Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 27 190-PH

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$5 MILLION

AND A PROPOSED GRANT OF $5 MILLION

FROM THE

GOVERNMENT OF NETHERLANDS

TO THE

REPUBLIC OF THE PHILIPPINES

FOR A

LAGUNA DE BAY INSTITUTIONAL STRENGTHENING AND COMMUNITY PARTICIPATIONLISCOP

November 10,2003

Environment and Social Development Unit East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY E Q U I V A L E N T S

(Exchange Rate Effect ive November 7,2003)

Currency Unit = Philippines Peso 1 Peso = US$O.OlS US$1 = 55.27

ADB BLGF C B R M CDCF CDS COA DBM DENR DoF DSS ESSF EUFS GoP LEAP LGU L I D O LISCOP LISCOP-TRP LLDA

LOGOFIND MDFO

LLDA-B OD

MDFO-PGB MDFO-TRC O M PCF PCO PhP P M T RC RoP SDLBEP WRSS

F I S C A L YEAR January 1 -- December 31

A B B R E V I A T I O N S AND A C R O N Y M S

Asian Development Bank Bureau of Local Government Finance Community-based Resources Management Project Community Development Carbon Fund City Development Strategy Commission on Audit Department of Budget and Management Department of Environment and Natural Resources Department of Finance Decision Support System Environmental and Social Safeguards Framework Environmental User Fee System Government o f the Republic o f the Philippines Laguna Watershed Environment Action Plan Local Government Units within the Laguna de Bay Letter o f Institutional Development Objectives Laguna de Bay Institutional Strengthening and Community Participation Project Technical Review Panel o f the LISCOP Laguna Lake Development Authority LLDA’s Board of Directors Local Government Finance and Development Project Municipal Development Fund Office MDFO’s Policy Governing Board Technical Review Committee o f the MDFO Operations Manual Prototype Carbon Fund Project Coordination Office o f LLDA Philippine Peso Project Management Teams at the LGUs River Councils Republic of Philippines Sustainable Development o f Laguna de Bay Environment Project World Bank Water Resources Sector Strategy

V ice President: Country Managermirector:

Sector Managermirector: Task Team Leader/Task Manager:

Jemal ud din Kassum, EAPVP Robert V. Pulley, EACPF Mar ia Teresa Serra, EASES Patchamuthu Illangovan, EASES

FOR OFFICIAL USE ONLY

PHILIPPINES LAGUNA DE BAY INSTITUTIONAL STRENGTHENING AND COMMUNITY

PARTICIPATION/LISCOP

CONTENTS

A. Project Development Objective

1. Project development objective 2. Key performance indicators

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2. Main sector issues and Government strategy 3. Sector issues to be addressed by the project and strategic choices

C. Project Description Summary

1. Project components 2. Key policy and institutional reforms supported by the project 3. Benefits and target population 4. Institutional and implementation arrangements

D. Project Rationale

1. Project alternatives considered and reasons for rejection 2. Major related projects financed by the Bank andor other development agencies 3. Lessons learned and reflected in the project design 4. Indications o f borrower and recipient commitment and ownership 5. Value added o f Bank and Global support in this project

E. Summary Project Analysis

1. Economic 2. Financial 3. Technical 4. Institutional 5. Environmental 6. Social 7. Safeguard Policies

Page

3 3

3 4 8

9 11 11 11

14 16 17 18 18

18 19 20 21 23 24 25

This document has a restr icted d is t r ibut ion and may be used by recipients o n l y in the performance o f the i r of f ic ia l duties. I t s contents may no t b e otherwise disclosed w i thout W o r l d Bank authorization.

F. Sustainability and Risks

1. Sustainability 2. Critical risks 3. Possible controversial aspects

G. Main Loan Conditions

1. Effectiveness Condition 2. Other

H. Readiness for Implementation

I. Compliance with Bank Policies

Annexes

Annex 1: Annex 2: Annex 3: Annex 4: Annex 5: Annex 6:

Annex 7 : Annex 8: Annex 9:

Project Design Summary Detailed Project Description Estimated Project Costs Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary Financial Summary for Revenue-Earning Project Entities, or Financial Summary (A) Procurement Arrangements (B) Financial Management and Disbursement Arrangements Project Processing Schedule Documents in the Project File Statement of Loans and Credits

Annex 10: Country at a Glance Annex 11: Environmental and Social Safeguards Framework Annex 12: Letter o f Institutional Development Objectives

26 26 28

28 28

29

30

31 34 37 38 42 43 53 57 58 59 61 63 68

MAP(S)

PHILIPPINES Laguna de Bay Institutional Strengthening and Community Participation'LISCOP

Project Appraisal Document East Asia and Pacific Region

EASES

Date: November 10,2003 Sector Managermirector: Maria Teresa Serra Country Managermirector: Robert V. Pulley Project ID: PO70899 Lending Instrument: Specific Investment Loan (SIL)

Team Leader: Patchamuthu Illangovan Sector(s): General water, sanitation and flood protection sector (1 00%) Theme(s): Water resource management (P), Environmental policies and institutions (P), Pollution

For LoanslCreditslOthers: Loan Currency: United States Dollar Amount (US$m): 5 Borrower Rationale for Choice of Loan Terms Available on File: Proposed Terms (IBRD): Fixed-Spread Loan (FSL) Grace period (years): 8 Commitment fee: 0.75%

Yes

Years to maturity: 20 Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize from Loan Proceeds

Initial choice of Interest-rate basis: Auto. Rate Fixing by period 6 months

Type of repayment schedule: [ ] Fixed at Commitment, with the following repayment method (choose one): [XI Linked to Disbursement

Conversion options: [XICurrency [XIInterest Rate [X]Caps/Collars:

DEV. COOP. Total:

IBRD BORROWING AGENCY LOCAL GOVTS. (PROV., DISTRICT, CITY) OF BORROWING COUNTRY NETHERLANDS: MIN. OF FOREIGN AFFAIRS / MIN. OF

10.25 2.20 12.45

5.00 2.05 0.40

2.80

0.00 0.00 0.00

2.20

5.00 2.05 0.40

5.00

Borrower: REPUBLIC OF THE PHILIPPINES Responsible agency: LAGUNA LAKE DEVELOPMENT AUTHORITY Address: Rizal Provincial Capitol Compound, Pasig City, PHILIPPINES Contact Person: Dolora N. Nepomuceno Tel: 632-637-9748 Fax: 632-637-9054 Email: ppdd@llda.gov.ph

Estimated Disbursement in US$m Equivalent (Bank FYISemesters): - = - - -

Cumulative I $0.50 I $1.00 I $2.50 I $4.00 I $4.80 I $5.00 1 Project implementation period: 2004-2009 Expected effectiveness date: 0113 112004 Expected closing date: 0113 112009

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The overarching objective o f the proposed project i s to assist the Laguna Lake Development Authority (LLDA), Local Government Units (LGUs) and other stakeholders to improve the environmental quality o f the Laguna De Bay watershed.

This will be achieved through: (i) behavioral changes and activities undertaken by watershed users to improve the environmental quality o f the lake and i t s watershed; and, (ii) improved planning, regulatory instruments and incentives, and participation in the environmental management o f the Laguna de Bay watershed.

2. K e y performance indicators: (see Annex 1)

The key indicators to measure the success o f the project in reaching i ts development objective are:

i. At least a 10% reduction in pol lut ion loading for regulated parameters (organic pol lut ion and suspended solids) and 30% increase in compliance by enterprises.

ii. All LGUs in at least 10 o f the 24 micro-watersheds have adopted multi-stakeholder micro-watershed planning as part o f their municipal development planning process (local and 5-year development plan and annual investment program).

iii. At least 5 micro-watersheds have implemented interventions and ha l f o f the micro-watershed interventions resulted in their projected reductions in environmental pressures (for example, pollution loading, erosion reduction as a result o f afforestation and improved vegetative cover, and, garbage deposited in waterways).

iv. 30% increase in the number o f women and men from community and stakeholder groups involved in watershed planning, management and advocacy, as wel l as improved organizational maturity and expanded membership o f River Councils and their Federation.

Baseline data has been collected as part o f LLDA’s previous activities and the indicators will be monitored throughout project implementation as part o f the monitoring and evaluation framework outlined in the Project Implementation Plan (PIP). The framework includes the conducting o f an annual leaming forum for al l stakeholders o f the project and the annual publication o f the Laguna Lake Environment Monitor, which will document the indicators and the results o f the leaming forum.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R2002-0083 (IFC/R2002-0076)

The Bank’s Country Assistance Strategy for the Philippines specifically mentions the proposed project as an initiative that would help address the declining resource base in the country. The project also supports the Country Assistance Strategy in that it: (i) encourages environmentally sustainable urban and rural development; (ii) improves govemance through ensuring civ i l society participation; (iii) assists LGUs to deliver public services more effectively; and, (iv) ensures environmental sustainability through an integrated approach to watershed management and improved environmental govemance.

Date of latest CAS discussion: June 4,2002

The framework for application o f the Wor ld Bank Water Resources Sector Strategy (WRSS) to the

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Philippines i s currently being drafted through a regional East Asia and Pacific Regional Water Resources Strategy and Philippines Country Water Resources Strategy. The WRSS envisions integrated water resources management as a long-term goal, and focuses on a pragmatic but principled approach to define, prioritize and support practical incremental actions under an integrated water resources management framework. Sectors identified in the strategy include: water supply and sanitation; imgat ion and drainage; energy; environmental services; and, other services including industry and navigation. and cross-sectoral initiatives, the strategy i s envisioned to improve: the institutional framework; management framework; the development and management o f infrastructure; and the political economy o f water management and reform.

The proposed project i s consistent with the strategy as it i s implementing practical actions that are incremental to ongoing work in the environmental services sector in a watershed that has been identified as a priori ty watershed in the draft Philippines Country Water Resources Strategy. Within the Laguna de Bay watershed, the project will address several issues in the strategy: (i) strengthening the institutional framework including the role o f the Laguna Lake Development Authority, LGUs, watershed stakeholders and their coordination through River Councils; (ii) strengthening the management framework through improved regulatory measures on water quality; introduction o f incentives for environmental management through public disclosure o f environmental performance; improved planning through the LLDAs decision support system and participatory micro-watershed planning within River Councils; and, increased financing o f watershed interventions; and (iii) providing a project development and financing framework for development and management o f community and small-scale infrastructure for water quality protection.

l a . Global Operational strategyh'rogram objective addressed by the project:

NIA

2. Main sector issues and Government strategy:

SECTOR ISSUES

Continued dewadation of watershed environmental resources

Unregulated and unplanned behavior of watershed users increases environmental pressures: Land use changes including rapid deforestation, and inappropriate development in upland areas have exacerbated erosion in watersheds to the point where approximately 45 per cent o f the land area in the country suffers f rom moderate to severe erosion. Additionally, the use o f chemical fertilizers and pesticides have increased rapidly in the last 20 years, causing increased loading o f nutrients and pesticides to watersheds in the country. Treatment o f wastewater f rom industrial, domestic, and agricultural users i s severely limited, resulting in significant pol lut ion loading to watersheds.

Laguna D e Bay watershed is a priori ty watershed in this regard as it contains 13 per cent o f the population o f the country and i s has been subject to increasing environmental pressures over the last 30 years o r more. There are no treatment systems for domestic waste and most industries and agricultural operations do not have adequate pol lut ion abatement. Additionally, land use change over the last 30 years has been characterized by rapid deforestation and urbanization, l inked to the expansion o f the per i urban areas o f Manila. I t i s estimated 75,000 tons per year o f organic pol lut ion and 5,000 tons per year o f nutrient pol lut ion are put in the lake due to a combination o f domestic, industrial and agricultural pollution. Additionally, 4 mi l l ion tons o f sediment per year enters the lake which accumulates an estimated 0.5 centimeter per year in the lake bottom.

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Water quality degradation in surface waters continues to put important resources at risk: Water quality monitoring undertaken by the Department o f Environment and Natural Resources (DENR) in 2001 indicates that 64 percent o f the rivers in the country are not suitable for drinking without expensive treatment whi le 3 per cent are not suitable for fisheries. DENR monitoring data f rom coastal areas indicate that water quality degradation i s putting fisheries and tourism at risk in many areas. In addition, there are nearly over 900,000 cases o f water borne disease in the Philippines each year that cost the country over 1 b i l l i on Peso (PhP) in medical expenses and hospitalization.

The Laguna D e Bay watershed i s especially relevant in this regard as it i s currently used for fisheries (including finfish, mollusks and crustaceans), transport, power generation, industrial cooling, recreation, irrigation and domestic water supply. o n water quality criteria, recreational use i s l imited to non-contact although there i s l imited use o f the lake for swimming. There have been proposals for large scale tapping o f Laguna D e Bay for domestic water supply, however the water quality and associated treatment costs have limited this to a small scheme o f 300,000 m3/month to augment the water supply o f Ayala Alabang in Muntinlupa. Poor water quality in Laguna De Bay has also resulted in high levels o f water borne diseases, resulting in health costs. In lakeshore areas alone, annual medical expenses due to waterborne diseases are estimated at PhP 10.7 million. In general, women are more adversely affected since sickness among household members usually translate to income losses (loss o f days o f work) and added burden o n health care especially among mothers. M a n y o f the tributaries o f the watershed are also severely polluted, with many urban reaches o f these rivers f i l led with garbage, rendering many o f the resources they could provide unusable and reducing their aesthetic value.

Research has indicated that some fisheries are declining and, based

Increased greenhouse gas emissions are linked to watershed degradation: Beyond the increased water pollutants, much o f the recent environmental degradation o f watersheds, including deforestation, increased fertilizer use, and the inadequate treatment o f pig waste, have resulted in increases greenhouse gas emissions from these sources.

Weak Institutions and Ineffective Instruments

Weak regulation and incentives: Pollution control has been l imited by government capacity to enforce current laws and the lack o f widespread application o f market-based and other instruments that charge for environmental services and promote the effective use o f resources. Although, LLDA has piloted an environmental user fee program, the program i s s t i l l l imited in the scope o f pollutants and pol lut ion sources covered. Additionally, their enforcement and permitting capability i s s t i l l weak, covering only a fraction o f the targeted watershed users. LGU enforcement o f waste management laws and ordinances, and implementation o f land use plans and zoning is likewise rather weak.

Lack of strong watershed authorities: The country i s currently moving towards a watershed-based approach to water resources management. However, with the exception o f LLDA, the country lacks functional watershed-based regulatory and planning authorities. In Laguna de Bay, LLDA has developed i t s effectiveness as a watershed management authority but lacks the strength to fully meet i t s mandate as the apex institution for environmental management o f the watershed.

Weak watershed environmental planning and activities at the local level: Currently, local watershed management activities are severely l imited due to: (i) limited capacity and involvement o f L G U s in environmental activities as a result o f slow devolution o f environmental and natural resource functions,

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l imited environmental planning and financing; (ii) lack o f institutional structures that can address micro-watershed-based environmental issues that commonly go beyond the political boundaries o f a single local government jurisdiction; and, (iii) unorganized and l imited participation o f c iv i l society at the local level has not allowed the engagement o f the full range o f micro-watershed stakeholders.

GOVERNMENT STRATEGY

Reversing dewadation o f watershed environmental resources

Improving Water Quality: The government’s pol icy on water quality i s espoused in the proposed Philippine Clean Water Ac t o f 2002 that includes: national and regional planning; area-based water quality management; improved coverage o f sewerage and septage services; development o f guidelines for sewerage; disposal and treatment; and, expanded financing mechanisms, including user fees and a national water quality fund.

Effective Management of Water Resources in Watersheds: The Government has also outlined a water strategy in the 1995 GOP Water Summit which has been formalized in the Med ium Term Philippines Development Plan (2001 -2004). The strategy proposes a r iver basin based integrated water resources management approach for water resources planning and investment in the country. It emphasizes coordination o f water resources development among competing users, and promotes efficient use o f natural resources and resource conservation, to eventually reduce poverty.

Improving Watershed Environmental Quality in Laguna D e Bay: LLDA has developed 2 master plans for the Laguna De Bay watershed, the latest in 1995, which have provided the vision for environmental management o f the watershed. In order to implement this vision, LLDA developed a reengineering program that includes the fol lowing objectives: ecosystem based planning; participatory planning and partnership; broadening market based incentives; restoration o f water quality o f lake; and developing and sharing knowledge.

Reducing Greenhouse Gas Emissions: Additionally, as part o f i t s obligations under the Kyoto Protocol to which it i s a signatory, GoP has undertaken an inventory o f greenhouse gas emissions and identified mitigation strategies that include those that will support improved watershed management such as: waste management; afforestation; agroforestry; urban forestry; and, changes in agricultural practices. GoP has supported i t s greenhouse gas reduction agenda through GEF grants, capacity building in the Clean Development Mechanism and has sought Wor ld Bank support in carbon trade through the possible use o f the Prototype Carbon Fund and Community Development Carbon Fund.

Improving Institutions and Instruments

Introducing market based and other non-regulatory instruments: One o f the key reforms in the Clean Water Ac t i s the implementation o f a National Environmental User Fee System (NEUFS) that would apply to organic and suspended solids pollution. Also recently, the DENR issued an administrative order to mainstream the E C O W A T C H Public Disclosure Program nation-wide, and the p i lo t phase o f the program was successful at achieving substantial pol lut ion reduction at targeted enterprises.

LLDA has piloted several programs for water quality management, most notably their environmental user fee program. Since 1996, LLDA has been pi lot ing their environmental user fee system, targeting the most polluting industries and only organic (BOD) pollution. I t has been successful in reducing the BOD inflows to the lake by 25% and industries share o f BOD inflows from 35 to 20%. The program i s s t i l l l imited in

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that it only covers one parameter, only a limited number o f certain types o f industries and does not cover domestic sources which are the largest contributor to organic pol lut ion in the lake. Based o n this experience and further studies undertaken through a Wor ld Bank-assisted PHRD grant, the Government i s embarking o n a national program to mainstream the application o f user fee system. Accordingly, the DENR Administrative Order (ministerial decree) 2003-39, dated August 18, 2003, was issued. The Order, adopts and explains a National Environmental User's Fee, as a constituent o f the wastewater pemitting system.

Strengthening watershed institutions: The GoP water strategy proposes a river basin based integrated water resources management approach that will include the development o f watershed-based institutions for each o f the major r iver basins in the country. The lessons from LLDA's current and future strengthening are seen to play an important role in the development o f these types o f institutions. Recent strengthening o f LLDA has included a Dutch funded Sustainable Development o f Laguna D e Bay Project and a reengineering program developed based on the results o f studies funded under a Wor ld Bank P H R D grant. The reengineering program has la id out a strategy for improving: human resources management; policy, planning and regulation; market based instruments; public participation and outreach; and revenue management for environmental improvement. In addition, LLDA helped establish multistakeholder micro-watershed councils which have primarily focused in doing advocacy work and community-based r iver rehabilitation activities. These initiatives have enjoyed some success but have been l imited in scope and therefore need further expansion and strengthening.

