contingencies - Physical 79.7 101.7 181.4 263.23 510.99 774.22

- Price 71.0 102.0 173.0 - 318.00 318.00

Total Part 8 628.7 855.7 1,484.4 865.53 1,932.12 2,797.65

Total Parts A and B 1,371.0 1.545.5 2,916.5 1,717.55 2,853.62 4,571.17

Part C - Bank-Financed 22.2 - 22.0 17.50/c 17.50

Total 1,393.2 1,545.5 2,938.7 1,735.00 2,853.62 4,588.67

/a Figures in parenthesis represent Estimated v/s Actual.7W These wells are ready or being readied for operation. They do not include wells which

were abandoned after drilling./c Converted from USS equtvalent.

- 29-

MUILA maTER SUPPLY II PNgJgC, 'LOAE 1ISh-PII1

PIOJECT CONPLITION UCPOa?... _.........._......

Ceepliance mith Lean Cevolante.. _._..._.____.................

.... ___....._._.._..-...............___................_.__............._..___.._............ ........... _.,,_,..,,,,.._..........

:t3ea *f Croelapieiceject grief decrastion status at Precet statusree~nt.. __...___._ ._..........._-._.__.............----. ............. -- v*w-*-*-....................... --... _-..._._...........................

07 aeuisitio of ef land and land rights. 2 RoSe Nol fated difculti'tl i *oell sittits aneacenstructioen a breath Offises beCause *f landrequirements. For broaeb fices. amll it n4sto fent offie space rether than build o.e 444*ces.

01 insurance of ROSS eroo*rtv. I

02 it) A44frd lenk aptortunaty to coe- 2 * odor rs-ergsaaatiem Eqs carrIied Su in 1901-sent an revision of Oregtdlation lb. Ihale the aoranisatieft structure appears tostructure, be reason*ble, the number ef perenenat Staff had

*ere than doubled between 1976-SO.

(al) Staff elan of RUBS to be coe- I Coeoleted. Retent rearleasnones love allplated on revision of orenastaeon ePoser to General Manager/Adsialstrater te eobtaistructure. necessary Staff and classify thee at adequvte lovels.

(is)i loportunatv to coaeent an pro- 2Dosed appoanteents to SeniorCanaeae.at positions.

Olv) Establishment of internal auit I PA tnternal Control Davision has been estab-division anod lhing doo of internal lished to audit $vetees and eraetdures. Postaudit procedur5t. audit of financial treasenctons to artried out

by COA.

fvi EStablishment of a Training I Iuema Reoaurce.eOvelopeent Office now fullyOsvision. oserational. it conducting yearly stresm of

actsvaties, mith assistance of external trainersfor technical covrses.

.03 Pre*aatiton of a Drogps* by Jan. '? 2 RMUS has "as developed a ajar program (not yetcad aleaesntation of a oragree for fully oerationala whinee key objective isreduction of unaccounted 4or mster. to reduce unaccounted 4or mater. A0S has

ifnanced a *vetee Rehabilitation Projectta 1933 which covers aleast half e# MS *evtee.Thit projett has had a very slem start; slots&losseu have progreccayely increased to about 435 in 1934.

.02 Audit of accounts and financial state- Iseats.

.03 urto-off of unncllactible accounts and 2 Little Progrees roe write-off. Nrsever.bringing down accounts rece:vable to sucluding ueste-o4f, current arreers ar*not acae thai four manthe billing, generally lose than 4 *enthsl billing.

.04 Annual reviw anod aeplementatioe of mater I Banerally satisacCtory sea hel (4.051.rates.

.05 Rate of Return eo net fined assete I Conesdering delays ia project icplaeeotataon""reeively increasing to not less and an increasa (instead of decrease) inthen 2t an 1912 and thereafter, unaccounted for water, the finnecial

results are satisfactory. RON targets uorecodified under Successive leask operationsLns. ISIS and 2073t St ms Set for 1911.

5.04 *svaluation of fined assets. I Carried out ever. fifth year oh baais of physicalinventary. For antsraedaate years, revalva-tioe done an basis of estioated inflatien.

