Project Completion Report

PCR: PHI 32485

Local Government Unit Private Infrastructure Project Development Facility (Loan 1729-PHI) in the Philippines June 2005

CURRENCY EQUIVALENTS

Currency Unit – peso/s (P)

At Appraisal At Project Completion 8 November 1999 14 September 2004

P1.00 = $0.0250 $0.0178 $1.00 = P40.024 P56.200

ABBREVIATIONS ADB – Asian Development Bank BOO – build-own-operate BOT – build-operate-transfer CCPSP – Coordinating Council for Private Sector Participation CRS – credit rating system DILG – Department of Interior and Local Government DMC – developing member country DOF – Department of Finance EA – Executing Agency GFI – government financial institution JBIC – Japan Bank for International Cooperation LBP – Land Bank of the Philippines LGFSD – Local Government Financial Services Department LGU – local government unit ODA – official development assistance PCR – project completion report PDF – project development facility PPA – Philippine Port Authority PSP – private sector participation PUD – Public Utilities Department TA – technical assistance TASF – Technical Assistance Special Fund TCR – technical assistance completion report

NOTES

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

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CONTENTS

Page

BASIC DATA iii

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 4 C. Project Cost 5 D. Disbursements 5 E. Project Schedule 6 F. Implementation Arrangements 8 G. Conditions and Covenants 8 H. Consultant Recruitment and Procurement 9 I. Performance of Consultants, Contractors, and Suppliers 9 J. Performance of the Borrower and Executing Agency 10 K. Performance of the Asian Development Bank 10

III. Evaluation of Performance 11 A. Relevance 11 B. Efficacy in Achievement of Purpose 11 C. Efficiency in Achievement of Outputs and Purpose 11 D. Preliminary Assessment of Sustainability 12 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 18 3. Estimated and Actual Project Costs 22 4. Chronology of Events 23 5. Organization Chart during Project Implementation 25 6. Status of Compliance with Loan Covenants 28

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BASIC DATA A. Loan Identification

1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Amount of Grant 8. Project Completion Report Number

Philippines 1729 Local Government Unit (LGU) Private Infrastructure Project Development Facility Land Bank of the Philippines Land Bank of the Philippines Y314,745,000 ($3 million equivalent) $600,000 PCR: PHI 898

B. Loan Data

1. Appraisal – Date Started – Date Completed

2. Loan Negotiations

– Date Started – Date Completed

3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness

– In Loan Agreement – Actual – Number of Extensions

6. Closing Date

– In Loan Agreement – Actual – Number of Extensions

7. Terms of Loan

– Interest Rate – Maturity (number of years) – Grace Period (number of years)

8. Terms of Relending

– Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

13 October 1998 11 December 1998 12 November 1999 12 November 1999 20 December 1999 7 March 2000 5 June 2000 5 June 2000 None 6 June 2004 14 September 2004 none Floating interest rate, based on the Asian Development Bank's market-based loan facility for Japanese yen 15 years 3 years Variable interest rate based on prevailing commercial rate maximum 5 years 1 year Local government units with commercially viable project

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9. Disbursements

a. Dates Initial Disbursement

30 October 2002

Final Disbursement 14 September 2004

Time Interval 22.5 months

Effective Date 5 June 2000

Original Closing Date 6 June 2004

Time Interval 48 months

b. Amount ($ million) Category or Subloan

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Net Amount

Available

Amount

Disbursed

Undisbursed

Balance Consulting Services

3 3 2.016 0.328 0.328 0

Total 3 3 2.016 0.328 0.328 0

Note: Y 314,745,000 ($3.0 million equivalent) at the time of loan appraisal. The difference between the $3.0 million and the total of $2.016 cancellation and $0.328 amount disbursed is due to exchange rate difference during the implementation.

Category or Subloan (Application No.)

Amount Disbursed

Value Date

Consulting Services: Application No. TA-001 79,117 30 October 2002 Application No. TA-002 118,830 24 April 2003 Application No. TA-003 26,834 7 May 2004 Application No. TA-004 36,473 28 June 2004 Application No. TA-005 40,552 2 September 2004 Application No. TA-006 26,501 14 September 2004 Total 328,307

C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual

FX LC Total FX LC Total A. Project Development Facility

1.845 1.945 3.790 0.328 0.055 0.383

B. Capacity Building in LGU Financing

0.548 0.177 0.725 0.566 0.129 0.695

Total 2.393 2.122 4.515 0.894 0.184 1.078 FX = foreign exchange, LC = local currency, LGU = local government unit.

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2. Financing Plan ($ million) Cost Appraisal Estimate Actual

FX LC Total FX LC Total A. Project Development Facility

1. ADB 1.845 1.155 3.000 0.328 0.000 0.328 2. LBP/LGU/BOT 0.000 0.790 0.790 0.000 0.055 0.055

Subtotal 1.845 1.945 3.790 0.328 0.055 0.383 B. Capacity Building in LGU Financing

1. ADB 0.548 0.052 0.600 0.566 0.004 0.570 2. LBP 0.000 0.125 0.125 0.000 0.125 0.125

Subtotal 0.548 0.177 0.725 0.566 0.129 0.695 Total 2.393 2.122 4.515 0.894 0.184 1.078 ADB = Asian Development Bank, BOT = build-operate-transfer, FX = foreign exchange, LBP = Land Bank of the Philippines, LC = local currency, LGU =local government unit.

3. Project Performance Report Ratings

Ratings

Implementation Period Development Objectives

Implementation Progress

From 1 Jan to 31 Dec 2000 Satisfactory Satisfactory From 1 Jan to 31 Aug 2001 Satisfactory Satisfactory From 1 Sep to 31 Oct 2001 Satisfactory Partly Satisfactory From 1 Nov to 31 Dec 2001 Satisfactory Satisfactory From 1 Jan to 28 Feb 2002 Satisfactory Satisfactory From 1 Mar to 31 Mar 2002 Partly Satisfactory Satisfactory From 1 Apr to 31 May 2002 Partly Satisfactory Partly Satisfactory From 1 Jun to 31 Dec 2002 Satisfactory Partly Satisfactory From 1 Jan to 31 Dec 2003 Satisfactory Partly Satisfactory From 1 Jan to 28 Feb 2004 Satisfactory Partly Satisfactory From 1 Mar to 31 Mar 2004 Satisfactory Satisfactory From 1 Apr to 14 Sep 2004 Partly Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission Inclusive Dates No. of Persons

No. of Person-

Days Specialization of Members

Reconnaissance 04–24 Mar 1997 4 a Investment officer Mission Senior financial analyst Programs officer Financial analyst

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Name of Mission Inclusive Dates No. of Persons

No. of Person-

Days Specialization of Members

Follow-Up Mission 1

13 Oct–11 Dec 1998

4 a Private sector specialist Programs officer Economist Financial analyst

Follow up Mission 2

24 May–30 Aug 1999

3 a Private sector specialist Counsel Financial analyst

Loan Review Mission 1

24–30 Apr 2002 1 7 Governance specialist

Loan Review Mission 2

13 May 2002 3 3 Senior financial management specialist

Operations officer Economics officer Loan Review Mission 3

25–26 Jun 2002 2 4 Governance specialist

Operations officer Loan Review Mission 4

1–5 Sep 2003 1 5 Governance specialist

Loan Review Mission 5

21 Jul–9 Aug 2004

2 9 Senior financial management specialist

Operations officer Project Completion Review b

16 Nov–10 Dec 2004

2 20 Senior financial management specialist

Operations officer a The actual number of days for the mission cannot be computed because the mission was carried out intermittently

and the corresponding mission authorization requests, if any, can no longer be traced. b The project completion report was prepared by Emma Yang, senior financial management specialist, and Hermie

Bustamante, operations officer.