Strengthening local capacity and involvement in watershed environmental management: T o improveJinancing and capacity of local governments in environmental watershed management, GoP has recently adopted a new national government-LGU cost sharing formula for devolved activities which includes clearer cost sharing arrangements and more favorable terms for many environmental projects. Using these arrangements, the government i s providing opportunities to improve municipal infrastructure including development o f environmental infrastructure such as landfills and wastewater treatment facilities as well as natural resources management projects, only a few LGUs are doing this currently. Additionally, LLDA i s currently undertaking some training o f local governments in environmental related activities and i s providing a portion o f the revenues fees from fishpen licenses to local governments for their activities.

T o create institutional structures to address micro-watershed level issues, LLDA i s assisting in setting up River Councils in each o f the 24 microwatersheds in the Laguna De Bay Watershed. The River Councils (RCs) are made up o f members f rom the stakeholder groups in each microwatershed including municipal and barangay-level local governments, c iv i l society groups, resource user groups (e.g. fisherfolk and farmers.) individual citizens and the private sector. RCs are envisioned to evolve into a strong, autonomous and sustainable mechanism for multi-stakeholder participation, coordination, consensus building and conflict resolution for micro-watershed environmental issues and activities as wel l as a channel for local communication and coordination with LLDA and the LGUs. At this point, River Councils have been established in 22 o f the 24 micro-watersheds. Each o f these RCs are registered with the Securities and Exchange Commission (SEC) as non-profit associations or foundations and are l inked through a federation that i s likewise registered as a foundation. However, RCs present organizational strength and influence are s t i l l limited to al low them to affect changes in integrating interjurisdictional microwatershed issues in local planning. Only one-third o f the RCs may be considered as relatively strong and active. The other third are fledging, while the rest are relatively inactive. Major i ty (two-thirds) are s t i l l essentially LGU-driven which make them vulnerable to changes and tensions in the political environment. Representatiodinclusion o f more diverse watershed users/groups, including vulnerable and marginalized groups in most RCs i s likewise yet to be realized.

LLDA has been assisting and engaging the River Councils and their federation in dealing with various

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environmental issues affecting the lake, with the view that RCs form the backbone for c iv i l society engagement in the Laguna Lake watershed. In the past four years, a number o f special events (cleanup drives, tree planting, waste treatment demonstrations, information campaigns, etc.) have been organized and implemented through the partnership between LLDA and the RCs. There were also instances when RCs have demonstrated their independence from LLDA, by calling i t s attention on gapdweaknesses in LLDA's performance o f i t s mandated functions and commitments. These init ial successes have strengthened LLDA's resolve to help further strengthen RCs and expand their role in the management and protection o f the lake's resources.

3. Sector issues to be addressed by the project and strategic choices:

Reversinp Dewadation of Environmental Resources:

Reversing Degradation of the Laguna D e Bay Watershed: The proposed project will address this issue by implementing measures to improve watershed environmental quality in a priority watershed in the Philippines. The choice to have the project focus o n one watershed rather than a nationwide program was made based o n the importance o f the Laguna D e Bay watershed. Laguna D e Bay i s the largest lake in the Philippines and the second largest freshwater lake in Southeast Asia. I t s watershed includes 6 provinces and 61 municipalities and contains 13% o f i t s population o f the Philippines. The lake and i t s watershed represent the major water resource for the region, a resource that has degraded significantly over the last three decades. The population uses the watershed resources for a variety o f purposes including: fisheries and aquaculture; industrial cooling water, irrigation water, hydropower, transport, drinking water and recreation. At the same time it also serves as waste s ink for domestic and industrial effluents and agricultural and urban run-of f

Reducing greenhouse gas emissions: Additionally, the project will encourage the reduction o f greenhouse gas emissions through i ts watershed interventions. It i s estimated that, depending on the scale and type o f subprojects, this could result in between 9,000 and 60,000 tons o f C 0 2 equivalent annually. For subprojects that will result in a verifiable reduction o f greenhouse gases and are eligible under the Clean Development Mechanism o f the Kyoto Protocol, carbon financing will be sought through the Community Development Carbon Fund or other sources. The potential for greenhouse gas emissions and obtaining carbon finance wil l be developed in parallel and in coordination with the proposed project.

Improvinp Institutions and Instruments

Strengthening Regulations and Instruments: The proposed project will address this issue by strengthening LLDAs permitting and monitoring systems, expanding market based instruments including their environmental user fee program and introducing a publ ic disclosure program. This i s a clear priori ty within the Laguna De Bay watershed due to the large water pol lut ion problems and the need to solve problems o f this type by applying the polluter pays principle through regulation and incentives. The choice to implement market based instruments and incentives as a complement to traditional regulatory measures was done based on experience in the Philippines and other developing countries. This experience indicates that due to human resources and monitoring limitations in these countries, command and control approaches can not be relied upon by themselves to control pollution. Rather they can be effectively complemented by market based instruments and incentive programs such as public disclosure which have smaller resource requirements.

Strengthening L L D A as a watershed institution: The proposed project will address th is issue by assisting in the implementation o f LLDAs reengineering program including strengthening: their planning,

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regulation and incentives; public outreach and community networking through r iver councils; and, their role in funding and catalyzing watershed investments. The choice to focus o n building LLDA rather establishing and developing watershed institutions nationally was based o n the relative value-added o f the two programs. LLDA is at a key juncture in i ts development and further strengthening o f the institution will develop it into a model f rom which lessons can be applied throughout the country. In contrast a nationwide project would l ikely result in the establishment o f authorities nationwide and implementation o f a small set o f measures based on little institutional experience.

Strengthening local watershed-based planning, involvement and capacity: The project wil l strengthen LGUs capacity and provide financing to undertake environmental planning and investments. This will be done through a micro-watershed planning and subproject implementation process which wil l be undertaken by LGUs with the support o f the River Councils. The process wil l be integrated and institutionalized as part o f the local development planning and programs o f the LGUs, thereby influencing other related sectoral plans and policies.

The project wil l also further develop River Councils into an advisory, consultative, and coordinative multi-stakeholder body for micro-watershed- environmental issues. This wil l be done through the micro-watershed planning framework that will include al l LGUs in the micro-watershed. Additionally, implementation o f the program o f actions will be done by multiple L G U s in order to ensure a coordinated approach that can address the inter-jurisdictional micro-watershed issues.

The project will also provide a organized structure to involve c iv i l society in environmental planning and management. Through the project planning process and the strengthening and expansion o f the River Councils, the project hopes to increase the involvement o f key stakeholders in developing and implementing micro-watershed plans. Once this planning and implementation process i s institutionalized into the LGU local development planning, the River Councils will serve as the permanent forum for LGUs and various stakeholders to discuss environmental issues within the micro-watershed area and to plan and implement needed interventions. Additionally, at the Laguna D e Bay watershed, the project will help further strengthen and expand the now-constituted federation o f RCs to harness the engagement o f c iv i l society groups and other stakeholders o n watershed issues. The project will support the holding o f annual learning forum to serve as a venue for sharing experiences, assessing the progress various interventions, and re-affirming commitments o f stakeholders.

Piloting multiple-LGU implementation arrangements in a micro-watershed The project will assist MDFO to develop and pi lot a framework to enable LGUs within a micro-watershed to collectively borrow and implement sub-projects, for the f irst time. So far, LGUs have only implemented sub-projects that fa l l within their jurisdiction, and rarely cooperate among each other to implement activities that have spill-over benefits. Since the project i s targeting its interventions at the micro-watershed level, it provides a good opportunity for the Philippines to an approach for LGUs to collectively participate in a sub-project that contribute to beneficial use o f a shared resource.

C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

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The proposed project wil l have two components:

Component 1: Co-manaved Micro-watershed Environmental Interventions Th is component will support demand-driven investments (sub-projects) designed to improve the environmental quality o f the watershed. Subproject selection and prioritization will be based on the results o f a participatory micro-watershed-based planning and subproject identification process. The identified interventions will constitute an integrated program o f sub-projects that will be implemented concurrently within a micro-watershed by multiple LGUs, with each LGU borrowing for a sub-project within i t s jurisdiction. The component will fund subproject development, subproject investments, and implementation monitoring. I t i s expected that around 25-35 sub-project with an average size o f US$ 100-200,000 will be implemented. The sub-project will belong to four categories: (a) waste management and sanitation; (b) natural resources management; (c) soil erosion and localized f lood prevention; and (d) eco-tourism.

2. Strengthening Institutions and Instruments

Component 2: Strenvthening Institutions and Instruments: This component will: (i) assist LLDA to implement i t s reengineering program, strengthening i t s role as the apex body for management o f the Laguna D e Bay watershed. This will be done through capacity building in policy, planning and regulation; market based instruments; public participation and outreach; monitoring and evaluation; and revenue management; (ii) assist LGUs, River Councils and watershed stakeholders to establish and undertake an environmental planning process in the 24 micro-watersheds and to enhance their capacity o n environmental, social, technical, financial and managerial aspects o f watershed management; (iii) provide incremental operational support for efficient project management to LLDA, MDFO, LGUs and River Councils; and (iv) assist in implementing a monitoring and evaluation framework, which will include a Learning Forum and the annual publication o f the Laguna de Bay Environment Monitor. The component will fund primarily training and technical assistance (studies, surveys and outreach), but also the goods (e.g., database management, water quality testing and monitoring and communication tools) and works (to establish the Learning Resources Center) to undertake these tasks.

6.16 I 49.5 I 0.00 I 0.0

1. Co-managed Micro-watershed Environmental 1 6.24 1 50.1 1 4.95 I 99.0 1 Interventions

t I _ _ . .. . ..

Front-end fee I 0.05 I 0.4 I 0.05 I 1.0 I I I I I

Total Financing Required 1 12.45 I 100.0 I 5.00 I 100.0 * Co-financing of US$ 5 million wi l l be provided by Government ofNetherlands. LLDA and LGUs wi l l contribute USs2.3 million in counterpart and equity contributions

As a parallel initiative to the proposed project, carbon financing will be sought for the greenhouse gas emissions reductions achieved by subprojects eligible under the Clean Development Mechanism o f the Kyoto Protocol. The financing i s to be sought f rom the Community Development Carbon Fund o f the PCF which typically provides between US$3-5/ton C 0 2 equivalent reduction in greenhouse gas emissions. Up to 25% can be given upfront while the remainder i s done during subproject operation upon verification and certification o f emissions reduction. As a complementary activity to micro-watershed planning and subproject development process, a carbon emissions baseline for the micro-watershed wil l be undertaken and potential carbon emissions reductions and related carbon financing o f different subproject options will be identified. Additionally, the use o f the carbon financing revenues will be discussed and developed at this time.

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2. K e y pol icy and inst i tut ional reforms supported by the project:

The proposed project wil l effect pol icy and institutional reforms within LLDA and across the watershed. Specific changes within LLDA will include: (i) modemizing regulatory system to improve compliance by users through the application o f economic instruments l ike EUF and water rights trading and public disclosure o f environmental performance; (ii) simplifying intemal processes o f LLDA to improve responsiveness and efficiency in issuing and monitoring permits; (iii) increasing revenues through above measures; (iv) creating a performance-based mechanism for LLDA to achieve agreed targets set by the national government; and (v) leveraging i ts revenues to expand environmental investments, including the development o f a trunk infrastructure strategy.

Across the watershed, the proposed project will demonstrate an environmental govemance structure that includes: (i) developing River Councils into advisory, consultative, and coordinative multi-stakeholder body for micro-watershed environmental issues; (ii) promoting a multi-LGU implementation arrangement, in which a program o f sub-project interventions will be implemented concurrently by LGUs within a micro-watershed with each LGU assuming responsibility for i t s sub-project. The project will also support MDFO to pi lot a multiple-LGU borrowing framework, which in the medium t e r m will enable LGUs to collectively borrow from the MDFO under a single financing arrangement; and (iii) expanding role for community and stakeholder participation through the River Councils and LLDA outreach programs.

These reforms will be implemented through a three-phase re-engineering program o f LLDA, which i s articulated in a Letter o f Institutional Development Objectives (LIDO) for the project. The LIDO (annex 12) is signed by the Secretary o f DENR, the supervising department o f LLDA, and was provided to the Bank at negotiations. The f i rst phase involved studies and analysis that assessed the challenges and opportunities and was completed at the end o f 2001. For the on-going second phase, LLDA Board o f Directors have resolved to rationalize and streamline the functions currently managed by 16 Divisions, into four "empowered" offices - Watershed Policy and Planning; Environmental Regulations; Resources Management and Development; and Management Services. A Board appointed Task Force i s overseeing the process. A regrouping o f the staff will commence during the last quarter o f 2003 and the functioning o f the new structure will begin in January 1, 2004. In the thirdphase, LLDA will submit the re-engineered structure, operational processes, staffing and carreer development plan, and revenue and expenditure plan to obtain the approval o f Department o f Budget and Management (DBM) by January 31,2005. The project will support the capacity building needs for achieving the reform objectives stated in the LIDO.

3. Benefits and target population:

The project will benefit resource users in the watershed through protection and enhancement o f these resources both in the short and long term through: reduction in environmental pressures including pol lut ion loading; reduction in erosion and trash disposal in the rivers; incorporation o f watershed concems in LGU planning and investments; increased involvement o f communities and other stakeholders in watershed management; and, development o f mechanisms for planning, development and financing environmental investment in the watershed. The subprojects wil l also provide significant local co-benefits. For example, depending on the subproject chosen, these benefits may include: improved waste management; improved agricultural productivity; aesthetic improvements; and, providing an alternative fuel source for use by local communities.

4. Inst i tut ional and implementation arrangements:

Project Management

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The project will be co-financed by an IBRD loan and Government o f Netherlands grant. The loan agreement will be between the Republic o f the Philippines and the IBRD. The Netherlands grant will be adminstered by the Bank through an Administration Agreement between the Netherlands and the IBRD. LLDA i s the recipient o f the grant, and will enter into a Grant Agreement with the Bank. The two agreements spell out the project implementation management arrangements.

The Republic of Philippines through the Department of Finance (DoF) i s the borrower, while the Department of Environment and Natural Resources (DENR), as the supervising department, i s providing the budget cover for the loan portion o f the project through i t s General Appropriations (as required by DBM guidelines).

LLDA will have overall responsibility for project implementation, with oversight provided by i ts Board (The eight member LLDA Board consists o f representatives from the Office o f the President, National Economic Development Authority, DENR, Department o f Trade and Industry, Laguna Province, Rizal Province and Private Sector and the General Manager o f the LLDA) and the General Manager. The day-to-day management will be the responsibility o f the Assistant General Manager, who wil l be assisted by a Project Coordination Off ice (PCO) headed by a Project Coordinator. The special order (LLDA Memorandum Order 2003-53, dated October 3, 2003) establishing the PCO at LLDA and assigning eight full-time staff was issued after the appraisal mission. The PCO will be responsible for procurement, financial management and logistics. MDFO will be the conduit for on-lending to LGUs. LGUs will be the borrowers and implementers o f sub-projects. The inter-agency arrangements are detailed in the Institutional Memorandum o f Agreement (I-MOA) that was signed on October 9, 2003, by DoF, DENR and LLDA. The Project Implementation Plan (Part 1: Operations Manual; Part 2: Capacity Building Plan; and Part 3: Monitor ing and Evaluation Framework) explains the implementation arrangements, and was found to be adequate by the appraisal mission and confirmed at negotiations.

Component 1: The sequence o f sub-project development, approval and implementation will be as follows: (a) Fol lowing the preparation o f L E A P for a micro-watershed and signing o f a sub-project memorandum of agreement among LGU (multiple LGUs in the case o f more than one LGU are involved in a micro-watershed), LLDA and MDFO; LGUs will propose and prepare sub-projects; (b) LLDA will screen, review and select the sub-projects; (c) an inter-agency Technical Review Panel (TRP), co-chaired by DENR and DoF (established under DENR Administrative Order 2003-48), will appraise and endorse the sub-projects to the MDFO’s Policy Goveming Board (PGB) for approval; (d) thereafter the LGUs and MDFO will s ign a sub-project agreement, fol lowing which the MDFO will make available loans and grants to the LGUs; and (e) LLDA will monitor the implemenation o f sub-projects by LGUs and prepare the necessary monitoring reports. An operations manual (OM; part o f PIP) will guide the implementation o f this component, which specifies the procedures and criteria for selecting and approving subprojects.

The subproject development (planning, pre-feasibility and feasibility studies and capacity building) will be financed by the Netherlands grant, while the IBRD loan will finance sub-project goods, works and construction supervision. The financing o f sub-projects will fo l low the Government’s revised NG-LGU Cost Sharing Scheme for Devolved Activities that was adopted o n January 1,2003. Accordingly, the LGUs will need to provide equity in the range o f 10-20 percent, and the balance will be financed through a combination o f grants and loans (depending o n the income class o f LGU) funded by the loan. In addition, LLDA will provide an equity subsidy to each LGU, not exceeding ha l f the total equity for a sub-project, as an incentive for LGUs to invest in environmental improvement in the context o f a micro-watershed. For each micro-watershed, a River Council will facilitate inter-LGU collaboration and community involvement in sub-project planning and implementation, with the involvement o f participating LGUs. Each participating LGU will establish a Sub-project Management Team (PMT) to execute the subproject and

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work under the overall guidance o f the RC. The f i rst six sub-projects and any sub-project exceeding US$ 300,000 will require Bank's n o objection.

Component 2: The capacity building plan (part o f PIP) prepared in support o f the L L D A ' s re-engineering and institutional strengthening program detailed in the LIDO will guide the implementation o f this component. All operational departments wil l be involved. This component will be financed by the Netherlands grant. The counterpart staff needs numbering 25 have been identified and LLDA will gradually deployhire this staff (see section in conjunction with i ts transition to the re-engineered structure by project effectiveness. However, the staf f needed for the first year's activities including procurement specialist were assignedhired prior to negotiations o f the project. In addition, the LLDA will also administer the capacity building program for LGUs, RCs and communities.

Procurement

As mentioned above, LLDA's PCO will oversee procurement for both components. Procurements other than those for subproject implementation under Component 1 will be the responsibility o f LLDA. All procurements o f the LLDA will be managed by the Procurement Specialist with the assistance o f the Bids and Awards Committee (BAC) o f LLDA, and will handle procurement o f goods and equipment, consulting services, and training/workshops.

Procurement for subproject implementation under Component 1 will be the responsibility o f the Subproject proponents. Procurement wil l be done by the recipient LGUs as per standard Bank guidelines as specified in the OM, which includes a detailed section o n the procurement arrangements. Procurements wil l be the responsibility o f the P M T under the guidance o f the LLDA procurement specialist. All subproject procurement processes such as review, evaluation and selection o f quotations and bids (where applicable) will be opened, presented, and deliberated in a public meeting. All related procurement documents such as the terms o f reference, design and technical specifications, quotations and bids will be accessible or available to anyone who may be interested. N o bids will be opened unless in a public meeting. Each P M T will create a Procurement Committee which will take responsibility for a l l procurement-related matters. The working rules and criteria for the Committee are specified in the OM.

