ASIAN DEVELOPMENT BANK PCR: PHI 29083

PROJECT COMPLETION REPORT

ON THE

SUBIC BAY AREA MUNICIPAL DEVELOPMENT PROJECT (Loan 1599-PHI)

IN

THE PHILIPPINES

September 2004

CURRENCY EQUIVALENTS

Currency Unit – Philippine peso (P)

At Appraisal At Project Completion (5 September 1997) (30 June 2003)

P1.00 = $0.0296 $0.0187 $1.00 = P33.75 P 53.60

ABBREVIATIONS

BLGF – Bureau of Local Government Finance CDF – Countryside Development Fund DBM – Department of Budget and Management DBP – Development Bank of the Philippines DILG – Department of the Interior and Local Government DOF – Department of Finance EIRR – economic internal rate of return FIRR – financial internal rate of return GFI – government financial institution LBP – Land Bank of the Philippines LGU – local government unit LWUA – Local Water Utilities Administration MDFO – Municipal Development Fund Office MOU – memorandum of understanding NEDA – National Economic and Development Authority O&M – operation and maintenance PAG – project advisory group PCR – project completion report PGB – policy governing board PIU – project implementation unit PMO – project management office PSC – Project Supervisory Committee SBF-SEZ – Subic Bay Freeport and Special Economic Zone SBMA – Subic Bay Metropolitan Authority SEZF – Special Economic Zone Fund SIP – subproject investment package SLA – subloan agreement SWM – solid waste management TA – technical assistance TWC – technical working committee WD – water district

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, "$" refers to US dollars.

CONTENTS

Page

BASIC DATA iii MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 4 C. Project Costs 5 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 7 G. Conditions and Covenants 7 H. Consultant Recruitment and Procurement 8 I. Performance of Consultants, Contractors, and Suppliers 8 J. Performance of the Borrower and the Executing Agencies 9 K. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Efficacy in Achievement of Purpose 9 C. Efficiency in Achievement of Outputs and Purpose 10 D. Preliminary Assessment of Sustainability 11 E. Environmental, Sociocultural, and Other Impacts 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons Learned 12 C. Recommendations 14

APPENDIXES 1. Project Framework 16 2. Project Outputs 20 3. Estimated and Actual Project Cost 24 4. Project Schedule at Appraisal and Actual 25 5. Chronology of Events 28 6. Institutional, Financial, and Operational Action Plan 30 7. Organization Chart for Project Implementation 32 8. Status of Compliance with Loan Covenants 33 9. Financial and Economic Evaluation 39 10. Local Government Unit’s Institutional Capacity 46

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BASIC DATA A. Loan Identification 1. Country 2. Loan Number

3. Project Title 4. Borrower 5. Executing Agencies

6. Amount of Loan 7. Project Completion Report Number

Philippines 1599 Subic Bay Area Municipal Development Project Republic of the Philippines Subic Bay Metropolitan Authority Local Water Utilities Administration Department of the Interior and Local Government

$22.0 million

847 B. Loan Data 1. Appraisal – Date Started – Date Completed

2. Loan Negotiations – Date Started – Date Completed

3. Date of Board Approval

4. Date of Loan Agreement

5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions

6. Closing Date – In Loan Agreement – Actual – Number of Extensions

7. Terms of Loan – Interest Rate – Maturity – Grace Period

8. Terms of Lending

Municipal Development Fund Office – Interest – Maturity – Grace Period

Local Water Utilities Administration – Interest – Maturity – Grace Period

18 August 1997 5 September 1997

11 November 1997 13 November 1997

19 December 1997

21 January 1998

21 April 1998 8 September 1998 2

30 June 2003 30 April 2004 0

Variable 25 years 5 years

14% 12 years 3 years 10.5% 20 years 1 year

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9. Disbursements a. Dates Initial Disbursement

15 November 1998

Final Disbursement

16 July 2003

Time Interval

56 months

Effective Date

8 September 1998

Original Closing Date

30 June 2003

Time Interval

57 months

b. Amount ($ million)

Category or Subloan

Original Allocation

Last Revised

Allocation Amount

Canceled Net

Amount Available

Amount Disbursed

Undisbursed Balance

01 – Civil Works 11.1 0.3 10.9 0.3 0.1 0.2 02 – Equipment 2.6 0.7 1.8 0.7 0.6 0.1 03 – Consulting Services

1.3 0.1 1.2 0.1 0.0 0.1

04 – IDC 3.8 0.8 3.0 0.8 0.5 0.4 05 – Unallocated 3.2 0.2 3.0 0.2 0.0 0.2 Total 22.0 2.1 19.9 2.1 1.2 1.0 IDC = interest during construction. 10. Local Costs (Financed) - Amount ($) 0.2 million - Percent of Local Costs 8% - Percent of Total Cost 3% C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual Foreign Exchange Cost 18.6 3.1 Local Currency Cost 18.4 2.1 Total 37.0 5.2

2. Financing Plan ($ million) Source Appraisal Estimate Actual A. External Sources FX LC Total FX LC Total 1. ADB-Financed 15.8 6.2 22.0 1.0 0.2 1.2 2. Spanish Government Grant 1.0 0.0 1.0 0.9 0.0 0.9 Subtotal 16.8 6.2 23.0 1.9 0.2 2.1B. Domestic Sources: 1. National Government a. DILG 0.0 2.5 2.5 0.0 1.2 1.2 b. SBMA 1.8 2.4 4.2 1.2 0.6 1.8 2. LGUs and WDs 0.0 7.3 7.3 0.0 0.1 0.1 Subtotal 1.8 12.2 14.0 1.2 1.9 3.1 Total 18.6 18.4 37.0 3.1 2.1 5.2

ADB = Asian Development Bank; DILG = Department of the Interior and Local Government; FX = foreign exchange cost; LC = local currency cost; LGUs = local government unit; SBMA = Subic Bay Metropolitan Authority; WDs = water districts.

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3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate Actual A. Base Cost FX LC Total FX LC Total

1. Part A: Physical Infrastructure a. Water Supply 1.7 2.3 4.0 0.1 0.2 0.3 b. Solid Waste Management 1.7 1.3 3.0 0.4 0.1 0.5 c. Urban Roads and Bridge 3.1 3.3 6.4 0.0 0.0 0.0 d. Drainage and Flood Control 2.2 1.7 3.9 0.0 0.0 0.0 e. Public Markets 1.2 2.2 3.4 0.0 0.0 0.0

Subtotal 9.9 10.8 20.7 0.5 0.3 0.8 2. Part B: Capacity Building

a. Human Resource Development

0.3 1.4 1.7 0.2 0.8 1.0

b. Productivity Enhancement 0.7 0.6 1.3 0.7 0.4 1.1 c. Implementation Assistance 1.8 2.4 4.2 1.2 0.6 1.8 d. Incremental Administration 0.0 1.0 1.0 0.0 0.0 0.0

Subtotal 2.8 5.4 8.2 2.1 1.8 3.9 B. Contingencies

1. Physical 1.5 1.6 3.1 0.0 0.0 0.0 2. Price 0.6 0.6 1.2 0.0 0.0 0.0

Subtotal 2.1 2.2 4.3 0.0 0.0 0.0 C. Interest and Commitment

Charges 3.8 0.0 3.8 0.5 0.0 0.5

Total 18.6 18.4 37.0 3.1 2.1 5.2 FX = foreign exchange cost, LC = local currency cost. 4. Project Schedule Item Appraisal Estimate Actual Date of Contract with Consultants

Part A March 1998 December 1998 Part B July 1997 January 2001

Completion of Engineering Designs March 1999 December 2001 Civil Works Contract

Date of Award July 1999 April 2002 Completion of Work June 2001 June 2003

Equipment and Supplies Dates

Part A First Procurement January 1999 December 2000 Last Procurement October 1999 March 2003 Completion of Equipment Installation September 2001 June 2003

Part B First Procurement July 1998 November 2002 Last Procurement September 1998 November 2002 Completion of Equipment Installation September 1998 December 2002

Start of Operations Completion of Tests and Commissioning October 2001 August 2003 Beginning of Startup October 2001 August 2003

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5. Project Performance Report Ratings

Ratings Implementation Period Development

Objectives Implementation

Progress From November 1998 to November 2000 Satisfactory Satisfactory From December 2000 to February 2001 Satisfactory Partly Satisfactory For March 2001 Satisfactory Satisfactory From April 2001 to December 2001 Partly Satisfactory Satisfactory From January 2002 to February 2003 Satisfactory Satisfactory From March 2003 to December 2003 Partly Satisfactory Satisfactory From January 2004 to March 2004 Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission Date No. of Persons

No. of Person-Days

Specialization of Membersa

Fact-Finding 21 April–9 May 1997 4 76 b, d, e, f Appraisal 18 August–5 September 1997 5 65 b, b, c, d, h Inception 20 January–9 February 1998 1 4 b Review 1 19–20 November 1998 2 4 b, d Review 2 28 April–7 May 1999 2 4 b, k Review 3 25 November–3 December 1999 3 21 b, d, g Review 4 15–26 May 2000 2 24 d, g Review 5 11 September–17 November 2000 2 8 d, i Midterm Review 6 12 March–20 April 2001 5 74 d, a, b, g, e Review 7 12 September–5 November 2001 3 20 a, b, g Review 8 3–18 June 2002 2 13 a, g PCR 5–27 May 2004 4 57 a, g, i, j Total During Implementation 35 370 PCR = project completion report a a - engineer, b - financial analyst, c - counsel, d - urban development specialist, e - programs officer, f -

environment specialist, g – assistant project analyst, h - consultant (municipal engineer), i - consultant (financial analyst), j – consultant (evaluation specialist).

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I. PROJECT DESCRIPTION

1. After the closure of the United States Navy base in 1991, the Subic Bay area underwent an economic and industrial revival that increased employment opportunities. Rapid population growth in the local government units (LGUs)1 surrounding the Subic Bay Freeport and Special Economic Zone (SBF-SEZ) was expected to accompany the economic upturn. However, basic urban infrastructure in these LGUs was inadequate to meet the needs of the increased population. In 1992, the Government of the Philippines asked the Asian Development Bank (ADB) for an advisory technical assistance (TA) for the Subic Bay Area Urban Development Project. 2 Under the advisory TA, the Subic Bay Metropolitan Authority (SBMA) conducted an urban sector review and formulated a midterm investment plan for Olongapo City and the municipalities of Subic, Morong, and Hermosa—the four LGUs adjacent to SBF-SEZ. This was followed by a project preparatory TA in 1995 to formulate a project for urban infrastructure improvement for the four original LGUs, as well as the municipalities of Castillejos, San Marcelino, and Dinalupihan. These three additional municipalities, which are adjacent, have strong socioeconomic links with SBF-SEZ. 3 SBMA carried out this TA in close consultation with the concerned LGUs. In addition, a water supply component was prepared for five LGUs, which the water districts (WDs) and Local Water Utilities Administration (LWUA) were to implement. The Subic Bay Area Municipal Development Project (the Project) was approved on 19 December 1997 and closed on 30 June 2003.

2. The Project’s long-term development objective was to improve the living conditions, public health standards, and the urban environment in the project area by upgrading and improving urban infrastructure and services. The immediate objectives were to construct, upgrade, and rehabilitate basic urban infrastructure facilities, and to assist the participating municipalities in implementing programs for human resource development and productivity enhancement. The Project was supposed to benefit an urban population of about 280,000, including about 100,000 urban poor living in fringe and low-lying, flood-prone areas. In addition, about 1,100 LGU staff and community representatives were to receive training in urban development, financial management, and public services.

3. The approved Project had two parts. Part A, which covered physical infrastructure, included 27 subprojects in five subsectors: (i) water supply, (ii) solid waste management (SWM), (iii) urban roads and bridges, (iv) flood control and drainage, and (v) public market. Part B, which covered capacity building, comprised (i) human resource development programs for LGU staff, (ii) advisory studies for productivity enhancement at the Department of the Interior and Local Government (DILG) and participating LGUs, and (iii) upgrading of LGU office equipment. The project framework is in Appendix 1.

II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 4. The National Economic and Development Authority (NEDA) was formulating a National Urban Policy at the time of project preparation. The policy emphasized (i) integrated urban development, (ii) improved urban infrastructure and services, (iii) effective urban land management, (iv) stronger urban environmental management, and (v) improved resource mobilization and financial management of urban development. The project design was 1 Local government units include provinces, cities, municipalities, and barangays. 2 ADB. 1992. Technical Assistance to the Philippines for Subic Bay Area Urban Development Project.

Manila. ($600,000). 3 ADB. 1996. Technical Assistance to the Philippines for Infrastructure Improvement of Subic Bay Area

Municipalities. Manila. ($800,000).

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consistent with that policy. It also was in line with ADB’s sector strategy to support integrated urban development projects aimed at improving urban living conditions, particularly for low- and middle-income families; sustaining economic growth; protecting the urban environment; and strengthening the institutional capacity of participating LGUs.

5. Only five of the planned 27 infrastructure subprojects under Part A were implemented, and $20.8 million of the $22.0 million loan was canceled. Eight main weaknesses in project design and formulation were identified:

(i) Political influence. A strong local leader influenced the choice of executing agencies and participating LGUs, while partly sidelined established government structures. Many LGUs lost interest in the Project when this political leader was not in charge anymore. This was not anticipated during project preparation, and effective measures to mitigate the dependency on one dominant political leader were not built into the Project.

(ii) Changing development priorities. From project preparation through project implementation, LGUs changed their development priorities for subprojects many times, even after urban infrastructure development plans had been prepared by the advisory TA. After two mayoral elections in May 1998 and in May 2001, some new mayors spent several months reviewing subprojects, which delayed project implementation or resulted in cancellations due to changed priorities.

(iii) Inability to provide counterpart funds. Under the project design, the LGUs and WDs were to provide counterpart funds totaling $7.3 million equivalent. Two additional sources of counterpart funds were identified during project preparation: the SBMA Special Economic Zone Fund (SEZF), and the Countryside Development Fund (CDF) controlled by congressional representatives. 4 For many LGUs and WDs, these funds constituted the required counterpart contribution. LGUs and WDs could not manage the estimated amounts and the timing of the release of these funds. Consequently, when funds were not made available at the time subprojects were ready for implementation, several subprojects had to be canceled.