I. PROJECT DESCRIPTION

1. In December 1999, the Asian Development Bank (ADB) approved a technical assistance (TA) loan of $3.0 million equivalent and a TA grant of $0.60 million to the Land Bank of the Philippines (LBP). The Project comprised two components: (i) Part A – Project Development Facility (PDF), and (ii) Part B – Capacity Building in Local Government Unit (LGU) Financing. Under Part A, a revolving credit facility was to be established in LBP to finance consulting assistance to help LGUs solicit private sector participation in local infrastructure for project preparation. The consultants were to provide services comprised Phase 1 of project feasibility preparation and Phase 2 of bidding, evaluation, negotiations with, and contract awarding to private sector participants in revenue-generating infrastructure projects. As for Part B, LBP’s in-house capabilities were to be strengthened to finance LGU infrastructure projects with private sector involvement through (i) improvement of the credit rating system by incorporating governance criteria, (ii) training in private sector modalities, (iii) development of new credit products and enhancements to catalyze private finance, and (iv) preparation for a possible future ADB credit line. The project was classified to have economic growth as primary objective, and environmentally it is considered a Category C project. 2. The rationale for establishing the project development facility was based on the government plan to devolve responsibility for providing basic infrastructure services to the LGUs. With passage of Republic Act 7160, otherwise known as the Local Government Code of 1991, the primary responsibility for providing basic infrastructure services was devolved to LGUs. But traditional sources of LGU financing (e.g., official development assistance, internal revenue allotments, and local taxes) have been insufficient to meet their infrastructure needs. Thus the Government seeks to supplement these financing sources by helping credit-worthy LGUs with viable infrastructure projects to tap private sector financial sources. This could be through straight borrowing or any of the Government’s private sector participation schemes, including build-operate-transfer (BOT) or build-own-operate (BOO). 3. The project’s overall goal was to support decentralization process and regional economic development through increasing private sector funding of infrastructure projects at the LGU level. Specifically the TA aimed at promoting good governance and enhancing LGU capacity to prepare and bid infrastructure projects for private sector participation. The project comprised (i) project development facility (PDF), a revolving credit facility enhancing LGU capacity to prepare and tender suitable infrastructure projects for private sector participation, and (ii) capacity building assistance to enhance the capacity of government financial institutions (GFIs) to evaluate LGU project proposals for financing. Appendix 1 gives the project framework.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The project design was relevant in terms of consistency with the country’s development objectives and ADB’s Philippine country program and strategy. To encourage regional development and decentralization, the Government passed the LGU Code of 1991, which empowered LGUs to finance and manage their infrastructure projects. This created a significant demand for financial resources that could not be sufficiently covered by traditionally available public sector sources. To supplement the traditional sources, the Government passed Republic Act 6957 (amended by Republic Act 7718), otherwise known as the BOT Law, which allows the private sector to finance, operate, and maintain infrastructure projects of creditworthy LGUs.

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5. Private sector participation in LGU infrastructure has been constrained by the lack of LGU (i) capacity to prepare and tender projects for private sector participation; (ii) creditworthiness, mainly because of poor public sector governance structures and limited financing sources; and (iii) accessibility to long-term funds, because of shortcomings in the country’s capital market. Thus, the Government has worked toward a financing framework to optimize and supplement the financing available to LGUs for infrastructure projects by tapping private sector sources. 6. The PDF, established under Part A, supported the Government’s financing framework. It was the initial component of a larger national PDF initiative to provide project preparatory assistance to all government implementing agencies, at both national and local levels. The Government had planned to expand the PDF and get financial support from other donors. 7. The project design was in line with ADB’s Philippine country strategy and program, which aimed to (i) broaden LGU institutional and financial capabilities to undertake development programs and projects, and encourage private sector participation; (ii) support human resource development and investment in basic needs; (iii) help improve the efficiency and performance of LGU infrastructure delivery; and (iv) improve self reliance and lessen LGU financial dependence on the Government. 8. The Project was not properly implemented as envisaged during conceptualization. Few LGUs identified during project preparation and implementation were properly assessed of their understanding of the PDF and BOT schemes. Most LGUs were keen to finance feasibility studies for their respective projects through grants, not loans. Thus, only 2 of the 30 identified LGUs (17 during project processing and 13 during implementation) took advantage of the PDF. Unfortunately, the first subproject was partially implemented, then subsequently canceled, because of institutional differences among participating LGUs. But implementation of the second subproject is underway, and completion is expected in the first half of 2005. But because of the decision to close the loan account in 2004, financing for this subproject was limited to Phase 1. Phase 2 is now financed by the LGU from a separate LBP loan. During implementation, six main weaknesses in project design and formulation were identified:

(i) Limited facility coverage. Demand for credit to finance infrastructure was high, and LGUs were increasingly willing to borrow and assume responsibility for repayment of the loans. But most LGUs were not enthusiastic about the facility offered under the Project because (a) the PDF supported only the preparation of feasibility studies and bidding processes, but not the ensuing projects; and (b) the facility was limited only to revenue-generating projects that were deemed suitable for private sector participation. If the PDF were broadened to allow LGUs to obtain loans and undertake the infrastructure projects themselves, the take-up would probably have been far higher. But the BOT Center maintained that extending the facility would detract from the unique purpose of the BOT Law to promote private sector participation (PSP). This conceptual conflict between the target beneficiary and BOT Center was not anticipated when the Project began.

(ii) Non-familiarity with the build-operate-transfer modality. LGUs were still

unfamiliar with the BOT concept promoted through the PDF, and were reluctant to enter into such contracts, given the poor track record and high-profile failures at the national level. To overcome this resistance, the Project had intended as a matter of strategy to use the first one or two sub-loans as demonstration cases to

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encourage further LGU participation. Thus, the Project would have fulfilled two purposes: to provide financing for the preparatory works, and to support policy reform to encourage partnerships of the public and private sectors. But because of delay in project implementation and the closing of the loan account in September 2004, without extension, the implementation of one of the two approved purposes was not fully completed in time to serve as a demonstration case.

(iii) Insufficient marketing efforts. The agencies involved in the Project––LBP and

the Coordinating Council for Private Sector Participation (CCPSP), which was later renamed the BOT Center by Executive Order 144––have promoted PDF through different approaches. The BOT Center tended to be more proactive in producing marketing materials and conducting orientation seminars for local government officials. But it was constrained by its limited staff and offices that were only in Manila. In contrast, LBP had a far broader reach through its regional lending centers, which were the first ports-of-call for local governments seeking financial assistance. Although the LBP headquarters had trained its staff at regional lending centers, the level of interest and understanding at the regional level remained too low to enable effective marketing of the PDF to LGUs.

(iv) Availability of other and cheaper financing assistance. LGUs were reluctant

to borrow for feasibility study, but wanted only to finance largely from grants or their own resources. The PDF even faced competition from other ADB projects (e.g., the Mindanao Basic Urban Services Sector), which provided grants for the feasibility study. PDF was offered at the prevailing commercial rates––the fixed rate at 11%––while LGUs could tap cheaper sources. LGUs generally failed to appreciate the distinction between fixed and variable rates, and simply opted for the cheaper funds. The LGUs also argued that since ADB provided the funds, the funds should be lent at concessional rates. Although LBP had expressed willingness to lower the PDF rate to make it competitive, it was only willing to give a variable, not a fixed, rate.

(v) Unacceptable processes for consultant selection. The consultants were

selected by LBP in accordance with the ADB Guidelines, and the team of consultants included international experts. A fundamental reason to provide international consultancy assistance to the Borrower was to protect LGUs from unsolicited private bids, low-quality feasibility studies, and nonqualified contractors. But LGUs still questioned the consultant’s selection processes, and the relatively high costs of international consultants just for feasibility studies. Discussions with potential recipients indicated that LGUs would have liked more participation in selection, and would have preferred cheaper local consultants with comparable qualifications.

(vi) High market risk. The loan required the LGUs to assume full cost of the

feasibility study in case there was no successful bidder for the projects. Once the project was successfully awarded, the LGU could pass the cost of the feasibility study to the winning bidder. Few LGUs would take on an expensive feasibility study in which successful bidding process was not guaranteed.

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9. Capacity building for the LBP under Part B was considered essential for project implementation. The PDF program was new to both LBP and the LGUs. Thus, it was necessary that LBP familiarize with the PDF concept so it could more effectively market PDF to the LGUs. B. Project Outputs

1. Part A. Project Development Facility 10. At loan approval in December 1999, 17 potential projects were in the pipeline; another 13 subprojects had been identified during implementation. The loan was anticipated to finance as many as 10 subprojects. But only two subprojects have been approved: the Davao del Norte Integrated Water Resource Development Project, and the Modernization of Olongapo City’s Public Utilities Department (PUD). The PDF funded only Phase 1 of both subprojects; their status is discussed in the following paragraphs. Appendix 2 compares project outputs at appraisal and completion, including a list of subprojects that did not materialize.

(i) Davao del Norte Integrated Water Resource Development Subproject. The consultant’s feasibility study was submitted to key officials of the six LGUs and the Davao provincial government for review and deliberation. But some stakeholders did not accept the feasibility study and recommendations. Concerned officials from two of the six water districts (Tagum and Panabo) rejected the institutional recommendation to discontinue the existing six water districts and combine them in a single provincial water district. Because of this, Davao del Norte and the six participating LGUs jointly agreed to pre-terminate their agreement with the consultants for implementation of Phase 2 of the subproject. Due to the termination of the feasibility study, the four water districts that accepted the consultant’s recommendation had turned to local water utilities administrations for financing support and received loans from their local water utilities administrations to rehabilitate their water distribution facilities.