F i n uncial Management

Financial management and accounting: The financial management arrangements proposed for the project are acceptable. LLDA maintains a sound accounting system as indicated by an unqualified audit opinion o n i t s latest audited financial statements. LLDA has previously executed a P H R D grant. LLDA with the assistance o f a consultant i s designing and installing an appropriate financial management and accounting system to ensure that the necessary internal controls are in place for the activities o f the project that are new to LLDA operations (Le., cost-sharing arrangements with LGUs). These are codified in the Finanical Management Manual which i s part o f the project's Operations Manual, and meet the Bank's minimum requirements. LLDA has assigned a financial management specialist to the PCO, who i s coordinating and supervising the installation o f the financial management system. In addition, LLDA has committed to hire additional s ta f f as the need arises. This function will be under the overall and direct supervision o f the Division Chief for Finance o f LLDA. The financial management, accounting, disbursement and auditing arrangements are summarized below and expained in Annex 6B

Fund f low and disbursement arrangements :

0 Component 1: The IBRD loan wil l be a 5-year, single currency, FSL to be disbursed over a five-year

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period, and will finance component 1. MDFO w i l l maintain a Special Account- 1 where the IBRD loan proceeds will be deposited and disbursed for expenditures under this component. The disbursements wil l be made directly to the participating LGUs based on the endorsement o f LLDA, who will make such a recommendation after an evaluation o f the liquidation report and request for payment o f the LGUs. Withdrawals will be in accordance with the traditional SOE-based method The LGUs will maintain separate bank accounts for the loan, grant and equity portions o f a sub-project. LGUs will also shoulder the operating costs o f sub-projects. LGUs will be responsible for the financial and accounting requirements o f their sub-projects using their own organic units. However, the PCO will or ienthain the financial and accounting staff o f sub-project beneficiaries after sub-project approval but before the initial release o f funding.

0 Component 2: The grant provided by the Government o f Netherlands will be executed by the LLDA and finance th is component. LLDA will maintain a Special Account-2 where the grant proceeds will be deposited and disbursed for the payment o f services, goods and works and other expenditures (like workshops). In addition, LLDA provide the counterpart costs for this component f rom intemally-generated funds.

Audit arrangements: External audit arrangements have been made, in addition to internal audit requirements, and the responsibilities o f LLDA, MDFO and Commission o n Audit (COA) are documented in the Financial Management Manual.

Results Measurement

LLDA i s establishing a dedicated team to monitor and evaluate the progress o f the project as spelt out in the Monitoring and Evaluation Framework o f the PIP. The key performance indicators are listed in section A 2 and Annex 1 and Government's Letter o f Institutional Development Objectives (LIDO) that was provided at negotiations to the Bank by the DENR, on behalf o f the national government. The results measurement and monitoring will take place at three levels:

0 Environmental sustainability o f the watershed, to be measured in terms o f completed LEAPS, reduced pollution loadings, and growth in the revenues reinvested in environmental infrastructure;

0 Organizational effectiveness o f the LLDA, comprising improved data collection and management procedures, increased revenues f rom user fees, and increased compliance; and

0 Involvement o f stakeholders, to be gauged by signed sub-loan agreements, completed sub-projects, and maturity o f the RCs.

Further, the LLDA will annually publish a Laguna de Bay Environment Monitor that will disseminate results o f the monitoring activities.

D. Project Rationale 1. Project alternatives considered and reasons for rejection:

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Instrument. The proposed project was init ial ly processed as a Leaming and Innovation Loan (LIL). However, the Government could not complete i ts internal processing requirements within the stipulated 180 day period. Fol lowing GoP confirmation and endorsement, the proposed project was revived as a specific investment loan (SIL). The original design supported the pi lot ing o f approaches on (i) improving compliance by targeted watershed users; (ii) deepening community involvement in watershed activities in selected micro-watersheds; and (iii) leveraging revenues to obtain additional financing for environmental improvement investments. While the general thrust o f the project design on improving the environmental quality o f the watershed remains essentially the same, some modifications to the investment component have been introduced, which are explained below. In parallel to the proposed project, a free-standing operation using one o f the instruments o f the Prototype Carbon Fund (PCF) will be prepared to mitigate greenhouse gas emissions, as discussed previously.

Balance between institutional strenahenina and infrastructure investments: The project decided to balance institutional strengthening and environmental infrastructure investments rather than focus o n a comprehensive environmental infrastructure investment program. This was due to the current capacity limitations in watershed management and the potential long term benefits o f developing the institutions in the watershed. In addition to the direct benefits o f the project o n the environment, the long-term benefits o f building an effective watershed authority and improving participation and capacity at the local level will provide the interest, capacity and regulatory, planning and financing structure under which comprehensive environmental infrastructure improvements can be effectively undertaken and sustained.

Scale o f interventions. The more traditional top-down large infrastructure investments spanning the entire watershed was considered and thought to be appropriate at a later time due current limitations in institutional capacity. Rather the project took the approach o f using participatory planning to implement small to medium-scale interventions, at the micro-watershed level, as they: (i) can have a significant and potentially comparable impact; (ii) the scale i s more in l ine with the current capacity limitations, and (iii) they will more directly address the issue o f l imited public and government involvement in watershed environmental management.

Local-level interventions, mode o f delivew and financing.. In the original design, the investment component was to include (i) grants delivered to communities using a community-driven development approach (similar to the KALAHI project); and (ii) grants to River Councils with flexible counterpart funding and implementation arrangements through i ts constituent stakeholders including LGUs. As the Government announced the new NG-LGU Cost Sharing Scheme for Devolved Activities in January 2003, the proposed SIL design needed to be consistent with this policy. Consequently, the fol lowing changes were introduced to the design o f the investment component: (i) financing would use the NG-LGU cost sharing formula and include a combination o f LGU loans and grants f rom the national government and LLDA; (ii) project proponents will be LGUs, but with a participatory role for communities and River Councils in the planning, designing and implementation o f sub-projects; (iii) MDFO and not LLDA would be the conduit for the f l ow o f funds, with the later being responsible for technical assistance to LGUs, and appraisal and monitoring of sub-projects; and (iv) a detailed process for identification and preparation o f demand-driven investments at the micro-watershed level i s elaborated to help ensure participation o f a l l stakeholders.

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2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).

Sector Issue

Ban k-f i na n ced Assisting water utilities to improve their operational efficiency and accountability to consumers, facilitate private sector participation, and leverage financial flows into the water and sanitation sector Assisting LGUs to plan and implement

facilities Improving the quality o f sanitation

Concessionaires to expand their septage

sewerage, sanitation and drainage

services and enabling the

management program Reducing rural poverty and environmental degradation through support for locally generated and implemented natural resource management sub-projects. Supporting the implementation o f a broad pol icy and institutional framework in the water sector. Financing municipal infrastructure, building capacity o f LGUs and reforming the MDF Expanding the sewerage network and treatment facilities

Project

LGU Urban Water and Sanitation 2 (4422-PH)

Water Districts Development (4227-PH/4228-PH

Second Manila Sewerage (40 19-PH)

demand driven development activities in a r iver basin context Xher development agencies Government o f Netherlands

Community-based Resources Management (4299-PH)

Water Resources Development (4 1 1 O-PH)

Local Government Finance Development

Sustainable Development o f Laguna D e Bay (SDLDB): Capacity building assistance to LLDA to strengthen its integrated water resources management capability and

Third Mani la Sewerage (proposed) (Project ID: P079661) River-basin Management (proposed P064974)

Enhancing livelihoods and improved natural resources management by promoting coordinated and sustainable

Latest Supervision (PSR) Ratings

(Bank-f/nance Implementation

Progress (IP)

srojicts only) Development

Objective (DO)

S

S

S

S

S

S

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Japan Bank for Intemational Cooperation (JBIC)

Lesson Learned

United States - Asia Environment Partnership (US - AEP)

Design Consideration

Asian Development Bank

Local environmental and natural resource planning i s weak and tends to be done based on political rather than environmental boundaries. Involvement o f all stakeholders in the planning and implementation process builds ownership, quality and sustainability o f interventions.

Subprojects often suffer from weak monitoring and evaluation.

Sub-project review and appraisal often delay implementation.

establish a GIs-based decision support system. Physical infrastructure development in water and sanitation sector in both urban and rural areas. The US-AEP provides support for the capacity-building o f the River Councils. Previous assistance includes sharing o f best practices between the Laguna de Bay and the Chesapeake Bay and support for model building efforts o f the LLDA for the co-management approach. Pasig River Rehabilitation Project which aims to clean-up an adjoining river system.

The proposed project will use a microwatershed-based planning process to identify investments and encourage the adoption of the planning framework within LGUs and River Councils. A formal, participatory approach to sub-project development and implementation wil l be undertaken through the multistakeholder River Councils. A stakeholder assessment wil l be undertaken to ensure relevant groups participate or are consulted. Subproject monitoring and evaluation wil l be systematic and linked to subproject management effectiveness, local benefits as well as Laguna De Bay Watershed environmental improvements. The proposed project adopts a one-stop shop review and appraisal process. A Technical Review Panel in LLDA wil l screen appraisal reports prepared by LLDA

I

3. Lessons learned and reflected in the project design:

. I . ~ . operation and maintenance. geniraicapacity building wil l be provided to L G h throughout the project. LGUs

will commit to a subproject operation and maintenance plan and a monitoring indicators that will be publicly disclosed as part o f the annual leaming forum.

The proposed project will strengthen LLDA role as an apex body to provide vision and encourage participation in environmental management of the watershed.

Component 2: Environmental management of the Laguna De Bay watershed i s constrained by conflicts and lack of a unified vision among stakeholders. LLDAs strengths are its strong mandate over the watershed, its pioneering The proposed project will build on these strengthens by assisting LLDA to environmental user fee system, and its financial flexibility through its fiscal further implement their mandate, develop the environmental user fee system and autonomy and revenue generating ability. other revenue generating mechanisms and improve the use of its revenues. Implementation of regulatory measures often suffer from weak monitoring The proposed project wi l l build capacity and encourage efficiency in the and enforcement. permitting, monitoring and enforcement procedures of the LLDA. Command and control measures can be effectively complemented by LLDA has experience in implementing a pilot environmental user fee program market based instruments and other incentives like public disclosure of and the proposed project wi l l support its expansion including assistance to build performance. However, the implementation of such activities require political consensus. T h e DENR recently issued a decree to formalize public high-level political support. disclosure program for the industrial sector, which should provide the policy

Laguna De Bay suffers from a lack o f critical infrastructure for environmental improvement due to historical under-investment by local governments, national govemment agencies and private sector

land recommend approval to MDFO to proceed with a sub:project. hbproiect-specific capacitv buildine. for planning and implementation as well as LGUs subprojects are often limited bv capacitv constraints and poor

underpinning to implement the program in the watershed. The proposed project wi l l support LLDA to develop a long term strategy to address this use by developing a strategy for hunk infrastructure and preparing a prototype project.

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4. Indications o f borrower and recipient commitment and ownership:

The fol lowing actions demonstrate the borrower’s commitment to pursue the proposed project: (i) endorsement o f the project by the Investment Coordination Committee (ICC) o n August 28, 2003; (iii) Issuing the Letter o f Institutional Development Objective by the borrower (Secretary, DENR), that provides the pol icy and institutional underpinning for the project and articulates a longer-term Government strategy for institutional arrangement in the Laguna de Bay watershed. (iii) confirmation by D o F that it wil l be the borrower; (iv) provision o f budget cover by DENR during the l i fe o f the project, and in turn DBM issued the Forward Obligation Authoroity (FOA) prior to negotiations o f the project; (v) approval by DENR and LLDA Board o f Directors (LLDA-BOD) to undertake the project; (vi) approval by the LLDA-BOD o n earmarking Project Development Fund to provide part o f the equity requirements o f sub-project financing; (vii) establishing the PCO at LLDA and assigning eight-full time staff prior to negotiations o f the project; and (viii) MDFO becoming the financial conduit for component 1; These commitments are recorded in an Institutional Memorandum o f Agreement (I-MOA) that was signed by DoF, DENR, LLDA and MDFO on October 9, 2003, prior to negotiations o f the project. In addition, a Pledge o f Commitment has been signed by representatives o f various Provinces and municipalities as we l l as the League o f Municipal Mayors and Vice Mayors in Laguna de Bay region to participate in the proposed project. As a follow-up to this, six o f the 61 LGUs have signed sub-project Memorandum o f Agreements (S-MOA) with LLDA and MDFO to prepare and implement sub-projects with supporting Council Resolutions, which indicates significant interest and commitment o f local governments towards the project. Further, the LLDA Board has approved the organization’s Re-engineering Plan. The management o f DENR led by i t s Secretary i s also committed to expanding and mainstreaming economic instruments and voluntary disclosure tools as part o f i ts regulatory program for pol lut ion prevention and control. T o th is end, it recently issued the Administrative Orders (ministerial decrees) for voluntary disclosure o f environmental performance in the industrial sector and the mainstreaming o f Environmental User Fee System (EUFS).

5. Value added o f Bank and Global support in this project:

The value added o f Bank involvement in this operation i s i t s long-term engagement with LLDA (1 0 years) and with the water sector in the Philippines (30 years) combined with i t s global experience and multi-disciplinary approach including experience in regulatory instruments and incentives, watershed planning and management and demand driven municipal investments.

The Project provides value-added to the Bank’s own learning experience by implementing a project o f th is type in a complex watershed. LLDA i s the only operational watershed management authority in the country. Lessons from the proposed project can be applied elsewhere in the Philippines, where the creation o f integrated r iver basin authorities are being considered, especially under the proposed River Basin Management Project. The proposed project will also pi lot the feasibility o f implementing multi-LGU projects within a micro-watershed under a common borrowing framework, which lessons will contribute to the efforts to reform the MDFO. The experiences from implementing the regulatory improvement activities can also contribute to capacity building activities in other countries.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):

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0 Cost benefit 0 Cost effectiveness 0 Incremental Cost 0 Other (specify)

NPV=US$ million; ERR = % (see Annex 4)

Component 1 : This component aims to support numerous demand-driven LGU sub-projects that will address micro-watershed priorities. Since the nature o f these sub-projects i s demand-driven, economic and financial analyses o f sub-projects will be performed on a case by case basis as they are developed and appraised. The expected economic rates o f retum o f representative sub-projects i s expected to be significantly larger than the estimated financial rates o f retum as the financial analyses o f these representative sub-projects do no t include al l economic benefits o f the sub-projects (such as health benefits associated with a reduction o f water pollution, and off-site environmental benefits). As a matter o f illustration, sub-projects implemented under the Central Visayas Regional Project (CVRP) and more recent experience with sub-projects implemented under the Community-based Resource Management Project (CBRMP) - both projects being implemented with the assistance o f the Wor ld Bank - have experienced economic rates o f retum from 22 to 33 per cent. Representative sub-projects within the CVRP and CBRMP projects are o f a similar nature o f those qualifying for funding under this component, including micro-watershed management, agro-forestry, tree plantations I reforestation, and water and sanitation.

Component 2: Laguna de Bay and i t s watershed offers a multitude o f use values (direct, indirect, and option use values) as wel l as non-use values (existence and bequest values). Since the estimation o f indirect use values, option values, and non-use values i s generally a demanding exercise, an economic analysis was performed focusing solely on the estimation o f changes in the fol lowing direct use values o f Laguna de Bay and i t s watershed: fisheries (measured as the economic value o f fish catch lost without the project); irrigation (measured as the additional cost o f sourcing water without the proposed project); domestic water supply (measured as the avoided cost in extracting drinking water f rom alternative (groundwater) source, as wel l as the value o f raw water for domestic use without the proposed project); and recreational activities (measured as the value o f recreational benefits lost without the proposed project). Using solely these direct use values, the net present value o f Component 2 (over an horizon o f 25 years) i s estimated to be approximately PhP 460 mi l l ion (using a 12 per cent discount rate), with an economic rate o f retum o f 3 1.9 per cent. These are in practice expected to be considerably higher since other use and non-use values have not been included in the above calculation. In addition, it i s expected that L L D A ' s capacity to conduct environmental economics studies and assessment will be significantly enhanced by the proposed project and should bring long-term benefits to the authority.

2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = "6 (see Annex 4)

Component 1 : The financial viabi l i ty o f representative sub-projects was assessed. One such representative sub-project i s the implementation o f a Comprehensive Trash Reduction Program for the Muntinlupa Micro-watershed. This sub-project involves the implementation o f a trash interceptor system in the r iver and a material recovery facility. The financial rate o f retum o f the program i s estimated to be in excess o f 25 per cent. Furthermore, the financial viability o f a representative Integrated Watershed Management Project for the Pagsanjan-Lumban Mic ro Watershed was also assessed. This sub-project includes three components, each exhibiting internal rates o f retum in excess o f 16 per cent. N o t al l micro-watershed sub-projects are expected to necessarily exhibit high financial rates o f retum, but a l l are expected to deliver high economic rates o f retum. Bo th will be assessed in the context o f sub-project development and appraisal, as the project i s implemented.

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Component 2: A number o f activities to be undertaken under Component 2 are not expected to immediately generate additional fiscal revenues to LLDA (such as studies and policy planning support). However, the expansion o f the existing environmental user fee system to include total suspended solids (TSS) will take place in the course o f the project. This sole expansion in itself i s expected to generate revenues o f approximately PhP 100 mi l l ion on an annual basis. Furthermore, the implementation o f the water abstraction pricing pol icy (even if applied init ial ly to only one sector) represents significant sources o f income. For example, if applied solely to the power generation sector as a rent capture mechanism, water abstraction fees could yield revenues up to PhP 285 mi l l ion o n an annual basis. Under a conservative hypothesis whereby no additional revenues would be realized in the f i rst five years o f the proposed project implementation and that revenues would be limited solely to the above two sources from year 5 to 25, the net present value o f these revenues amount to PhP 1 bi l l ion or U S D 24 million, wel l in excess o f the estimated total costs not only o f Component 2, but o f the entire project. With the larger number o f industrial facilities covered by the environmental user fee system, the expansion o f the user fee system to include total suspended solids, and the selected implementation o f water abstraction pricing, LLDA’s revenues and net income are expected to increase by 150 and 180 per cent respectively by 2007.

Fiscal Impact:

The proposed project i s expected to have limited fiscal impact vis-.-vis the long-term positive environmental impact to be derived from the implementation o f direct micro-watershed level interventions. The adoption o f the LGU financing framework would, however, necessitate direct counterpart funding to be provided by the Government through the grant portion o f the sub-project financing, estimated at about 5.18 per cent o f the total cost.