4.07 LEeg-tere debt limitations I

^~. It *ii

:PI

L.j Lj- 00 -

4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

I ~~ ~iO

- 31 -

PHILIPPINES ANNEY6

MANILA WATER SUPPLY PROJECT II (LOAN L61RHi )

PRO!ECT COMPLETION REPORT

Schedule of Water Pates by Service Tvpe (Peso)------------------------------------------ ____--_

Tvpe Of Service/ EffectiveCONSUMFTION RANGE April 16. 1996

DOMESTIC USERSUp to 15 m') 16.85/CONN16 to 20 .3 28.15/CONN21 to 25 m3 41.75/CONN26 to 30 m3 60.15/CONN31 to 50 m3 2.47/m351 to 70.3 3.04/137. to 1003 3.74Jm3-01 m3 and above 4.65/J3

COMMERCIAL USERSUpr to 25 .3 117.70 CONN26 to 1000 m3 4.71!m31001 m; and above 5.61/m3.

INDUSTRIAL USERSUp to 25 .3 154.15/CONN26 to 1000 m3 6.17/m31001 m3 and above 7.240/m3

SEA TRANSPORT 12. 46/m3

RAW WATER l. Q/m3

AVERAGE TARIFF 4.13/m3

Annex 7-32-

PHILIPPINES

MANILA WATER SUPPLY PROJECT It (1615-PH).,______________________________________

PROJECT COMPLETION REPORT

Summary of Unpaid Accounts by User Categoryas of June 30, 1996

(P million)

COMMERCIAL TOTALfEAR TOTAL DOMESTIC INDUSTRIAL GOVERNMENT BtLLED

1986 (June 06) 311.70 (1002) 178.65 (357) 51.52 (172) 91.61 (26%) 602L985. 160.20 (1002) 71.40 (45%) 13.37 (82) 75.44 (47%) 9431994 66.40 (1002) 26.05 (392) 7.60 (112) 32.75 (49%) 59S1993 41.23 (1002) 12.90 (312) 5.48 (13%) 22.94 (55%) 509

iub-Ttal 1/ - ---------- _-_--_--_-Sub-Total ~ 267.03 110.35 26.45 13.1.03

1962 andPrior Years 120.4 52.89 21.60 45.91

OTAL 700.0 341.00 99.57 258.54

1/ 1983-1985.

Annex Sa

- 33 -

PHILIPPINES

MANILA WATER SUPPLY PROJECT II (LOAN 1615-PH)

PROJECT COMPLETION REPORT

INCOME STATEMENT (P million)

1982 1993 1994 1985 1996

Est. Act. Est. Act. Ect. Act. Est. Act. Prov.

later Sales(M7 million) 519 =?0: 597 23 635 290 666 303 .12Ave. Water Rato (P) 1.7?, 1.5 1.70 1.7 1.90 2.1 1.90 3.1 4.0

loeratina RevenuesWater Revenues 882.; 401 1008.0 452 1143.0 621 1198.9 1009 1513Sewer Revenues 57.0 50 8-.5 56 123.3 69 157.5 105Others 15.8 11 17.5 15 18.4 15 19.7 19(Doubt. A/C) (47.6) -18 (55.2) (20) (64.1) (29) (69.6) (45) -60

otal Oper. Revenues 907.5 445 1052.8 504 1220.6 678 1307.0 1008 1453

lperating ExpensesPersonnel 103.9 s0 123.5 79 146.6 1'Pi 174.- 122 212Power 33.3 49 37.6 67 42.6 116 47.8 166 155Other 99.6 72 101.9 76 112.3 99 125.4 120 160Depreciation 171.6 60 219.9 99 239.5 109 260.9 129 201Sub-total 397.4 261 4e9.9 321 541.2 414 609.1 537 729

3perating Income 510.1 184 569.9 le 679.4 264 699.9 551 725-Jon-Operatinq

(Income) - (59) - (39) - (93) - (74) -114Expenditure 1.9 2 1.2 2 - I - - -

Interest - - - - 93Other. 187.5 6 193.9 6 210.6 tO 199.6 9 -

Sub-total (31) (82) (65) -31

'et Income 320.7 235 3s4.8 214 469.9 346 500.3 616 756

vWe. Rate Base 5899 4751 7150 5105 8192 5963 8615 8662 8067tate of Return X 8.6 4 9.0 4.2 8.3 4.5 e.1 9 9

/2/87

_ 34 Annex Sb

PHILIPPINES

rILI UNA IR Y nUIW It (UN 161548)

M U9E (P etalhon)

t1i2 193 194 19t5 1986Est kt Est kt Est kt Cst At (Pro,.)