(ii) Modenization of Olongapo City’s PUD Subproject. Olongapo City accepted

the consultant’s report, including the recommendation for the employees’ separation program for those employees affected by the PUD modernization, and those who want to voluntarily leave their government positions. To make the program effective, a premium over the legal separation pay will be offered to departing employees, based on their number of government service years. Departing employees will also be paid the monetary value for their leave credits. The separation program will become effective when the distribution system is turned over to the winning bidder. The city government will absorb employees that the private operator does not employ. In consultation with LBP, the consultants’ services under Phase 2 of the project will no longer be financed under the ADB loan. Instead, those services will be financed by the LBP-approved loan to Olongapo. Implementation of Phase 2 will be completed in the first half of 2005.

2. Part B. Capacity Building in Financing of Local Government Units

11. Capacity building was supported by TA 3349-PHI: Capacity Building in Local Government Unit Financing. The consultant’s final report was rated satisfactory, and the overall

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rating of the TA was also successful since TCR focused on the delivery of outputs.1 It summarized the work undertaken and the main finding, and proposed an innovative way to catalyze LGU financing through a multifaceted, market-oriented approach. Recommendations for improving LGU loan processing and administration were accepted, and LBP appreciated the regional training provided. LBP considered the credit rating system developed under the TA an excellent tool. A seminar on LGU financing and credit rating was well-attended by both the public and private banking community, and was a key mechanism for promoting the TA findings. Capacity building and training were accomplished through three 2-day regional seminars. However by reviewing the TA outcomes at the time of completion of the loan, there are concerns on the sustainability of the impacts of the TA. C. Project Cost

12. At appraisal, the project cost was estimated at $4.515 million, but the actual project cost was only $1.078 million (Table 1).

Table 1: Project Cost

Appraisal Estimate

Actual Cost

Source FX LC Total FX LC Total Part A: Project Development Facility

1.845 1.945 3.790 0.328 0.055 0.383

Part B: LBP Capacity Building 0.548 0.177 0.725 0.566 0.129 0.695 Total 2.393 2.122 4.515 0.894 0.184 1.078 FX = foreign exchange, LBP = Land Bank of the Philippines, LC = local currency. Source: Report and Recommendation of the President to the Board of Directors on a Proposed Technical Assistance Loan and Grant to the Philippines and the Land Bank of the Philippines for the LGU Private Infrastructure Project Development Facility. 13. Of the total estimated project costs of $4.515 million for Parts A and B, ADB was to provide $3.0 million equivalent as a TA loan for Part A and $0.6 million as a TA grant for Part B. LBP was to provide $0.335 million; the BOT Center, $0.250; million; and LGUs, $0.330 million. 14. Under Part A, the actual loan utilization was significantly lower than the appraisal cost estimate. The significant disparity in cost is attributed to the lesser number of approved subprojects. Only two out of the ten expected subprojects materialized, and ADB financing for both subprojects was limited to phase 1 only. On the other hand, the activities of Part B were implemented according to its schedule. The actual costs are within the estimated costs projected during appraisal. A comparison of detailed cost estimates at appraisal and actual expenditures are shown in Appendix 3.

D. Disbursements

15. The arrangement for disbursement of loan proceeds is appropriate. Consultants are paid directly, based on approved billings. Such disbursements are booked to the relevant LGUs as subloan disbursement under LBP’s PDF credit facility. No extension of loan closing date was made in view of ADB’s decision to close the loan account on or before the Project’s original loan

1 TCR was circulated to the Board on 25 July 2002. Document No. IN.176-02.

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closing date of 6 June 2004, due to slow project implementation and the anticipation that there would be no additional subprojects to be approved or implemented under the Project. LBP was advised, and concurred with ADB’s decision. LBP was given a 3-month grace period to complete the payment for the consultant’s remaining claims for the Olongapo City subproject. The TA loan account was closed on 14 September 2004, with a total disbursement of $0.328 million and cancelation of an unutilized loan amount of $2.518 million. E. Project Schedule

16. The Loan Agreement stipulated that both TA components were expected to commence in the first quarter of 2000. The TA loan for Part A was expected to be committed over 3 years with disbursement continuing as long as 12 months. Thereafter LBP’s PDF would continue operating, financed by reflows of funds. Part B would be implemented over 18 months. Appendix 4 chronologically lists major project milestones. 17. The loan was anticipated to finance as many as 10 subprojects over 4.5 years, ending in June 2004. But the Project has experienced significant delays in implementation due to difficulties encountered by LBP and the BOT Center in getting the LGUs’ confirmation to avail of the TA loan facility. The latter in turn is due to the LGUs’ (i) lack of appreciation of the BOT/PSP policies; (ii) reluctance to access loans for pre-investment studies, especially with the availability of grants for such studies from other financing facilities; and (iii) reluctance to pursue infrastructure projects whose implementation usually goes beyond the 3-year terms of local executives. 18. Thus, the feasibility study for the first subloan to Davao del Norte was approved only in June 2002, and was completed in January 2003. Phase 2 of the consultancy assistance related to the preparation of tender documents. Evaluation and awarding were subsequently canceled because the LGUs involved in the subproject failed to agree on the amalgamation of the water districts under them. The second subloan agreement was signed by LBP and Olongapo City on 27 January 2004 for the rehabilitation and upgrading of the city’s system of electrical power distribution. The feasibility study was completed and accepted by the City of Olongapo. The bidding process began in December 2004 and is expected to be completed during the first half of 2005. 19. Under Part B, the target was to have at least five LGUs subprojects appraised for possible financing by LBP, and recommendations for terms and conditions for a possible ADB credit line to LBP to finance implementation of such subprojects. The key objectives of the credit line were to (i) pioneer project financing approaches for LGU infrastructure, (ii) provide private sector developers and project proponents with long-term peso-denominated debt, (iii) serve as a catalyst for mobilizing commercial debt and equity, (iv) help develop more mature capital markets through several successful project financing operations, and (v) create a credible bridge to future use of municipal bonds and similar instruments for LGU infrastructure development. 20. Compared with the targeted five subprojects for possible ADB credit lines to LBP for financing, no subprojects were actually financed by LBP to a private developer under this program. The reasons behind it can be attributed to the following two main constraints:

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1. Organizational constraints. These were: a. Actual implementation was constrained by the fact that some LGUs

lacked the capacity to identify and submit subprojects. Such LGUs require effort and time to develop subproject proposals.

b. The TA component was a misnomer. Some LGUs initially expressed interest in Private Infrastructure Project Development Facility, thinking that it was a direct financial grant rather than a loan.

c. The onlending interest rate to LGUs on the PDF was higher than the internal LBP interest rate to LGUs to finance their projects.

d. The LGUs’ perceived that official development assistance (ODA) loans entail long and tedious processing procedures and requirements. Some LGUs stated that the targeted completion time of a project would never be accomplished if financing were from ODA loans.

e. Project implementation normally goes beyond the 3-year term of the local executives. Thus, previous marketing efforts were useless if newly elected executives did not support the Project. Re-marketing to create awareness of the PDF was necessary.

f. LGUs were not keen on accepting international consultants imposed on them. LGUs wanted a free hand in choosing consultants because they bear the burden of paying the loans.

g. Prudent private investors would not just bid on an LGU project, putting full trust on a feasibility study done by a third party unknown to them.

h. The consultant for the capacity building component recommended adoption of a revised computerized credit rating system (CRS) for LGUs. But CRS was found limiting because the proposed system classifies LGUs in only two categories: good and bad. In the present LBP system, LGUs are classified as prime, high-grade, medium-grade, and poor. Furthermore, the LBPs’ raw data on LGUs were not in a form that can be readily used by the system. Hence, there was a need for conversion. The data needed relies heavily on a number of updated inputs to be provided by the LBP field units, the LGUs, Department of Finance (DOF), Commission on Audit, Department of National Defense, and the National Economic and Development Authority. Without updated data from those agencies, the system will be ineffective. With consistency of the present CRS to existing LBP credit policies, LBP found no urgency to adopt the recommended revised CRS. However, with limitations, the present LBP CRSs for LGUs have been sufficient to address ADB’s current requirements.

i. The credit line proposal was considered innovative but LBP could not immediately implement it because: (i) there was no champion in DOF to implement it, due to changes in the Government; (ii) it was too early to implement the proposal because no project had yet been prepared under the PDF; (iii) economic conditions were not conducive to its implementation; (iv) the proposal was, in some ways, too innovative; and (v) LGUs had a negative perception of BOT projects.