3. Technical:

Component 1: The subprojects to be implemented under component 1 will build upon the wealth o f Philippine and worldwide experiences in technologies and practices to address watershed environmental issues such as nutrient loading, organic loading, erosion reduction, and cleanup or prevention o f trash dumping. These will be consolidated as a resource to be used in the multi-stakeholder planning and project development process and complemented by LLDA’s modeling capability and data sets that will be enhanced to better address environmental issues faced at the scale and resolution o f the micro-watershed. The technical feasibility o f each subproject will also be reviewed for the shortlisted subprojects and a thorough review o f the technical feasibility will be done during appraisal and approval o f the subproject.

Component 2: Policy andplanning support The preparatory work and the experience o f the Dutch-funded technical assistance were able to identify priori ty technical improvements in pol icy and planning support that could be undertaken through the proposed project. These include improvements to LLDAs monitoring and reporting procedures as wel l as the application o f modeling and GIS tools to decision making and action programming. The monitoring system will be expanded to include new locations and improved sample frequency and the laboratory facilities will be upgraded. State o f the art GIS and modeling tools that were developed under the Dutch-funded technical assistance will be expanded to include a shoreland information system that will use remote sensing, GIS and GPS technologies to monitor resource use and development. Under the proposed project these tools will be integrated into LLDAs activities including: management decision making, EIA review, master plan development, the micro-watershed planning process and ongoing research program.

Regulatory instruments and incentives Preparatory work identified technical gaps and barriers to

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implementation o f command-and-control; market-based incentives; and self-regulation in Laguna D e Bay and recommended ways in which the project could address them. In particular, it was found that the environmental user fee system currently has shortcomings including: poor fee collection efficiency, l imited coverage in terms o f types and sources o f pollution and the structure o f the EUF formula, which may, under some circumstance, provide an incentive to dilute rather than reduce pollution. Also LLDA’s permitting, monitoring and enforcement procedures were found to be l imited by an inefficient tracking system, insufficient laboratory facilities and a lack o f public information materials. Specific actions to address these issues have been developed, including programs to expand the EUF, improve procedures, develop a computerized tracking system, and upgrade laboratory facilities. Additionally, project preparation identified the development o f a surface water abstraction fee, more efficient use o f EUF revenues, and the development o f a public disclosure program as priorities.

4. Institutional:

4.1 Executing agencies:

LLDA was established in 1969 as a Government Owned and Controlled Corporation (GOCC). I t has jurisdiction for the entire watershed. Over the years, it has evolved into a planning and regulatory agency, and has not embarked o n any major infrastructure projects. It i s a self-financed organization, with regulatory activities being the main source o f i ts revenues. The organization i s at a crucial juncture with public pressure building on it to take more aggressive steps to protect the environmental quality o f the watershed. This would require LLDA to enhance staf f skills and facilities, strengthen its regulatory capability, create incentives for stakeholders l ike LGUs and enterprises to improve their environmental performance and expand community networks through RCs. A PHRD-funded Technical Assistance assisted LLDA in the preparation o f the three-phase Re-engineering Program that responds to the above challenges and enabling it to become an effective watershed management authority. The details o f these could be found in the LIDO (see annex 12). The f irst phase involved detailed studies, and the second phase wil l be the transition to a new structure, regrouping o f functions and re-assignment o f staff. The third phase will be the formalization o f the program by DBM.

A separate assessment o f MDFO performance and i t s reorganization was undertaken under the Local Government Finance and Development Project (LOGOFIND). A s a result, the government has decided to corporatize MDFO as an affiliate o f the Landbank o f the Philippines. This recent development has been taken into consideration in designing the sub-project review and appraisal process o f the proposed project, and implications are expected to be minimal as LLDA will perform these functions while MDFO role will be l imited to passing on the funds to LGUs as per the protocol outlined in the Operations Manual. The Executive Order (EO), establishing the MDFO as a corporate entity i s currently being drafted, and at negotiations it was agreed that when the EO becomes final, the Loan Agreement will be amended accordingly.

LGUs will be responsible for sub-project design and implementation. In recognition that capacity at these levels are very weak, the proposed project will support targeted capacity building activities to build capacity in project management, and environmental and social management. Further, at the LGU-level the capacity building will be performance-based, and in the event a LGU fails to implement a feasible sub-project for which borrowing capacity exists, it will be required to reimburse the costs o f the feasibility study and some o f the capacity building activities. The sub-project development cycle was simplified during the appraisal mission.

The proposed project will require inter-LGU collaboration within a micro-watershed, to achieve the desired

- 2 1 -

environmental outcome. As previously mentioned, the proposed project will strengthen the role o f River Councils (RCs) to function as the mechanism for inter-LGU collaboration, stakeholder participation and consensus building in the preparation o f plans, and identification and implementation o f sub-projects. Specific training programs will be conducted through the RCs for LGUs and other stakeholders, which were finalized during appraisal and included in the Project Implementation Plan (PIP).

4.2 Project management:

Project management arrangements are described in section C4.\

MDFO i s a known client to the Bank, and i s very familiar with Bank requirements, however, LLDA has not implemented a Bank project o f this scale and therefore project-specific adjustments were necessary within LLDA. A Project Coordination Office (PCO) will be established in LLDA to coordinate procurement, financial management, special account and disbursement arrangements for the project, while the technical functions will be undertaken by the relevant operational divisions o f the LLDA.The LLDA has assigned eight full-time staff to PCO, including a Project Coordinator. The other core staff include: (a) Procurement Specialist; (c) Financial Management Specialist; (d) Social Safeguards Specialist; (e) Environmental Safeguards Specialist; ( f ) Training Specialist and (g) support staff. Additional staff needed in the PCO and Operational Divisions wil l be hired on contract basis, as and when the need rises. I t i s estimated that up to 10 regular s taf f and 15 contract staff wil l be needed for the duration o f the project. The LLDA Memorandum Order 2003-53 (dated October 3,2003) explains the staffing and job descriptions.

Project management arrangements for sub-proj ect development and implementation will be the responsibility o f the LGUs, who will establish a Sub-project Management Team (PMT) made up o f regular LGU staff. The proposed project wil l provide consultant services to LGUs for the preparation o f feasibility studies, detailed engineering design and construction supervision and monitoring. To overcome any budget cover shortfall due to delays in the approval o f the General Appropriations A c t in the Congress, LLDA will advance funds to MDFA, so that Sub-project Loan Agreements can be signed.

4.3 Procurement issues:

The Procurement Capacity Assessment identified two issues: (i) the lack o f an experienced procurement specialist to manage the procurement activities o f the project and to assist the LGUs in the conduct o f their own procurement activities. Recruiting this position i s part o f the action plan to strengthen the PCO’s capacity. The procurement specialist, together with other PCO and LGU staff will be provided training by given by the Bank staff o r through the regular courses offered by the Asian Institute o f Management (AIM). The frequency o f training needs will be agreed during the appraisal mission; and (i) the need to institutionalize open and transparent procurement policies at the LGU and community levels that are consistent with Bank and GoP procurement procedures. Many LGUs and local communities have limited experience with such procurement processes. These procedures are essential elements for building transparency, confidence and trust in local government institutions. In this respect, the project has worked out appropriate procurement methods and arrangements to ensure transparency, economy and efficiency.

4.4 Financial management issues:

LLDA has the necessary institutional arrangements for the successful implementation o f the proposed project and the assessment indicates that its financial management arrangements also meet the Bank’s minimum requirements. Nevertheless, there are some r isks that need to be mitigated. The financial management and Accounting protocol detailed in the financial management manual should ensure that the project funds are properly used. The budget cover risk o f the IBRD loan and counterpart funding for the grant portion are mitigated by DENR assuming the former for the entire duration o f the project, while the

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latter i s financed from LLDA's corporate funds and project development facility, and LGU equity contributions. The risk o f project funds not being efficiently and effectively used i s moderate, as necessary internal controls have been codified in the Financial Manual. Inadequate and trained staf f at LLDA and MDFO can cause delays in submissions o f reports and withdrawal application. This is being minimized by having a staffing plan in the financial management manual and also the relevant staff o f these two agencies plus LGUs and C o A will undergo orientation and training in the use o f the project's financial management and accounting system, as detailed in the manual. Also, provisions have been included in component 2 to update the manual based o n init ial implementation experiences. To reduce risk at the LGU-level, the terms and conditions o f financing have been made attractive, which include the LLDA subsidizing ha l f o f the LGU equity and capacity building grants, while at the same time borrowing capacity certification and commitment to make available funds for operation and maintenace for a sub-project are pre-requsites before L G U s sign sub-project MOAS with LLDA and MDFO. Also, the release o f loan proceeds wil l be in proportion to the equity portion o f a sub-project. The financial management arrangements are detailed in Annex 6B.

5. Environmental: 5.1 Summarize the steps undertaken for environmental assessment and E M P preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The proposed project i s designed to improve environmental conditions in the Laguna de Bay watershed. The activities that will necessitate an environmental assessment and EMP are those associated with the subprojects under the first component. The environmental assessment o f planned intervention in micro-watersheds will take place at the micro-watershed planning process and during sub-project development and implementation. While the exact subprojects have not been identified, it i s anticipated that the nature o f the eligible subprojects are such that the majority o f them will result in only site-specific, reversible, and mitigable negative environmental effects (ie, those associated with small construction works and minor natural habitats conservation issues). Sensitive impacts such as those affecting natural habitats; cultural property; indigenous peoples and loss o f land or assets, wil l be unlikely, small in scale and can be easily identified, avoided or mitigated and measures to address impacts will be incorporated into the subproject planning and implementation. For this component a programmatic approach, Environmental and Social Safeguards Framework (ESSF), has been prepared as part o f the Operations Manual and integrated to the micro-watershed planning process. The ESSF i s consistent with Wor ld Bank Safeguard Policies and relevant guidelines o f GoP.

5.2 What are the main features o f the E M P and are they adequate?

The ESSF spells out the EA principles to be included in the micro-watershed planning process, screening and el igibi l i ty criteria for sub-projects, operational procedures for reviewing EMPs, institutional arrangements, consultation and disclosure requirements and compliance monitoring. The micro-watershed planning process will establish the baseline environmental conditions, options to improve environmental quality and priori ty sub-projects. The LGU proponents o f sub-projects will need to prepare EMPs in accordance with the draft ESSF, which will be reviewed by LLDA prior to sub-project approval. The ESSF i s explained in Annex 1 1.

5.3 For Category A and B projects, tinieline and status o f EA:

Environmental Category: B (Partial Assessment)

Date o f receipt o f f inal draft: N/A

5.4 H o w have stakeholders been consulted at the stage o f (a) environmental screening and (b) draft EA report o n the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were used and which groups were consulted?

The ESSF stipulates that environmental screening o f subprojects and the draft EA and E M P wil l be done

as an integral part o f the micro-watershed planning process (see table in Annex 11 for details) which will include inputs from al l stakeholders. The Framework has been disclosed by LLDA prior to appraisal by posting them in the central and f ield offices o f LLDA and selected LGUs and this was validated by the appraisal mission.

5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP?

An important part o f the proposed project i s the monitoring and evaluation framework . The framework will be used as the platform to monitor the implementation and achievement o f project development objectives (including environment) at three levels: (i) Institutional Development as spelt in the LIDO; (ii) Project Outputs and Outcomes - monitoring o f specific project activities and expected outcomes; and (iii) Project Management - procurement, safeguard compliance, disbursement and financial management. Annually, the monitoring results will be published in the Laguna Lake Environment Monitor and discussed as part o f a Leaming Forum. Also DENR and LLDA, will conduct a multi-stakeholder compliance monitoring and audit o f the EA and E M P implementation for subprojects.

6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes.

The project's long-term social development outcomes are those related to the benefits o f improved water quality and water conservation in the watershed including improvement in fisheries, aesthetics, health, and water supply. In the short-term, the project could result in a variety o f local benefits such as: livelihood improvement; aesthetic improvements and reducing localized pollution sources. In addition, the project will provide a structure for improve participation in environmental management o f the Laguna D e Bay watershed.

Potentially detrimental social issues associated with the project include: (i) Subproject-related effects: Resettlement, land acquisition or loss o f assets due to subprojects will be uncommon but are dealt with through the ESSF (see Annex 11 and safeguards section below for details); and (ii) Social implications of fee structures: The design and pi lot ing o f the EUF for households, the user fee for surface water abstraction and a water trading system, will include social studies addressing issues such as poverty impacts o f different fee schedules, willingness to pay, awareness and social acceptability.

6.2 Participatory Approach: H o w are key stakeholders participating in the project?

The stakeholders in micro-watersheds include: LGUs, LLDA, national agencies, private enterprises, c iv i l society organizations, community groups and media. The proposed project i s designed to facilitate increased participation o f these stakeholders in the environmental management o f Laguna de Bay watershed. The micro-watershed planning process and the River Councils are the two mechanisms through which this will take place. As part o f the micro-watershed planning process, key stakeholders will be mapped. At the beginning o f a subproject development, the main micro-watershed stakeholders will be identified to ensure they are involved in the design and implementation stages. This will enable stakeholders to develop an unif ied environmental goal, reach consensus o n planned interventions, establish a dispute resolution mechanism, share information o n project activities and participate in monitoring o f project progress. The second component o f the proposed project will undertake specific capacity building activities to strengthen consultation and participation sk i l ls o f stakeholders. In addition, the proposed project will also support LLDA and River Councils to expand information, education and communications campaigns that are currently being undertaken.

For indigenous groups, special consultations will be undertaken and the National Commission for

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Indigenous Peoples will act as an advisor to ensure their views are taken into account (see safeguards section and annex for details on I P issues).

6.3 H o w does the project involve consultations or collaboration with NGOs or other c iv i l society organizations?

LLDA consulted with NGOs during the formulation o f i t s reengineering program, and their views helped shaped the organization's approach to establishing community networks through RC. NGOs are expected to be involved in both the micro-watershed planning process and sub-project development. Also, the proposed project wou ld support opportunities for NGO groups to be contracted by LLDA and LGUs to undertake specific activities in sub-project implementation. Specific areas where operational NGOs cold be involved include: waste recycling and material recovery, eco-tourism, community training, third-party monitoring, awareness campaigns etc.

6.4 What institutional arrangements have been provided to ensure the project achieves i t s social development outcomes?

The River Councils and i ts constituent stakeholders will convene the participatory subproject planning process, thus allowing social concems to be mainstreamed into subproject development. The subproject appraisal and approval criteria, which include the social benefits o f the subproject, will also help ensure the social development outcomes are integrated into the subprojects.

6.5 H o w will the project monitor performance in terms o f social development outcomes?

The monitoring and evaluation framework includes provision for monitoring social issues in addition to environmental improvements. These will be aggregated and discussed as part o f an annual learning forum to be undertaken to monitor project impact and the environment o f the Laguna D e Bay Watershed.

Pest Management (OP 4.09) Cultural Property (OPN 11.03) Indigenous Peoples (OD 4.20) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP 4.37, BP 4.37) Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)"

7. Safeguard Policies:

0 Yes 0 No 0 Yes 0 No 0 Yes 0 No 0 Yes 0 N o 0 Yes 0 N o 0 Ycs 0 No 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The ESSF integrates the environmental goals o f the proposed project and the appropriate aspects o f the Wor ld Bank and GoP policies into project planning and implementation. This includes an explicit process for OP 4.01: Environmental Assessment and OP: 4.36 Forests, and Policy Frameworks for OD 4.20: Indigenous Peoples and OP 4.12: Involuntary Resettlement. Additionally, although not expected to be triggered by the project, contingencies are made in the subproject planning and implementation process to ensure compliance with OP: 4.04 Natural Habitats, OP: 4.09 Pest Management and OPN: 1 1.03 Cultural Property.

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F. Sustainability and Risks 1. Sustainability:

LLDA mandate. There are moves by members o f Philippines Congress to establish an umbrella regulatory agency in the country similar to the US-Environmental Protection Agency. It i s too early to determine i ts impact on LLDA as there are two different proposal being discussed. However, it i s anticipated that the creation o f such an agency i s not anticipated to alter the long-term mandate o f LLDA, which i s expected to continue to perform i t s regulatory role even in a new institutional context, as the GoP stated pol icy i s to establish watershed'river basin management authorities in the country. The LIDO c o n f i i s the long-term mandate o f LLDA

Cauacitv building. The capacity building activities within LLDA will be mainstreamed as part o f the reengineering program which they and the national government are committed to implementing. These activities derive directly f rom the mandate and functions o f LLDA, and therefore, highly l ikely to be sustained. The sustainability o f the capacity building for the LGUs and River Councils wil l be enhanced through the mainstreaming o f the microwatershed planning process into local planning and using the subproject interventions as a focal point. At the same time, there i s a risk o f sustaining the commitment and interest o f the LGUs and River Council stakeholders in the planning process. The project will address this by building incentives into the planning and implementation process o f micro-watershed plans and sub-project, which include: (a) capacity building o f al l stakeholders; @I) expanding the mandate and role o f r iver councils; (c) supporting community monitoring o f micro-watershed plans and sub-project implementation; and (d) selectivity in the micro-watershed sub-projects, allowing for gradual build up o f local planning and implementation capacities.

Sub Proiects. At the sub-project level, it i s expected that project sustainability would be assured since LGUs would borrow funds to implement the projects that they have identified. Their equity contribution also enhances sense o f ownership and increases the chances o f maintaining and sustaining the project. Provisions for operations and maintenance represents one o f the conditionality that will be stipulated in sub-project agreement, where the LGUs will be required to earmark a portion o f their internal revenue allocation for operation and maintenance and non-adherence thereto would result in the grant provided to the LGUs being converted to a loan. Further, the LGUs will be required to reimburse LLDA the cost o f doing a feasibility study in the event it decides not to proceed with the sub-project after the sub-project's feasibility and the capacity to borrow have been established. This i s expected to make the LGU capacity bui lding program reward-based, while at the same time reducing the number o f sub-project dropouts.

Additionally, for subprojects that will result in a verifiable reduction o f greenhouse gases and are eligible under the Clean Development Mechanism o f the Kyoto Protocol, carbon financing wil l be sought through the Community Development Carbon Fund or other sources. Depending on the scale and types o f subprojects this could result in between a total o f US$45,000 and US$300,000 annually in incremental funding, provided during subproject operation in exchange for the carbon emissions reduction. T h i s i s a potential means o f providing an incentive for operations and maintenance o f the subprojects and thus ensure their sustainability in the medium term. The potential for obtaining this funding will be developed as a parallel activity to the proposed project.

2. Critical Risks (reflecting the failure o f critical assumptions found in the fourth column o f Annex 1):

I Risk I Risk Ratina I Risk Mitiaation Measure IFrom Outputs to Objective I I I

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Subprojects identified are feasible and capable o f reducing important environmental pressures on the lake and its watershed. Capacity o f LGUs and other stakeholders i s adequate to implement subprojects effectively.