(iv) LGU borrowing capacity. The ADB loan to the LGUs was channeled through the Municipal Development Fund Office (MDFO) under the Department of Finance (DOF). The Bureau of Local Government Finance (BLGF) under DOF assessed the LGUs’ borrowing capacity for long-term loans based on the 1991 Local Government Code that stipulates LGUs’ budget appropriations for debt servicing shall not exceed 20% of their regular incomes. 5 During project preparation, ADB also evaluated the LGUs’ borrowing capacity based on cash-flow projections. The main variables considered in the revenue projections were population growth and growth of the gross regional domestic product. However, at the time of subloan approvals, BLGF considered only the current income of the LGUs. Thus, the LGUs’ assessed borrowing capacity was less than anticipated by ADB, which translated into a limited number of possible subprojects.

4 Business enterprises operating within SBF-SEZ were tax exempt. In lieu of taxes, they were requested to

contribute 5% of their gross income to the SEZF. Part of this fund was to be used for infrastructure improvements in the municipalities surrounding the SBF-SEZ. Two congressmen, representing Zambales and Bataan, committed to provide counterpart funds from the CDF.

5 Local Government Code of 1991, Section 324.

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(v) Alternative funding sources. For LGUs, borrowing from government financial institutions (GFIs) was more advantageous than going through the MDFO. These GFIs included the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP), which were the LGUs’ depository banks. 6 The GFIs (a) offered simpler borrowing procedures, i.e., direct negotiation between the mayor and a local GFI representative; (b) did not apply the strict borrowing criteria of the MDFO; and (c) lent far more funds than the MDFO.7 Three subprojects for local markets were canceled because concerned LGUs implemented them with funds borrowed from GFIs. LGUs had access to other fund sources, such as CDF and provincial government’s subsidy, although these funds are appropriated irregularly. Such alternative funding sources were not considered during project preparation.

(vi) Lack of project flexibility. A sector loan approach with its flexibility to replace subprojects during implementation was not adopted for the Project. Instead, a project loan approach that determines subprojects at appraisal was selected. This decision was taken due to (a) the absence of urban development plans that covered all participating LGUs, and (b) weak LGU capacity to implement infrastruc ture development projects. Urban development plans for four LGUs (Olongapo, Subic, Hermosa, and Morong) were prepared under ADB’s TA1829. Three LGUs (Dinalupihan, San Marcelino, and Castillejos ) were not covered by TA1829, and did not have any urban development plans. During implementation, the municipalities’ inadequate capacity to implement infrastructure development projects that included civil works became obvious. The chosen project approach lacked the flexibility to replace subprojects . As a result, many subprojects were canceled when LGUs changed their development priorities.

(vii) Poorly prepared subprojects . In hindsight, the decision on subprojects at appraisal was premature because of LGUs’ changing priorities of subprojects. When detailed engineering designs of civil works and procurement packages for equipment had to be prepared after the Project started, the Project Supervisory Committee (PSC) and the MDFO’s Policy Governing Board had to re-appraise each subproject before subloan agreements were approved. Consequently, project implementation was delayed and some subprojects were canceled as a result.

(viii) Added complexity. The inclusion of a water supply component added unnecessary complexity to the Project. This component could have been covered by another ADB loan (Loan 1472-PHI: Small Towns Water Supply Sector Project) that was approved on 30 September 1996 and became effective in October 1997. Including five water supply subprojects in the Project required an additional executing agency, which complicated implementation arrangements.8

6. Capacity building for the participating LGUs under Part B was essential for successful implementation and for the sustainability of project facilities. At the beginning of implementation, a survey which assessed the training needs of LGU staff confirmed the need for capacity building. Before, LGU staff had had almost no opportunities for training

6 LGUs receive their Internal Revenue Allotment through DBP or LBP. 7 It appears that the GFIs neglected the circular of the Bangko Sentral ng Pilipinas dated 28 May 2002, which

requested all banks follow LGUs’ debt service limit in lending to them. 8 Dinalupihan WD, which is in the project area, implemented its expansion project under Loan 1472 in parallel

with the Project.

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and development, mainly due to the lack of financial resources and appropriate training programs.

B. Project Outputs

1. Part A: Physical Infrastructure

7. The Project, as appraised, included 27 subprojects in five subsectors to be implemented in seven LGUs. However, only five of these subprojects in two subsectors were implemented. Table 1 compares the appraisal target with the actual implementation. Detailed project outputs for Part A and B are shown in Appendix 2.

Table 1: Summary of Project Outputs (Part A) Implementeda Subsector Appraisal Target

ADB Loan Other Funds b Canceled

Part A.1 Water Supply 5 water systems 2 1 2

Part A.2 SWM 2 sanitary landfills 6 SWM equipment

0 3

0 2

2 1

Part A.3 Urban Roads and Bridge

5 urban roads 1 bridge

0 0

3 0

2 1

Part A.4 Flood Control and Drainage

5 drainage and riverbanks works 0 3 2

Part A.5 Public Market 2 expansion 1 new construction

0 0

2 1

0 0

Total 27 5 12 10 ADB = Asian Development Bank, SWM = solid waste management.

a Some subprojects were implemented with a reduced project scope. b Funds from Countryside Development Fund, gover nment financial institutions, subsidies from provincial governments, and the budgets of local government units and water districts. Source: The local government units. 8. Two of the five planned water supply subprojects (Part A.1) were canceled. Two (San Marcelino WD and Castillejos WD) were completed successfully under the Project, although with a reduced scope based on detailed feasibility studies done during implementation. The remaining subproject was implemented by Subic WD using its own funds.

9. Of the 22 original subprojects planned under the SBMA component (Part A.2–A.5), eight were canceled and three were completed under the Project. The remaining 11 subprojects were implemented using funds from other sources. The completed subprojects included procurement of SWM equipment for Subic, Hermosa, and Morong. The LGUs lacked the capacity to implement any civil works subproject.

10. The Government and ADB were concerned about the substantial reduction in project scope. In April 2001, the Government agreed to reevaluate the technical, financial, and economic viability of the Project. In August 2002, the Government’s Investment Coordination Committee reviewed the respective report, and determined that the remaining subprojects still were viable. Therefore, the Government submitted a request to continue project implementation, which ADB approved.

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2. Part B: Capacity Building

11. Institutional capacity building activities were subsumed under two components: (i) a human resource development program for the LGUs, and (ii) a productivity enhancement program for LGU staff and DILG project management. DILG’s Project Management Office (PMO) implemented the capacity-building activities with consultants’ assistance. Most intended outputs under Part B were achieved. DILG and the LGUs considered these programs useful in enhancing their capabilities to carry out their duties.

12. Human Resource Development Programs. At appraisal, 15 training courses were identified in 12 specialized areas, including urban planning and management, public and private sector partnerships, and project implementation and construction supervision. Fourteen of the developed training programs and two additional computer-related training courses were completed (Appendix 2). At appraisal, 1,100 persons were targeted for training. The actual number of persons trained was 958 (705 from the LGUs and WDs, and 253 from DILG). 9 Castillejos municipality was excluded from the training, because it withdrew all its subprojects early during implementation.

13. Productivity Enhancement Program. As envisaged at appraisal, guidelines were elaborated and awareness-building activities were carried out in five subjects: (i) municipal financial planning and management, (ii) private sector partnerships, (iii) regional SWM, (iv) project management capacity building for DILG, and (v) preparation of an urban land use plan for Olongapo City. In addition, basic office equipment, including computers, fax machines, and photocopiers, were procured for the participating LGUs and DILG.

C. Project Costs

14. At appraisal, the estimated project cost was $37.0 million equivalent, comprising $18.6 million in foreign exchange costs and $18.4 million equivalent in local currency costs. ADB was to provide a loan of $22.0 million (60% of the project cost) to finance Part A. The Government of Spain agreed to provide a grant of $1.0 million for Part B. The Government of the Philippines was to finance $2.5 million equivalent, as a grant through DILG, to implement the remaining portion of the capacity-building program. SBMA was to provide $4.2 million equivalent to support implementing LGUs’ infrastructure development under Part A. Finally, the executing agencies , the participating LGUs, and WDs were to finance $7.3 million equivalent.

15. The detailed cost estimates at appraisal and actual expenditures are compared in Appendix 3. The actual cost for Part A was significantly lower than the appraisal estimate of $24.9 million. 10 Due to the cancellation of 22 of 27 subprojects, the actual cost was $2.6 million, of which $1.8 million was disbursed for SBMA’s project management. Although activities of Part B were implemented largely as envisaged at appraisal, only $2.2 million of the $4.0 million11 estimated at appraisal was used. This reduction was partly due to the depreciation of the peso, but the costs also appear to have been overestimated at appraisal.

D. Disbursements

16. Two imprest accounts were established for SBMA and LWUA to disburse loan funds. Loan funds totaling $0.3 million were transferred to SBMA’s imprest account in February 2001. Disbursement of loan funds was delayed because delivery of SWM equipment started only in May 2002. LWUA’s imprest account was established at Philippine National Bank (PNB). The first and last deposit of loan funds, totaling $0.3 million, was transferred to the 9 Many staff participated in more than one training course. 10 The sum of Part A’s Base Cost and Part B’s Implementation Assistance Cost. 11 Part B’s cost excluding the Implementation Assistance Cost.

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Department of Budget and Management (DBM) in December 2002. DBM did not release the funds to LWUA’s imprest account until June 2003. The slow transfer of funds to the imprest account forced LWUA to exhaust its counterpart funds, and even advance some of its own funds, to avoid delays in project implementation. After the loan was closed, LWUA took 10 months to refund excess loan funds from its imprest account—instead of the mandatory 3 months—because of its slow administration.

E. Project Schedule

17. The actual project implementation schedule is compared with appraisal estimates in Appendix 4. Nearly 8 months passed between loan approval and effectiveness. The Loan Agreement stipulated that the Project would be completed by 31 December 2002, with loan closing on 30 June 2003. However, the implementation schedule prepared at appraisal envisaged all project activities to be completed by December 2001, providing an unusually long allowance of 1.5 years until the loan closing date. Major milestones are chronologically listed in Appendix 5.

18. Part A—SBMA Component. The SBMA-PMO consultants, mobilized in January 1999, highlighted the need for a comprehensive review of development priorities in each LGU. They also recommended to modify some subprojects . The subproject investment packages (SIPs) were submitted to the technical working committee (TWC) attached to the PSC only in September 1999—12 months after loan effectiveness. After TWC endorsement, PSC took 5 months to endorse the SIPs to MDFO. Nine signatures were required on the TWC endorsement, and 13 on the PSC endorsement. Another 5 months passed before MDFO approved the SIPs, and the LGUs and MDFO did not sign the subloan agreements (SLAs) until July 2000. In all, about 22 months were needed from loan effectiveness to the signing of SLAs.

19. Further delays occurred during procurement process. Although the SBMA-PMO consultants prepared the procurement documents for the SWM equipment in May 1999, procurement was delayed. In Hermosa, bid invitations were advertised in April 2000, about 11 months after the consultants prepared the procurement documents. In Morong, bid invitations went out in October 2001, about 30 months after preparation of the documents. Delivery of the equipment to Hermosa was completed in October 2002, and to Morong in May 2003. The late release of the SEZF and changes in the type of equipment procured were the main reasons for the delays. Moreover, rebidding was needed for Morong as only one bid was submitted.12 In Subic, the contract for the SWM equipment was awarded in August 2000, immediately after the signing of its SLA. However, the delivery of equipment was not completed until June 2002 due to an amendment of the SLA. PSC endorsed the amendment in May 2001, and MDFO approved it in December 2001. The suppliers’ slow processing of the required documents also contributed to delivery delays.

20. Part A—LWUA Component. At appraisal, the water supply works were envisaged to be completed in early 2001. However, construction works started only in July 2002 and were completed in June 2003—about 11 months behind schedule. This was caused by delays related to (i) LWUA’s preparation of detailed engineering designs, (ii) DOF and LWUA signing SLAs in November 2001, and (iii) the release of funds from LWUA’s imprest account.

21. Part B. In February 1999, the Government of Spain signed a memorandum of understanding (MOU) to provide a $1.0 million grant for the capacity building component. Although DILG signed the MOU in April 1999, the Bureau of Treasury did not release the funds to DILG until August 2000. The consultants were mobilized in January and February 2001—nearly 2 years behind the appraisal schedule—and they completed their services in

12 As required by the Government’s own regulation.

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August 2001. The consultants (i) designed the training programs based on a training needs assessment survey, (ii) conducted a training-of-trainers course, and (iii) supervised the implementation of the first four training courses. DILG implemented the remaining 10 training courses from November 2001 to August 2003.

F. Implementation Arrangements

22. At appraisal, the Government agreed to implement the Project in cooperation with the LGUs and based on an institutional, financial, and operational action plan. Details of that plan are shown in Appendix 6.

23. The Project had three executing agencies : SBMA for the LGU infrastructure component, LWUA for the water supply component, and DILG for the capacity building component. The LGUs implemented the infrastructure components, while the WDs implemented the water supply components. The PSC was to provide policy guidelines and supervise the implementation of the Project.13 An organization chart is in Appendix 7. Two major changes in the project organization were approved during implementation: (i) the creation of TWC to assist the PSC, and (ii) SBMA’s replacement by DILG as Olongapo’s executing agency for Part A.

24. Coordination among the three PMOs was unsatisfactory for two main reasons. First, the location of the PMOs created coordination problems. SBMA-PMO resided in the Subic Bay area, while LWUA-PMO and DILG-PMO were in Manila. Second, the lack of common ownership of the Project frequently undermined coordination among the PMOs.

25. Two project implementation units (PIUs) were established under the SBMA component. The PIU for Olongapo City was located in the Olongapo City office, while the PIU for the other six LGUs was established within the SBMA-PMO. Each participating LGU organized a project advisory group (PAG) to ensure that local policy guidelines and priorities were incorporated into the design and implementation of their subprojects. The PAG was chaired by the mayor of the concerned LGU, and included municipal officials and community representatives. Five LGUs arranged two to three PAG meetings from March 1999 to July 2000. No PAG meetings were held after that. Olongapo did not arrange any PAG meetings. The PAGs did not function as envisaged by the project design.