2. Implementation constraints. These were: a. The onlending interest rate to LGUs on the PDF was higher than the

internal LBP interest rate to LGUs to finance their projects. b. Most LGUs sought only infrastructure financing. Local executives

sometimes had difficulty justifying million-peso loans to their constituents

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just to finance the feasibility studies, especially with no assurance that private investors would participate in the BOT.

c. Project implementation normally goes beyond the 3-year terms of local executives. Thus, previous marketing efforts were useless if newly elected executives did not support the Project. Re-marketing to create awareness of the PDF was necessary.

d. LGUs were not keen on accepting international consultants selected by LBP and imposed on them. LGUs wanted a free hand in choosing consultants because they bear the burden of paying the loans.

e. Prudent private investors would not just bid on an LGU project, putting full trust on a feasibility study done by a third party unknown to them.

f. LBP considered the enhanced CRS an excellent tool, but did not adopt it, mainly because it was inconsistent with ADB’s new priorities, caused by reorganization and corresponding changes in management. LBP found it unnecessary to follow the consultant’s recommendation, considering that its portfolio with LGUs had done well and its lending centers’ personnel were immersed with the LGUs. LBP felt that no enhanced CRS could perform better than the frequent and physical interactions of ADB and the LGU executives and staff.

g. The credit line proposal was considered innovative but LBP could not immediately implement it because: (i) there was no champion in DOF to implement it, due to changes in the Government; (ii) it was too early to implement the proposal because no project had yet been prepared under the PDF; (iii) economic conditions were not conducive to its implementation; (iv) the proposal was, in some ways, too innovative; and (v) LGUs had a negative perception of BOT projects.

F. Implementation Arrangements

21. The project implementation arrangements remained essentially as envisaged during appraisal. For Part A, LBP, under its Local Government Financial Services Department (LGFSD), established a PDF desk to be responsible for PDF relending operations, including coordination with LGUs through LBPs’ regional centers and close coordination with the BOT Center. But LBP reorganization, which resulted in transfer of original project officers and personnel, greatly hampered PDF implementation. LGFSD was dissolved and its personnel handling the PDF were transferred to other LBP branches or units. The LGUs’ loan-related files were transferred to the area lending centers. The BOT Center, under its LGU and Project Preparation Division, provided technical support for LBPs’ PDF operations. LGUs established a project unit and assigned counterpart staff and facilities for project implementation. Appendix 6 gives the organization chart for project implementation. 22. The consulting firm engaged under Part B, provided 28.6 person-months of consultancy assistance, comprising 15.6 person-months for foreign and 13.0 person-months for domestic consultants. The contract period was appropriate for the consultants to carry out their terms of reference, which were designed to provide support for the accompanying TA loan. G. Conditions and Covenants

23. The Executing Agency’s (EA) compliance with the loan covenants was partly satisfactory. LBP could not effectively market the PDF because (i) LBP officers originally involved in the Project were transferred to other branches or units; and (ii) concerned officers in

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some LBP branches were not aware of the PDF to be offered to LGUs. LBP also failed to submit the quarterly progress report within the time specified in the Loan Agreement. Appendix 7 gives detailed compliance of the EAs with the loan covenants. H. Consultant Recruitment and Procurement

24. Under Part A, an estimated 55 person-months of international and 220 person-months of domestic consulting services would be required over the 3-year implementation period. An international consulting firm would undertake the first year’s PDF activities, and consultants might be engaged for the duration of project implementation. 25. In February 2001, LBP engaged an international consulting firm to help the LGU undertake the feasibility study of the identified subproject and all phases of tendering, negotiation, and awarding of contracts. The consultancy agreement covers about 18 person-months of international and 70 person-months of domestic consulting services. The consultants were recruited in accordance with ADB’s Guidelines on the Use of Consultants. 26. The total contract period for the consultants for the Davao del Norte project was 7 months. But the contract period was reduced to about 3 months because the stakeholders terminated the consultants’ services because they could not agree with the consultants’ recommendation to close their respective water districts and create a new provincial water district. For the Olongapo project, the consultants utilized a total of 3 calendar months for Phase 1, as envisaged in the contract agreement between LBP and the LGUs. 27. Under Part B, an international consulting firm was engaged to provide 15 person-months of services to LBP, to be supported by 15 person-months of domestic consulting services in the areas of LGU finance, banking, law, and information technology. The total actual inputs of the consultants were consistent with the appraisal estimate except for the domestic consultants, where the actual inputs were short by 2 person-months. The consultants procured computers and accessories with ADB’s approval. The consultants turned over the equipment to LBP on completion of project implementation. I. Performance of Consultants, Contractors, and Suppliers 28. The services provided by the consulting firm engaged under Part A of the project cannot easily be measured because of the event that took place during implementation of the two subprojects. In Davao del Norte, the consultants could complete only the feasibility study, but not the second phase of the project, which involved bidding and contract award. Non-implementation of the second phase is attributed to the refusal of two of the six LGUs to accept the consultants’ recommendation to consolidate the six municipal water districts into one provincial district. Because of this, the consultancy contract for Phase 2 was terminated prematurely. 29. For the second subproject, in Olongapo, the city accepted the consultants’ feasibility report, including its recommendations. But because implementation of Phase 2 of the project has slipped to 2005, subproject financing was limited only to Phase 1. 30. The contract for Part B––LBP Capacity Building in LGU Financing––was not well negotiated. The negotiations took more than a week because local representatives had no real authority to negotiate and the team leader was not involved. Thus at inception, many problems affected project implementation. The consultant team leadership and performance were not well

10

managed. There was no obvious support from a head office for review of work or support of general implementation. The consultants’ performance is rated as satisfactory, overall, but there was a problem. The affiliated consultant of the lead firm was rated marginal due to lapses in coordinating with the BOT Center and late submission of revisions for the final report, which significantly delayed submission of the final report. Overall, the consultant’s inputs were appropriate in terms of design, quality, and quantity. J. Performance of the Borrower and Executing Agency

31. LBP’s performance was considered partly satisfactory. In line with the Loan Agreement, LBP was responsible for marketing the facility, with BOT assistance. But LBP’s marketing effort was insufficient, particularly at the regional level. In fact, LBP had little incentive to market the facility independently of other products that it offers. LBP mainly relied on the list of LGUs and possible projects that the BOT Center provided. 32. Both the LBP–LGFSD and the BOT Center should have been provided sufficient and qualified staff and adequate resources to support the LBP–PDF credit facility during TA implementation. But frequent staffing changes during implementation negated the knowledge and experience gained by those earlier assigned to the Project. 33. Before loan approval, the BOT Center assured LBP and ADB that a number of worthy projects were in the pipeline. But most projects initially identified were canceled because the sponsoring LGUs had either lost interest or could secure grant assistance from other funding agencies. The 2001 election further hampered project marketing and implementation. Thus, only two subprojects were approved before the TA loan was closed. K. Performance of the Asian Development Bank

34. ADB’s overall performance is rated as partly satisfactory. ADB should have addressed deficiencies in project design and formulation immediately when they became apparent, but did not. ADB should have changed the project scope when none of the initial and subsequent subprojects materialized in 2001, and no disbursements from the loan accounts were made. 35. During early project implementation, ADB met with representatives of LBP and the consultants to discuss issues and report requirements. Five review missions were subsequently conducted. In 2001–02, ADB called tripartite monthly meetings of ADB, LBP, and the BOT Center to share information, monitor progress, and deal with current issues. The possibility of loan cancelation was discussed in country portfolio review meetings in November 2002 and April 2003. Both LBP and the BOT Center reiterated the Project’s importance, and requested more time to improve project performance, which ADB approved. ADB also approved LBP's request to extend the consultants’ services––but only until May 2004, rather than August 2004, as originally planned. Approval for contract extension was based on ADB's decision to close the loan account on or before 6 June 2004, after completing payment for consultants’ services for phase 1 of the Olongapo City subproject. Constant reminders to LBP were made relative to submission of quarterly progress reports.