Regulatory instruments and incentives can be effectively implemented and provide sufficient incentive to modify watershed user behavior

LLDA will implement the complementary activities under the Re-engineering Program

From Components to Outputs Sufficient interest and ability exists among LGUs to borrow for microwatershed interventions under LISCOPs borrowing framework which includes multi-LGU borrowing. LLDA and MDFO can process subproject applications and make effective decisions in a timely manner.

LLDA and LGUs are familiar with Bank procedures, especially procurement and financial management.

Newly elected LGU political leadership w i l l remain committed to the proposed project and there will be no political interference in sub-project bidding

The River Councils are able to convene the multistakeholder planning and

M

M

M

N

M

M

M

N

M

The subproject identification and approval process includes analysis and criteria based on project feasibility and impact.

Project wil l include substantial capacity building o f LGUs including project-specific implementation. Their effectiveness will be tracked through the monitoring and evaluation framework LLDA’s past record has shown that they can effectively implement these measures and they provide sufficient incentive. Further, DENR recently issued decree to mainstream public disclosure in the country and draft decree for mainstreaming EUF i s at an advanced stage. So, there exists pol i t ical support for these programs. The program has been endorsed by i t s Board. GOP will issue a letter o f institutional development objective which will capture the long-term mandate and goal. LLDA will transition to the new organizational structure before project effectiveness. Further, the performance-based grant agreement provides LLDA the incentive to implement the program .

LGU borrowing capacity was assessed for 11 LGUs, and for the remaining LGUs it wil l be done as part o f the micro-watershed planning process. The financing terms are favorable (NG-LG cost sharing scheme and LLDA grant). The approval process will be done through a single interagency technical review panel (TRP) Additional TA needs for LLDNMDFO will be provided by the project. Procurement and financial management assessment have been undertaken that include as a condition o f appraisal i s the establishment o f a PCO in LLDA that has adequate capacity in these issues. This Unit will support and supervise LGUs. In most micro-watersheds, the subproject planning will be completed after the M a y 2004 elections which will give an opportunity for new LGU administrations to be involved. Further, the involvement o f River Councils i s expected t c minimize any transitional problems Four River Councils are fully functional, and others are either being established or becoming

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facilitate the development o f good subproject proposals in a timely fashion.

Overall Risk Rating M

3. Possible Controversial Aspects:

The proposed project i s not expected to give rise to any major controversial aspects. Three aspects that could trigger some issues are: (a) conflicting mandates between LLDA and other national agencies having jurisdiction over parts o f the lake. The Philippines Supreme Court has ruled that LLDA mandate takes precedence over that o f the others; and (b) conflict in resource use among different stakeholders in the watershed. The River Councils will provide opportunities for stakeholders to resolve disputes and further stakeholders will be trained conflict resolution; and (c) issues over the equity implications o f tar i f fs proposed in project studies (and potentially p i lot programs) for implementation o f water abstraction and household environmental user fee system. Prior to the introduction o f any new tariffs and charges, LLDA will conduct extensive consultation.

operational. The project wil l provide substantial technical support and capacity building.

G. Main Loan and Grant Conditions 1. Effectiveness Condition

a. DENR has adapted and LLDA has commenced the implementation o f the second phase o f the re-engineering program as described in the LIDO.

b. At least two Sub-project Agreements are ready to be signed between MDFO and LGUs.

Negotiations

a. Signed Letter o f Institutional Development Objective (LIDO), from the Secertarymepartment o f Environment and Natural Resources, on behalf o f Republic o f Philippines (see Annex 12).

b. Signed Sub-project Memorandum o f Agreements (S-MOA) for six sub-projects among LLDA, MDFO and LGUs

c. Final Project Implementation Plan (PIP), which includes the Operations Manual (including Financial Manual, Procurement Manual and Environmental and Social Safeguards Framework), Capacity Building Plan and Monitoring and Evaluation Framework

d. Request for Proposal Package for services titled "Improving Regulatory Instruments and Approaches; and Strengthening Policy and Planning and Regulatory Functions" o f Component 2

2. Other [classify according to covenant types used in the Legal Agreements.]

Main Implementation Covenants

a. The Borrower shall and shall cause LLDA to maintain until completion o f the Project, the PCO under the direction o f an assistant general manager and headed by a Project coordinator, to be responsible for day to day management o f the implementation o f their respective Parts o f the Project, including procurement and financial management; said Unit to be provided with adequate resources, and staffed with qualified personnel in adequate number, including inter alia, two assistant project managers for

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technical and operational support functions, a procurement specialist, a financial management specialist, a social safeguards specialist, an environmental safeguards specialist and two technical support staff, a l l in a manner satisfactory to the Bank.

b. The Borrower shall: (a) cause LGUs to propose and prepare Subprojects; (b) cause LLDA to select and screen said Subprojects; (c) through TRP, appraise and endorsed the technical, environmental and financial viability o f said Subprojects; (d) through MDFO-PGB approve said Subprojects; (e) thereafter, through MDFO, make Subloans and Subgrants, to eligible LGUs, to finance said Subprojects; and (f) cause LLDA to monitor and submit the necessary reports related to said Subprojects, a l l in accordance with the criteria and procedures, and on terms and conditions set forth in the Operations Manual.

c. LLDA shall take al l necessary actions to carry out i t s Re-engineering Program as described in the LIDO, and for that purposes shall:

i. Streamline i ts operational and administrative procedures in order to improve services delivery;

ii. Reorganize i ts current structure and create four separate offices: (i) a watershed pol icy and planning office; (ii) an environmental regulations office; (iii) a management services office; and (iv) a resource management and development office;

iii. Improve career opportunities for LLDA’s staff; and

iv. Complete al l the necessary steps in order to seek Borrower’s approval o f the third phase o f LLDA’s Re-engineering Program, as described in the LIDO, by January 3 1,2005.

d. By no later than December 31, 2005, LLDA shall (a) complete the design of: (i) the Environmental User Fees System for households; (ii) the user fee system for surface water abstraction; and (iii) the water trading system; and (b) formulate a strategy for the financing o f trunk infrastructure projects, that are satisfactory to the Bank.

e. At least once every year, commencing in 2004, LLDA shall publish a Laguna de Bay Environment Monitor and conduct a public leaming forum to disseminate the lessons learnt in the environmental protection and management o f the Laguna de Bay Watershed, based o n the monitoring and evaluation framework referred to above.

H. Readiness for Implementation 0 1. a) The engineering design documents for the first year’s activities are complete and ready for the start

o f project implementation. [xi 1. b) N o t applicable.

2. The procurement documents for the f i rs t year‘s activities are complete and ready for the start o f

[XI 3. The Project Implementation Plan has been appraised and found to be realistic and o f satisfactory

0 4. The fol lowing items are lacking and are discussed under loan conditions (Section G):

project implementation.

quality.

The borrower and LLDA are wel l advanced in achieving the actions preceding effectiveness, and should pose n o obstacle to early effectiveness o f the project.

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I. Compliance with Bank Policies 1. This project complies with all applicable Bank policies.

0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

I

/

Patchamuthu Illangovan Maria Teresa Serra obert V. Pulley Team Leader Sector ManagerlDirector

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Annex 1: Project Design Summary PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

To promote sustainable urban md rural development, hrough improved protection )f the environment.

'roject Development lbjective:

To assist the Laguna Lake Ievelopment Authority LLDA), LGUs and other ,takeholders to improve the mvironmental quality o f the ,aguna De Bay watershed. rhis wil l be done through: i) encouraging behavioral :hanges and implementing ictivities by watershed users o improve the environmental luality o f the lake and i t s vatershed; and (ii) improving danning, regulatory nstruments, incentives and )articipation in the :nvironmental management if the Laguna de Bay vatershed.

Sector Indicators: Improving trends in environmental quality and public health status.

Outcome I Impact Indicators: . Atleast 10 percent reduction in pollution loading for regulated parameters and 30 percent increase in :ompliance by enterprises.

. All LGUs in at least 10 o f ihe microwatersheds have idopted multi-stakeholder nicrowatershed planning as 3art o f their municipal ievelopment planning process :local and 5 year development Jlan and annual investment Jrogram).

. At least 60 percent o f the nicrowatershed interventions :hat are implemented result in neasurable reductions in mportant environmental xessures (e.g. pollution oading, erosion reduction as i result o f afforestation and Jegetative cover, and garbage ieposited in waterways).

' 30 per cent increase in the lumber o f men and women kom community and itakeholder groups that are

- 31

Sector1 country reports: CAS Update Government statistics

'roject reports:

'rogress reports (including ;ender-disaggregated data on iarticipation)

Supervision reports

Monitoring and Evaluation 2ramework

Annual Laguna de Bay h i r o n m e n t Monitor.

[from Goal to Bank Mission) . Stable sectoral, macroeconomic, and political :onditions prevail. .Government's commitment to policy reforms to promote a sustainable and integrated water management system ioes not falter. -Political commitment to xforcement environmental laws i s stepped up.

[from Objective to Goal)

Laguna de Bay i s an important eco-system in the Philippines from a social, environmental, and water resources perspective

The proposed project will provide a replicable example o f integrated watershed management in the Philippines (and possibly other countries).

Sustained government commitment to environmentally and socially-sustainable watershed management.

Continuing interest and commitment o f communities to improve environmental quality o f the watershed.

Output from each Component: 1. Co-managed Micro-watershed Environmental Interventions

Output Indicators:

-Setting-up and Operating Monitoring and Evaluation Framework. - Multistakeholder planning process (Lake environment action planning-LEAP) conducted in 24 micro-

2. Strengthening Institutions and Instruments

Project reports:

- Progress reports (including gender disaggregated data on participation). - Supervision reports - Laguna de Bay Environment Monitor - Annual Learning Forum

involved in watershed planning and management.

- LLDA has implemented the - Progress reports (including new structure and completed its re-engineering program as anvisioned in the L IDO. - Modif ied EUF formula officially adopted. - Operational guidelines for expansion o f EUF to new mterprises and their Zollection adopted. - Public disclosure o f industry md LGU performance occurs I t least twice. . Measures to upgrade ?ermitting, monitoring, :nforcement, policy, and danning procedures officially idopted in LLDA. . infrastructure strategy idapted by LLDA. . Operational guidelines for EUF expansion to households

from Outputs to Objective)

gender-disaggregated data on participation). - Supervision reports - Annual Laguna de Bay Environment Monitor. - Annual Learning Forum. - Organizational Maturi ty Assessment for River Councils. - Public Perception Survey o f stakeholders to assess effectiveness o f outreach programs and River Councils.

Subprojects identified are 'easible and capable o f ,educing important mvironmental pressures on he lake and i t s watershed.

takeholders i s adequate to mplement subprojects :ffectively .

Capacity o f LGUs and other

. Government o f Philippines :DoF, DBM and DENR) mdorses the LLDA .e-engineering program. . Regulatory instruments and ncentives can be effectively mplemented and provide rufficient incentive to modify Natershed user behavior. . LLDA will implement the :omplementary activities inder the Re-engineering Program.

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'roject Components / iu b-components: :o-managed dicro-waters hed hvironmental nterventions .2 Sub-project Development .2 Subproject aplementation and upervision

Xrengthening Institutions nd Instruments .l Enhancing LLDA :apacity .2 Capacity Building o f Aicro-watershed stakeholders .3 Project Coordination lupport .4 Monitoring, Evaluation nd Learning

md regulation o f water-use leveloped. ' Capacity o f River Councils substantially expanded.

nputs: (budget for each :omponent) US$ 6.2 million

I. 1 0.4 mi l l ion I .2 5.8 mi l l ion

W$ 6.2 million

!.l 3.0 mi l l ion !.2 1.3 mi l l ion

!.3 1.3 mi l l ion

!.4 0.6 mi l l ion

Iroject reports:

'or both components Progress reports (including ,ender-disaggregated data on Narticipation). Project supervision reports Disbursement reports Annual project work lrograms Annual Laguna de Bay hvironment Monitor

from Components to Iutputs) :or both components Newly elected LGU political eadership wil l remain :ommitted to the project and here i s no polit ical nterference in subproject lidding. Sufficient interest and ability

:xists among LGUs to borrow md LLDA and MDFO can p i c k l y process sub-project ipplications The River Councils are able

o function as nultistakeholder consultative ,odies. ' LLDA and LGUs are 'amiliar wi th Bank irocedures, especially xocurement and financial nanagement . LLDA Board i s supportive md responds quickly to :hanging needs during -e-engineering

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Annex 2: Detailed Project Description PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

By Component:

Project Component 1 - US$6.30 million

This component will have two sub-components: (i) Sub-project preparation and monitoring; and (i) Sub-project investments (civil works, goods and construction supervision). This component will finance c iv i l works, equipment, consultant services, and training and outreach activities for designing and implementing environmental interventions (sub-projects) identified through a participatory planning process (Laguna Micro-watershed Environmental Action Plan - LEAP) involving stakeholders in a micro-watershed. The L E A P process will identify priorities and interventions. These interventions will constitute an integrated program o f sub-projects that will be implemented within a micro-watershed by mult iple LGUs, with each LGU borrowing for a sub-project within its jurisdiction. The details o f the L E A P process and sub-project development are detailed in the Operations Manual. The average size o f each sub-project i s expected to be in the range o f US$ 100,000-200,000. The financing o f sub-projects will fo l low the Government’s revised NG-LGU Cost Sharing Scheme for Devolved Activities that was announced on January 1, 2003. Accordingly, the LGUs will need to provide equity in the range o f 10-20 percent, and the balance will be financed through a combination o f grants and loans (depending on the income class o f LGU) funded by the loan. In addition, LLDA will provide an equity subsidy to each LGU, not exceeding ha l f the total equity for a sub-project, as an incentive for LGUs to invest in environmental improvement in the context o f a micro-watershed. For each micro-watershed, a River Council will facilitate inter-LGU collaboration and community involvement in the LEAP and sub-project planning and implementation. Each participating LGU will establish a Sub-project Management Team (SPMT) to execute a subproject.

An open menu o f sub-project interventions may broadly fa l l under the fol lowing general themes:

0 Waste Management and Sanitation. Includes solid waste management, communal bio-gas systems, establishment o f trash traps, waste reuse, recycling and community sanitation projects;

0 Natural Resource Management. Interventions addressing watershed management issues in the upper watershed are l ikely to be undertaken by non-lakeshore LGUs. Sub-projects under th is theme would include sustainable agriculture, agro-forestry and reforestation; Eco-tourism. Sub-projects such as the development o f parks and recreational facilities; and Soil erosion and localized f lood prevention. Sub-projects under this classification include: shoreline protection and embankment (including tree-planting and other activities addressing vegetation cover), minor tributary river channel improvement including clean-up and dredging.

The loan proceeds wil l finance civ i l works, goods and small part o f the consultant services, while the grant from the Government o f Netherlands will fund consultant services, goods and training activities for sub-project preparation. Preparation o f LEAPS will be financed through component 2.

0

0

Project Component 2 - US$6.30 million

This component will finance consultant services, goods, training and outreach activities to enhance the capacity o f LLDA, LGUs, River Councils and community groups through the fol lowing sub-components:

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Subcomponent 1 - Enhancing LLDA Capacity

Act iv i ty A: Improving Regulatory Instruments and Approaches. The EUF will be expanded and strengthened by improving the formula used to calculate the pollution charge, increasing the collection rate, and expanding the number o f users and pollutants. A Public Disclosure Program for enterprises and LGUs will be introduced at a pi lot level. Additionally, studies will be undertaken to explore the application o f the EUF to the household sector, and the introduction o f water pricing and trading systems. To complement and support the pi lot ing o f these instruments and incentives, LLDA ’s permitting monitoring and enforcement procedures will be strengthened as part o f the project. Activi ty B: Strengthening Policy and Planning. LLDA’s ambient water quality monitoring and reporting program will be strengthened by expanding and optimizing the frequency and location o f monitoring, developing laboratory manuals, and upgrading and modemizing the facilities and equipment. The project will further develop the Decision Support System, a state-of-the-art system that uses environmental modeling and monitoring databases to describe and predict the environmental quality o f the watershed, by integrating it into other LLDA databases, providing better data and parameter estimation and implementing training programs for LLDA staff. Specific action plans also will be developed based on DSS information and their implementation will be piloted. Also the information, education and communication program at LLDA will be strengthened through expansion o f i ts tools and resources and development o f more effective outreach techniques and materials. Further, th is component will support the modernization o f LLDA management information system, including computerization o f i t s accounting and procurement functions. Activi ty C Strenthenging Information, Education and Communication Program , This activity will support LLDA to expand its Information, Education and Communication Program through: (i) the development and implementation o f communications strategy and plan; (ii) the establishment o f a civil-society managed Leaming Resources Center; and (iii) providing assistance to c iv i l society and media organizations to underake I E C campaigns and surveys. Act iv i ty D: Formulating a Strategy for Trunk Infrastructure This subcomponent will explore the use o f LLDAs regulatory revenues to leverage other sources o f financing trunk infrastructure projects. A strategy and a prototype unit will be set up to encourage infrastructure project development by leveraging project development ski l ls and mobil izing financing. If successful, it will be graduated to full-scale project development facility at the end o f the project. The project will fund the strategy preparation and set-up o f the unit, the preparation of a prototype infrastructure project and the development o f a business and implementation plan.

Subcomponent 2 - Capacity Building of Stakeholders in the Micro-watersheds

0 Activi ty E: Preparing Laguna Micro-watershed Environmental Act ion Plans This sub-component will support the participatory micro-watershed planning process in 20 micro-watersheds (four are being undertaken during project preparation). The process will be facilitated by River Councils and involve the LGUs, private enterprises and community groups in a micro-watershed. The specific activities wil l include: (a) social marketing and promotion; (b) household and enterprise surveys; (c) water quality monitoring; (d) technical analysis for identifying sources and causes o f environmental degradation; (e) setting priorities, and identifying solutions and technical options; (f) public consultation and participation; (8) consensus building; (h) detailing social, environmental and technical interventions;(i) capacity building needs assessment; (j) preparing action plans; (k) disclosure and dissemination. ConsultantsinGOs wil l assist in the conduct o f these activities, whose costs will be financed by the project. Activi ty F: Training and Skills Development o f LGUs, RCs and Community Groups The activities under this component wil l be guided by the Needs Assessment done as part o f the L E A P process. The

0

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training programs will be grouped into two broad categories: (a) cross-cutting activities that are important for micro-watershed protection involving al l stakeholders; (b) stakeholder-specific targeted activities. Another major thrust o f this sub-component will be the capacity building o f River Councils. It i s expected that LGU staff will be trained in environmental, social and project management topics (sub-project development i s covered under Component 1) and communities in basic project management, routine operation and maintenance, raising environmental awareness and watershed monitoring.