26. The implementation arrangements for channeling the ADB loan to the LGUs, using the MDFO as conduit, were cumbersome and time consuming. The 10 months required before the SIPs were approved and SLAs signed had not been anticipated during appraisal.14

27. Selecting SBMA as the executing agency for Part A was a problematic choice. The implementation framework did not recognize that DILG was the only agency designated to assist LGUs under the 1991 Local Government Code and could not function as agreed in the SBMA agreement. Despite its geographic proximity and provision of SEZF, SBMA had a weak relationship with the LGUs in the project area. SBMA could have assisted project implementation as a member of PSC.

G. Conditions and Covenants

28. The main conditions for loan effectiveness were (i) an agreement between DOF and SBMA (the SBMA Agreement), (ii) the establishment of a PMO within each executing

13 PSC, chaired by the DILG secretary, included members from DOF, DBM, NEDA, SBMA, LWUA, and

representatives of participating LGUs. 14 In 1999–2000, DOF reorganized BLGF and created MDFO, which delayed the approval of the SLAs. The PCR Mission was infor med that the SLA approval procedure was streamlined after the reorganization.

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agency, and (iii) the establishment of PSC. The SBMA Agreement took nearly 8 months, delaying loan effectiveness.

29. With a few exceptions, the loan covenants were generally complied with. The main exceptions were the loan covenants on project implementation, which were not complied with due to the large reduction in project scope. LWUA-PMO also failed to establish a separate project account, because it implemented its subprojects as part of its regular activities (Appendix 8).

H. Consultants Recruitment and Procurement

30. Part A—SBMA Component. In December 1998, SBMA engaged an international consulting firm, associated with two local firms, to (i) assist project management for the LGU component, (ii) review detailed engineering designs, and (iii) supervise construction works and the PIU consultants. As estimated at appraisal, the contract with these consultants covered 268 person-months (70 person-months of international and 198 person-months of domestic consultants). The consultants were engaged according to ADB’s Guidelines on the Use of Consultants. The actual inputs from these consultants were reduced to 108.5 person-months (27.0 international and 81.5 domestic) as the project scope was reduced significantly.

31. At appraisal, the SBMA component was envisaged to include 14 packages of civil works to be procured through local competitive bidding (LCB), and two packages of equipment to be procured under international competitive bidding. However, none of the civil works subprojects covered by the 14 packages was implemented. The SWM equipment was purchased partly through international shopping procedures and partly by direct purchase due to the relatively small estimated costs.

32. Part A—LWUA Component. At appraisal, local consultants were to be engaged using loan proceeds to assist the WDs. However, due to the reduction of project scope, consultants were not recruited. LWUA carried out the detailed engineering design and construction supervision of the water supply subprojects as part of its regular activities.

33. The construction of elevated steel tanks, which was a major part of the civil works, was tendered using LCB procedures. The remaining minor works were carried out by a work force engaged by the WDs through competitive procedures.

34. Part B. Four teams of consultants were engaged for the capacity building component. DILG handled consultant selection and engagement according to the procedures approved by the Government of Spain. ADB only reviewed the selected consultants’ qualifications and experience.

I. Performance of Consultants, Contractors, and Suppliers

35. Part A—SBMA Component. Due to the project scope reduction, the contract with the SBMA consultants was terminated in November 2000. SBMA rated the performance of these consultants as satisfactory. SBMA reported that the performance of suppliers and the quality of SWM equipment supplied generally was satisfactory.

36. Part A—LWUA Component. The quality of steel tanks completed by two contractors, as well as the work done by local contractors, was generally satisfactory.

37. Part B. The members of the four consultant teams were competent in their field of expertise, and they satisfactorily completed the tasks in their terms of reference. DILG replaced one local consultant whose performance was unsatisfactory.

9

J. Performance of the Borrower and Executing Agencies

38. The performance of the Borrower, represented by DOF, and of the associated government institutions like DBM, MDFO, and NEDA, is considered partly satisfactory. The approval of the SIPs and the signing of the SLAs took about 10 months. Regular members of the MDFO Policy Governing Board reportedly often did not attend the subproject review and evaluation meetings, instead unauthorized representatives attended these meetings. Securing the signatures of the regular members took about 2 months. DOF and NEDA were not involved actively enough in the PSC discussions to solve the many problems that hampered project implementation.15

39. The performance of the three executing agencies—SBMA, LWUA, and DILG—is rated as partly satisfactory, although their implementation efforts should be appreciated. Many of the delays in project implementation and the substantial reduction in project scope were outside of the PMOs’ control.

40. The WDs’ implementation of the two water supply subprojects is considered satisfactory. However, the LGUs’ performance is rated as partly satisfactory, because their shortage of competent staff and their limited experience in the design and implementation of subprojects hampered implementation.

K. Performance of the Asian Development Bank

41. The performance of ADB is rated as partly satisfactory. Deficiencies in the design and formulation of the Project are apparent. In addition, ADB should have terminated the Project when many of the subprojects were canceled in late 2000. At that time, no disbursements from the loan account for project activities had been made, and only commitment charges had been paid.

42. During project implementation, ADB dispatched eight review missions, including the Inception and Midterm Review missions. The executing agencies found these missions useful, contributing to the resolution of implementation issues. In addition to fielding review missions, ADB also organized biweekly meetings with SBMA–PMO to monitor progress and resolve implementation issues during the months when intensive monitoring was needed.

III. EVALUATION OF PERFORMANCE A. Relevance 43. The Project’s objectives and scope, as formulated at appraisal, were consistent with the Government’s and ADB’s sector strategy for urban development. However, the Project suffered from a lack of ownership by the Government and the LGUs. Deficiencies in the design and formulation of the Project contributed to the limited achievement of project targets for Part A. Part A, therefore, is rated as irrelevant. Under Part B, most of the objectives of the capacity building program were achieved. Part B is rated as partly relevant. Overall, the Project is rated as partly relevant.

B. Efficacy in Achievement of Purpose

44. The Project’s two immediate objectives were to (i) improve urban services by implementing 27 infrastructure subprojects, providing benefits to about 280,000 people,

15 Memorandum of Understanding, para. 25, signed by DILG, LWUA, Olongapo City, NEDA, DOF, and ADB on

13 February 2001.

10

including 100,000 urban poor; and (ii) strengthen the institutional capacity of the LGUs to provide, manage, and maintain public services through training of about 1,100 staff.

45. The first objective was achieved to a very limited extent. As of May 2004, an estimated 760 households, or approximately 4,000 people, 16 benefited from the two completed water supply subprojects. That was well below the appraisal estimate of 8,200 households that were to have received treated piped water by 2002. The population of the urban areas of the three LGUs that received the five units of SWM equipment is estimated to be about 100,000. The equipment procured contributed somewhat to improvements in SWM in these urban areas.

46. Capacity building objectives were mostly achieved. Almost all of the planned training courses were completed as envisaged, resulting in the training of 958 staff. Participants rated the training programs as useful in improving their technical knowledge and skills. The programs also improved their confidence and increased their interest in the work assigned to them. The produced guidelines and awareness building activities also were considered useful in enhancing the operational efficiency of the LGUs and DILG.

47. Part A is rated as inefficacious, while Part B is rated as efficacious. Overall, the Project is rated as less efficacious.

C. Efficiency in Achievement of Outputs and Purpose

48. ADB’s internal processing of the Project took 7 months from the dispatch of the loan fact-finding mission to loan approval. However, it appears more attention and time could have been required for the design and formulation of the Project.

49. Financial and economic analyses were conducted for the five completed subprojects under Part A. The estimated and recalculated financial internal rate of return (FIRR) and economic internal rate of return (EIRR) are in Table 2. For the two water supply subprojects, the FIRRs and EIRRs were lower than at appraisal, mainly because of the slow increase in the number of customers. However, the FIRRs and EIRRs were higher than the weighted average cost of capital (WACC) of 1.7% and the economic opportunity cost of capital of 12%, respectively. That demonstrated the financial and economic viability of the subprojects. The estimated FIRRs for the SWM equipment procured under the Project were lower than the WACC of 8.2% for MDFO loans. This was because the LGUs’ subsidies for operation and maintenance (O&M) were excluded from the revenue in the calculation. EIRRs for the SWM equipment were higher than the economic opportunity cost of capital of 12%, showing the economic viability of the SWM equipment subprojects.

Table 2: Internal Rates of Return at Appraisal and Project Completion (%)

Appraisal Project Completion Subproject FIRR EIRR FIRR EIRR

Castillejos WD 11.7 19.7 8.1 19.5 San Marcelino WD 14.0 19.0 5.8 18.3 Subic SWM — — 5.6 12.7 Hermosa SWM — — 4.9 12.7 Morong SWM — — 4.0 13.6

EIRR = economic internal rate of return, FIRR = financial internal rate of return, SWM = solid waste management, WD = water district. Source: Staff estimates. 16 Estimated based on the number of service connection and the average household size. The number of

customers of the water supply service is growing.

11

50. The efficiency of funds utilization was also weak. Of the $1.2 million disbursed, $0.5 million (38%) was paid for interest during construction and commitment charges. SBMA spent $1.8 million for project management for the LGU infrastructure component.

51. Funding of Part B included a $0.9 million grant from the Government of Spain and a $1.2 million grant from the Government of the Philippines. On average, investment per participant per day was about 1,500 pesos (including food, accommodation, materials and supplies, and fees for resource persons). Part B is rated as less efficient. Overall, the Project is rated as inefficient.

D. Preliminary Assessment of Sustainability

52. Water Supply Subprojects . The two water supply subprojects that were completed in June 2003 and started operations in August 2003 generally were well-constructed. The WDs have sufficient institutional capacity for O&M. However, the quality of water at Castillejos WD does not meet the national standards of drinking water and needs to be improved by removing high levels of dissolved solids and odor. The WD believes its water quality is better than the water that users got from the shallow wells before. Castillejos WD is planning to tap a deeper aquifer from its well to improve the water quality, so that it can attract more customers.17

53. The water supply systems have been operating for less than a year. Castillejos and San Marcelino’s water supply systems could supply more households if they would expand the number of service connections. This would increase their revenues to cover their debt repayment, which starts in September 2004 for Castillejos and in November 2004 for San Marcelino. After solving the water quality problem, the WDs are confident that they can attract new customers. LWUA assigned resident engineers and a management advisor to assist the WDs technically and institutionally. Although the number of customers is already growing, LWUA may need to consider restructuring the loan repayment schedule if the WDs cannot attract enough customers in time. With LWUA’s assistance, the operation of the two water supply subprojects can be sustained.

54. SWM Subprojects. The O&M costs for the SWM equipment in all LGUs are not fully recovered by collections from users. Minimal fees are collected from business enterprises, and no fees are collected from households. The funds for O&M, therefore, need to be covered by each LGU’s regular budget.18 In the long run, the LGUs need to collect fees from more users to be able to sustain SWM services. Most LGUs require approval of the municipal council to implement a new fee structure which meets resistance from households. To enforce the ordinances, public awareness of SWM benefits must be improved through campaigns and information dissemination programs. As long as the LGUs support O&M financially, the operation of SWM equipment is sustainable.

55. The LGUs reported that the training programs and advisory studies were very useful, and had improved the operational efficiency of the LGUs (Appendix 10). To sustain and improve the operations of the LGUs, DILG should provide updated training courses to further enhance the knowledge and qualifications of LGU staff. The LGUs’ financial position should be strengthened by increasing their local revenue generation, which should increase their institutional capacities, improve public service delivery, and enhance sustainability. Capacity building is rated likely sustainable.

17 Castillejos WD taps an aquifer 54 meters (m) deep, and plans to tap another aquifer about 100 m deep using

the same well, which is 124 m deep. 18 The two pieces of equipment for use at the Subic dumpsite are needed there for only 2 days per week on

average. For the remaining time, the equipment is rented out to private individuals and firms, or other LGU departments. The backhoe at Hermosa is also partly used for other purposes. These rentals contribute to covering O&M expenses.

12

56. While the five subprojects implemented using the loan funds are likely sustainable as discussed in paras. 52-54, the Project is rated, overall, unsustainable because of the drastic cancellation of other subprojects.

E. Environmental, Sociocultural, and Other Impacts

57. Environmental Impact. The Project initially had included two environmentally sensitive solid waste and landfill site development subprojects at appraisal. However, the two subprojects were canceled before any detailed environmental impact assessments were carried out. Three LGUs that procured SWM equipment improved their SWM capabilities, which had a positive impact on the environment. Hermosa, which did not have any SWM equipment before, procured equipment under the Project to handle solid waste at its landfill site. Hermosa collects solid waste from its communities using equipment procured with the help of other sources. Morong, which used to have only one dump truck for collecting solid waste before the Project, now has two dump trucks, and collects solid waste twice a week from its five communities. Subic, which had an SWM system before the Project, replaced old solid waste equipment at its landfill site. The two small water supply subprojects that were implemented had no impact on the environment.

58. Health Impact. The two water supply subprojects provide 24-hour uninterrupted water service, supported by the installation of disinfection facilities. This reportedly has reduced waterborne diseases in the connected households, although no statistics have been provided to substantiate these reports. The more regular collection of solid waste also has improved public health.

59. Other Impacts. No issues related to the involuntary resettlement of indigenous people was reported to ADB. Overall, environmental and sociocultural impacts are rated as moderate.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment 60. The Project was poorly designed. In Part A, the Pro ject did not anticipate risks arising from political interference, slow decision-making of the Government, cumbersome administrative procedures, and the lack of professional coordination among government agencies. Moreover, the Project failed to create a sense of ownership of the subprojects among LGUs. As a result, the majority of loan funds was cancelled, costing the Government $0.5 million in interest during construction and commitment charges and $1.8 million in SBMA’s project management for the use of $0.7 million in ADB loan funds.

61. Part B generally was implemented well. The LGUs’ capacities for delivery of public services were strengthened, and DILG’s capacity for project development and management was improved. The LGUs are aware that they need to strengthen local revenue generation and human resource development.

62. Part A is rated unsuccessful, while Part B is partly successful. Overall, the Project is rated unsuccessful.

B. Lessons Learned

63. Project implementation yielded nine major lessons:

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(i) Mitigating political influence. During project preparation, political risks should have been carefully reviewed. When the local political leadership that initiated the Project changed during implementation, the Project faltered. Project design could have minimized the risk of political interference by following the established division of work among government agencies , which designates DILG to assist LGUs’ infrastructure development. Further, mitigation measures against political changes could have been built into the design by adjusting the project schedule to mayoral terms.