11

III. EVALUATION OF PERFORMANCE

A. Relevance

36. The overall Project is rated partly relevant. The Project’s objectives and scope, as formulated at appraisal, were consistent with the Government’s framework for LGU financing and ADB’s sector strategy for public governance and urban development. But the Project suffered from a lack of EA ownership, and a lack of LGU interest. Deficiencies in project design and formulation contributed to the limited achievement of project targets. Thus, Part A is rated as partly relevant. As to the relevance of Part B, its design assumed successful implementation of Part A. As the implementation of Part A was limited to the financing of only two subprojects, in retrospect, Part B could not be most relevant. B. Efficacy in Achievement of Purpose

37. The Project aimed to support regional development and decentralization by facilitating private sector financing of infrastructure projects at the LGU level. Specific objectives were to promote good governance and enhance LGU capacity to prepare and bid infrastructure projects for private sector participation. To achieve the objectives, the Project was to (i) establish a project preparatory financing mechanism for LGU-level infrastructure projects, (ii) enhance GFI’s LGU financing capacity, and (iii) build capacity in LGU credit/governance rating. 38. The first target was achieved to a limited extent. Although a project development facility was established and consultants were engaged, LBP approved only two LGU infrastructure subprojects. 39. Most of the Part B objectives, for capacity building, were achieved. But the Project failed to productively apply what had been learned to market the product because LBP had its own funds to offer to potential borrowers, in competition with those that the Facility offered. Thus, Part B, and the overall project is less efficacious. C. Efficiency in Achievement of Outputs and Purpose

40. The Project was inefficient in achieving its targeted outputs, which were to (i) complete feasibility studies and tender of at least 10 LGU-level infrastructure projects; (ii) train at least 10 LGUs and involve them in preparing and managing private sector projects; (iii) development of LBP’s and other GFI capacity to appraise and finance projects, including expertise in credit ratings; (iv) computerize and enhance LBP’s LGU financial information and credit rating systems; (v) incorporate governance rating criteria in LBP’s credit rating system; and (vi) define the proposed credit line to finance implementation of the LGU private sector project, and appraise five projects. The target outputs for (i) and (ii) were marginally met, but LBP did not properly address or implement the others, as the TA consultant recommended. 41. Although LBP had undergone capacity building under Part B, that knowledge seemed to have been used to evaluate LGU projects for financing with its own funds––not to market the Project. No LGUs visited at project closing were aware of the PDF. Interviews revealed that no one from LBP approached and promoted the Facility to them. Furthermore, LBPs believed that, even if they had been aware of PDF, they still would not have used it because grant funds were available to finance the feasibility study. Nor were the LGUs convinced of the privatization concept. Most still perceived that local government––not the private sector––should undertake public infrastructure projects.

12

D. Preliminary Assessment of Sustainability

42. Based on the small number of LGUs that used the loan facility, and the limited interest of other LGUs, the sustainability of the PDF, in its current form, seems unlikely. Furthermore, lending competition was not only from the other donor agencies but also from LBP, which was entrusted with project implementation. E. Environmental, Sociocultural, and Other Impacts

43. The Project, which only provides funding for the preliminary costs of conducting feasibility studies, has had no direct environmental, sociocultural, or other impacts. The two subprojects entailed no land acquisition or resettlement, or environmental issues, since ADB funded only Phase 1 of the feasibility study. 44. The two LGUs assured that the feasibility studies financed under the Project complied with ADB’s environmental and social guidelines, including the policy on involuntary resettlement.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

45. Neither Part A nor Part B of the Project was properly implemented. In Part A, the Project did not take off effectively because the LGUs’ were unwilling to borrow for feasibility studies. Competition arose from other donor agencies, and from LBP itself, in several ways. First, a number of donor agencies offered grants to finance feasibility studies. Second, LBP offered financing for feasibility studies as part of its loan processing activities. In contrast, the fund that the Project offered was a loan. Furthermore, the loan charged interest equivalent to prevailing commercial rates, which was higher than the interest that LBP charged to its customers for loans from its own funds. 46. Part B was not successful. Although the grant was fully utilized to provide LBP staff some degree of familiarity with the processing and evaluation of LGU projects with private sector participation, LBP’s subsequent marketing of the Project was not effective. ADB’s closing review of the prospective projects showed that few LGUs had been aware of the PDF. Furthermore, in lieu of promoting the use of ADB funds, LBP used its own funds to finance viable projects. Although it was implemented satisfactorily, output of Part B was not sustained and it was not relevant to the development outcomes at the LGU level. 47. Part A is rated unsuccessful, while Part B is partly successful. Overall, the Project is rated unsuccessful. B. Lessons Learned

48. The Project had valid objectives, but several essential factors were overlooked during its conceptualization stage. Project implementation yielded the following major lessons learned that should impact on design and implementation of similar loans in the future:

(i) Demand analysis of local government units. A thorough demand analysis of LGUs should have been conducted to ascertain target LGUs’ willingness to participate in the Project. To strengthen commitment, participatory approach

13

during the design of such projects is absolutely necessary. The financial capacity of the identified LGUs to enter into loan agreements of several million pesos for preparation of feasibility studies and tender documents, which might or might not transform into actual LGU infrastructure, should have been examined first.

(ii) Simpler implementation arrangements. Coordination between the LBP and the

BOT Center during project implementation left much to be desired. Although the BOT Center was quite proactive in producing marketing materials and conducting orientation seminars for local government officials, its activities had limited impact as its staff and offices are located only in Manila. In contrast, although LBP has a far broader reach through its regional lending centers, which had been provided training, the level of interest and understanding at the LBP regional level remained low. The LBP regional representatives could have enhanced their capacities to market the product to LGUs by attending the training conducted by the BOT Center.

(iii) Loan coverage and terms. The facility had limited focus in terms of activity and

project eligibility. First, the facility offered loans only to finance feasibility studies and tender documents; it gave no funding for the ensuing project. Second, financing was restricted only for private sector projects and LGUs were not fully keen nor familiar or comfortable with bidding projects out. The interest of LGUs would probably have been higher if the facility had allowed financing for LGUs to develop local government infrastructure. There were also problems with the terms of lending in terms of higher interest rate and the lack of understanding of the advantages of fixed-rate borrowing.

(iv) Mitigating political influence. The project design should have reflected a basic

understanding of the dynamics of political cycles. Local leadership changed every 3 years, and the project selection process lay in the hands of the incumbent or newly elected local executives. More often than not, newly elected officials shelved projects that the former local executives initiated, especially if the officials belonged to different parties. Mitigating measures to alleviate the effects of political changes could have been included in the project design. For example, the project design could have minimized the risk of political interference by following the established division of work among government agencies, which designates the Department of Interior and local governments to assist in LGU infrastructure development. Furthermore, measures to alleviate negative effects of political changes could have been built into the design by adjusting the project schedule to mayoral terms.

(v) Financial channels for LGUs. Local LBP branches were usually the first

agencies that the LGUs approached when seeking funds for development projects. LBP loans include the cost of a feasibility study, so LGUs prefer to use GFIs. Thus, LBP’s role as a financial conduit should be carefully reviewed to minimize conflicts of interest.

(vi) Earlier project termination. ADB could have insisted that the Project close in

late 2002, when implementation progress was low and few potential subprojects had materialized.

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C. Recommendations

49. The sector analysis and the basic rationale for the loan, as presented in the report and recommendation of the President, remain valid. The framework for local government financing, and particularly the ability of LGUs to access long-term financing for development projects, has not changed since loan preparation. But LGUs do not appreciate the facility of providing loan funds for feasibility studies on LGUs’ revenue infrastructure projects for private sector participation. Furthermore, with cancelation of Phase 2 of the two PDF-funded subprojects, no further follow up can be scheduled for the Project. 50. Based on the key lessons learned from review of the Project, the following general recommendations are made for future ADB projects:

(i) Thorough risk analysis. A risk analysis should be done during appraisal to assess risk that LGUs’ demand would not be available, analyzing the facility’s competitiveness, and other relevant factors.

(ii) Consistency in development plans for local government units. Many LGUs

do not have comprehensive development plans, and changing political considerations influence their development priorities considerably. Newly elected mayors rarely follow their predecessors’ development plans. The average time from planning to operation of infrastructure projects usually exceeded a mayor’s 3-year term. To ensure that loan funds are used efficiently and effectively, each LGU should establish a comprehensive development plan at participatory basis and linked to provincial and national development plans and integrated in the regional development plan. The LGU’s comprehensive development plan should be followed consistently, regardless of who is in charge of the administration. Furthermore, the Department of Interior and Local Government (DILG) may be used to monitor implementation of long-term projects.