bets

6ros reRd uts 7367 54"2 92 6504 IOO 8270 10M3 864 1116las u b . beee. 1025 11? 1327 1317 1672 164 2066 1.1 2116

ket fied sets 6342 i315 7972 5187 6l1 6621 867 7103 9030rk mn Prugress 158 2443 300 303 0 4240 I1I0 S1l? 4342

Sqtletd 7am 688 8272 8270 4210 10na 10267 l2220 13372

rWvent IGSWtlsb 84 168 121 534 1t8 372 4 711 U70UAtW lisaw # . 224 2S7 331 408 635

lesm Ohtfulkc 135 155 183 i22 284ltIet 1 . 159 89 184 102 213 118 228 260 346Other es. it

lnstates 4 63 S1 9 s 53 112 64 IS 139I. 38 M33 38 2 i 38 8 3a 20

Si-otal 325 55M 394 473 437 680 424 1046 176

0*3w AssetsPepimt 1 00 17t 286 10 110 104Othr 1 2 1 2 2fisc. 26 11 12 12 155ujl4se1 1 202 0 Z46 0 154 0 124 119

Total sets ?26 56 8666 45 9647 11695 1064 13440 IS16?

CenWt I Lmamltie

6rossOt 2443" le 2" 10 2326 2333 3913 24 M2I3 5872Ins Car hbtwrt 56 26 13 55 140 47 142 320 349

htet t23 I? 1OSI8 2333 17 a1 386 2052 3463 SS4Ososts 6S 4 101 4 106 9 ItS 11 21Sitatl 2m 1062 24M3 2275 2301 3S 2167 3974 SS1S

vret udmlmtleskcea.ts 'sdle 20 246 23 489 26 3M8 29 575 758

wtzgtacn 56 26 137 Ss 140 4? 142 320 348Oeteord Creits 12 106 10 7Other 2 22 28 25 2 31 29 39 103Sub-lotwl 103 306 16 615 I" 5216 20m 441 1209

Ctntv 1392 1369 1342 13 1391 2035 1342 2635 3000

leeliatie n Sutle 2415 3i0n 2M62 33? 3120 "42 423 442S 3531Swuls . S55 419 1340 918 184 ?755 2309 466 2082Sisads 330 33 3M M0Ssb-total 5152 61ff 6044 6596 7150 ?2 72? 64 526 861i

lotal Entt * . 772m 7564 8666 9540 4645 11693 10641 134t4 1536?

Annex 9

- 35 -

PHILIPPINES

MANILA WATER SUPPLY PROJECT It (LOAN 161SPH'

PROJECT COMPLETION REPORT

INTERNAL RATE OF RETURN(Peso million)

Year Capitol jpe/Masn Total Saes, Tariff Sales Other Total Net O.?late Net Benefits

Expend. t/ Expend. E-pand. Volume (P) Revenue Revenue Revenue Benefats Factor (Const. Prtces)0f3 mill.)