(ii) Simple implementation arrangements. Coordination among the three executing agencies during project implementation was not satisfactory. Project implementation would have benefited from having one executing agency and one PMO with full responsibility and accountability. DILG should have been the executing agency since it is the agency designated to assist LGUs’ development under the 1991 Local Government Code. SBMA, a government-owned and -controlled corporation, could have assisted project implementation as a member of PSC.

(iii) Limiting components in urban development projects. While urban development can cover various types of infrastructure, projects should limit the number of components to keep implementation arrangements simple. LWUA and its water supply component could have been covered by another ADB-financed water supply project. Inclusion of a water supply component, with LWUA as additional executing agency, unnecessarily complicated implementation arrangements.

(iv) Flexibility in loan approach. Generally, the LGUs do not follow their own development plans consistently and development priorities tend to change. Recognizing this reality, the Project should have built in more flexibility to accommodate additional LGUs and their components by adopting a sector loan approach. The drastic cancellation of loan funds requested during implementation could have been avoided if a sector loan approach had been chosen. In addition, the Project should have examined more carefully each LGU’s willingness to participate. If a project loan approach had to be chosen, appraisal of subprojects should be completed during loan processing, allowing procurement to begin upon loan effectiveness.

(v) Assessment of LGUs’ borrowing capacity. Project design could have followed the procedures established by BLGF in assessing the LGUs’ borrowing capacity. If other procedures were considered more appropriate for the Project, the concerned government agencies should have been consulted on the use of those procedures.

(vi) Confirming availability of counterpart funds. When evaluating the capacity of selected LGUs and WDs to provide required counterpart funds, the Project should consider only funds from sources that the LGUs can generate, collect, and allocate. At appraisal, the estimates of counterpart funds included allocations from SEZF and CDF, which the LGUs did not control. Allocations from these funds were provided either very late or not at all, which prompted the cancellation of several subprojects..

(vii) Financial channels for LGUs . Local branches of DBP and LBP apply their own appraisal methods, which are less strict than those of MDFO. These GFIs also process loans more quickly than MDFO. LGUs, therefore, prefer to use GFIs. MDFO’s role as a financial conduit should be carefully

14

reconsidered. In recent projects, ADB has already used GFIs for channeling loan proceeds to LGUs.

(viii) LGU’s capacity to implement civil works. While Part B was generally successful, the LGUs’ capacity for infrastructure development needs strengthening. None of the LGUs implemented civil works subprojects within the project period, except for Morong’s market subproject. Their capacity to supervise engineering consultants and contractors has been limited.

(ix) Early termination of the project. ADB could have insisted that the Project be closed in late 2000, when very little implementation progress had been achieved and many subprojects were canceled. At loan closing in June 2003, 38% of the loan funds disbursed were for interest during construction and commitment charges. An earlier termination of the Project would have prevented this distressing outcome and the unnecessarily high costs for the Government.

C. Recommendations

1. Project Related

64. Activities requiring follow-up under the Project include:

(i) The water quality of Castillejos WD must be improved to meet the national standards for drinking water.

(ii) Castillejos and San Marcelino WDs need to expedite their marketing to attract more customers and increase revenues to cover their loan repayment starting in late 2004. LWUA should continue assisting the WDs financially and technically.

(iii) All LGUs need to improve their collection of fees for SWM. Draft or approved ordinances that include fee collection from households should be approved and/or enforced.

(iv) The training modules developed under the Project strengthened the LGU and WD staff. DILG, in coordination with its Local Government Academy, should seek opportunities to use these modules to train staff from other LGUs.

(v) If ADB would select the Project for a project performance audit review, the review should start not before 2006—about 3 years after project completion. The sustainability of the water supply subprojects and the implementation of the revised SWM ordinances could be better assessed at that date.

2. General

65. Based on the key lessons learned from the review of the Project, some general recommendations are made for future ADB projects:

(i) Consistency in LGU development. Many LGUs do not have a comprehensive development plan, and changing political considerations influence their development priorities considerably. Newly elected mayors rarely follow development plans of the previous administration. From planning to operation, infrastructure development usually takes more than a mayor’s 3-year term. To ensure loan funds are used efficiently and effectively, each

15

LGU should establish a comprehensive development plan—to be followed consistently regardless of who is in charge of the administration.

(ii) Loan approach. As appraised, the Project included many small components with a high degree of uncertainty about priorities of LGUs. A sector loan approach—with adequate consultancy input for subproject preparation and implementation support—would have been more appropriate to finance municipal infrastructure than a project loan approach. The LGUs’ willingness to participate in a sector loan project should be confirmed during project preparation.

(iii) LGUs’ borrowing capacity criteria. The Government should establish one standard to calculate the LGUs’ borrowing capacity. Although LBP, DBP, and MDFO are all government financial entities, LBP and DBP branches may lend significantly larger amounts to LGUs than would be allowed based on the borrowing capacity calculated by BLGF.

16 Appendix 1

PROJECT FRAMEWORK

Design Summary1

Appraisal Targets1 Project Achievement Key Issues and Recommendations

Goal Improve basic living conditions, public health, and urban environment.

No clear indicator was proposed at appraisal.

Basic living conditions, public health, and urban environment were reported to be improved where the subprojects were implemented.

Comprehensive and long-term plans for urban development and steady implementation of the plans are essential.

Purpose Improved urban services through upgrading, rehabilitation, and construction of essential basic infrastructure. Strengthening of the managerial capacity of the seven LGUs to provide, manage, and maintain urban service facilities.

By 2002, about 400,000 people in the project area will receive direct benefits from improved urban infrastructure. 2 No clear indicator was proposed at appraisal.

An estimated 104,000 people partly benefit from five subprojects to improve urban infrastructure constructed under the Project. Additionally, 10 subprojects were implemented using other fund sources. Completed subprojects are in operation and in good working condition. Some LGUs reported that tax revenues have increased and their public service delivery has improved.

Continue proper operation and maintenance of the completed facility and equipment. Continue human resource development and strengthen local revenue generation. Implement the recommendations made under the advisory studies.

Outputs Part A: Physical Infrastructure Construct, upgrade, and rehabilitate basic urban infrastructure.

Implement 27 subprojects in five subsectors.

Five subprojects in 2 subsectors were implemented under the loan. Twelve subprojects were implemented by other fund sources. Ten subprojects were canceled.

Implement feasible but canceled 12 subprojects in the near future.

1 The design summary and the appraisal targets were reorganized based on the main text of the Report and

Recommendation of the President (RRP). 2 The main text of RRP states that 280,000 people will receive direct benefits of the Project.

Appendix 1 17

Design Summary1

Appraisal Targets1 Project Achievement Key Issues and Recommendations

Water supply Solid waste management Market improvement Flood control and drainage Urban Roads and Bridges

Provide piped water to 8,200 households in five LGUs (Subic, Hermosa, San Marcelino, Castillejos, and Morong) One joint landfill site for San Marcelino and Castillejos, and one landfill site and its access road in Dinalupihan Procure SWM equipment for six LGUs (Subic, Castillejos, San Marcelino, Dinalupihan, Hermosa, and Morong). Two market extensions for San Marcelino and Dinalupihan One new market for Morong San Marcelino: Street canals cleaning and new lining Dinalupihan: Dila-Dila River desilting Olongapo: (i) Santa Rita creek lining (ii) Kalaklan River desilting (iii) Bank protection for the Sta. Rita, Mabuyan, and Kalaklan Rivers and declogging works Olongapo: Roads improvement Olongapo: A new bridge (130 meters) construction.

As of May, 760 households in San Marcelino and Castillejos gained access to piped water through the two subprojects under the loan. An additional 1,761 households gained access to piped water in Subic through its subproject implemented using its own funds. Two other subprojects were canceled from the loan. Canceled. Equipment was procured for three LGUs (Subic, Hermosa, and Morong) under the loan. The two markets were constructed by borrowing from LBP. Morong’s market was constructed by borrowing from DBP. Canceled from the loan, but partly implemented by LGU’s funds. Canceled from the loan, but partly implemented by other funds. Canceled. Implemented by DPWH. Canceled from the loan, but implemented by LGU’s funds. Canceled from the loan, but partly implemented by LGU’s funds. Canceled.

The WDs needs to expedite increased connections to sustain their operation. Expedite the processing of MDF loan.

18 Appendix 1

Design Summary1

Appraisal Targets1 Project Achievement Key Issues and Recommendations

Part B: Capacity Building Human resource development Productivity Enhancement Program Advisory studies: Municipal Planning and Management Project Management Capacity Building for DILG

Train 1,100 persons (900 LGU staff and 200 community representatives) in 11 courses Provide 138 units of various office equipment (computers, fax machines, and photocopiers) (i) Municipal Financial

Planning Management (ii) Private Sector

Participation Opportunities in Municipal Services

(iii) Urban Land Use

Planning in Olongapo City

(iv) Regional Solid Waste

Management for Castillejos and San Marcelino

Strengthen DILG’s project management capability.

705 LGU staff, 253 DILG staff trained. 264 units procured for six LGUs. Mayor’s Handbook on Financial Management was produced and distributed countrywide. Completed. Completed. The study was completed, but its outcomes were not implemented because the subproject was canceled. A strategic framework of DILG’s project management was established.

Efforts for human resource development should be continued.

Inputs Part A: Physical Infrastructure Water supply SWM Flood control and drainage Road and bridge Markets

$20.7 million $4.0 million $3.0 million $3.9 million $6.4 million

$3.4 million

$0.8 million $0.3 million $0.5 million $0.0 million $0.0 million

$0.0 million

Appendix 1 19

Design Summary1

Appraisal Targets1 Project Achievement Key Issues and Recommendations

Project management assistance Part B: Capacity Building Human Resource Development Productivity Enhancement Program

Consulting Service: $4.2 million 268 person-months 70 international 198 domestic Cost: $4.0 million Personal inputs: 112 person-months 38 international 74 domestic $1.7 million $1.3 million

Consulting Service: $1.8 million 108.5 person-months 27 international 81.5 domestic Cost: $2.1 million 128.5 person-months 41.5 international 87 domestic $1.0 million $1.1 million

DBP = Development DILG = Department of Interior and Local Government, DPWH = Department of Public Works and Highways (DPWH), LGU = local government unit, MDF = Municipal Development Fund, WD = water district Sources: Report and Recommendation of the President and the Government project completion report.

20 Appendix 2

PROJECT OUTPUTS

Appraisal Project Completion Part A: Physical Infrastructure A. Subic 1. Mangan-Vaca Water Supply

- Drilling of one deep well - Pumping facilities - One 220 m3 storage tank - 2.8 km distribution line - Additional 930 service connections

Canceled from the loan, but implemented by the WD’s own funds (P6.4 million) from Jan 2001 to Mar 2002. - One well drilled - Pumping facilities - One 200 m3 tank - 2.8 km distribution line - 1,761 connections added to the WD’s

network as of May 2004 2. Solid Waste Collection Equipment

- One 8 m3 dump truck - One 8 m3 compactor

- One wheel loader - One bulldozer

B. Castillejos 3. Poblacion Water Supply Implemented.

- Drilling of two 150 m deep wells - Pumping facilities - 1.8 km distribution line - One 336 m3 storage tank - 1,450 service connections

- One well drilled using CDF - Pumping facilities - 6.8 km distribution lines - One 150 m3 tank - 319 connections installed as of May 2004

4. Joint Sanitary Landfill Canceled. - Construction of a regional sanitary

landfill - One bulldozer and one payloader

- Castillejos continued to use the existing landfill site, converting it from an open dumpsite to a controlled dumpsite.

5. Solid Waste Management Equipment - One 8 m3 dump truck - One 8 m3 compactor

Canceled from the loan, but implemented by local funds. - Castillejos owns 3 units of equipment: a

shredder; a mixer; and a grader, procured by LGU’s own funds.

- Castillejos owns 3 dump trucks for collection. 6. Landfill Access Road Canceled from the loan, but partly implemented

by LGU’s funds. - Pavement of 1 km road with cement concrete

- Road paved with gravel

C. San Marcelino 7. Water Supply

- Drilling of three 150 m deep wells - Pumping facilities - 26 km distribution line - Two storage tanks - 3,300 service connections

Implemented. - One 100 m well drilled - Pumping facilities - 19 km distribution line - One 200 m3 tank - 438 connections installed as of May 2004

8. Solid Waste Collection Equipment - Two 6 m3 dump trucks

Canceled from the loan, but implemented by LGU’s funds.

9. Market Extension - Addition of 3 modules consisting of

two buildings each with 448 stalls

Canceled from the loan, but implemented by borrowing from LBP (P40 million).

Appendix 2 21

Appraisal Project Completion 10. New Street Canals

- Clearing of 1,000 m of heavily silted canals

- Construction of 2,860 m lined canal

Canceled from the loan, but partly implemented by DPWH using LGU’s funds.

D. Dinalupihan 11. Sanitary Landfill

- Development of 3.6 ha with fencing, surface water cut-off ditches, power and water supply, leachate treatment facilities, administration and operation buildings

Canceled. - The LGU continued to use the existing site as

an open dumpsite - The LGU uses 2 compactors - No equipment added during project period

12. Solid Waste Collection Equipment - One 8 m3 dump truck - Two 8 m3 compactors

Canceled. - The LGU uses two old dump trucks - No equipment added during project period

13. Market Extension - Construction of 2nd floor to the

building to house 276 stalls

Canceled from the loan, but the LGU is extending the market in the neighboring site by a loan initially from Philippine National Bank that was later taken over by LBP (P67 million).

14. Desilting of Dila-Dila River - Desilting and dredging of 3 km of

the river

Canceled. - Flooding problem remains

15. Landfill Access Road - Strengthening of 4.1 km of the road

with adequate foundation and a asphalt concrete surface

- Construction of pipe culvert and double-barrel box culvert

Canceled from the loan, but partly implemented by provincial funds. - 500 m partly paved by provincial government

funds

E. Hermosa 16. Water Supply

- Drilling of two 70 m deep well - pumping facilities - 11.7 km distribution line - One 420 m3 storage tank - 1,600 service connections

Canceled due to an institutional problem. LWUA took over the WD’s management, and is preparing the subproject to be funded under another LWUA project.