(iii) Broader loan coverage. Discussions with stakeholders should continue, to

develop a concept for local government finance facilities with broader coverage that can facilitate, but not be restricted to, BOT projects. In line with that, water districts and electrical cooperatives are suggested to be considered as eligible borrowers, subject to clearances from national regulators. Furthermore, the facility could be made more attractive if it allowed LGUs to access financing for infrastructure projects, not just for feasibility studies, although feasibility study preparation should always be a loan conditionality. Last, the facility could provide an element of risk-sharing for BOT projects if the feasibility study is sound to attract private sector.

(iv) Meet the needs of local government units. The financing facility for LGUs

should not be complex. Similarly, the financing facility should support the immediate needs of LGUs. The terms and conditions, and procedural requirements, of LGU lending should be practical, without sacrificing control and other safeguard measures.

(v) Monitoring and coordination. The progress of project implementation should

be closely monitored through regular meetings and reporting. The first loan review for this project was more than 2 years after loan approval. There were neither LGU interest nor disbursements, so ADB should have been more vigilant

15

about the project implementation. There should be closer and more frequent review of the project during implementation. Continuous dialogue and communication is essential in a project with multiple stakeholders. A full-time manager should be appointed to ensure project continuity and successful operation.

PROJECT FRAMEWORK

Design Summary Performance Indicators/Targets Monitoring Mechanisms

Assumptions and Risks

Goals • Support decentralization processes

and regional economic development • Increase private sector funding of

infrastructure projects at the LGU level

• Increase private infrastructure investment and financing

at the LGU level • Improve LGU governance • Improve efficiency of infrastructure provision

• National statistics • Build-operate-

transfer (BOT) Center’s records on private sector participation

• Continued government

support for effective LGU autonomy

• Early recovery from the Asian currency crisis

• Maintenance of conducive macroeconomic environment

Objectives • Enhance LGU capacity to prepare

and tender suitable infrastructure projects for private sector participation

• Establish a project preparatory financing mechanism for

LGU-level infrastructure projects • Enhance GFIS financing capacity • Build capacity of GFISs.in LGU credit/governance rating

• Technical

Assistance (TA) progress reports, review missions

• Project Completion Report/TA Completion Report (PCR/TCR)

• Effective

implementation of the TA

• Long-term funds are available for LGU infrastructure

• LGUs build up capacity for infrastructure planning, project preparation and tendering, and negotiation with the private sector

Outputs • LGU project development facility • Capacity building for Land Bank of

the Philippines (LBP) and other GFIs, and a credit line facility

• Complete feasibility and tender of at least 10 LGU-level

infrastructure projects • Train at least 10 LGUs, and involve them in preparing

and managing a private sector project • Develop LBP’s and other GFI capacity for appraising and

providing project financing, including credit rating expertise

• Computerize and enhance LBP’s financial information and credit rating systems on LGUs

• TA review

missions and progress reports

• PCR/TCR

• LGUs utilize the facility • Costs can be

recovered

16 Appendix 1

PROJECT FRAMEWORK—Continued.

Design Summary Performance Indicators/Targets Monitoring

Mechanisms Assumptions and

Risks • Incorporate governance rating criteria into LBP’s credit

rating system • Define proposed credit line to finance LGU private sector

project implementation, and appraise five projects Activities • Project development facility • Capacity building in LGU financing

Inputs • TA loan for $3.79 million to cover 55 months of

international + 220 months of local consulting services • TA grant for $0.73 million to cover 15 months

international + 15 months domestic consulting services • Total of $4.52 million

• TA review

missions and progress reports

• PCR/TCR

• Availability and timely

recruitment of qualified consultants

• Adequate counterpart contributions by BOT Center, LGUs, and LBP

BOT= build-operate-transfer, GFI= government financial institution, LBP= Land Bank of the Philippines, LGU = local government unit, PCR= project completion report, TA= technical assistance, TCR= technical assistance completion report, Source: Report and Recommendation of the President to the Board of Directors on a Proposed Technical Assistance Loan and Grant to the Philippines and the Land Bank of the Philippines for the LGU Private Infrastructure Project Development Facility.

Appendix 1 17

18 Appendix 2

PROJECT OUTPUTS

Table A2.1: Project Outputs at Appraisal and Completion

Appraisal Project Completion

Part A: Project Development Facility

1. A revolving credit facility is established in LBP

Subloans were made for the implementation of the two subprojects, but they did not become a “revolving” credit facility.

2. Completed feasibility study and tender of at least 10 LGU-level infrastructure projects

Feasibility studies for only two subprojects completed – the Davao del Norte Integrated Water Resource Management Project and the Modernization of the Public Utilities Department of Olongapo City

3. Train at least 10 LGUs and involve them in preparing and managing private sector projects

At project closing, the two LGUs with approved subprojects had been involved only in overseeing preparation of feasibility studies for their respective projects. The PDF project had not been extended to cover training of LGUs to manage their own infrastructure projects.

Part B: Capacity Building in Financing of Local Government Units

4. Develop the capacity of LBPs and other GFIs to appraise and provide project financing, including credit rating expertise

The training and seminars on project appraisal were completed on schedule, including the study tour to the United States.

5. Computerize and enhance the financial information and credit rating systems of the LGUs of the LBP

The LGU financial information and credit rating systems, designed by the LBP consultants, were completed. But LBP did not adopt the system, preferring to continue to use its existing and well-tested system that did not require LBP staff to undergo familiarization processes.

6. Incorporate governance rating criteria in LBP’s credit rating system

Although “governance” rating criteria had been integrated into the credit rating system designed by the consultants, the new system had not been used by LBP for reasons given in item 5 (above).

7. Define proposed credit line to finance LGU private sector project implementation and appraise five projects

As in the rating system, the consultants had also formulated the terms and conditions for a subsequent credit line from ADB to LBP and GFIs to the LGUs. But because the Project had not been brought to the point of financing, the proposed credit line facility had not been established, nor used at all.

ADB = Asian Development Bank, GFI = government financial institution, LBP = Land Bank of the Philippines, LGU = local government unit

Appendix 2 19

Table A2.2: Current Status of Some of the Envisaged Subprojects Anticipated to be

Supported under the Project at the Time of Project Design

Project Province/City Status

A. Luzon

1. Modernization of the Public Utilities Department

Olongapo City

The Regional Development Council approved the project on 24 November 2004. Bidding process in December 2004 while the evaluation of technical proposals tentatively scheduled for March 2005.

2. Curimao First Port Project

Ilocos Norte

Nothing happened on the project after its submission to the BOT Center. The current administration does not want to make a loan because of its limited resources. Thus, it prefers that the feasibility study be carried out through the grant.

3. Public Market and Commercial Complex Tarlac

The project is still on hold. Because of the stallholders’ nonacceptance of the recommendations in the feasibility study conducted by ITHIEL Corporation, the city council, through the recommendation of the city’s legal officer, revoked its contract with ITHIEL Corporation for construction of the public market. Contract revocation is now being reviewed by the proper court for resolution.

4. Solid Waste Disposal

Angeles City

The LGU is not aware of inclusion of the project under the loan facility. The feasibility study for the proposed project was already completed by NEDA and DILG. The head of CPDO were of the opinion that the project might have been included in the Clark Area Municipal Development Project.

5. Bus Terminal

Baguio City

The project is still on hold. The city administration cannot eject or demolish the existing structures in the proposed project site because of legal problems, including enormous costs that the city government would incur for ejecting the current tenants and for relocation.

6. Provincial Administrative and Commercial Building

La Union The LGU is not aware of the project inclusion under the loan facility. The proposed site has yet to be titled in favor of the provincial government. Financing of the feasibility study should be through a grant and the project could be implemented through BOT with minor variations.

B. Visayas 7. Capiz Inter-Municipality Water Supply System

Capiz

The project did not push through because the LGUs concerned do not have the resources to finance the initial estimated project cost. A pre-feasibility study, financed from other sources, was completed. The LGU would now like the full feasibility study to be carried out through a grant.

8. Bacolod City Sanitary Landfill Negros The project is on hold. The current mayor does

20 Appendix 2

Project Province/City Status

Occidental

not have the city council’s full support to implement the project. The LGU was not aware of the facility, and would like for the project feasibility study to be carried out through a grant.

9. Cebu City Fast Ferry Terminal Project

Cebu City

The feasibility study was prepared through USAID. Project implementation did not push through because of changes in administration, and the abolition of the Cebu City Waterfront Commission. The LGU plans to build a ferry terminal, with private sector participation, under the build-operate-own scheme.

10. Public Market and Slaughter House

Talisay City, Cebu

Implementation of Phase 1 of the project is ongoing, using the LGU’s own resources, while the national government has already earmarked P80 million to implement Phase 2. The LGU does not want to carry out the project through a loan.