1979 56 2 so 6 0.6 3.6 6.6 9.6 -46.4 6.S -96.6

1979 96 2 Ss 6 0.9 5.4 6.0 11.4 -86.6 0.6 -144.3

19S6 146 3 149 6 1.6 6.0 6.0 12.6 -137.0 6.7 -195.7

1981 312 4 316 6 1.3 7.8 6.0 13.0 -302.2 0.8 -377.71982 455 17 472 Z2 1.5 33.0 6.0 39.0 -433.0 0.9 -461.1

1983 752 Z9 781 37 1.6 S9.2 7.0 66.2 -714.8 1.0 -714.8

1984 836 44 686 42 2.1 88.2 8.0 96.2 -793.6 1.4 -559.9

19SS S86 73 961 94 3.i 167.4 9.0 176.4 -784.6 1.8 -43S.9

1986 513 166 619 63 4.1 298.3 10.0 268.3 -366.7 1.9 -184.6

1987 1340 141 1481 87 4.1 356.7 12.0 368.7 -1112.3 2.0 -556.2

1968 lS6 260 2015 126 4.4 554.4 13.6 967.4 -1447.6 2.1 -689.3

1989 1970 240 1816 1S7 4.6 753.6 17.0 770.6 -1639.4 2.2 -472.5

1996 -486 311 799 169 5.1 943.S 21.6 964.5 165.5 2.3 72.6

1991 326 363 683 212 5.3 1123.6 24.0 1147.6 464.6 2.4 193.6

1992 336 375 711 242 S.9 i463.6 30.0 1433.6 722.6 2.5 289.0

1993 375 375 27Z 5.8 1577.6 30.0 1667.6 1232.6 2.9 493.0

1994 375 375 302 S9. 1791.6 30.0 1761.6 1469.6 2.5 562.6

1995 375 375 332 S.9 1925.6 30.6 1996.6 lSO9.6 2.5 632.2

1996 375 375 362 5.8 2099.6 30.0 2129.6 1754.6 2.S 761.6

1997 375 375 391 S.9 2262.0 30.0 2292.0 1917.0 2.5 766.8

1996 375 375 390 5.8 2262.0 30.0 2292.0 1917.0 2.5 766.6

1999 37S 375 396 5.8 2262.6 30.0 2292.6 1917.0 2.S 766.82060 375 375 396 9.8 2262.6 30.0 2292.0 1917.0 2.5 766.8

2061 375 375 390 6.6 2262.0 30.0 2292.0 1117.6 2.15 766.6

2002 375 375 390 5.8 2262.0 36.0 2292.6 1917.0 2.5 766.6

2003 375 375 390 S.8 2262.0 30.6 2292.0 1917.6 2.5 766.8

2004 375 375 390 5.6 3262.6 30.0 2Z92.6 1917.0 2.5 766.8

2065 375 375 396 S.8 2262.6 30.6 2292.0 1917.6 2.5 766.8

2z66 375 375 390 5.6 2262.6 30.0 2292.0 1917.0 2.5 766.6

2667 375 37S 390 5.8 2262.6 30.0 2292.0 1917.0 2.S 766.6

INTERNAL RATE OF RETURN (tRR) 6-

a/ Includes investment under Loans 1516-PH and 2676-PH, and ADB Loan for Rehabilitation(Loan 654-PH), and other investment for extension or improvement of water distributionsystem.

ANNEX 10

-36- Page 1 of 8

PHILIPPINES

MANILA WATER SUPPLY PROJECT II (LOAN 1615-PH)

PROJECT COMPLETION REPORT

MWSS Comments on Project Completion Report

1.0 Highlights, para ii, p. IV

"Inplementation of the project took sane four years longerthan the original sc' dule."

a. Under the loan, Part B(the IBRD) pipelaying conponent of the projectwas scheduled for completion in 6 years (1978 to 1983)

However, the Loan becane effectilue only on Decenber 31, 1978; andafter conpleting plans and bid docunents, the first large dianeterwater main contract was opened for bids in October 1979. Thefirst contract for pipelaying therefore actually started only in -

1980. The bulk of the other contracts were bidded out in 1980 and1981. The project becane substantially operational by end 1985with some corrective and minor physical works spilling oxer into1986, and disbursenents to settle claks of accounts payablesrurming into 1987. Slippage in project bnplenentation wastherefore only o'er one year, net.

2.0 Art III, para 3.3, p. 5

"The primary cause of these delays (on ADB proj&t canponent)was gomrment' s cunbersone procedure for the award of largecontracts . . .

a. True, gourrment award procedure was quite cunbersane, e.g. uariouslewls of approwal of higher authorities was at that time a require-ment in the awards of large contracts. This delayed award by sixmonths on the awrage. But the real major cause or delays of theADB (and also IBM) contracts can be attributed to many of the con-tractors themselves.

b. To illustrate: Themost critical of the ADB conponents of theprojects were the Ipo Dan, the 4th Aqueduct, the La Mesa WaterTreatnent Plant and one large dianeter water transiissionm4ncontract (PG-5). A Korean-French joint uenture contractor of the.4th aqueduct and a Japanese contractor of the transmission mainfirished their contracts only with a few months (6 and 4) slippageeach. But the sane Korean contractor for a dam this tine and alarge Filipino contractor for a 1500 mld water treatment plantsuffered serious delays of more than 2 years each. MWSS went outof its way to assist these two contractors at the technical andadninistratiue leuels, but both suffered recurring cash flowproblens due to their own financial and management Inadequacies.In fairness though to the dan builder, a force majeure floodinghis work site 'set back the dan project by not less than six months.

ANNEX 10_37- Page 2 of 8

3.0 Art. III, para 3.4, p. 5

"Start up of Part B of the project, i.e., preparation ofdetailed design and tender docunents were delayed byover two years. MWSS was reluctant to start work onPart B until sone progress was made on construction ofPart A. Furthexmore, MWSS and Consultants also under-estinated the tine required to inplenent a conplex andlarge distribution conponent in conditions prevailing inMmA . .

a. The two-year delay in two (Part A) projects cited in 1.b above whichhappen to be along the critical path of the project also affectedthe decisions and tine tables of sane of the downstrean conponents(Part B) of the project which are also along the critical path.