17. Solid Waste Management Equipment - Two new 8 m3 dump trucks

Implemented. - One backhoe was procured - Two dump trucks procured by a loan from

LBP 18. Access Road to Industrial Estate Site

- Construction of 1.7km access road Canceled. Site development of the industrial estate ongoing.

F. Morong 19. Water Supply

- Drilling of a 100 m deep well - Pumping facilities - 3 km of distribution line - One 230 m3 storage tank - 910 service connections -

Canceled due to WD’s poor financial condition.

22 Appendix 2

Appraisal Project Completion 20. Solid Waste Collection Equipment

- Two 6 m3 dump trucks - Two 6 m3 dump trucks procured

21. New Market - Construction of two new market

buildings

Canceled the loan, but implemented by borrowing from DBP (P12.3 million).

G. Olongapo City 22. Sta. Rita Rehabilitation

- Widening and lining of three creeks for 1,150 m

Canceled.

23. Kalaklan River Desiltation - Dredging for 3.6 km - Six 12 m3 dump trucks - Two backhoes - Two 2 m3 payloaders - One bulldozer

Canceled from the loan, but implemented by CDF and CIF.

24. Bank Protection to the Sta. Rita, Mabuyan, and Kalaklan Rivers, and Declogging the Open Drainage System - 1,250 m revetment walls

construction - Declogging of open drainage

system at East Baiac-Baiac River - Declogging of main open drainage

system at New Kalalake barangay

Canceled from the loan, but implemented by LGU’s funds.

25. Rehabilitation of Seven Streets - Widening of pavement to 6.7 m - Lining of side ditches - Cement concrete pavements to the

various parts of the seven streets.

Canceled from the loan, but partly implemented by own funds.

26. Upgrading of Sanders Street - Asphalt concrete pavement for 1.5

km - Regrading and widening of steep

and narrow sections of the Street - Rectification of drainage

deficiencies - Slope protection works - Construction of ditches and culverts

Canceled.

27. Construction of the Kalaklan Bridge Canceled.

Appendix 2 23

Appraisal Project Completion Part B: Capacity Building A. Human Resource Development Program

- Train 1,100 (900 LGU staff and 200 community representatives)

- Proposed training courses § Project Orientation § Urban Planning & Management § Private Sector Participation § Municipal Finance Management § Operation and Maintenance § Solid Waste Management § Water Supply Management § Transport and Traffic Management § Community Participation § Contract Bidding, Evaluation, and

Award § Project Implementation and

Construction Supervision § Engineering Design § Community Relations

- Trained 958 (705 LGU staff and 253 DILG staff)

- Actual training courses: § Urban Planning & Management § Private Sector Participation § Municipal Finance Management § Solid Waste Management § Water Supply Management § Transport and Traffic Management § Community Participation § Contract Bidding, Evaluation, and Award § Project Implementation and Construction § Engineering Design § Community Relations § Training of Trainers § Human Resource Development and

Management § Project Development and Project

Management for LGUs § Computer-Aided Drafting and Design § Computer Application

B. Productivity Enhancement Program 1. Provision of Office Equipment

- Provide 138 units of computers, fax machines, photocopiers, and other equipment to LGUs

- 264 units provided to six LGUs and DILG

2. Advisory Studies - Municipal financial planning

management

- Urban land use planning for Olongapo City

- Private sector participation opportunities in municipal services

- Regional solid waste management

for Castillejos and San Marcelino

- Capacity building for DILG’s project management

- Mayor’s Handbook on Financial Management

was produced, and 2,000 copies were printed and distributed.

- Completed as the Comprehensive Urban Land Use Plan for Olongapo City, which the City Council approved

- The study was completed, but it appeared that private sector participation in municipal services is still premature

- The study was completed, but its recommendations were not implemented because Castillejos and Dinalupihan canceled the sanitary landfill development subprojects

- A strategic framework in DILG’s project management was established

CDF = Countryside Development Fund, CIF = Countrywide Industrialization Fund, DBP = Development Bank of the Philippines, DILG = Department of Interior and Local Government, DPWH = Department of Public Works and Highways , LBP = Land Bank of the Philippines , LGU = local government unit, LWUA = Local Water Utilities Administration, WD = water district.

ADB = Asian Development Bank, FX = foreign exchange cost, LC = local currency cost, LGU = local government unit, SBMA = Subic Bay Metropolitan Authority, SPAIN = Government of Spain, WD = water district. Sources: Asian Development Bank records and the Government’s project completion report.

ESTIMATED AND ACTUAL PROJECT COST ($ ’000)

Appraisal Estimate Completion ADB SPAIN SBMA/WD/LGU Component

FX LC Subtotal FX LC Subtotal FX FX LC Subtotal

Total

A. Base Cost 1. Part A: Physical Infrastructure

a. Water Supply 1.7 2.3 4.0 0.2 0.1 0.3 0.0 0.0 0.1 0.1 0.4 b. Solid Waste Management 1.7 1.3 3.0 0.4 0.1 0.5 0.0 0.0 0.0 0.0 0.5 c. Urban Roads and Bridge 3.1 3.3 6.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 d. Drainage and Flood Control 2.2 1.7 3.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 e. Public Markets 1.2 2.2 3.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtotal 9.9 10.8 20.7 0.6 0.2 0.8 0.0 0.0 0.1 0.1 0.9 2. Part B: Capacity Building

a. Human Resource Development 0.3 1.4 1.7 0.0 0.0 0.0 0.3 0.0 0.9 0.9 1.2 b. Productivity Enhancement 0.7 0.6 1.3 0.0 0.0 0.0 0.7 0.0 0.4 0.4 1.1 c. Implementation Assistance 1.8 2.4 4.2 0.0 0.0 0.0 0.0 1.2 0.6 1.8 1.8

d. Incremental Administration 0.0 1.0 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Subtotal 2.8 5.4 8.2 0.0 0.0 0.0 1.0 1.2 1.9 3.1 4.1

B. Contingencies 1. Physical 1.5 1.6 3.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2. Price 0.6 0.6 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtotal 2.1 2.2 4.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 C. Interest During Construction 3.8 0.0 3.8 0.5 0.0 0.5 0.0 0.0 0.0 0.0 0.5

Total 18.6 18.4 37.0 1.1 0.2 1.3 1.0 1.2 2.0 3.2 5.5

24 A

ppendix 3

Appendix 4

25

Part A: Physical Infrastructure Improvement

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4Subic Town

C

Castillejos

C

C

CSan Marcelino

C

C

CDinalupihan

C

C

C

C

CUpper Row: Appraisal Consultants Selection Design Specifications Bidding to Contract Award Construction/Equipment DeliveryLower Row: Actual Implementation C - CancellationSWM=Solid Waste ManagementSource: Asian Development Bank.

2001 2002 2003

PROJECT SCHEDULE AT APPRAISAL AND ACTUAL

1997 1998 1999 2000Subcomponent

Mangan-Veca Water Supply

SWM Equipment

Water Supply

Regional Sanitary Landfill

SWM Equipment

Landfill Access Road

Water Supply

SWM Equipment

Market Extension

New Drainage Canals

Regional Sanitary Landfill

SWM Equipment

Market Extension

Dredging of Dila-Dila River

Landfill Access Road

26

Appendix 4

Part A: Physical Infrastructure Improvement

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4Hermosa

C

CMorong

C

COlongapo City

CKalaklan River Desilting

C

C

C

C

CUpper Row: Appraisal Consultants Selection Design Specifications Bidding to Contract Award Construction/Equipment DeliveryLower Row: Actual Implementation C - CancellationSWM=Solid Waste ManagementSource: Asian Development Bank.

20011997 1998 1999 2000 2002 2003

Water Supply

PROJECT SCHEDULE AT APPRAISAL AND ACTUAL

Water Supply

SWM Equipment

Industrial Estate Access Road

Upgrading of Sanders Street

Construction of Kalaklan Bridge

SWM Equipment

Construction of New Market

Sta. Rita River Rehabilitation

Subcomponent

Bank Protection for 3 Rivers

Rehabilitation of 7 Streets

Appendix 4

27

3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4Community Relations Program

Setup of CRU and Development of Community Relations ProgramImplementation of the Program

CancelledPart B: Institutional Capacity-Building ProgramTraining Program

Office Equipment

Advisory StudiesMunicipal Planning and Management

Project Management Capacity Building for DILG

Upper Row: AppraisalLower Row: ActualCRU = Community Relations UnitSource: Asian Development Bank

Consultants Selection

Implementation of Study

Subcomponent

Consultants Selection

Consultants Selection

Implementation of Training

Design of Training Program

Implementation of Training

Establishment of Specifications

Bidding of Contract Awards

Delivery

Consultants Selection

PROJECT SCHEDULE AT APPRAISAL AND ACTUAL

199919981997 2003200220012000

28 Appendix 5

CHRONOLOGY OF EVENTS

Dates Events 1991 U.S. military bases withdraw from Subic and Clark.

RA 7227 creates Subic SEZ and the SBMA. 1992 Government of the Philippines requests ADB TA to formulate basic infrastructure development plan for Olongapo, Subic, Morong, and Hermosa.

29 December ADB approves an advisory TA to formulate a medium-term development plan for Olongapo, Subic, Morong, and Hermosa.

1996 6 June ADB approves a preparatory TA to formulate a project for

urban infrastructure improvement for the four original LGUs, plus Castillejos, San Marcelino, and Dinalupihan.

1997 21 April–9 May Fact-Finding Mission. 18 August–5 September Loan Appraisal Mission. 19 Dec ember Loan approval. 1998 21 January Loan signing. 8 September Loan effectiveness. November Review Mission. December SBMA-PMO consultant mobilized. 1999 19 April SBMA-PMO submit inception report. April Government of the Philippines and Spain sign MOU to finance

capacity building. 28 April–7 May Review Mission. 25 November–3 December Review Mission. 2000 15 May–26 May Review Mission. 7 July San Marcelino’s SLA signed. 8 August PGB approves Morong’s SIP. 11 August Procurement contract of Subic SWM equipment awarded. 21 August Olongapo City requests to change its executing agency for its

infrastructure subprojects. 29 August First cancellation of loan funds, amounting to $2,624,000, for

five subprojects. 31 August DILG receives the Spanish grant. DILG receives counterpart funds from DBM, through MDFO. 5 September Hermosa and Subic’s SLAs signed. 11 September–17 November Review Mission. 7 December Morong’s SLA signed. 15 December PSC designates DILG-PMO as the new executing agency for

Olongapo’s infrastructure subprojects. 29 December Contract for Subic SWM equipment signed. 2001 10 January Contract Package 1 consultants under Part B mobilized. 22 January Contract Package 3 consultants under Part B mobilized. 12 February Contract Package 2 consultants under Part B mobilized.

Appendix 5 29

Dates Events 12 March–20 April Midterm Review Mission. 14 March Olongapo City requests cancellation of all subprojects. April Country Portfolio Review Mission questions the Project’s

viability, because of the large reduction in project scope and cost. ADB asks ICC to reevaluate project viability.

25 June Second cancellation of loan funds, amounting to $13,495,400, for 10 subprojects.

10 July Contract Package 1 under Part B completed. 22 July Contract Package 3 under Part B substantially completed. 12 August Contract Packages 2 and 4 under Part B completed . 12 September–5 November Review Mission. November SLA between LWUA and DOF signed. 12 December Dinalupihan’s SLA signed. 19 December Notice of Award issued to Hermosa SWM equipment supplier. 2002 7 January Contract for Hermosa SWM equipment signed. 17 January Notice of Award issued to Morong SWM equipment supplier. 18 January Contract for Morong SWM equipment signed. 17 May First SWM equipment delivered to Subic. 1 June SWM equipment delivered to Subic. 3 June–18 June Review Mission 31 July MDFO-PGB approves subloan closing date extension for San

Marcelino Public Market from 31 December 2002 to 30 June 2003, and for Dinalupihan SWM equipment from 31 July 2002 to 31 December 2002

1 August ICC-Cabinet Committee determines that remaining subprojects were viable, and recommended their implementation.

22 August Third cancellation of loan funds, amounting to $2,508,000, for two subprojects.

7 October Hermosa’s SWM equipment delivered. 2003 2 January Fourth cancellation of loan funds, amounting to $373,000, for

one subproject. 8 January MDFO-PGB approves extension of loan closing date of

Dinalupihan SWM Equipment from 31 December 2002 to 30 June 2003.

23 April Fifth cancellation of loan funds, amounting to $881,000, for three subprojects.

19 May Morong’s SWM equipment delivered. 30 June Loan closing. ADB=Asian Development Bank; DILG=Department of Interior and Local Government; DOF=Department of Finance; ICC=Investment Coordination Committee; LGU=local government unit; LWUA=Local Water Utilities Administration; MDFO=Municipal Development Fund Office; MOU=Memorandum of Understanding; PGB=Policy Governing Board; PMO=Project Management Office; RA=Republic Act; SBMA=Subic Bay Metropolitan Authority; SEZ=Special Economic Zone; SIP=Subproject Investment Package; SLA=Subsidiary Loan Agreement; SWM=Solid Waste Management; TA=Technical Assistance.

30 Appendix 6

INSTITUTIONAL, FINANCIAL, AND OPERATIONAL ACTION PLAN

Actions Agency Target Date Results A. Institutional 1. PMO

Organize and make the Project Management Office (PMO) operational by appointing a project director, project implementation coordinator, and other PMO staff.

2. PIU

Upon approval of the ADB loan for the Project, set up a PIU with adequate staff in consultation with the PMO.

3. Training

Prepare to undertake Part B (Institutional Capacity Building Program) of the Project in consultation with DILG and the PMO. The LGUs will ensure that the candidate trainees will be nominated in advance, and the staff who receive the training will remain in service at least during the project implementation period.

4. SWM Joint Venture

Reach an agreement on setting up an SWM joint venture for operation of the sanitary landfill site, and solid waste collection and disposal. Private sector participation should be explored.