11. Babatngon Seaport Project

Leyte A pre-feasibility study conducted by the Philippine Port Authority shows that the proposed project site, Babatngon’s municipal port, is not viable for development because the water along the project site is too shallow. An alternative site with deep water has been identified. But the location is open, and unsafe in bad weather. Also, the area is inaccessible, and the rugged terrain would make construction of an access road too costly to be feasible.

C. Mindanao 12. Lake Maugham: Mt. Parker Water System

Koronadal, Sarangani, and South Cotabato

Neither the provincial nor city governments were aware of the facility. A pre-feasibility study was conducted and submitted to NEDA for consideration in 2000, but no response has been received. The proposed project is no longer included in the pipeline of the provincial government.

13. General Santos City Public Market and Commercial Complex

General Santos Ciry, South Cotobato

In lieu of the proposed project, the LGU is now undertaking construction of the integrated bus terminal and commercial complex, using its own resources. A foreign consulting firm (Quimonix) conducted the feasibility study.

14. Sta. Ana Port

Davao City

Modernization of the Sta. Ana Port is on hold because the same is currently under PPA jurisdiction. To rehabilitate the port, the Davao City government is considering three options: (i) to enter into agreement with the PPA for the city government to administer the port for 25 years, with an option for renewal; (ii) the PPA will return the port to the city government;; or (iii) the national government will be requested to issue a presidential decree putting the Sta. Ana port as part of the economic and industrial zone.

Appendix 2 21

Project Province/City Status

15. Integrated Water Resource Development Project

Davao del Norte Project implementation did not push through due to strong objections from current boards of the Tagum and Panabo water districts about the consultants’ recommendation to abolish the local water districts and create a new national water district. Considering the above, each of the four LGUs that participated in the proposed project obtained a loan from Local Water Utilities Administration for rehabilitation of their water districts.

BOT = build-operate-transfer, CPDO = City Planning Development Office, DILG = Department of Interior and Local Government, LGU = local government unit, NEDA = National Economic and Development Authority, USAID = United States Agency for International Development Source: Back-to-office report of PCR Mission for Loan 1729-PHI: LGU Private Infrastructure Project Development Facility.

22 Appendix 3

ESTIMATED AND ACTUAL PROJECT COSTS ($'000)

Appraisal Estimate Actual

Component FX LC Total FX LC Total A. Part A: Project Development Facility 1. Financed by ADB i. Consultants 1.430 0.990 2.420 0.328 0.000 0.328 ii. Computer and Office Equipment 0.060 0.000 0.060 0.000 0.000 0.000 iii. Reports and Communications 0.115 0.000 0.115 0.000 0.000 0.000 iv. Contingencies 0.240 0.165 0.405 0.000 0.000 0.000 Subtotal (1) 1.845 1.155 3.000 0.328 0.000 0.328 2. Financed by LGU/BOT/LBP i. Counterpart Staff 0.000 0.381 0.381 0.000 0.055 0.055 ii. Office Space 0.000 0.192 0.192 0.000 0.000 0.000 iii. Local Transport 0.000 0.114 0.114 0.000 0.000 0.000 iv. Contingencies 0.000 0.103 0.103 0.000 0.000 0.000 Subtotal (2) 0.000 0.790 0.790 0.000 0.055 0.055 Subtotal (A) 1.845 1.945 3.790 0.328 0.055 0.383 B. Part B: Capacity Building in LGU Financing 1. Financed by ADB i. Consultants 0.399 0.045 0.444 0.518 0.004 0.522 ii. Computer and Office Equipment 0.025 0.000 0.025 0.015 0.000 0.015 iii. Overseas Study Tour/Seminar 0.040 0.000 0.040 0.033 0.000 0.033 iv. Reports and Communications 0.010 0.000 0.010 0.000 0.000 0.000 v. Contingencies 0.074 0.007 0.081 0.000 0.000 0.000 Subtotal (1) 0.548 0.052 0.600 0.566 0.004 0.570 B. Financed by LBP i. Counterpart Staff 0.000 0.065 0.065 0.000 0.084 0.084 ii. Office Space 0.000 0.023 0.023 0.000 0.038 0.038 iii. Seminar Expenses 0.000 0.020 0.020 0.000 0.003 0.003 iv. Contingencies 0.000 0.017 0.017 0.000 0.000 0.000 Subtotal (2) 0.000 0.125 0.125 0.000 0.125 0.125 Subtotal (B) 0.548 0.177 0.725 0.566 0.129 0.695 Total 2.393 2.122 4.515 0.894 0.184 1.078 ADB = Asian Development Bank, BOT = build-operate-transfer, FX = foreign exchange, LBP = Land Bank of the Philippines, LC = local currency, LGU = local government unit, Source: Asian Development Bank estimates.

Appendix 4 23

CHRONOLOGY OF EVENTS

Dates

Events 1996 16–18 May 6 September 13 September

– Reconnaissance mission – Project brief discussion – Concept clearance and approval of small–scale PPTA

1997 4–24 March 25 June 25 July 13 August 02 September 12 September 8 October 12 December

– Follow-up reconnaissance mission – Project brief forwarded to LBP – Informal interdepartmental meeting to discuss the revised project

concept – Circulation of draft RRP for interdepartmental comments – Receipt of addendum on the consultant’s report for PPTA – Receipt of LBP’s comments on project brief – Receipt from the LGU BOT financial adviser of the list of LGU projects

that might be eligible for financing under the proposed project – ADB provided DBP with SSTA to (i) provide initial training for DBP

staff in limited recourse finance concepts, (ii) assist DBP in identifying suitable pipeline projects for financing under the proposed LGUIF, (iii) advise DBP on financing of at least two pipeline projects, and (iv) assess the regulatory framework for private sector participation in water projects at the LGU level

1998 13 October– 11 December

– Follow-up reconnaissance mission carried out intermittently

1999 22 January 20 April 24 May–30 August 14 October 25 October 3–04 November 23 November 20 December

– Request to publish the project in ADBBO – Circulation of first draft of the RRP for interdepartmental comments – Follow-up reconnaissance mission carried out intermittently – Staff review committee meeting – Submitted draft RRP for editing – Loan negotiations – Circulation of Board documents – Loan approval

2000 7 March 21 March 6 April 12 April 31 May 1 June 5 June 1 August 8 August 16 August

– Loan signing – Submission of draft legal opinion by LBP – LBP submission of short list of consultants – CSC meeting was held to review the proposed short list of

consultants and invitation documents – LBP was advised about the extension of the date of loan

effectiveness until 5 Jun 2000 – Submission of final legal opinion – Loan effectivity – Submission of the quarterly progress report for April– June 2000 – Submission of the evaluation of technical proposals and ranking of

short-listed firms – ADB conveyed its approval on the evaluation of technical proposals

24 Appendix 4

Dates

Events

7 September 12 September 7 November 11 December

and ranking of firms – Submission of draft consultancy agreement for ADB’s review – ADB forwarded its comments on the draft consultancy agreement – LBP submitted the results of contract negotiations with the first-

ranked firm – LBP was advised to finalize the contract with the first-ranked firm

2001 6 February 19 April 16 October

– Submission of consultancy agreement – Submission of the quarterly progress reports for July–September

2000, October–December 2000, and January–March 2001 – Submission of the TA agreement between the Davao del Norte

Province and CCPSP for the Integrated Water Resource Development Project

2002 28 February 24 April–13 May 25–27 June 14 August 24 September 9 December

– Submission of the quarterly progress reports for April– June 2001,

July–September 2001, and October–December 2001 – Review mission carried out intermittently – Special loan administration mission – Issuance of notice to proceed to consultants – Submission of the quarterly progress reports for January–March 2002

and April–June 2002 – Submission of the quarterly progress report for July–September 2002

2003 20 January 10 February 23 March 1–5 September

– Submission of the quarterly progress report covering October–

December 2002 – Special loan administration mission – Submission of the quarterly progress report covering January–March

2003 – Review mission

2004 26 July 21 July–9 August 14 September 16 November– 10 December

– Submission of the quarterly progress reports for January–March 2004

and April–June 2004 – Review mission carried out intermittently – Closing of loan account – PCR mission carried out intermittently

ADB = Asian Development Bank, ADBBO = Asian Development Bank Business Opportunities, BOT = build-operate-transfer, CCPSP = Coordinating Council for Private Sector Participation, CSC = Consultants Selection Committee, DBP = Development Bank of the Philippines, LBP = Land Bank of the Philippines, LGU = local government unit, LGUIF = Local Government Unit Infrastructure Facility, PCR = Project Completion Report, PPTA = project preparatory technical assistance, RRP = report and recommendation of the President, TA = technical assistance

Appendix 5 25

ORGANIZATION CHARTS DURING PROJECT IMPLEMENTATION

Figure A6.1: Land Bank of the Philippines Notes: 1. Figure A6.1 presents only the sectors and groups comprising the units of the Land Bank of the Philippines and

the specific personnel involved in the LGU Private Infrastructure Project Development Facility. 2. From 2000 to 2002, the Project Management Department was known as Local Government Financial Services

Department, and the project manager was Alvie Marantan. 3. In June 2004, Gene David replaced Elsa Lim as project manager. For the project duration, the project managers

technically had no assistants directly involved in the project implementation.