Added to this was the unexpected interuention, at top levels, inthe design (of two major river crossings) and locational decisionsfor two prinary water.main transnission conponents of Part B (PG-6and PG-7). Those high lexel decisions alone were to delay the projpctfor one year, at least.

b. Except for three large dianeter (1,050 mn to 3,000 mm) water trans-mission main contracts and area couerage (1,400 kilcneters) ofsecondary and tertiary mains (2" to 20") there is nothing very"coanplex" about the pipelaying conponent of Part B. Their contracttines and es$tnates were reasonable under noinal conditions.

What its consultants (and MWSS) may hawe ouerestinated or may hayebeen too optinistic about was the ability of the pipelaying-contrac-tors to manage their respectixe contracts.

In the case of one of the large dianeter water main conponents, awell-Cinanced and well4 anaged foreign (Japanese) contractor finishedhis contract with only a few months slippage. But this cannot besaid of the joint uenture between a foreign (Japanese) and a largeFilipino contractor which won two of the three large dianeter water.nain contracts. This joint 'enture suff.ered serious cash flow problensat various tines during the project inplenentation and only recoveredtowards the end, when gouernnent decided to extend all out assistanceto the joint venture in the interest of project conpletion.

Sinilar financial and managenent problens would hound the other pipe-'laying contractors who:in spite of MWSS 15% cash advance for mobilizi-tion would have not much operating capital: to make deposits forforward supply contracts, to meet payroll requirenents and equipnentleases; and had to resort to clandestine sub-contracting arrangenents.

Fornal reconnendations by project staff in 1983 to take ower delayedcontracts were set aside in fa wr of giving defaulting contractorsa "second chance". At that tine, this appeared to be a more appro-priate option.

- 38 - ANNEX 10Page 3 of 8

4.0 Art III, para 3.4, P- 5

"During inplenertation all canponents suffered additional delaysdue to the rollowing:

The Bank project was packaged in a large nunber of snall con-tracts to encourage participation of local contractors andthereby prcoote the dexelopnent of the loca. industry.SeYeral of the local contractors had difficulties with thecontracts, sane for financial reasons (attributed to under-bidding), others because of their lack of technical capabili-ties (perhaps a reflection of inadequate pre-assessment oftheir capabilities) and in case of the major contractor, ouer-extension of his contracting activities in the Middle East."

a. There appears to be nothing essentially wrong about si2e of th, pipe-laying contracts. Scope of pipelaying contracts were fairly extensiueaueraging 72 kns. and ranging frnm 44 to 104 kns. of secondary andtertiarymains, ualued at a range of P2G M to P50 M ($1 to $3 M).These 21 contracts cannot be considered "snall" as they would inuml%epipelaying in 1 out of 2 or 1 out of 3 streets in 5 cities and 23 muni-cipalities. They are only "snall" in tenns of money lalue and in thecontext that they did not attract foreign based contraetors.

Their biddings were also staggered: 2 in 1978, 2 In 1979, 5 in 1980,16 in 1981 and 1 in 1982.

b; The pre-assessnent of contractors are not to be faulted for they werebased on guidelines set in existing go wrmeht procedures and contrac-tor s docunented subuissions, both as to technical and financialcapabilities.

Much of the failure of contractors were due to:

1. low bids2. inadequate working capital (contrary to submitted financial

statenents)3. poor managenent

not easily discernible at pre-qualification stages.

c. On hindsight, it appears that one of the major flaws of go%errmentrules on the prequalification of contractors is the NFCC or "NetFinancil Contracting Capacity". NFCC is based on the contractor' sNETWORTH TIMES 15.

Fran MWSS experience, it now appears that the multiplier-factor of15 appears too large. Thus a contractor with only P1.3 M net worthcan qualify for a P20 million contract. Most often, howe-,er, acontractor' s declared net worth is not reliable especially if it is

-not in terns of cash or liquid assets. -Inxeriably such contractor canhardly meet e wn the monthly operating cash requirenents of a contract.

39 ANNEX 10Page 4 of 8

d. The bank is correct in assuning that "anall" contracts of betweenP20 to P50 million had encouraged the participation and the dexelop-

ment of the local contracting industry.