DILG LWUA SBMA All LGUs All LGUs San Marcelino and Castillejos

Loan effective date (Actual loan effectiveness: 8 September 1998) Loan effective date 31 March 1998 30 June 1998

All PMOs established before September 1998. The PIU for the six municipalities was mobilized in June 2000. Implementation of Part B started in January 2001, about 3 years behind the appraisal schedule. The subproject was canceled.

B. Financial 1. Special Fund Utilization

In consultation with DOF, DILG, and SBMA, agree on the use of the funds and take steps to utilize the special fund contributed by SBMA for the development of the LGUs around the SBMA area.

2. MDF Application

In consultation with DOF and DILG, take advance action on studying the procedures for applying for a loan from the MDF.

3. Financial Planning

Based on the feasibility study for the Project, prepare det ailed financial projections to determine the availability of counterpart funds on time.

All LGUs All LGUs All LGUs

7 August 1997 31 March 1998 31 March annually

DBM, DILG, BIR, and DOF issued a joint circular on 20 April 1999, and the SBMA issued Circular No. 001-99 on 7 October 1999. Actual release of funds started in 2001 for the 1998 allocation. No advance action was taken. No effective projection was prepared.

Appendix 6 31

Actions Agency Target Date Results 4. Cost Recovery

Ensure full cost recovery from the beneficiaries for revenue-generating project components.

5. Project Account Open a project account in the PMO and PIUs to record funding and expenditures regarding project implementation.

All LGUs and WDs PMO and PIU

Throughout project life 31 March 1998

Most LGUs approved ordinances to collect fees for solid waste collection from household and business, but are having difficulty collecting from households. SWM O&M is supported by LGUs’ regular budgets. Some LGUs use SWM equipment for other purposes to generate additional revenues. LWUA-WDs are trying to ensure full cost recovery. SBMA-PMO and DILG-PMO opened project accounts upon establishment of the PMOs. LWUA-PMO did not establish a separate project account since it undertook the project activities as part of their regular works.

C. Operational 1. Land Acquisition

Take advance action on the acquisition of land to avoid delays in project implementation.

2. Engagement of Consultants

Undertake preparatory works for the engagement of domestic consultants for detailed engineering design and supervision of construction.

3. ECC

With assistance from the PMO, plan to obtain the ECC of the subproject in time for project implementation.

4. Community Relations and

Participation In association with the PMO, carry out a community relations and public campaign programs on urban infrastructure management to capture the maximum benefits of the Project.

All LGUs PIUs PMO and PIUs PMO, LGUs and PIUs

31 March 1998 31 March 1998 31 December 1998 Throughout project implement-ation

All subprojects were canceled. The PIU for the six municipalities was mobilized in June 2000, but no detailed engineering works were done. ECC as required for subprojects were issued by DENR. Community relations and public campaign programs were developed in 2000, but they were not implemented because the subprojects were mostly canceled.

ADB = Asian Development Bank, BIR = Bureau of Internal Revenue, DBM = Department of Budget and Management, DENR=Department of Environment and Natural Resources, DILG = Department of the Interior and Local Government, DOF = Department of Finance, ECC = Environmental Compliance Certificate, LGU = local government unit, LWUA = Local Water Utilities Administration, MDF = Municipal Development Fund, O&M = operation and maintenance, PIU = project implementation unit, PMO = project management office, SBMA = Subic Bay Metropolitan Authority, SWM = solid waste management, WDs = water districts.

32 Appendix 7

ORGANIZATION CHART FOR PROJECT IMPLEMENTATION (as implemented)

EA = executing agency, LGU = local government unit, LWUA = Local Water Utilities Administration, PAG = project advisory group, PIU = project implementation unit, PMO = project management office.

Project Supervisory Committee

DILG Project Secretariat

Project Director

LWUA-PMO (Water Supply Component)

Project Manager

SBMA-PMO (LGU Component)

Project Manager

Consultants for Project Implementation

6 LGUs’ PIU

PIU Manager

6 LGUs’ PIU Consultants

DILG-PMO (Capacity Building)

Project Manager

Consultants for Training and Studies

Subic Town Water District

Castillejos Water District

Hermosa Water District

San Marcelino Water District

Morong Water District

Subic Town Municipal Planning and

Development Office

Castillejos Municipal Planning and

Development Office

San Marcelino Municipal Planning and

Development Office

Dinalupihan Municipal Planning and

Development Office

Hermosa Municipal Planning and

Development Office

Morong Municipal Planning and

Development Office

PAG Subic Town

PAG Castillejos

PAG San Marcelino

PAG Dinalupihan

PAG Hermosa

PAG Morong

PAG Olongapo

City

Technical Working Committee

Change of Olongapo’s Part A EA

Added during implementation

Olongapo City PIU

PIU Manager

Olongapo PIU Consultants

Appendix 8 33

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference

in Loan Agreement

Status of Compliance

General

1. The Borrower, act ing through Department of Finance (DOF), shall relend to the local government units (LGUs) a portion of the proceeds of the loan up to an aggregate amount equivalent to $17,620,000, such funds to be made available to the LGUs through the Municipal Development Fund (MDF), under Subsidiary Loan Agreements (SLAs) on terms and conditions satisfactory to Asian Development Bank (ADB), including those set forth in para. 9 of Schedule 6 to this Loan Agreement (LA).

Section 3.01 (a)

Complied with. SLAs for Hermosa and Subic were signed in September 2000, while the one for Morong was signed in December 2000. The amount relent was $765,000 equivalent.

2. The Borrower, acting through DOF, shall relend to Local Water Utilities Administration (LWUA) a portion of the proceeds of the loan up to an aggregate amount equivalent to $4,380,000, under the LWUA SLA on terms a nd conditions satisfactory to ADB.

Section 3.01 (b)

Complied with. DOF and LWUA signed SLA on 12 November 2001. The amount relent to LWUA was $407,000.

3. The Borrower shall cause the project executing agencies (EAs) and the project implementing agencies (IAs) to apply the proceeds of the loan to the financing of expenditures of the Project in accordance with the provisions of the LA, the project agreements, the SBMA Agreement, and the subproject agreements.

Section 3.02 Complied with. Only eligible expenditures were financed out of the loan funds.

4. The goods and services and other items of expenditure to be financed out of the proceeds of the loan, and the allocation of amounts of the loan among different categories of such goods and services and other items of expenditure, shall be in accordance with LA Schedule 3.

Section 3.03 Complied with.

5. All goods and services to be financed from the loan shall be procured in accordance with Schedule 4 and Schedule 5 of this LA.

Section 3.04 Complied with. LGUs and water districts (WDs) procured the civil works and SWM equipment according to ADB and Government procurement guidelines.

6. The Borrower shall cause all goods and services financed from the loan to be used exclusively in carrying out the Project.

Section 3.05 Complied with.

7. 8.

The closing date for withdrawals from the LA for the purposes of Section 8.03 of the loan regulations shall be 30 June 2003, or such other date as may be agreed between the Borrower and ADB. The Borrower shall cause the EAs and IAs to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental, and public utility practices.

Section 3.06 Section 4.01 (a)

Complied with. The last disbursement was made on 16 July 2003 (within the grace period). Partially complied with. Project implementation was significantly delayed, and the scope was reduced drastically.

9. The Borrower shall make available, or cause to be made available, to LWUA and the LGUs, promptly as needed, the funds, facilities, services, and other resources that are required, in addition to the proceeds of the loan and the

Section 4.02 Partially complied with. Establishing subloan agreements between the Borrower and LGUs took about 10 months, delaying

34 Appendix 8

Covenant Reference

in Loan Agreement

Status of Compliance

Spanish grant, for carrying out the project and for the operation and maintenance (O&M) of the project facilities.

project implementation significantly.

10. The Borrower shall maintain records and accounts adequate to identify the goods and services and other items of expenditure financed out of the proceeds of the loan, to disclose the use thereof in the Project, to record the progress of the Project and to reflect, in accordance with consistently maintained sound accounting principles, the operations, and financial condition of SBMA, LWUA, the LGUs, the WDs, and the other agencies of the Borrower responsible for carrying out the Project and operating the project facilities, or any part thereof.

Section 4.08 (a)

Complied with, except for LWUA-PMO, which did not establish a separate project account for project activities carried out by its staff.

11. The Borrower shall cause the EAs to (i) maintain separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualificati ons, experience, and terms of reference are acceptable to ADB; (iii) furnish ADB, as soon as available, but in any event not later than 6 months after the end of each related fiscal year, certified copies of such audited project accounts (APAs) and audited financial statements (AFSs) and the report of the auditors relating thereto (including the auditors' opinion on the use of the loan proceeds and compliance with the covenants of this LA), all in the English language; and (iv) furnish ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

Section 4.08 (b) PA (SBMA), Section 2.09 (a)

Complied with.

12. The Borrower shall furnish, or cause to be furnished, to ADB quarterly reports on carrying out the Project and on the O&M of the project facilities. Such reports shall be submitted in such form and in such detail and within such a period as ADB shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

Section 4.09 (b) PA (LWUA) Section 4.10

Complied with. DILG submitted required quarterly progress reports and other special reports to ADB. SBMA also submitted required progress reports quarterly and monthly after early 2002.

13. Promptly after physical completion of the Project, but in any event not later than 6 months thereafter or such later date as may be agreed for this purpose between the Borrower and ADB, the Borrower shall furnish, or cause the EAs furnish, to ADB a report, in such form and in such detail as ADB shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this LA, and the accomplishments of the purposes of the loan.

Section 4.09 (c)

Complied with, but delayed. SBMA submitted its Project Completion Report (PCR) to ADB on 30 September 2003. DILG submitted the consolidated PCR on 25 February 2004.

14. The Borrower shall cause the LGUs and the WDs to ensure that the project facilities are operated, maintained, and repaired in accordance with sound administrative, financial, engineering, environmental, urban development, and maintenance and operational practices.

Section 4.10

Complied with.

Appendix 8 35

Covenant Reference

in Loan Agreement

Status of Compliance

Institutional Matters

15. Among the three EAs, LWUA shall have overall responsibility for Part A.1 of the Project (the water supply component); SBMA for Parts A.2, A.3, A.4, and A.5 of the Project (the solid waste management, urban roads, and bridge, flood control and drainage, and public market improvement components); and DILG for Part B of the Project (the institutional capacity building component).

Schedule 6, para. 1

Complied with. With ADB approval, DILG became the EA for Olongapo City’s infrastructure subprojects.

16. The Borrower, through the EAs, shall ensure the full and timely cooperation of (i) the WDs, which shall be IAs for Part A.1 of the Project, and (ii) the LGUs, which shall be IAs for Parts A.2, A.3, A.4 and A.5 of the Project.

Schedule 6, para. 2

Complied with. The timely cooperation of the WDs and LGUs as IAs was provided for adequately in subsidiary agreements.

17. Before the effective date, the Borrower shall organize a Project Supervisory Committee (PSC) under the chairmanship of the DILG secretary, with members from NEDA, DOF, DBM, SBMA and LWUA, and including a representative of each participating LGU.

Schedule 6, para. 3(a)

Complied with. The PSC was established in May 1998. The PSC held eight meetings .

18. To service the needs of the PSC, the Borrower shall establish a secretariat ("the Project Secretariat") within DILG. The Project Secretariat shall be headed by a project director to be appointed by the PSC chairman. The Project Secretariat shall have overall responsibility for ensuring adequate coordination between and among the three EAs and IAs throughout the project implementing period.

Schedule 6, para. 3(b)

Complied with. The Project Secretariat was established in May 1998.

19. Before the effective date, the Borrower shall cause each of SBMA, LWUA, and DILG to establish and make operational a project management office (PMO). SBMA shall establish the PMO (the "SBMA-PMO") that shall be responsible for Parts A.2, A.3, A.4 and A.5 of the Project; LWUA shall establish the PMO (the "LWUA-PMO") that shall be responsible for Part A.1 of the Project; and DILG shall establish the PMO (the "DILG-PMO") that shall be responsible for Part B of the Project. To assist the project managers, SBMA shall, promptly after loan effectiveness, recruit a project adviser to assist in the initial operation of the SBMA-PMO. In due course, an international consultant team, in association with local consulting firms, shall assist each project manager in the overall management of project implementation.

Schedule 6, para. 4

Complied with. Three PMOs were established. Project adviser was recruited in April 1998 to assist in the initial operations of the SBMA-PMO. SBMA-PMO recruited international consultants. Contract was signed in December 1998, but was terminated in November 2000. DILG recruited four teams of consultants January–February 2001.

20. Promptly after the effective date, two project implementation units (PIUs) shall be established, one for Olongapo City and the other for the six remaining LGUs (to be located within the SBMA-PMO). Each PIU shall be headed by a full-time PIU manager who shall be supported by an adequate number of qualified staff. In addition, each PIU shall be assis ted by a team of local consultants, who shall be responsible for detailed engineering design, preparation of the engineering drawings and bid documents, prequalification of contractors, evaluation of bids, recommendation of award of construction and procurement contracts, contract supervision, and quality control.

Schedule 6, para. 5

Complied with. PIU1 for Olongapo City was established, but not mobilized. PIU2 for the five municipalities (excluding Castillejos, which dropped all its subprojects in 1999) was established in December 1998. PIU2 manager was mobilized from June 2000 to February 2002 and September 2002.

36 Appendix 8

Covenant Reference

in Loan Agreement

Status of Compliance

21. The Borrower shall ensure that each participating LGU, prior to financing a subproject out of a subloan, shall organize a project advisory group (PAG) to ensure that local policy guidelines and priorities are incorporated into the design and implementation of the Project. Each PAG shall be chaired by the mayor concerned, and shall consist of heads of key departments, municipal council members, and NGO and community representatives. To enable the PAGs to function as intended, the SBMA-PMO shall assist the concerned mayors in convening PAG meetings regularly to discuss the progress made in project implementation and issues and problems identified. The results of the PAG meetings shall be consolidated into the quarterly reports to be submitted to ADB for review.

Schedule 6, para. 6

Partially complied with. The participating LGUs formed their respective PAGs by March 2000. Three rounds of PAG meetings were held with five municipalities. Olongapo City did not convene a PAG meeting. It appeared that PAG did not function as planned, mainly because most subprojects were canceled.

22.