Subcomponent 3: Project Coordination Support

This sub-component will finance consultant services and goods. The sub-component will mainly provide incremental operating support to LLDA for procurement, financial management, environmental and social safeguards and technical specialists needed to review and appraise LEAPS and sub-project documentation, and a project management consultant for MDFO. LLDA will provide the core positions through i t s counterpart funding.

Subcomponent 4: Monitoring, Evaluation and Learning This sub-component will financial consultant services, goods and workshops to set-up and operationalize a Monitoring and Evaluation Framework, conduct learning forums and publish annual environmental monitors

This component wil l be financed by grant funds from the Government o f Netherlands, and counterpart funding o f LLDA.

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Annex 3: Estimated Project Costs PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

Goods Su b-projects Services Training Works

1 Total Project Costs

Front-end fee Total Financing Required

Component 1 : Co-Managed Micro-watershed Environment Interventions Component 2: Strengthening Institutions and Instruments Total Baseline Cost

Physical Contingencies Price Contingencies

0.90 0.00 0.90 5.70 0.00 5.70 3.10 1.90 5.00 0.20 0.30 0.50 0.30 0.00 0.30

10.20 2.20 12.40

0.05 0.05 10.20 2.25 12.45

Total Project Costs’ Front-end fee

Total Financing Rewired

5.40

3.50 8.90 0.90 0.40

10.20

10.20

2.20 I 12.40

0.05 I 0.05 2.25 I 12.45

I Identifiable taxes and duties are 0.33 (USSm) and the total project cost, net oftaxes, IS 12.12 (US$m). Therefore, the project cost sharing ratio i s 41.27% o f

total project cost net of taxes.

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Annex 4: Cost Benefit Analysis Summary PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

Sub-project

Trash Reduction Program Materials Recoverv Facilitv

Summary of Benefits and Costs:

NPV at 12% over 10 years Financial internal rate of (Pesos) return 635 503 25%

2 234 000 28.6%

Component 1

Sub-project

Eco-tourism in MajajayiTaytay falls Agro-ecological tourism in the Lumban Delta Plain Mt. Banahaw de Lucban Botanical Garden

This component aims to support numerous demand driven LGU sub-projects that will address micro-watershed wide priorities. Since the nature o f these sub-projects is demand driven, economic and financial analyses o f sub-projects will be performed o n a case by case basis as they are developed and appraised. However, the financial viability of representative sub-proj ects was assessed in the context o f project preparation.

NPV at 12% over 10 years Financial internal rate (Pesos) of return 533 530 16%

1255 690 17%

3 295 470 17%

Financial. One such representative sub-project i s the implementation of a Comprehensive Trash Reduction Program for the Muntinlupa Mic ro Watershed. This project involves the implementation o f a trash interceptor system, and o f a material recovery facility. The financial rate of retum of the program i s estimated to be in excess of 25%.

Table 1 Trash Reduction Program for the Muntinlupa Micro

Watershed Financial analysis

The financial viability o f a representative Integrated Watershed Management for the Pagsanjan-Lumban Mic ro Watershed was also assessed. This watershed management includes three sub-projects with estimated N P V and financial rate o f retum as presented in Table 2.

Economic analysis. The expected economic rates of retum o f the above representative sub-projects i s expected to be significantly larger than the estimated financial rates o f return as the financial analyses

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include solely financial benefits and do not include al l economic benefits o f the sub-projects (such as health benefits associated with a reduction o f water pollution, and off-site environmental benefits). As a matter o f illustration, sub-projects implemented under the Central Visayas Regional Project (CVRP) and more recent experience with sub-projects implemented under the Community-based Resource Management Project (CBRMP) - both projects being implemented with the assistance o f the Wor ld Bank - have experienced economic rates o f return f rom 22% to 33%. Representative sub-projects within the CVRP and CBRMP are o f a similar nature o f those qualifying for funding under Component 1 o f the LISCOP including micro-watershed management, agro-forestry, tree plantations / reforestation, and water and sanitation.

Component 2

The overall objective o f Component 2 i s to promote the sustainable management o f the resources o f the Laguna de Bay by: (1) strengthening the regulatory, planning, and monitoring capacity o f LLDA; (2) expanding the use o f market-based instruments to create incentives for pollution control and the conservation o f natural resources; and (3) strengthening institutions and building capacity o f LGUs and River Councils.

Financial. A number o f activities to be undertaken under Component 2 are not expected to immediately generate additional fiscal revenues to LLDA (such as studies and pol icy planning support). However, the expansion o f the existing environmental user fee system to include total suspended solids (TSS) will take place in the course o f the project. Furthermore, the implementation o f the water abstraction pricing pol icy (even if applied init ial ly to only one sector) represent significant sources o f income.

Financial forecasts o f costs and revenues resulting f rom the implementation o f the expanded EUF depend on a large number o f assumptions including: (1) the level o f the user fee; (2) the existing pollution load and changes in pollut ion load as the user fee i s introduced; (3) the number o f targeted f i rms; and (4) the collection efficiency. Similarly, estimates o f revenues from raw water pricing depend on: (1) the level o f the volumetric price; (2) the existing estimated abstraction o f water and changes in water abstraction as the pricing scheme i s introduced; (3) the coverage o f the new tarification scheme; and (4) the collection efficiency.

Estimates o f financial revenues for the period 2004 - 2007 for the sole expansion o f the EUF to TSS and the introduction o f raw water pricing have been performed under the conservative assumptions presented in Table 3. These assumptions are based on 2001 actual levels o f TSS discharges and water abstraction.

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Table 3 Assumptions for the calculation of revenues from expanded EUFS to TSS and raw water pricing

2004 I 2005 2006 2007

Under these assumptions, expected revenues from the expanded EUFs and water abstraction pricing have been estimated to be the following:

Expansion to TSS

Total Raw water pricing

Table 4 Estimated revenues from expanded EUFS

(thousands pesos)

2004 2005 2006 2007 81,731 99,150 104,768 112,325

401,681 453,640 497,282 546,670

-

319,950 354,490 392,514 434,345

Under a conservative hypothesis whereby n o additional revenues would be realized in the first 5 years o f Project implementation and that revenues would be l imited solely to PhP 100 mil l ions f rom TSS pollut ion fees and P 285 from water abstraction pricing applied solely to power generation as a rent capture mechanism from year 5 to 25, the net present value o f these revenues amount to Php 1 bi l l ion or U S D 24

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million, well in excess o f the estimated total costs o f the entire project.

With the implementation o f these market-based instruments, LLDA ’s revenues and net income are expected to increase by 150% and 180% respectively by 2007 over the levels experienced in 2001.

Economic. Laguna de Bay and i t s watershed offers a multitude o f use values (direct, indirect, and option use values) as we l l as non-use values (existence and bequest values). Since the estimation o f indirect use values, option values, and non-use values i s generally a demanding exercise, an economic analysis was performed focusing solely on the estimation o f changes in the fol lowing direct use values o f Laguna de Bay and i t s watershed: Fisheries (measured as the economic value o f fish catch lost without the project); Imgat ion (measured as the additional cost o f sourcing water without the Project); Domestic (measured as the avoided cost in extracting drinking water f rom alternative (groundwater) source, as well as the value o f raw water for domestic use without the Project); and recreational activities (measured as the value o f recreational benefits lost without the Project). Using solely these direct use values, the net present value o f Component 2 (over an horizon o f 25 years) i s estimated to be approximately PhP 460 mi l l ion (using a 12% discount rate), with an economic rate o f return o f 3 1.9%. These are in practice expected to be considerably higher if other use and non-use values were to be included in the analysis.

Main Assumptions: NIA

Sensitivity analysis / Switching values of critical items: NIA

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Annex 5: Financial Summary PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP Years Ending

FYO4-FY 09

IMPLEMENTATION PERIOD I Year1 I Year2 I year3 I year4 1 Year5 1 Year6 I Year 7

Total Financing Required Project Costs Investment Costs 1 .o 1 .o 3.0 3 .O 1.6 0.4 0.0

Recurrent Costs 0.2 0.2 0.7 0.7 0.4 0.1 0.0 Total Project Costs 1.2 1.2 3.7 3.7 2.0 0.5 0.0

Front-end fee 0.1 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 1.3 1.2 3.7 3.7 2.0 0.5 0.0

Financing IBRDllDA Government

Central Provincial

Co-financiers Government of Netherlands LGUs LLDA Total Project Financing

Main assumptions:

0.5 0.5 1.5 1.5 0.8 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.5 1.5 1.5 0.8 0.2 0.0

0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.2 0.2 0.6 0.6 0.3 0.1 0.0 1.2 1.3 3.7 3.7 2.0 0.5 0.0

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An n ex 6( A) : P roc u rem en t A r ra n gem e n t s PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

Procure men t

1. Bank Loan will be carried out in accordance with the Bank’s procurement guidelines (“Guidelines - Procurement under IBRD Loans and IDA Credits” o f January 1995, revised January and August 1996, September 1997, and January 1999; and the “Guidelines - Selection and Employment o f Consultants by Wor ld Bank Borrowers” o f January 1997, revised September 1997, January 1999 and M a y 2002). In the case o f procurement under National Competitive Bidding (NCB) method, an Annex in the Procurement Schedule o f the Loan Agreement and Project Agreement will be included detailing the procedures under the existing national laws that are not acceptable to the Bank.

Guidelines. Procurement o f works, goods and consultant services funded whol ly or partly by

The loan proceeds will finance subprojects (civi l works and goods) and small part o f the consultant services, while the grant f rom the Government o f Netherlands will fund consultant services, goods and training activities for sub-project preparation. Procurement for the grant component funded by the Government o f Netherlands shall fo l low al l Wor ld Bank procurement guidelines as above.

2. Project will be implemented by the Laguna Lake Development Authority (LLDA), with participation f rom Local Government Units (LGUs) being served by the Authority, which are responsible for the implementation o f their respective subprojects. An assessment o f L L D A s capacity to implement project procurement was f i rs t carried out in February 2002, and updated in August 2003; while the assessment o f a representative LGU (that o f the Municipalities o f Bay and Calauan) was carried out in August 2003. The general findings o f the assessments conform with the findings and recommendations o f the Bank’s Country Procurement Assessment Report (CPAR), which was completed in June 2002. Overall risk assessment for the project: high risk category.

Summary of the Procurement Capacity Assessment of the Implementing Agencies. The

Laguna Lake Development Authority. LLDA will be responsible for the selection o f consultants, conduct o f training/workshops, procurement o f goods and a small works contract, a l l funded by the Dutch grant, and will provide oversight function to the subproject activities by the LGUs. LLDA, as the overall implementing agency, will have oversight responsibility o f procurement activities conducted by the LGUs and will provide necessary training and ensure quality o f procurement services. The procurement capacity assessment found that the proposed P M O for the project has staff that are equipped with working knowledge o f procurement but has l imited prior experience in procurement o n Bank-funded projects, as they have only implemented P H R D grants for the Bank. This P M O will include staff that are, not only currently, involved in the implementation o f on-going PHRD grants, but were also involved in the selection o f the consultants for these grants. The assessment, however, concluded that LLDA will s t i l l require the expertise o f a Procurement Specialist who i s very experienced on Bank procurement, to help them facilitate al l the required procurement o n the project, as wel l provide assistance to the LGUs o n their procurement activities. Risk assessment o f LLDA i s considered to be average.

LGUs. The LGUs will be responsible for the procurement o f the subprojects, and the selection o f consultants to supervise their subprojects. The assessment o f two representative LGUs (Bay and Calauan in Laguna) found that they have not been involved with projects funded by the Bank. Both are small municipalities, and they fol low the Local Government Code in the conduct o f their procurement, not P.D.

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#I 594 nor E.0 #40. They have, however, established bid and award committees, and have been doing local competitive bidding (no I C B nor N C B yet). In general, this is true for most o f the LGUs served by LLDA. The assessment concluded that the LGUs will require substantial training on the procurement procedures that will be applicable to the project, and assistance from LLDA in the conduct o f their procurement activities. An action plan i s included in the Procurement Assessment Capacity Report, and the LGUs’ capabilities shall be strengthened by available resources f rom the Grant component o f the Project. Risk assessment for the LGUs i s considered to be o n the high side.

3. procedures acceptable to the World Bank. The Country Procurement Assessment Report (CPAR) for the Philippines was completed in June 2002, and it assessed the procurement risk as average. The Philippines’ Public Procurement System, through i ts various laws, rules and regulations, adhere to the principle o f competition and are intended to promote faimess, economy, efficiency and transparency. However, there are certain rules and regulations, and procedures, which may not fully support these principles in procurement transactions. Also, there are serious weaknesses in the implementation o f the system which led to: (a) cumbersome procurement processes and unnecessary delays; (b) inadequate capacity o f implementing agencies; (c) ineffective oversight; (d) high incidence o f rebidding; and (e) lack o f accountability.

In recent years, the conflicts with the Bank’s Procurement Guidelines for works and goods and the Consultants’ Guidelines have been lessened through the amendments made to national bidding laws, rules and regulations. The amendments invariably mandate that “for contracts financed partly or whol ly with funds from international financing institutions, the corresponding l odg ran tk red i t agreement between the government and the concemed IF1 shall prevail.” Most recently, an “Act Providing for the Modernization, Standardization and Regulation o f the Procurement Activities o f the Government and for Other Purposes”, otherwise known as Republic Ac t No. 91 84, was approved into law by the President o f the Republic o f the Philippines in January 2003. The waiver provisions mentioned above are also found in this R.A. No. 9184. However, there are s t i l l several conflicts between the procurement procedures o f the Republic o f the Philippines and those o f the Bank. An annex in the procurement schedule in the loan agreement and grant agreement will be included detailing procedures under existing national laws that are not acceptable to the Bank. This annex will have among others, the fol lowing provisions:

Conflicts between the procurement procedures o f the Government o f the Philippines and

National Competitive Bidding (NCB) opportunities shall be advertised in national newspapers o f general circulation, with sufficient time for bidders to prepare offers, which shall not be less than 30 days, unless a different time i s specifically agreed upon by the Bank. Posting shall also be done in the Government Electronic Procurement System (GEPS) or the Procuring Entity’s website. Foreign suppliers and contractors f rom eligible countries shall be allowed to participate, if interested, without first being required to associate with, or enter into jo int ventures with, local f i rms. However, jo in t ventures wil l be encouraged. Eligibility screening may be carried out prior to bidding with the pr ior concurrence o f the Bank. If any bidder i s to be denied access to the bidding process for reasons unrelated to i t s financial and technical qualifications to perform the contract, pr ior concurrence o f the Bank shall be sought. A ceiling may be applied to bid prices, with the pr ior concurrence o f the Bank in advance o f bidding. T h e Approved Budget Estimate may be disclosed in the advertisement or in the bidding documents. The Bank’s domestic preferences shall not be applied in the evaluation o f bids, and other preferences in effect in the Philippines shall also not be used, except with the prior concurrence o f the Bank. Price negotiation shall not be allowed. However, in the case o f a budget limitation, an adjustment

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0

0

0

0

0

0

0

0

0

0

0

4.

a.

in the quantities o f goods or the scope o f work may be agreed upon, subject to the prior concurrence o f the Bank. Bid opening shall be open to those who wish to attend, and the deadline for submission o f bids shall be the same as that for bid opening. All bids received o n time shall be opened and read publicly. Within 72 hours f rom bid opening, but prior to bid evaluation, a copy o f the certified minutes o f bid opening shall be furnished to the Bank, which shall contain the following: (a) names o f the bidders provided with bid documents; (b) original amount (unevaluated) o f the bid o f each bidder, as read; (c) date, time and place o f bid opening; (d) summary o f bid proceedings; and (e) names o f the bidders' representatives and other persons present. Suppliers and contractors shall not be required to purchase only local goods or supplies, or to hire local labor, except for unskilled labor. Expl ici t bid evaluation criteria shall be set forth in the bid documents based o n monetarily quantifiable elements. Modifications exceeding 15% o f the contract amount and material changes in the conditions during implementation require prior concurrence o f the Bank. For foreign suppliers and contractors, prior registration (such as with the Bureau o f Food and Drugs for the registration for drugs, agency accreditation, etc.), licensing (such as licensing by the Philippine Contractors Accreditation Board, etc.), and/or other government authorizations (such as a Mayor's permit, etc.), shall not be a requirement for purposes o f participating in bidding competitions. Such registration, licensing and/or other government authorizations may, however, be required from the selected bidder as a condition o f signing o f the contract, and the Borrower shall not be estopped from asserting such requirement where th is i s mandated under national law. Bid and performance securities shall be specified in the bidding documents, which may be in the form o f a certified check, letter o f credit, or bank guarantee f rom a reputable bank. To obtain the best market prices available, open competitive bidding shall be maximized. For this purpose, requirements shall not include restrictive importation permits f rom private associations or protective preferences for Philippine Flag vessels. Two-envelope system procedures shall not be used unless prior concurrence by the Bank has been obtained. Privileges granted to Provincial bidders to match the lowest bid submitted by a contractor with the principal office address outside the province in which the project i s located, shall not be allowed. The use o f GEPS for procurement o f goods may be allowed with the prior concurrence o f the Bank.

Procurement Methods.

Subprojects: about US5.76 million, including contingencies, are allocated for community subprojects (civi l works or goods) and about US$O. 18 million, including contingencies, are allocated for consultant's services to undertake construction supervision and monitoring o f the subprojects; where a l l costs are funded from the Bank loan. This include demand-driven environmental investments (subprojects) implemented by LGUs, or multiple LGUs, within a micro watershed with community and other stakeholder involvement. Subproject selection and prioritization will be based from the results o f a participatory micro-watershed-based planning and subproject identification process. The project will finance any i tem included in the open menu o f subproject interventions listed in Annex 2 o f this PAD.

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Procurement under the subprojects will be undertaken by the participating Local Government Units (LGUs), and procurement wil l fol low the fol lowing procedures. For contracts estimated to cost the equivalent o f less than $500,000 for works (up to an aggregate amount not to exceed $1,000,000 equivalent) and $200,000 for goods (up to an aggregate amount not to exceed $360,000 equivalent), National Competitive Bidding (NCB) wil l be used. For contracts estimated to cost the equivalent o f $50,000 or less, goods will be procured through national shopping procedures (up to an aggregate amount not to exceed $425,000 equivalent) and works will be procured through procurement o f small works (up to an aggregate amount not to exceed $1,235,000 equivalent), wherein contracts will be awarded on the basis o f quotations received from at least three qualified suppliers or contractors, respectively. For contracts estimated to cost the equivalent o f $25,000 or less, up to an aggregate amount not to exceed $2.74 mi l l ion equivalent, community participation mode o f procurement will be used (details are given in the following paragraph). There i s n o Intemational Competitive Bidding (ICB) envisioned for the project, as the average size o f each subproject i s expected to be in the range o f $150,000 to $200,000, wherein a subproject can be a single contract or composed o f several smaller contracts. The LGUs capabilities shall be strengthened by available resources from the Grant component o f the Project. In the procurement o f the subprojects, the beneficiary LGUs shall use bidding documents to be prepared by consultants for use o n th i s project, based o n available Wor ld Bank standard documents. Consultants to undertake the construction supervision and monitoring o f subprojects, contracts o f which are estimated to cost less than $100,000 equivalent, may be procured through selection based o n consultant’s qualifications (CQ) in accordance with the provisions o f the Consultant Guidelines.