If foreign contractors did not see it fit to participate in packagesof $1 to $3 M in MWSS pipelaying contracts, this policy had benefittedthe Philippines.

1. Sexeral local contractors are now proficient in the art of pipe-laying and many professional FM skilled personnel 'f the localcontractors are now in denand in the foreign labor ontracts,thus earning foreign exchange for the country.

2. The supply and lay contracts created a local denand whichenabled the establishnent of many local firns which uenturedin the manufacture of:

a) polybutylene and polyethylene tubingsb-D PVC plastic water pipesc) large dianeter steel pipesd) CI and brass fittingse) ialues and fire hydrantsf) water meters

Had there been no winning local contractors, these entrepreneurs wouldnot haue been motilated to establish their factories locally as foreigncontractor could haue brought in their constructiorl materials, taxfree. A success story is that of a local manufacturer of large dianeterpipes who won an international bid in the Malaysian market.

The establishment of these factories has contributed posittiely to thenational econany.

5.0 Art III, pam 3.5, p. 6

"Other factors of relatimely less sigiificance which contribi 3dt.f the delays were: . . . and c) unsatisfactory quality ofmn. ,erials and equipnent produced by owr extended local manufac-turers and suppliers . . .

Allowed to stand alone, the statenent may be taken out of context bysane. But it is to be pointed out that M''SS is the first gouernnentagency in the Philippines which introduced and institutionaliaedin-house, day-to-day, plant-6ite quality control inspection for alltrie construction materials and equipment used by contractors in theirpipelaying contracts.

This procedure therefore had afforded %ery little opportdnity forcontractors to use unsatisfactory quality materials. Nor .lhould thestatenent be taken to mean that plant site inspection may haxe "caused"delays. On the contrary, it was MWSS plant inspection, with its stickersysten, that assured the incorporation of quality materials in MWSSprojects or the rejection of inferior,quality products.

ANNIX 10-40- Page 5of

This has become a boon to the local industry a, they haw becmequality conscious. Other agencies are now fbllowlng, or should nowbe following MM fxmple.

6.0 A* II:, para 3.14, p. 7

As explalrud In Item la of this paper, no disburment for 1979 sholdhaw been expected, because the loan becene effectiw orny on December 21,1978. 1979 ws deiOted to detailed deslgn, preparation of bid docmeentaand biddlng. Construction therefore had to star nnly In 1980 onwards.

7.0 Art III. para 3.20. p. 9

Local contractors could hawe resorted to lUnited knportations In the ewntscae local suppliersnantafacturers could not meet their orders. Unfortu-nately, they did not autil of the oqxortunity, but *iited for local suppliersto deliwr because the latter probably had lower prices.

8.0 Art V. Par 5.11,p. 16

Tbe programed nmmber of new servlce connections which ws assmmed underthe Project was based on projected land occupancy method (per unit area-hectare) basis. The shortfall in the actual nLuber of new serulce correc-tions under the project may be attributed to the fact that the projectedland occupancy may not haew fully materialized during the project inplenent-ation period. Durirg the period, housing dewlopment suffered from lackof, or due to tlght credit. Another possibility is that many of those wharefused to connect to the systen may haw alternate sources of supply;cannot afford to connect or preferred to buy fran vendors; or are alreadyIllicitly connected to the M?5S systen.

At any rate current MMSS efforts are now directed td accelerate new connec -tions and to flush out illegl services. This should maxinie underutilzed capacity, reduce non-.rewnue water and inprow MWSS incane.

9.0 Art IX, para 9.3, p. 21

"Partly because of canplexities associated with lmplenentation ofthe distribution canponent were underestinated the preparation ofdetailed design and terder docunents was delayed by about twoyears. This delay, in turn, resulted in extending construction.activities lnto the period of steep inflation which started in1983. Had the Bank proJect started on appraisal schedule, it is

*probable that its inplenentation would hau. been conpleted beforethe 1983 crisis. Again, had the price escalation fonmula for thecontracts been increased earlier and the contractors paid in a

*tlnely manner, the projects would haie been conpleted earlier andfor a lower final cost.. .

a. As already clarified in la and 2b earlier, the schedules set up for theproject were based on Ideal, normal conditions.

What may be adnitted as a probable m isjudgenent was that only modestallowances were provlded for contlngencies both in tine aiidin cost.