To ensure a high degree of community involvement in the design, implementation, and operation of the Project, the Borrower shall ensure that the SBMA-PMO conduct a community relations program in conjunction with project implementation. For this purpose, SBMA, with the assistance of DILG, shall establish a community relations unit within the PMO to which a suitable number of consultants will be assigned. (LA, Schedule 6, para. 7)

Schedule 6, para. 7

Complied with, but delayed. The community relations coordinator (CRC) was mobilized by August 2000. A community relations program was introduced to all agencies concerned.

The SBMA Agreement

23. The SBMA Agreement between the Borrower and SBMA shall outline the financial and institutional support to be provided by SBMA for the Project generally, and for Parts A.2, A.3, A.4, and A.5 of the Project ("the LGUs components") in particular: (i) Financial Support—The SBMA Agreement shall confirm SBMA's commitment to contribute the equivalent of $4,200,000 in cash and in kind to finance the expenses required for the SBMA-PMO; (ii) Institutional Support—The SBMA Agreement shall confirm

all institutional support to be provided to the Project by or through SBMA relating to:

(a) the preparation of the subproject agreements required for the LGU components, including provision for supervision and control of detailed design works and monitoring implementation of the subprojects;

(b) the procurement of goods and services for the LGU components;

(c) the operati on and monitoring of the imprest account

referred to in para. 8 of Schedule 3 to this LA; (d) the monitoring of subloans to LGUs, in particular the

setting up and operation of the LGU subproject trust accounts and the LGU debt service accounts;

(e) coordination with the PIUs and the LGUs regarding

project implementation; (f) the obtaining of environmental compliance certificates

(ECCs) required for the LGU components;

Schedule 6, para. 8

Complied with. SBMA and DOF signed the memorandum of agreement (MOA) in June 1998. The MOA outlines the financial and institutional support SBMA is to provide to the Project. Complied with. SBMA is financing the operations of the PMO in cash and in kind. Complied with. SBMA-PMO was operational in April 1998 with a project manager and some support staff. Complied with. Six subproject agreements were signed in late 1999 for the six active LGUs. Complied with. MDFO maintains the imprest account. SBMA made withdrawal applications. Complied with. All remaining LGUs under the program have opened subproject trust account and debt service accounts. Complied with. Technical assistance provided to LGUs. Complied with.

Appendix 8 37

Covenant Reference

in Loan Agreement

Status of Compliance

(g) the implementation of the project performance monitoring system (PPMS) referred to in para. 13 of this Schedule; and

(h) other administrative matters relating to project implementation.

The system was developed, but not used due to subproject cancellation. Complied with. Manual on PPMS was prepared in October 2000

24. Except as ADB may otherwise agree, the subproject agreements shall require, inter alia, that the LGUs and the WDs provide counterpart funds from their own resources in the form of cash and payments in kind to cover certain local currency costs, including costs associated with land acquisition, incremental administration, and local civil works.

Schedule 6, para. 10(a)

Complied with.

25. Without limiting the generality of Section 4.02 of this LA, the Borrower shall ensure that the equivalent of $2,500,000 in counterpart funds required at the national level from DILG for Part B of the Project shall be reflected in the budgets of DILG over the implementation period of the Project.

Schedule 6, para. 10(b)

Complied with.

Subproject Agreements

26. In drafting each subproject agreement involving an LGU, SBMA shall ensure that the LGU concerned, among other things, agrees to:

(i) make adequate budgetary provision for the O&M of the project facilities after project completion, in particular those involving non-revenue generating components (urban roads, drainage, and flood control);

(ii) ensure full cost recovery through adequate fees and user charges for revenue generating components (solid waste management and public markets);

(iii) comply with minimum standards for operational efficiency where applicable; and

(iv) submit to SBMA and ADB on an annual basis full budget statements.

PA (SBMA), Schedule, para. 2

Complied with. Six of the seven LGUs signed the subproject agreements. Castillejos withdrew from the Project.

27. Each subproject agreement shall be submitted to ADB for approval prior to signing.

PA (SBMA), Schedule, para. 2

Complied with.

28. Each subproject agreement shall be submitted in draft form to ADB for approval prior to signing, and shall, among other things, incorporate the following:

(i) full details of the relevant subproject, including details of all technical advisory services LWUA and the project consultants are to provide;

(ii) an obligation on the part of the WD concerned to provide adequate funds for the O&M of the project facilities after project completion;

(iii) an obligation on the part of the WD concerned to ensure full cost recovery in respect of the subproject;

(iv) a requirement that the WD concerned comply with minimum standards for operational efficiency, such standards to include a requirement that no WD should have a level of unaccounted-for water exceeding 25% by project completion; and

PA (LWUA), Schedule, para. 1(a)

Complied with. Complied with. Complied with. Complied with.

38 Appendix 8

Covenant Reference

in Loan Agreement

Status of Compliance

(v) an obligation on the part of the WD concerned to submit annual AFSs covering the WD's operations in general and the subproject in particular to LWUA and ADB.

Complied with.

Other Matters

29. IAs shall be responsible for O&M of the project facilities provided under their respective components under Part A of the Project. During project implementation, SBMA and LWUA shall ensure that detailed O&M guidelines and procedures are prepared by each LGU and WD assisted by the concerned PMO and the consultants. Under these guidelines, the LGUs and WDs shall be required to allocate on an annual basis sufficient budget, staff, and equipment for proper O&M of the project facilities upon completion of the Project.

Schedule 6, para. 12

Complied with. The LGUs have committed to incorporate funding for O&M of the project facilities in their budgets.

30. Each IA shall undertake a PPMS for each subproject after completion to ensure that the project benefits as envisaged have been achieved. The SBMA-PMO, with the assistance of the consultants, shall develop comprehensive PPMS procedures and plans in accordance with ADB’s Handbook on Benefit Monitoring and Evaluation. The PPMS exercise shall be carried out within 3 months of completion of the Project. The results of the PPMS activities shall be incorporated in the PCR.

Schedule 6, para. 13

Partially complied with. SBMA-PMO prepared the manual on PPMS, and presented it in October 2002. However, the PPMS never was used, because of the large reduction in the number of subprojects. SBMA-PMO also advised the LGUs to use PPMS intensively in monitoring the completion of their activities against targets, including an assessment of desired benefits.

31. For so long as the project facilities remain in the public sector, the LGUs and the WDs shall set, impose, and regularly review the relevant fees, rentals, and other charges to ensure that they are sufficient to cover (i) capital cost, (ii) debt service, and (iii) O&M expenses.

Schedule 6, para. 14

Being complied with.

32. Each LGU shall, within 3 years of the effective date and with assistance from the SBMA-PMO, carry out a study on the options for private sector participation in the O&M of municipal enterprises and other appropriate municipal services, such as public markets and solid waste collection.

Schedule 6, para. 15

Complied with. The Study on Private Sector Participation Opportunities was conducted under Part B-DILG Component.

33. Commencing from the effective date and with assistance from the concerned PMO, the LGUs and the WDs shall carry out an institutional strengthening, financial, and operational action plan, the content and timing of which shall first have been agreed between the Borrower and ADB.

Schedule 6, para. 16

Complied with. LWUA assigned two resident engineers and other personnel to assist the WDs in their activities for the Project. SBMA, through consultants, conducted training courses on procurement and disbursement for the participating LGUs. DILG implemented the training program. LGUs adopted and implemented the recommendations of the Advisory Study on Municipal Financial Planning and Management under Part B.

Appendix 9 39

FINANCIAL AND ECONOMIC EVALUATION

A. Financial Analysis

1. Evaluation Approach

1. This appendix presents the results of financial and economic analysis of two water supply subprojects implemented by the water districts (WDs) of San Marcelino and Castillejos, and three subprojects of solid waste management (SWM) equipment procurement implemented by the municipalities of Subic, Hermosa, and Morong. The analysis assessed the efficiency of the investments by estimating the financial internal rate of return (FIRR) and economic internal rate of returns (EIRR) of each subproject. The analysis applied only to the incremental changes associated with the investments made under the loan, and not on the entire operation of the WDs or the solid waste management systems of the local government units (LGUs). A weighted-average cost of capital (WACC) was estimated and compared with FIRRs.

2. Financial Assumptions

2. Forecast Period. The financial projections for the water supply subprojects were prepared based on their initial operation from August 2003 to May 2004. The construction costs were based on the actual disbursement. The operational life of the facilities was assumed to be 30 years, which is typical when planning water facilities development in the country. Benefits probably will continue beyond this period.

3. For the SWM subprojects, the financial projections were prepared based on the operation of the equipment since the delivery. The equipment’s operational life was assumed to be 15 years, as typically assumed in the country.

4. Price Levels. The financial and economic evaluations of the subprojects were carried out in real terms. The projections of revenues and costs were made using 2002 price levels.

5. Collection Efficiency and Non-Revenue Water. Collection efficiency of water bills and non-revenue water (NRW) rates were based on the March 2004 data provided by the WDs. These were used throughout the forecast period.

Table A9.1: Assumptions of Collection Efficiency and Non-Revenue Water (%)

Water District Collection Efficiency NRW

Castillejos 83 10

San Marcelino 98 10 NRW = non-revenue water. Source: The water districts.

3. Revenue Projections

7. Water Revenues. In projecting the revenues, the average tariff rates were multiplied by the incremental water supply (net of the non-revenue portion).

40 Appendix 9

8. The nominal revenue and adjusted total revenues were calculated as: Incremental billed water = [Incremental water supply] – [NRW] Net water sales = [Incremental billed water] X [average tariff] X [collection efficiency]

9. Increases in water revenues were projected assuming that the growth of customers since August 2003 to May 2004 will continue until the water supply reaches the maximum capacity of the existing wells or distribution facilities, whichever is smaller.

10. Other Revenues for Water Districts. Other revenues consist of new connection fees, including water meter sales and disconnection fees. New connection fees were calculated by multiplying the average connection fee by the number of new connections.

11. Solid Waste Management Fees. Subic, Hermosa, and Morong municipalities have ordinances on the rates of solid waste collection fees that were supposed to be collected from households and business establishments. However, these LGUs collect SWM fees—ranging from P60 to P80 per year—only from business establishments when business licenses are renewed annually. The LGUs have difficulty collecting SWM fees from households. However, the LGUs plan to collect fees from households in the near future. In the analysis, the collection from households was assumed to be 50%, as stipulated in the ordinances, from 2010 onward. The current level of collection from business establishments was assumed to be maintained. Further, the subsidies that the LGUs budgeted for operation and maintenance (O&M) of the SWM equipment were excluded from the revenues. On the other hand, Subic and Hermosa rent the SWM equipment to individuals or private firms to generate extra revenues. These revenues were considered in the financial projection, based on the actual revenue generated.

4. Expenditure Projections

12. Capital Costs and Depreciation. Actual capital costs were used in this analysis. The residual value of capital works at the end of forecast period was estimated assuming a 30-year depreciation period for the water supply facilities, and 15 years for the SWM equipment. The annual depreciation of each investment item was calculated using a straight-line method. According to generally accepted accounting principles, depreciation is an accounting charge based on book value and not a cash expense item.

13. Personnel Costs. Personnel costs include salary and social payments for all staff the WDs and LGUs employ. For WDs, the number of staff was assumed to increase with the increase in connections at the staff-to-connection ratio of one staff per 100 connections.1 Personnel cost projections were based on the increase in the number of staff. Personnel cost for SWM equipment was expect to remain at the current level.

14. Operation and Maintenance Costs. O&M costs consist of electricity, fuel, oil, chemicals, other materials, administration, and miscellaneous costs applicable for the water supply facilities and SWM equipment. Expenses for electricity and chemicals were assumed to increase in direct proportion to the increase in water production. Other expenses include the cost of pipes and fittings, which cover materials and replacement parts required for new connections and systems maintenance. Administration expenses include the cost of indirect materials and supplies, such as telephone and office expenses.

1 The staff-to-connection ratio of one staff per 100 connections is considered an achievable, efficient level in water

utility management among LWUA and WDs.

Appendix 9 41

15. Interest Expenses and Loan Repayments. LWUA relent ADB loan proceeds to the WDs at an average interest rate of 10.5% per year, with a repayment period of 20 years including a 1-year grace period. The MDFO relent to LGUs at an interest rate of 14% per year, with a repayment period of 15 years including a 3-year grace period.

5. Weighted-Average Cost of Capital

16. Water Supply. WACC for subprojects was calculated in real terms. The WDs’ equity cost and the inflation rate were assumed to be 10.0%2 and 5.0%,3 respectively. The real WACC was computed to be 1.7%.

Table A9.2: WACC for Water Supply Subprojects (%)

Financing Component Item LWUA Loan WD Equity

Participation Total

A. Weighting 90.0 10.0 100.0 B. Average Nominal Cost 10.5 10.0 C. Tax Rate 35.0 35.0 D. Tax-adjusted Nominal Cost [Bx(1-C)] 6.8 6.5 E. Inflation Rate 5.0 5.0 F. Real Cost [(1+D)/(1+E)-1] 1.7 1.4 G. Weighted Component 1.6 0.1 1.7

WACC 1.7 LWUA = Local Water Utilities Administration, WACC = weighed-average cost of capital, WD = water district. Source: Staff estimates. 17. SWM Equipment. WACC for SWM equipment subprojects was calculated in real terms. LGU equity and rate of inflation were assumed at 10.0% and 5.0%, respectively. The real WACC was computed to be 8.2%.

Table A9.3: WACC for SWM Subprojects (%)

Financing Component Item MDFO Loan LGU Equity

Participation Total

A. Weighting 90.0 10.0 100.0 B. Nominal Cost 14.0 10.0 C. Weighted Nominal Cost (BxC) 12.6 1.0 D. Inflation Rate 5.0 5.0 E. Real Cost [(1+C)/(1+D)-1] 8.6 4.8 F. Weighted Component 7.7 0.5 8.2

WACC 8.2 LGU = local government unit, MDFO = Municipal Development Fund Office, SWM = solid waste management, WACC = weighed-average cost of capital. Source: Staff estimates. 2 The prevailing lending rate by government financial institutions for development projects. 3 The inflation rate that National Economic Development Authority suggests to use in financial analysis in 2004.