The procedures to be fol lowed under community participation are those provided for under Section 3.15 o f the Procurement Guidelines. This will govem the procurement o f community subprojects under component 1. The detailed procedures are described in the Procurement Manual. Essentially, the procedures are simplified selective tender procedures for works, shopping for goods and direct contracts. A brief description o f the procedures follows:

Local Bidding for Goods and Works Contracts. Contracts for goods amounting to more than $15,000, but not exceeding the equivalent o f $25,000, will be procured fol lowing a simplified open tendering procedure. The process involves l imited local advertising by posting notices at strategic places, use o f local media such as radio or local newspaper, circulating the notice or reading them out in community meetings or other public gatherings. Simplified standard bidding documents will be included in the Procurement Manual. The request for bids spells out the work or goods needed, the criteria for selection and the deadline for submission o f bids. Bids shall be opened at a public ceremony and evaluated by a committee appointed by the community. Bids are examined to determine whether they meet the minimum specifications mentioned in the bidding documents. Bids that meet the minimum requirement specified in the bid invitation are retained for further evaluation. The bidder who meets the lowest bid i s selected. The award and the amount o f the contract should be announced to al l bidders. Contracting will fo l low the form specified in the Procurement Manual, and wil l be signed within five days o f the announcement. Local Shopping for Goods. Contracts for goods available locally and estimated to cost the equivalent o f $10,000 or less, will be awarded by getting quotations solicited f rom at least three qualified suppliers o n the basis o f simplified documents fol lowing the forms required in the Procurement Manual. To enhance efficiency and remove the inherent risk o f compromise, request for and submission o f quotations will be in writing. Quotations should be opened at the same time and to the extent possible in the presence o f community members. The supplier who offered the lowest price will be awarded the contract. Local Shopping for Works. Contracts for small works estimated to cost the equivalent o f $10,000 or less shall be procured by obtaining written quotations f rom at least three qualified local

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contractors (including NGOs) who would be invited to submit quotations o n the basis o f simplified quotation forms as specified in the Procurement Manual. The invitation to submit quotations should be in writing. The invitation shall include a detailed description o f the works, including basic specifications, start and completion dates, a basic agreement format acceptable to the Bank, and relevant drawings. Quotations should be opened at the same time and to the extent possible in the presence o f community members. As a general rule, the award shall be made to the contractor who offers the lowest price quotation and i s evaluated to have the technical capacity for the required work. Direct Contracting, Goods and works that are available locally f rom one source and do not exceed $5,000, or their equivalents, may be procured by directly choosing the particular supplier or contractor. The contract price agreed upon should be within local market rates and the goods procured are o f good quality. This method requires approval o f the community committee to remove the inherent risk o f compromise. Community Force Account. Contract for works estimated to cost the equivalent o f $5,000 or less, that are determined to be implemented by the community using i ts own resources such as skilled and unskilled labor, materials, equipment may be allowed provided it i s shown that the community has the resources and capacity to perform the works. Under this method, the community may apply: (a) hir ing o f laborers fol lowing the pakyaw procedure; andor (b) direct provision o f raw materials or finished product. Detailed procedures and standard forms wil l be incorporated in the Procurement Manual, and payment i s to be made on an output basis.

Wor ld Bank Standard Bidding Documents will be the basis o f the documents to be prepared by the consultants, and these include:

0

0

0

The Procurement o f Works: Smaller Contracts document, January 1995, revised June 2002 and March 2003. The Wor ld Bank's Standard Bidding Documents for Goods, January 1995 revised March 2000, January 200 1, March 2002 and March 2003. The Standard Bid Evaluation Form, Procurement Goods or Works, April 1996.

b. f rom the Dutch grant. This amount will be used for the construction o f a Resource Learning Center that will promote leaming opportunites and interaction and awareness programs among the stakeholders. Each contract estimated to cost less than the equivalent o f $500,000, up to an aggregate amount not to exceed $0.25 million, will be procured fol lowing N C B procedures. Wor ld Bank Standard Bidding Documents will be used, and these include:

Works: about US$0.25 million, including contingencies, to be procured by LLDA and funded

0

0

The Procurement o f Works: Smaller Contracts document, January 1995, revised June 2002 and March 2003. The Standard Bid Evaluation Form, Procurement Goods or Works, April 1996.

c. the Dutch grant. Goods to be procured by LLDA under the Project includes computers and other goods necessary to support planning activities, subproject development, and M I S development. This include information technology equipment; office equipment, furniture and fixtures; communication equipment; vehicles; and laboratory equipment. Each contract estimated to cost the equivalent o f $200,000 or more, will be procured fol lowing I C B procedures; with contracts estimated to cost less than the equivalent o f $200,000, up to an aggregate amount not to exceed $0.25 million, may be procured fol lowing NCB procedures; and for contracts estimated to cost the equivalent o f US$50,000 or less, up to an aggregate

Goods: about US$0.92 million, including contingencies, to be procured by LLDA and funded fi-om

- 47 -

amount not exceeding $0.67 mi l l ion may be procured following national shopping procedures. Wor ld Bank Standard Bidding Documents will be used, and these include:

0

0

The Wor ld Bank's Standard Bidding Documents for Goods, January 1995 revised March 2000, January 2001, March 2002 and March 2003. The Standard Bid Evaluation Form, Procurement o f Goods or Works, April 1996.

d. Services: about $4.79 million, including contingencies, comprise contracts for: subproject preparation (FS and DE); improving regulatory instruments and approaches / strengthening pol icy and planning; strategy for trunk infrastructure; micro watershed management, including planning and manual production; capacity building o f RCs and LGUs; community participation and monitoring; subproject IEC; and project coordination support. Costs for the above mentioned services will be funded from the Dutch grant.

Quality- and cost-based selection (QCBS) procedures will be followed in the hiring o f consulting f i r m s with contracts estimated to cost the equivalent o f $100,000 or more, specifically, this will apply to the big-value consulting services, l ike i) improving regulatory instruments and approaches / strengthening pol icy and planning; ii) formulation o f a strategy for trunk infrastructure development; and iii) micro-watershed management, including planning and manual production. Contracts estimated to cost less than $1 00,000 equivalent may be procured through selection based o n consultant's qualifications (CQ) in accordance with the provisions o f the Consultant Guidelines; or through single-source selection (SSS), with the Bank's prior agreement, in accordance with the provisions o f the Consultant Guidelines. Selection based o n consultant's qualifications will be used for consultants for the preparation o f feasibility studies and detailed engineering design; while single-source selection will be used to hire consulting f i r m s for tasks that represent a natural continuation o f previous work carried out by the same firm, as in the conduct o f feasibility studies and detailed engineering design.

Individual consultants (required to assist LLDA in the implementation o f the various components o f the project, project coordination support, community participation and monitoring, and subproject IECs) meeting the requirements set forth in Section 5 o f the Consultant Guidelines wil l be procured under contracts awarded on the basis o f competition in accordance with the provisions o f the Consultant Guidelines.

The Wor ld Bank's standard documents will be used, and these include:

Standard Request for Proposals-Selection o f Consultants, July 1997 and updated April 1998, July 1999 and April 2002 will be used for al l consultant contracts. All contracts for consulting f i r m s shall be advertised in newspapers o f national circulation, and any contract above $200,000 will be advertised in the U.N. Development Business, requesting expressions o f interest pr ior to developing a shortlist. Standard Sample Fo rm o f Evaluation report may be used for the evaluation o f proposals at the Borrower's discretion.

0

e. f rom the Dutch grant. This involve expenses for workshops, trainings, study tours, travel (accommodation, meals, airfare, etc.) and materials.

Workshops, Training and Study Tours: about $0.48 million, including contingencies, funded

- 48 -

Expenditure Category ICB NCB Other ZI

N.B.F. Total Cost 11

1. Subprojects (Works)

2. Subprojects (Goods)

3. Subprojects (Consultant

0.00 1 .oo 3.29 0.00 4.29 (0.00) (0.82) (2.74) (0.00) (3.56) 0.00 0.36 1.11 0.00 1.47

(0.00) (0.30) (0.92) (0.00) (1.22) 0.00 0.00 0.18 0.00 0.18

I I I I I I I

Services)

4. Front-end fee (0.00) (0.00) (0.17) (0.00) (0.17) 0.00 0.00 0.05 0.00 0.05

' I

'' Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies. Includes subprojects (goods and works) to be procured through national shopping, procurement o f small works or community participation, consulting services for construction supervision and monitoring, and front-end fee. N.B.F = Non-Bank Financed, includes Government counterpart funds.

(0.00) (0.00) (0.05) (0.00) (0.05)

Total

' I Figures in parentheses are the amounts to be financed by the Dutch Grant. All costs include contingencies. Includes goods to be procured through national shopping, consulting services, services o f contracted staff o f the project management office, trainingiworkshopsistudy tours, technical assistance services. N.B.F = Non-Bank (or more specifically, Non-Grant) Financed, includes Government counterpart funds.

1'

0.00 1.36 4.63 0.00 5.99 (0.00) (1.12) (3.88) (0.00) (5.00)

- 49 -

Expenditure Category ICB NCB Other 21 Total Cost 11

N.B.F.

Total 0.00 0.50 5.94 0.00 6.44 (0.00) (0.47) (4.53) (0.00) (5.00)

Table A3: Consultant Selection Arrangements (Bank Loan)

Consultant Services Expenditure Category

A. Firms

R. Tndividuals

Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-Based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection o f individual consultants (per Section V o f Consultants Guidelines) N.B.F. = Not Bank-Financed Figures in parentheses are the amounts to be financed by the Bank Loan. All costs include contingencies

QCBS QBS SFB L C S CQ Other N.B.F. Total cost

3.78 0.00 0.00 0.00 0.28 0.09 0.00 4.15 (2.69) (0.00) (0.00) (0.00) (0.20) (0.06) (0.00) (2.95) 0.00 0.00 0.00 0.00 0.00 0.64 0.00 0.64

Table A4: Consultant Selection Arrangements (Dutch Grant) (US$ million equivalent)

I (0.00) I (0.00) I (0.00) 1 (0.00) I (0.00) I (0.46) I (0.00) I (0.46) Totaj 3.78 I 0.00 I 0.00 I 0.00 I 0.28 I 0.73 1 0.00 1 4.79

1 (2.69) I (0.00) I (0.00) I (0.00) I (0.20) I (0.52) I (0.00) I (3.41) I Note: QCBS = Quality- and Cost-Based Selection

QBS = Quality-Based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Single-Source Selection o f f i rms and Selection o f individual consultants (per Section V o f Consultants Guidelines) N.B.F. = Not Bank-Financed (or Not Grant-Financed) Figures in parentheses are the amounts to be financed by the Dutch grant. All costs include contingencies.

5. Consultant Guidelines shall apply to:

Prior Review. The procedures set forth in paragraph 2 o f Appendix 1 to the Procurement and

a. Subprojects. Each civil works or goods contract under a subproject, to be procured by the LGU, with an estimated cost o f the equivalent o f $100,000 or more wil l be subject to the World Bank's

- 50 -

prior review, and the first contract for subprojects (goods or works), to be procured by the LGU for the project through NCB, N S or SW, and al l allowed CP procurement procedures (regardless

b. Works. Each works contract o f US$lOO,OOO, or more, equivalent per contract, to be procured by LLDA under the Dutch grant, wil l be subject to the Wor ld Bank's prior review, and the f i rs t contract for works procured by LLDA for the project through N C B procedures (regardless o f

c. Goods. Each goods contract o f US$lOO,OOO, or more, equivalent per contract, to be procured by LLDA under the Dutch grant, will be subject to the Wor ld Bank's pr ior review, and the first contract for goods procured by LLDA for the project through N C B and N S procedures (regardless

d. Services. Each consultant services contract o f more than US$50,000 equivalent per individual consultant contract and each contract o f f i r m s o f more than US$lOO,OOO equivalent per contract wil l be subject to the Wor ld Bank's prior review. All terms o f reference, request for proposals, shortlist, evaluation reports, draft negotiated contracts, sole-source contracts (if any), and f inal contracts with substantial differences to the original draft will be subject to prior review.

o f cost).

cost).

o f cost).

Contract Value Threshold

US$ (thousands) 500 (works) 200 (goods)

50

< 50

< 25 500

6. paragraph 4 o f Appendix 1 to the Procurement and Consultant Guidelines will apply. The ratio shall be 1:5.

Post Review. With respect to each contract not subject to prior review, the procedures set forth in

Procurement Method

International Competitive Bidding (ICB)

National Competitive Bidding (NCB)

National Shopping or Small Works

Community Participation I C B

Expenditure Category

50

~

1. Subprojects

N C B 2. Works

200 3. Goods I C B

4. Services

50 N C B

Individual Consultants

,ior Review Contracts Subject to

Prior Review IUS$ millions)

\11 contracts equal to or greater (0.00)

All contracts equal to or greater than $100,000, and the first contract regardless

o f cost (1.35) First contract regardless o f cost (0.05)

First contract regardless o f cost (0.02) All contracts equal to or greater (0.00) First contract regardless o f cost (0.25)

All contracts equal to or greater

First contract regardless o f cost

First contract regardless o f cost

(0.00)

(0.10)

(0.05) 411 contracts equal to or greater (3.78)

All contracts equal to or greater (0.10)

- 51 -

Total value of contracts subject to prior review: $5.70 mi l l ion Overall Procurement Risk Assessment: High

Frequency of procurement supervision missions proposed: Once every six months (three months after each supervision mission), including participation in full supervision missions once every six months, wh ich will be carried out by a procurement specialist f rom the Bank's Country Office.

- 52 -

Annex 6(B): Financial Management and Disbursement Arrangements PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

Financial ManaPement

1. Summary of the Financial Management Assessment

Country Issues. The upcoming national elections in June 2004 may slow down the progress o f the proposed project, as normally experienced in the past. However, such a situation wil l only be temporary. N o other country issues are immediately evident that can disrupt the project activities.

R i s k s Analysis. Risk on the proposed project i s considered to be moderate, on the overall. Necessary institutional arrangements among LLDA, MDFO and LGUs have been agreed upon and recorded in the Insitutuional Memorandum o f Agreement signed by the relevant agencies. The project financial management system, that will incorporate al l necessary internal controls and reporting requirements, are codified in the Financial Management Manual (part o f the Operations Manual). LLDA has committed to assignhire the necessary staffing complement consistent with the requirements o f the project. Thus, the remaining risks which are considered moderate, are the failure to implement the financial management system properly and the possibility that the staffing complement may lag behind the requirements o f the project. There i s also that moderate risk that participating LGUs may not be able to provide their share o f the equity contribution.

Strengths and Weaknesses. The strengths o f the proposed project are: 1. Strong ownership by LLDA as demonstrated by the hir ing o f a financial management (FM) consultant

just in time for the preparation and implementation o f the financial management and accounting system and training o f FM personnel o f entities involved in the project and also assigning a full-time financial management specialist to the PCO.

2. Commitment o f LLDA to hire the necessary number o f FM personnel and the availability o f a facility to finance such incremental overhead.

3. Strong interest o f potential participating LGUs as indicated in the keen interest in the L E A P process that was observed during the appraisal mission, as we l l as the number o f LGUs that signed the Sub-project Memorandum o f Agreements prior to negotiations.

The weaknesses that were identified during the preparation o f the project are being sufficiently wel l addressed

Financial Management Manual. This Manual, part o f the Operations Manual, details the project financial management, accounting and auditing system which explains the necessary internal controls and reporting requirements. The relevant institutional arrangements that were agreed with LLDA and MDFO are documented in the Operations Manual and Financial Management Manual. Bo th the Manual and the arrangements have been reviewed by the Bank and found to be satisfactory.

Staffing. The financial management specialist has been assigned to the PCO. Additional FM staff will be hired as the need arises. The overall financial management function o f LLDA i s being handled by i t s Finance Divis ion and reports directly to the Off ice o f the Assistant General Manager who in tum report directly to the General Manager. All operating units report to the AGM.

Accounting Policies and Procedures. The New Government Accounting System (NGAS) which i s

- 53 -

prescribed by the Commission on Audit (COA) will be followed. Moreover, the project financial management system that i s being prepared will be a computer-ready system.

Management Information System. The project accounting system o f the N e w Government Accounting System has not been rol led out yet. Consequently, LLDA has hired a financial management consultant to design a financial management system which will also be the backbone o f a management information system that will generate the information needed by the PCO in supervising and monitoring sub-projects. Procurement arrangements and procedures are also considered in the system. The work o n th is system i s progressing satisfactorily

Supervision Plan

Objective and Nature: The FM supervision o f the project shall be periodically done to ensure that loan proceeds are used only for the purposes for which it was granted, with due regard to economy, efficiency, and the achievement o f the project’s objectives. This normally would address the following: (a) the measures undertaken by the project o n the r isks and weaknesses identified during the assessment or in the previous supervision; (b) ensuring that the FM system agreed to be acceptable i s being maintained or further strengthened and that it has not deteriorated; (c) that the FMRs are being submitted o n a timely basis and that disbursements are on track; and (d) that there i s adequate and t imely budget appropriation and releases.

Coverage; The coverage o f the supervision would address al l aspects o f financial management arrangements. The magnitude o f the review on the components, geographic areas and implementing entities will be based o n the professional judgment o f the FM specialist. The fol lowing FM areas may be included in the supervision: a. Maintenance o f an adequate FM system including review o f o f FMRs. b. Test review o f SOEs c. Discussions with auditor o n progress o f audit, findings or o n familiarity with the requirements o f the

bank

Frequency and duration: Frequency and duration will be determined o n a sub-project basis based on the judgment o f the project’s financial management specialist.

2. Audit Arrangements

Internal Audit: The internal audit function o f LLDA i s lodged with i ts Corporate Management Services. I t has a three professional s ta f f and an administrative clerk and plans to hire an Analyst to support the proposed project. If requested by the GM or AGM, the Internal Audit Unit does a pre-audit o f vouchers; otherwise, they undertake post-audit.

External Audit: The financial monitoring reports that will be be prepared by the participating LGUs, MDFO, and LLDA and to be audited by C O A have been agreed upon by LLDA and MDFO, and their respective C O A auditors. The audit arrangements are documented in the FM Manual and the Bank will review the terms o f reference prior to their being undertaken. C O A i s considered acceptable as the auditor for the project.

The fol lowing audit reports will be required, with appropriate disclosures in the LLDA audit report on the Special Account for Component 2 and use o f Statements o f Expenditures for both Components:

- 54 -

Responsible Agency LLDA

MDFO

The audited statement will be submitted to the Bank within six months after the end o f each fiscal year.