ANNEX 10- 41 - Page 6 of 8

Unfortunately, abnormal conditions did occur which no one expected(e.g. Aquino assassination, oil price escalations, the series ofpeso devaluations, steep inflation) and can be cited only now andin hindsight.

b. Furthernore, the pipelaying contracts were bidded in managbable simsouer tine, viz: 2 in 1978, 2 in 1979, 5 in 1980 and 1C in 1981, andonly 1 in 1982. The tining of the bid openings was based on the esti-mated progress being achieved in the on-goirn source, treatnent worksand prinary transnission mains. This woula llow energization of thedistribution systen to be progressively done as additional wv.ters werebecaning partially available thru the cited upstrean works.

c. Echoing the PCR' s connents, in hindsight the contractors need not halebeen overtaken by the aduerse ewents because they had all the tine tofinish their contracts long before the 1983 crises (that nobody could:hawe predicted). It is reiterated that there ls. nothing wry "conplex"in the water main distribution contracts, that a well-managed andfinancially equipped contractor could not have done under nornal condi-tions.

d: Mention was also nade that projects could have conpleted earlier hadthe price escalation fornula for the contracts "been increased earlier."

It nay be mentioned that there was nothing essentially theimatter withthe price escalation fornula. This was the wery legal uehicle whichwould hawe provided the cushion for any abnomnal increases in the pricesof gouernment contracts. Any change in price indices is p operly reflectedin the fornula. And govermnent lifted the ceiling of annual escalation

! fran 12% to 30%. Moreover MWSS PG contracts need not hale been caughtby the years of steep inflation (late 1983, '1984 and 1985) had theyfinished their respective contracts earlier.

e. There was also a general statement which imply that contractors were notpaid in a "tinely manner". It has to be clarified that if this euerhappened, it may hawe referred to a particular one-year period startingin March 1986 under very abnornal conditions which the Bank was privy to.But in all the preceding periods, MWSS contractors were paid in regular,monthly periods, all within the 60 day processing period as provided forin MWSS contracts. As a matter of fact during those tines MWSS gaineda reputation for paying its contractors on tine and with wery littlehassle. Furtheraore, when contractors started having cash flow problensstarting 1983, MWSS went out of its way to uoluntarily cut down processingtine to only about 11 days average (5 to 18 days) to speed up progresspaynents.

Other financial acconnodations extended were advance paynent for nobili2a-tion, paynent for materials delivered at site, upped percentages of

monthly progress paynents, alnost gratuitous grants of tine extensionsor grace periods so as to reliewe cortractors of having to pay liquidateddanages.

ANNEX 10-42- _ Page 7 of 8

10.0 Art IX, para 9.6, p. 22

"MWSS also needs to determine why its water sales to industrialsales are so low, and to take appropriate steps to increasethen substantially."

a. The decrease in industrial (and euen canmercial) sales as conpared tothe dranatic increase in donestic sales is understandable in the sensethat the thrust of MWSP II was to reach as much of the unserued popula-tion within the limits of MWSS available pply and pressure. Thus ina space of fixe years domestic services viriually doubled in nunber.Econonic decline in the 1985's and uncertainties in 1986 may haueresulted in folding up or stagnation of many in the industrial sector.Sales in this sector will increase as a natural consequence of therestoration of econonic stability in the country and uery little effortneed to be exerted as MWSS has already made and is making extensions inthe distribution systen into nost of MWSS service areas where there aremany potential industrial concessionaires.

11.0 General

The major setbacks suffered in the implenentation of Second ManilaWater Supply Project (MWSP II) were caused prinarily by circunstancesunforseeable at the tine of project planning. In retrospect the post protectexeluation may have looked "better" had the project planners/appraisers notbeen too modest by providing too snall allowances for unforseen contingentexents that had, in fact, aduersely affected construction tine tables andcosts. The project estimates as to tine and costs were therefore optimisti-cally based on "nonnal" conditions. But what happened in the country duringthe implenentation period were not only wery abnornal but also rnearly catas-trophic. These euents happened not too long ago no be quickly forgotten.These must be borne in the minds of those rendering the post evaluation ofthis project.

Notwithstanding all the abowe, MWSP II was an achieuenent MWSS couldwell be proud of, In a space of less than eight years, MWSS has doubledwhat took oxer eighty years for all its many predecessors to build. Todaythe systen is serving 540,000 concessionaires with a capacity to serve200,000 more, if systen's physical losses can be recouered ouer ttne.Production capacity is 2,500 million liters per day, up fron 1350 .nld inthe early 1980's. It has now 3,100 kns. of distribution lines where it hadonly 1,600 kns. before. MWSS is now reaping financial benefits fran M1WSP II.