42 Appendix 9

6. Financial Evaluation

a. Financial Internal Rate of Return

18. Water Supply. The recalculated FIRRs are shown in Table A9.4. All recalculated FIRRs were higher than the WACC of 1.7%, showing the financial viability of the constructed water supply systems. However, the recalculated FIRRs were much lower than the estimates at appraisal, mainly due to the slower-than-expected increase in customers. Castillejos’ revised FIRR was higher than that of San Marcelino, because Castillejos (i) used other grant funds instead of borrowing the initial amount from LWUA, and (ii) built a network that is larger than San Marcelino’s. San Marcelino’s increase in revenue was limited by its supply capacity.

19. SWM Equipment. At appraisal, FIRRs were calculated for SWM subprojects as a whole, not for individual SWM equipment. Since the intermunicipal landfill subprojects were not implemented, FIRRs for SWM equipment were estimated only at Project Completion Review.

Table A9.4: Financial Internal Rate of Return FIRR (%) WD/LGU

At Appraisal At Completion Difference Castillejos WD 11.7 8.1 (3.6) San Marcelino WD 14.0 5.8 (8.2) Subic — 5.6 — Hermosa — 4.9 — Morong — 4.0 —

FIRR = financial internal rate of return, LGU =local government unit, WD = water district. Source: Staff estimates. b. Sensitivity Analysis

20. Water Supply. As shown in Table A9.4, three scenarios were tested to evaluate the implications of uncertainty on the financial viability of the water supply subprojects: (i) a 10% increase in NRW, (ii) a 10% decrease in the real price of water, and (iii) a 10% decrease in collection efficiency. The results show that all these changes would significantly affect the financial viability of the water supply operation. To maintain financial viability, NRW should be kept low, water tariff should be adjusted to the increase in production cost, and collection efficiency should be kept high.

Table A9.5: FIRR Sensitivity Analysis FIRR (%)

Cases Castillejos WD

San Marcelino WD

Assessment

Base Case 8.1 5.8 Case 1: Change in NRW rate from 10% to 20% 6.0 4.0 An increase in NRW could significantly

reduce revenues. Case 2: 10% decrease in the real price of water 6.3 4.2 Tariff levels should always be adjusted

to maintain the real price of water.

Case 3: 10% decrease in collection efficiency 6.3 4.2

A decrease in collection efficiency significantly affects the level of revenues and financial viability.

FIRR = financial internal rate of return, NRW = non-revenue water, WD = water district. Source: Staff estimates.

Appendix 9 43

21. SWM Equipment. As shown in Table A9.5, two scenarios were tested to evaluate the implications of uncertainty for estimating FIRR: (i) a 2-year delay in collecting garbage fees from households, and (ii) a 10% increase in O&M costs by 20%. The results show that collecting fees from households has a significant impact on revenues and financial viability, while an increase in O&M cost has a limited impact. Thus, garbage fee collection from households as soon as possible is essential.

Table A9.6 FIRR Sensitivity Analysis FIRR (%) Cases

Subic Hermosa Morong Assessment

Base Case 5.6 4.9 4.0

Case 1: Delay in implementing garbage fees collection from households by 2 years

3.3 2.3 1.4 Non-collection of garbage fees from households significantly reduces revenues and financial viability.

Case 2: 10% increase in O&M costs 5.4 4.4 3.5 Limited impact.

FIRR = financial internal rate of return, O&M = operation and maintenance. Source: Staff estimates. B. Economic Analysis

1. General

22. The economic analysis of the subproject was undertaken based on available data, and in accordance with the Asian Development Bank’s Guidelines for the Economic Analysis of Water Supply Projects .

2. Economic Benefits

a. Water Supply

23. Resource Savings (Non-incremental output). Upon completion of the subprojects, water users no longer incurred the costs of securing water from shallow wells and buying vended water. The Project, therefore, was expected save resources. This savings was estimated by multiplying the quantity of water consumed without the Project by the average economic supply price if the Project were not implemented. The average economic supply price consists of the costs of buying, collecting, treating and storing poor quality water.

24. Increased Per Capita Consumption (Incremental Output). The Project also was envisaged to increase the amount of water being used per capita, because (i) the cost of water to consumers will decrease; (ii) a properly functioning piped water system will provide higher water volumes at higher pressure; (iii) piped water supply is more convenient than an outside point source, thus greater volumes of water will be used; and (iv) a properly functioning piped water supply will use fewer resources than a poorly functioning piped water supply or a non-piped water supply. The benefit of the additional water available is equivalent to the willingness to pay for an improved water supply, as reflected in the water tariffs and connection fees.

44 Appendix 9

25. Non-Technical Losses. A major source of economic benefits for the Project is consumer surplus for paying and nonpaying users of water. NRW expressed as a percentage of water production was estimated (para. 5). The causes of NRW include losses in the distribution system (technical losses) and illegal usage (non-technical losses). The economic benefit was adjusted for the economic value of water that was consumed, but not paid for. The non-technical losses from water consumed, but not billed and paid for, were estimated at 5% of incremental water sold. This was included in the benefit stream to compensate for this small loss that benefits consumers, even though it was not paid for.

26. Benefits Not Evaluated. A number of benefits were not valued specifically, although they would be reflected to some extent in a consumer’s willingness to pay for more water. These include (i) substantial improvements in health standards, (ii) increased productivity due to better health, (iii) income transfer due to a reduction in medical expenses for treating waterborne diseases, and (iv) an increase in property values. A more convenient supply leads to increased water use for washing hands, utensils, and kitchen facilities. The resulting health, productivity, and income transfer benefits are important. However, difficult-to-measure other factors, such as income levels, housing standards, education, food preparation, and sanitation habits also contribute to the improvement. Property values increase with improved access to water.

b. SWM Equipment

27. Health Benefits. Benefits identified and quantified include savings on medical expenses and reduction in time lost due to illness. To derive the economic value of lost income due to illness, several factors were considered: (i) immediate population served by the Project, (ii) labor force participation rate, (iii) morbidity rate of the immediate population, (iv) percentage of ill persons, (v) number of days sick per incidence (an average of 4 days, as indicated in the Department of Health’s statistical report), and (vi) the minimum wage rate of P220 per day.

28. Willingness to Pay. Revenues derived from the collection of garbage were considered as a proxy valuation of the benefits derived from improved handling of garbage.

29. Benefits Not Evaluated. Unquantifiable benefits include improved health, better nutrition, and fewer diseases. The improvement in health due to better handling of garbage was expected to impact positively the service population, although measuring the impact physically and monetarily might not be possible.

3. Economic Costs

30. Economic costs comprised the construction and O&M costs during the economic life of the subprojects. Capital costs were computed based on the actual disbursements for the subprojects. The same O&M expenditures used in the financial analysis were used in the economic analysis. Some adjustments were made in the economic evaluation: (i) taxes, duties, and subsidies were excluded, as they transfer resource from one party to another without reducing or increasing the amount of real resources available to the economy; (ii) unskilled domestic labor was given a shadow price of 0.6 of the market price to reflect the underemployment of unskilled labor in the country, while skilled labor was given a shadow price of 1.0; and (iii) foreign exchange was given a shadow exchange rate factor of 1.20.

Appendix 9 45

4. Economic Internal Rate of Return

31. The EIRRs for the subprojects were calculated as shown in Table A9.6. The recalculated EIRRs for the Castillejos and San Marcelino WDs were 19.5% and 18.3%, respectively. No EIRR was estimated at appraisal for the SWM equipment. The EIRRs at project completion were calculated at 12.7% for Subic, 12.7% for Hermosa, and 13.6% for Morong. The EIRRs for all subprojects was higher than the economic opportunity cost of capital of 12%, suggesting economic viability. To test the sensitivity of EIRR, two cases were considered: (i) a 10% increase in costs, and (ii) a 10% decrease in benefits. Both scenarios had a significant impact on the EIRRs.

Table A9.7: Economic Internal Rate of Return and Sensitivity Analysis EIRR (%)

Sensitivity Analysis WD/LGU At

Appraisal At

Completion Difference Case 1: 10% Increase in

Cost

Case 2: 10% Decrease in

Benefits Castillejos WD 19.7 19.5 (0.2) 18.2 18.0 San Marcelino WD 19.0 18.3 (0.7) 16.9 16.7 Subic — 12.7 — 11.3 11.1 Hermosa — 12.7 — 11.1 10.9 Morong — 13.6 — 12.0 11.9 EIRR = economic internal rate of return, LGU = local government unit, WD = water district. Source: Staff estimates.

46 Appendix 10

LOCAL GOVERNMENT UNIT’S INSTITUTIONAL CAPACITY

1. The participating local government units (LGUs) welcomed Part B of the Project, mainly because they had never received such a large training program and so much office equipment. A training needs assessment was carried out at the beginning, and the results were used to develop the most-needed training courses at the trainees’ skill level. The 14 training courses developed under the Project, and the two additional courses on computer usage, reportedly were well-attended. The trainees actively participated.

2. During its field trip, the Project Completion Review Mission observed some positive impacts on the LGUs’ public services after implementation of Part B. In January 2004, the Department of Interior and Local Government (DILG) also identified some positive impacts during its rapid evaluation of training transfer effectiveness. Some examples:

(i) Motivation of LGU staff was strengthened.

(ii) Awareness of the need for continuous human resource development was enhanced, and some LGUs now prioritize human resource development in their budgets.

(iii) Some LGUs streamlined their procedures for the issuance of tax and business licenses, which was appreciated by taxpayers and businesspeople.

(iv) Some LGU staff who participated in the Public Relations course established women’s organizations and partnerships with nongovernmental organizations within their LGUs.

(v) LGU staff who participated in the Urban Planning and Management course said it helped improve supervision of the development of an urban development plan in the LGU.

(vi) LGU staff who attended the Contract Bidding, Evaluation, and Award course initiated the reorganization of their respective LGUs’ bids and award committees.

(vii) The Project Development and Management course helped LGU staff develop project proposals.

(viii) Following the Solid Waste Management course, some LGUs improved their garbage collection or introduced garbage segregation systems.

(ix) Some LGUs conducted a traffic volume survey or introduced a rerouting strategy after the Transport and Traffic Management course.

(x) The Water Supply Management course was particularly helpful for Castillejos and San Marcelino Water Districts, whose operations started with the construction of the project facilities.

(xi) The MS Excel and Auto Cad course helped LGU staff speed up their daily works and improve their recording.

Appendix 10 47

3. More importantly, the LGUs’ revenue collection improved. Their collection of two major sources of local revenue—real property tax, and business licenses and taxes—increased, as shown in Table A10.1. From 2001 to 2003, all LGUs increased their revenue for these items, except for Morong, where business taxes and licenses revenue declined. Further, these local taxes as a percentage of total revenue increased in four of the six participating LGUs over the same period. The Internal Revenue Allotment (IRA) continues to be the major source of revenue for the LGUs.

4. Despite the positive project impacts following implementation of Part B, the capacity of small municipalities (except for Olongapo City) to provide adequate public services and promote economic development in their municipalities still is weak. The size of the staff is limited in every office. Many offices are staffed with only a few professional staff and equipped with minimal office equipment, including telephones, fax machines, and computers. As a result, the quality and coverage of public services are limited. The weak financial condition of the LGUs, which rely heavily on IRA, is the main constraint to increasing the size of the staff. Since the Government lacks the capacity to increase IRA to the LGUs in the near future, strengthening the LGUs’ collection of local revenues is essential.

5. Further, while many participants supported further human resource development, opportunities for LGU staff to participate in training are very limited. DILG’s Local Government Academy, which has the capacity to train mayors, cannot provide training for lower level staff. The Government’s capacity to provide training for LGU staff should be strengthened.

48 Appendix 10

Source: The local government units.

2001 2002

Actual Actual Actual Change from '01

SubicTotal Revenue 47,248,206 66,141,074 71,848,303 +52.1%

Real Property Taxes 1,087,117 1,815,907 1,488,883 +37.0%Business Taxes & Licences 2,714,814 4,892,609 7,695,038 +183.4%

Subtotal of Above 2 Local Revenues 3,801,931 6,708,516 9,183,921 +141.6%Share of 2 Local Revenues in Total Revenue 8.0% 10.1% 12.8% +4.7%

CastillejosTotal Revenue 23,511,534 32,250,311 36,735,860 +56.2%

Real Property Taxes 295,209 330,092 744,810 +152.3%Business Taxes & Licences 1,213,457 1,745,278 1,952,141 +60.9%

Subtotal of Above 2 Local Revenues 1,508,666 2,075,370 2,696,951 +78.8%Share of 2 Local Revenues in Total Revenue 6.4% 6.4% 7.3% +0.9%

San MarcelinoTotal Revenue 26,212,975 43,130,200 45,144,630 +72.2%

Real Property Taxes 330,869 327,642 1,408,239 +325.6%Business Taxes & Licences 810,932 935,609 981,521 +21.0%

Subtotal of Above 2 Local Revenues 1,141,801 1,263,251 2,389,760 +109.3%Share of 2 Local Revenues in Total Revenue 4.4% 2.9% 5.3% +0.9%

DinalupihanTotal Revenue 38,823,009 72,652,062 73,948,309 +90.5%

Real Property Taxes 1,330,254 1,715,611 2,206,644 +65.9%Business Taxes & Licences 2,185,503 2,373,725 4,008,394 +83.4%

Subtotal of Above 2 Local Revenues 3,515,757 4,089,336 6,215,038 +76.8%Share of 2 Local Revenues in Total Revenue 9.1% 5.6% 8.4% -0.7%

HermosaTotal Revenue 34,432,389 49,914,722 51,107,024 +48.4%

Real Property Taxes 6,803,938 8,552,464 11,396,000 +67.5%Business Taxes & Licences 1,255,851 1,786,281 1,859,465 +48.1%

Subtotal of Above 2 Local Revenues 8,059,789 10,338,745 13,255,465 +64.5%Share of 2 Local Revenues in Total Revenue 23.4% 20.7% 25.9% +2.5%

MorongTotal Revenue 24,668,881 33,831,313 36,172,718 +46.6%

Real Property Taxes 1,990,247 2,171,996 2,690,749 +35.2%Business Taxes & Licences 350,632 336,293 265,551 -24.3%

Subtotal of Above 2 Local Revenues 2,340,879 2,508,289 2,956,300 +26.3%Share of 2 Local Revenues in Total Revenue 9.5% 7.4% 8.2% -1.3%

2003

Table A10: Analysis on the LGU'S Revenue(Peso)