Board of Directors

President & Chief Executive Officer

Institutional Banking Sector

Agrarian & Domestic Banking Sector

Operations Sector/ Executive Sector

Corporate Services & Subsidiaries Sector

Legal Service Group

Strategic Planning Group

Internal Audit Group

Risk Management Group

Technical Management Group Trust Banking Group

Program Management Department

Assistant Vice President

Project Manager for the Asian Development Bank

26 Appendix 5

FIGURE A6.2: BOT CENTER (FORMERLY CCPSP)

Notes: 1. Figure A6.2 presents only the major groups comprising the units of the BOT Center (formerly Coordinating

Council for Private Sector Participation) and the specific personnel involved in the LGU Private Infrastructure Project Development Facility at the time of project closing review.

2. During project implementation, several major changes affected the unit directly involved in the project, including the change in unit name, personnel involved, and the transfer from the Technical Services Group (formerly the Project Development Division) to the Program Support Group. But, in all instances at least two staff, in addition to the supervisor, were assigned to the Project.

3. From 2000 to 2001, the Project Development Facility (PDF), under the Project Development Division (later renamed the Technical Services Group), handled the Project. In November 2002, the unit was moved to the Administrative & Other Service Group (which was later renamed Program Support Group) and was renamed the Marketing & Resource Mobilization Group and the CCPSP was called BOT Center. Its task included implementation of PDF projects funded by the US Agency for International Development (USAID) and the Asian Development Bank (ADB). Staff changes are shown below.

CCPSP Chairman

Executive Director PDF Steering Committee Oversight & Implementing Agencies

CCPSP Council Members

Deputy Executive Director Program Support Group

Deputy Executive Director Technical Services Group

BOT Center OIC-Director

Project Assistant Project Assistant

Project Development Officers

Marketing & Resource Mobilization Group

Appendix 5 27

1999 2000 2001 2002 2003 2004 PDF Group – CCPSP

PDF Group – CCPSP

PDF Group – CCPSP

Marketing & Resource

Mobilization Group – BOT

Center

Marketing & Resource

Mobilization Group – BOT

Center

Marketing & Resource

Mobilization Group – BOT

Center Sylvia Clemente

Head, Project Devt Div

Maria Clarissa Tuazon Director

Maria Clarissa Tuazon Director

Maria Cristina Avila

Director

Lilia Arce OIC-Deputy

Director

Eli Ricote Director

Maria Clarissa Tuazon

Head –PDF Group

Evelyn Martin Planning Officer

Evelyn Martin Planning Officer

Aida Mendoza Planning Officer

Rafael Ledesma Planning Officer

Rafael Ledesma Planning Officer

Evelyn Martin Planning Officer

Mayla Moran Planning Officer

Mayla Moran Planning Officer

Ma. Corazon Batol

Planning Officer

Hazel Flores

Planning Officer

Hazel Flores

Planning Officer Mayla Moran

Planning Officer Melquides Gaite Planning Officer

Melquides Gaite Planning Officer

Laiden Perdiña Planning Officer

Source: Land Bank of the Philippines and BOT Center.

28 Appendix 6

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference

in Loan Agreement

Status of Compliance

A. General 1. The Borrower shall perform all the obligations set forth in

Schedule 5 of the Loan Agreement. 2. The Borrower shall not make a subloan to any qualified

enterprise unless such qualified enterprise has made appropriate arrangements to obtain all funds, including adequate working capital, that are required to carry out the qualified project.

3. The Borrower shall have its account and financial

statements audited annually, in accordance with appropriate auditing standards consistently applied by independent auditors.

4. The concerned qualified enterprise shall ensure that the

bidding documentation finalized for the LGU infrastructure project shall contain an undertaking that the successful bidder for such LGU infrastructure project shall reimburse the qualified enterprise for the costs of the feasibility study.

B. Specific 5. The Borrower is responsible for carrying out the Project

and shall (i) undertake marketing and promotion of the PDF; (ii) undertake credit reviews of proposed qualified projects and qualified enterprises; (iii) process and, as applicable, approve or recommend approval of subloans; (iv) with the assistance of CCPSP and the BOT Center, select, engage, manage, administer, and arrange payment for consultants financed under the Project; and (v) supervise, manage, and administer each subloan.

The PDF Desk of the Local Government Financial

Services Department of the Borrower, in close coordination with CCPSP/BOT Center, shall be responsible for implementation of lending of subloans to qualified enterprises for qualified projects, and shall coordinate with LGUs concerned through the Borrower’s regional centers.

6. The CCPSP/BOT Center shall assist the Borrower in (i)

marketing and promoting PDF operations and activities; (ii) pre-screening proposals for eligibility as qualified projects; (iii) assisting LGUs concerned with preparation of relevant subloan applications; (iv) helping qualified enterprises in negotiation and management of consultant services under qualified projects financed by subloans; and (v) provide sufficient and appropriate qualified staff

Section 5.01, para. (b) Section 5.04 Section. 5.07 Schedule 5, para. 7 Schedule 5, para. 1 Schedule 5, para. 2(v)

Partially complied with. Status of compliance with some of the obligations is shown below. Complied with Complied with. The Borrower submitted to ADB a copy of its annual audited financial statements. Complied with. Bidding documents prepared by the consultants include this. Partly complied with. Some branches of the Borrower were not aware of the PDF to be offered to LGUs because of insufficient effort by the Borrower to market the facility, particularly at the regional level. It mainly relied on the list of LGUs and possible projects that the BOT Center provided. Partly complied with. The LBP reorganization resulted in the transfer of officers and personnel originally involved in the Project. The LGFSD was dissolved and personnel who handled the Project were transferred to different ADB units. Partly complied with. Some LGUs for projects identified during the processing and administration of the Project were not keen to avail of the PDF. Although the BOT Center was quite proactive in producing marketing materials, its activities were constrained by

Appendix 6 29

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference

in Loan Agreement

Status of Compliance

and adequate resources to support PDF during project implementation.

7. The Borrower shall ensure that the qualified enterprise will

provide counterpart support for implementation of the qualified project, including necessary logical and transport arrangements, office space and facilities, and assignment of at least one full-time qualified LGU staff.

8. The Borrower shall furnish to ADB quarterly progress

reports on project execution. 9. Promptly after the closing of the loan account, the

Borrower shall furnish to ADB a report on loan utilization and execution of the qualified projects, their costs, and the Borrower’s performance.

10. The Borrower shall enable ADB’s representatives to

inspect any qualified enterprise or project. 11. The Borrower shall maintain the following financial ratios

• A capital: adequacy ratio of no less than 10% as determined by Bangko Sentral ng Pilipinas;

• A minimum return on assets of 0.55% for FY2000, and 0.60% for FY2001; and

• A loan: deposit ratio not exceeding 100%.

Schedule 5, para. 5 Article V, Section 5.06 (b) Article V, Section 5.06 (c) Article V, Section 5.08 Article V, Sec. 5.10

inadequate resources and the location of its staff and offices only in Manila. Complied with. LGUs concerned for the two approved projects assigning a number of staff for project implementation. Complied with, but late. Most quarterly progress reports were submitted late, and covered more than one quarterly period. A total of 14 quarterly progress reports were submitted during project implementation. Complied with, but late. The Borrower submitted its own PCR in January 2005. Complied with. Staff from LBP and the BOT Center participated in some review missions. Complied with for project duration. Complied with for the project period, except in 2000. Not complied with for the entire project period.

ADB= Asian Development Bank, BOT= build-operate-transfer, CCPSP= Coordinating Council for Private Sector Participation, PCR = project completion report, PDF = Project Development Facility, Source: Report and Recommendation of the President to the Board of Directors on a Proposed Technical Assistance Loan and Grant to the Philippines and the Land Bank of the Philippines for the LGU Private Infrastructure Project Development Facility.