Not gixen much proninence was the fact that it was in this projectthat MWSS introduced innovatixe/least cost designs, e.g.

a. a high dan at Ipo in lieu of a costlier, production disruptiwewide*ing of an existing tunnel;

b. 3.4 m prestressed corncrete, non-cylinder aqueducts;

ANNEX 10- 43 - Page 8 of 8

c. a hydraulically operated inter-filter back,wash type of treatment.plant with the least mechanical equipment and with a trlnediarapid sand "ilter;

d. large dianeter water mains in lieu of booster punping stations tosawe on power; and

e. plant site quality control neasures and rejection of pipes that had.not gone through or passed leakage and pressure tests.

f. MWSS also resorted to TUNNELING in the l. ing of larpe dianeterwater mnains in crossing major rivers and under major or heavily.trafficked roads. This increased project'costs but was a benefitto the national econony in terns of fuel and business losses thatresult fron traffic-jan's because of open exca-,ations of utilityworks.

Moreouer except for certain abnornal tines in 1986, lt may be uen-tured that the uast najority 1/ of project personnel had perforaed exenplarilywell. They were a highly -notTlated group, fair and even concessionary inacceding to reasonable clains of contractors, especially as it is perce6iedto speed up project coupletion; but wery fiim against denands that haue noc6ntractual or noral basis. It is in the latter that project personnel havebeen called to task and as a matter of fact, even blaned. But signlficarstly,it is the fiimness of project personnel on these'kinds of issues that, byand large, would gi.e the project managenent its reputation for professionalisn,courage and integrity. In the milieu that MWSP II was undertaken, MW5P IIwould stand out.

=~~~~~~~~~~~~~~~~~~~~~~~~

It may be adnitted that there were sone undesirables in the project but theywere either allowed to resign fron the project or otherwise shifted to lesssensitiw positions.

_ 44 - ANNEX 11

PHILIPPINES Page 1 of 2

MANILA WATER SUPPLY PROJECT II (LOAN 1615-PHL)

PROJECT COMPLETION REPORT

NEDA's Comments on Project Completion Report

Hereunder are our comments on the Project CompleticnReport:

1. Except fcr some minor clarification we generallvactree with the findings of the comoletion report.

2. Item 1.3 second sentence should read as "The Local

Water utilities Administration (LWUA), established

in 1973, is responsible in Providir1a tcechnicalassistance and loans to locally-controlled water

districts (WDs) in the provincial cities as wellas rural waterworks and sanitation outside of

Metro-Manila Area (MMA)". The thi.rd sentence

should now be- deleted. The chance i.s due to theabolition of RWOC and the transfer of its functionto LWUA by virtue of Executive Order No. 124.

'. With respect to item 9.3, it should be rentionedthat the MWSS manaqement had exerted every effort

t.o er;pedite the implementation of the project.It will be recalled that during the difficultperiod between 1983-1985 the MWSS rmanagement wasfaced witi. severe financial. constiaints and not

even the national government was able tco offeradequate financial suvport.

4. The Problem concerning excessive NRW of MV7SS was

adequately highlighted in the report. It should

also however be mentioned th.at the MWSS management,inspite of financial constraints, has respondedto the problem through various programs and orojectsincludinc the on-going Manila Water Supply Rehabili-

tation Project.

5. Regardins, item 9.6, it may be mentioned that anAd Hoc Interagency Committee on Water Su;pply,Sewerage and Sanitation Sector Study has recommended r

that MWSS be allowed to charge commercial andindustrial groundwater abstractors in its franchiseareas to compensate for at least the economic losses

resulting from their pumping operations. This is

based on the observation that a substantial number

of corxrercial and industrial usere in MWSS franchiseareas are using groundwater for their cperation.

- 45 -

ANNEX 11

Page 2 of 2

6. The suggestions in item 9.7 to generate waterconservation awareness am;ong consumers has long beenimplemented by MWSS through pamphlets and the prirtand broadcast media.

7. Related to item 9.9, MWSS management has alreadyundertaken preparatory activities in anticipationof possible shortfall in water supply for Metro-Manila# Besides the Manila Witter Supply Project(MWSP III) it is now undertakir.g the feasibilitysttdy of the Angat Water cupply OptimizationProject which is envisioned to increase water sunplyutilization of the Angat Cam.