Audit Report Consolidated Project financial statements for the entire project: Component 1 and Component 2 Special Account Account for Component 1

The external audit report o f LLDA expressed an unqualified opinion o n its financial statements for the year ended December 3 1,2002. The management letter o f the auditor states a finding on the lack o f reconciliation o f recorded accountabilities with physical existence o f assets which i s in the process o f being resolved. This weakness in the internal control system o f LLDA will not affect the project since the project will have i ts own system.

3. Disbursement Arrangements

Disbursement for the proposed project shall be under the traditional SOE-based method with option to convert to a periodic disbursement method using Financial Monitoring Reports (FMR). In any case, FMRs consisting o f the financial report and the physical progress report as we l l as the procurement report shall be required to be submitted. The format o f such report has been agreed upon.

The fol lowing FMRs shall be submitted:

1. Financial Report: Statement o f Sources and Uses o f Funds -Should be the same format as the Physical and Financial Status Report but should be in financial terms which should at least include Current and Cumulative columns.

2. Physical Progress Reuort - Must have breakdown by components and sub-components. The financial columns must be l inked to the financial reports in terms o f the figures reflected. This will be submitted o n a quarterly basis.

3. Procurement Reuort - Current report o n annual procurement plan with addition o f forecast and status in terms o f stage and amount. This will be submitted o n a semi- annual basis.

Component 2 will be financed by a grant provided by the Government o f Netherlands and will fol low the standard disbursement arrangements

Allocation of loan proceeds (Table C) The proposed grant and loan will be disbursed against the project components shown in Tables C and C1, I t i s expected that the procees o f the Grant and Loan will be disbursed over a period o f five years.

- 55 -

Table C: Allocation of Loan Proceeds

Goods, works and services under Subloans and Subgrants

I Expenditure Category I Amount in US$million I Financing Percentage 4950000.00 99

0.00

Financing Front-end fee

\Total Project Costs with Bank I 4950000.00 1 I 50000.00 1

Total 5000000.00

Table C2:Allocation of Grant Proceeds Expenditure Category 1 Amount in US$ million I Financing Percentage Consultant Services I 3,406,000.00 I 6 8 Goods I 879.800.00 I 1 8 Training I 484,200.00 I 1 0 Works I 230.000.00 15

I Total I 5.000.000.00 I I

Special account: Funds flow for the parts o f the project financed by the Bank loan and the Dutch Grant grant would be from the Bank to Special Accounts (SA). MDFO would open a SA for the Bank loan and LLDA will open one for the Dutch Grant at the Land Bank.

Under the Bank loan, initial authorized allocation for the SA would be US$ 150,000. Authorized allocation would be increased to US$460,000 when the aggregate amount o f withdrawals from the loan plus all outstanding special commitments i s at least US$ 360,000. Under the Dutch, authorized allocation for LLDA would be US$ 1.1 mill ion ,

Disbursements shall be based on the agreed eligibilityifinancing percentage in the Loan and Grant Agreements. Disbursements under the project shall comply with the World Bank's policies and procedures on disbursements and financial management as reflected in i t s Disbursement Handbook and Project Management Manual. No advances shall be allowed to be paid from the SA. Reimbursements from the SA shall be only for eligible and duly supported expenditures. MDFO, with the endorsement o f LLDA, will release funds directly to the LGUs. LLDA wi l l make the endorsement for release o f funds after it has reviewed the reports accompanying release o f funds. As part o f i t s due diligence, LLDA will do an examination o f the supporting documents at the sub-project level and may also do an ocular inspection o f the sub-project if deemed necessary. The funds released to the LGUs will also be deposited in separate bank accounts and w i l l be separately accounted for.

- 56 -

Annex 7: Project Processing Schedule PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

Partici pationlLlSCOP

First Bank mission (identification) Appraisal mission departure

ITime taken to prepare the project (months) 1 6 I 24 I 1 1/23/200 1 11/23/2001

0513 1/2002 09/17/2003

I Negotiations I 0411 512002 I 04/11/2003 I IPlanned Date of Effectiveness I 0711 512002 I 04/12/2003 I

Prepared by: Patchamuthu Illangovan

Preparation assistance: The LLDA was assisted in preparation by grants provided by Japan PHRD (TF02664 - Laguna de Bay Environment and Watershed Management Project) and Netherlands Embassy in Mani la

Bank staff who worked on the projec

Patchamuthu Illangovan, EASES Chirstoper (Ray) C.Ancheta, EASUR Ernest0 Diaz, EAPCO Benoit Laplante, Consultant

Jose Tiburcio Nicolas, EASES

Rene S D Manuel, EAPCO

Mariana M. Montiel, LEGLA John Morton, EASES Anju Sachdeva, EASES

Josefo Tuyor, EASES

Sutthana Vichitrananda, E A C T F

Maya Gabriella Villaluz, EASES

Stephen Lintner, ENV Geoffrey Spencer, EASRD Dav id Wheeler, DECRG

Name included:

Task Team Leader

Municipal Engineer

Financial Management Specialist

Environmental Economist

Social Safeguards and Participation Specialist

Procurement Specialist

Legal Counsel

Environmental Engineer

Office Manager (Washington D.C.) Environmental Assessment Specialist

Program Assistant I Project Costing

Environmental Engineer

Peer Reviewer

Peer Reviewer

Peer Reviewer

Speciality

The project was first appraised as a Learning and Innovation Loan (LIL). However, as the Govemment could not complete its intemal processing requirements within the stipulated 180 day period, i t was not continued as a LIL. The Government renewed its confirmation o f interest in the project in October 2003. Thereafter, the project was processed as a Specific Investment Loan, and work was re-initiated in February 2003. The appraisal mission took place after the Govemment’s review and clearance o f the redesigned project on August 28, 2003. T h e Decision Meeting took place on September 4,2003.

- 57 -

Annex 8: Documents in the Project File* PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

Participation/LISCOP

A. Project Implementation Plan 1. Operations Manual

(a) Terms, Conditions, Elgibility Criteria and Procedures for Sub-projects (a) Procurement Manual (b) Financial Management Manual (c) Environmental and Social Safeguards Framework

2. Capacity Building Plan 3. Monitor ing and Evaluation Framework 4. Procurement Plan for the f i rst year activities

B. Bank Staff Assessments 1. Country Financial Accountability Assessment, September 2002 2. Country Procurement Assessment, March 2003 3. Procurement Capacity Assessment, September 2003 4. Financial Management Capacity Assessment, September 2003

C. Other 1. Institutional Re-engineering o f the Laguna Lake Development Authority, Phase 1 Final Report, February 200 1 2. Institutional Re-engineering o f the Laguna Lake Development Authority, Phase 2 Final Report, November 200 1 3. LISCOP Project Documents to National Economic Development Authority, M a y 2003

3: Sub-project Feasibility Studies) 4. Project-related Administrative Orders and Agreements

(Part 1 : M a i n Document; Part 2: Appendices Operations Manual and Detailed Technical Annex; and Part

0

0

0

0

0

0

0

Institutional Memorandum o f Agreement (I-MOA) entered into by DoF, DENR and LLDA, dated October 9, 2003 LLDA Memorandum Order for the establishment o f PCO (Memorandum Order 2003-53, dated October 3,2003) Signed Sub-project Memorandum o f Agreement (S-MOA) for 6 sub-projects DENR Administrative Order creating Technial Review Panel (A0 2003-48) Letter o f Institutional Development Objective, dated November 4,2003

Revised Industrial E C O W A T C H system amending implementing guidelines o f DAO 98-5 1 series o f 1998, dated July 4,2003 Implementing Rules and Regulations o f DAO 16, Series o f 2002 entitled "The DENR-EMB National Environmental User's Fee o f 2002"

5. Department Administrative Orders o f DENR for EUFS and Public Disclosure

6. National-Local Government Cost Sharing Scheme for Devolved Activities, December 2002.

*Including electronic files

- 5% -

Annex 9: Statement of Loans and Credits PHILIPPINES: Laguna de Bay Institutional Strengthening and Community ParticipationlLlSCOP

24-Sen-2003 ~

Difference between expected and actual

disbursements' Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO66076 2004 JUDICIAL REFORM SUPPORT PROJECT 21.90 0.00 0.00 0.00 21.90 0.00 0 00

PO77012

PO73488

PO71 007

PO69491

PO69916

PO57731

PO66069

PO66509

PO65113

PO39019

PO59933

PO58842

PO48588

PO57598

PO04576

PO04595

P 0 0 4 5 6 6 P 0 0 4 6 0 2

PO04613

PO37079

PO04571

PO0461 1

2003

2003

2003

2002

2002

2001

2001

2001

2000

2000

2000

2000

1999

1999

1998

1998

1998

1997

1997

1997

1996

1996

PH KALAHI-CIDSS PROJECT 100.00 0.00

PH - ARMM Social Fund 33.60 0.00

PH-Second Agrarian Reform CommunitiesDev 50.00 0.00

PH-LGU URBAN WATER APL2

PH-2nd Social Expenditure Management

PH-Metro Manila Urban Transport

PH - LAND ADMIN a MANAGEMENT

PH-MMURTRIP-Bicycle Nwk

PH-SOCIAL EXPENDITURE MGMT

PH-First Nat'l Rds Improve.

PH - COASTAL MARINE

PH . MINDANAO RURAL DEV

PH-LGU FINANCE a DEV.

PH-RURAL FINANCE 111

PH-WATER DISTRICTS DEV.

PH -COMMUNITY BASED RES0

PH-EARLY CHILD DEV.

PH-THIRD ELEMENTARY EDUCATION

PH - WATER RESOURCES DEVE

PH ~ AGRARIAN REFORM COMM

PH-TRANS GRID REINFORCE

PH-MANILA SEWERAGE I1

30.00 0.00

100.00 0.00

60.00 0.00

4.79 0.00

0.00 0.00

100.00 0.00

150.00 0.00

0.00 0.00

27.50 0.00

100.00 0.00

150.00 0.00

56.80 0.00

50.00 0.00

19.00 0.00

113.40 0.00

58.00 0.00

50.00 0.00

250.00 0.00

57.00 0.00

0.00 0.00 95.90 -2.40 0.00

0.00 0.00 32.26 1.28 0.00

0.00 0.00 49.50 2.67 0.00

0.00 0.00 30.75 7.21 0.00

0.00 0.00 75.54 -9.80 0.00

0.00 0.00 55.13 9.32 0.00

0.00 0.00 2.79 2.53 0.00

1.30 0.00 1.29 0.39 0.00

0.00 0.00 19.21 19.21 0.00

0.00 0.00 87.74 65.96 0.00

1.25 0.00 1.11 1.60 0.29

0.00 5.50 11.80 17.30 0.61

0.00 40.00 52.24 46.54 2.18

0.00 0.00 64.93 64.60 0.00

0.00 6.53 17.40 42.14 23.84

0.00 12.00 20.09 30.51 17.44

0.00 0.00 6.42 5.76 0.00

0.00 20.10 45.20 63.04 29.80

0.00 16.27 8.30 24.57 3.62

0.00 0.00 1.15 -0.55 0.00

0.00 79.51 16.25 80.77 1.59

0.00 20.90 23.26 44.16 23.26

Total: 1581.99 0.00 2.55 200.81 740.14 516.82 102.62

- 59 -

PHILIPPINES STATEMENT OF IFC's

Held and Disbursed Portfolio June 30 - 2003

In Mil l ions US Dollars

Committed Disbursed IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

2002 2001102 0 1996 1996 1996 2000 2002 1997 1998 2002 2001 1998 1989 1993 2000 2001 2003 1970172100 1993194 1993 2002 1992 2000 1998 2000 2000 2003 1995 1992 1994 1994

AEI APW Trade Alaska Mi lk A l l Asia Growth A l l Asia Manager AllAsiaVen Mgmt Asian Hospital Banco de Or0 Bataan PIE Drysdale Food Eastwood Filinvest H&Q PV 111 H&QPV-I H&QPV-I1 M F I MEP MNTC MWC Mariwasa Mindanao Power Mirant Pagbilao PSMT Philippines Pilipinas Shell PlantersBank Pryce Gases SME.COM STRADCOM SVI Sua1 Power Union Cement Walden Mgmt Walden Ventures

Total Portfolio:

1 .oo 0.67 0.00 0.00 0.00 0.00 7.00 0.00

29.82 10.96 25.00 22.00

0.00 0.00 0.00 0.00

46.00 30.04 10.52 0.00

21.00 12.50 0.00 0.00

13.00 0.00

11.99 0.00

24.67 0.00 0.00 0.00

0.00 0.00 0.62 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.76 0.61 1.16 0.12 0.00 0.00 0.00 0.00

10.00 0.00 1.56 0.00 0.00 0.20 0.00 4.00

17.50 5.63 0.05 1.04

0.00 0.00 0.00 0.00 0.00 0.00 0.00

20.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

' 0.00 0.00 3.00 0.00 0.00 0.00 0.00 8.71 0.00 0.00 8.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

116.55 7.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.60 0.00 0.00 0.00 5.00 0.00 0.00 0.00

97.54 0.00 0.00 0.00

0.00 0.67 0.00 0.00 0.00 0.00 5.00 0.00

29.82 10.96 20.00 16.00 0.00 0.00 0.00 0.00

18.00 0.00

10.52 0.00

21.00 10.20 0.00 0.00

13.00 0.00 9.59 0.00

24.67 0.00 0.00 0.00

0.00 0.00 0.62 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.76 0.61 1.16 0.12 0.00 0.00 0.00 0.00

10.00 0.00 1.56 0.00 0.00 0.12 0.00 0.00

17.50 5.63 0.05 1.04

0.00 0.00 0.00 0.00 0.00 0.00 0.00

20.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 0.00 8.71 0.00 0.00 8.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

116.55 6.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.60 0.00 0.00 0.00 5.00 0.00 0.00 0.00

97.54 0.00 0.00

0.00 0.00

266.17 48.25 49.71 227.49 189.43 44.17 49.71 226.29

Aoorovals Pendine Commitment

FY Approval Company Loan Equity Quasi Partic 2002 Eastwood 0.00 0.00 0.00 0.00 2000 LTO Project 0.00 0.00 0.00 0.02 2001 PEDF 0.00 0.00 0.00 0.00 2002 S&R Price 0.00 0.00 0.00 0.00

Total Pending Commitment: 0.01 0.00 0.00 0.02

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Annex I O : Country at a Glance PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

688 73.9 682 695 9 1 9.7 128 128

POVERTY and SOCIAL Philippines

. z o l _ * b j 6 mGDI l O " G D P

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNi (Atlas method, US$ billions)

Average annual growth, 1996-02

Population (%) Labor force (%I Most recent estimate (latest year available, 1996-02)

Poverty (% of population below national poverty h e ) 1/ Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

I982

0.4 2.4 1.3 -0.6

GDP (US$ billions) Gross domestic investmentiGDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savingslGDP

Current account balancelGDP Interest paymentslGDP Total debtfGDP Total debt service/exports Present value of debtfGDP Present value of debtfexports

m b r m - Exports +Imports

37.3 27.9 20.3 22.1

-8.6 2.5

65.4 42.6

1982-92 1992-02 (average annual growth) GDP 1.6 3.7 GDP per capita -0.8 1.4

79.9 1,020 81.5

2.2 2.3

28 60 70 29 32 86 5

113 114 113

I992

53.0 21.3 29.1 16.4 19.7

-1.6 2.5

62.3 24.5

2001

3.2 1 .o

East Asia B Pacific

1,838 950

1,740

1 .o 1.2

38 69 33 15 76 13

106 105 106

2001

71.4 17.6 48.5 19.0 25.5

1.9 4.0

80.9 21.6 77.4

132.7

2002

4.6 2.4

Lower- middle- income

2,411 1,390 3,352

1 .o 1.2

49 69 30 11 81 13 ill ill 110

2002

77.1 16.6 48.9 17.7 24.8

5.4 6.4

77.7 24.8

2002.06

(% of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Private consumption 2/ General government consumption Gross domestic investment Imports of goods and services

Manufacturing

Development diamond.

Life expectancy

1

GNI ,' per capita

Access to improved water source

*" '"Phiiippnes

Lower-middle-income group

Economic ratios'

Trade

J.

Indebtedness

* )***Philippines

Lower-middle-income oroun

STRUCTURE of the ECONOMY

23.3 21.8 15.1 14.9 38.8 32.8 31.6 31.6 25.1 24.2 22.8 22.9 37.8 45.3 53.3 53.5

" T 10

0

.i 0

1982-92 1992-02 I Growth of exports and imports ( X ) 1

I 1.5 2.0 3 7 0.1 3 5 2.3 4 1 1.3 3 5 2.9 3.1 4 6 3.7 5.4

2 8 3 9 1 9 1.9 3.9 0.3

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Philippines ~ ~ ~

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surdusldeficit

TRADE

(US$ millions) Total exports (fob)

Electronicsfrelecom Garments Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) import price index (1995=100) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC. local/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millionsj Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

Composition of net resource flows

1982 1992

.. 8.9 8.7 7.9

.. 18.0

.. 2.1

.. -1.2

1982 1992

.. 9,824

.. 2,753

.. 2,140

.. 7,293

.. 14,519

.. 599

.. 2,050

.. 4,023

1982 1992

6,825 14,566 9,467 16,834

-2,642 -2,268

-1,044 593 486 817

-3,200 -858

2,471 2,350 729 -1,492

.. 4,338 8.5 25.5

1982 1992

24,413 33,005 1,519 4,179

49 166

3,513 4,302 174 640

0 2

70 208 469 1,457

16 228 0 360

1,138 -1,330

541 630 259 578 61 325

197 254 113 317 84 -63

2001

6.1 6.6

15.5

-4.0 -2.3

2001

31,243 16,699 2,403

28,340 31,986

1,348 3,372

11,438

2001

34,391 37,184 -2,793

3,669 447

1,323

-192 -1,131

15,658 51 .O

2001

57,758 3,250

204

9,004 491

6

112 -258

2,883 1,142 1,050

90 120 312

-1 92 185

-377

2002

3.1 4.5

14.3 -5.3 -5.3

2002

34,383 18,583 2,391

31,181 33,975

1,384 3,273

13,532

2002

37,439 38,295

-856

4,550 503

4,197

-4,857 660

16,180 51.6

2002

59,919 3,324

208

11,271 479

7

74 -39

1,057 1,026 1,912

200 177 327

-150 158

-308

5 I 15

10

Export and import levels (US$ mill.)

40.000

30 000

20 000

10000

0

I 96 97 98 99 00 01 02

0 Exports Imports

Current account balance to GDP (Oh)

1/10 J

Composition of 2002 debt (US$ mill.)

A 3.324

F 33,592

A ~ IBRD 8 - IDA D - Other multilateral F - Private C - IMF

E - Bilateral

G - Short-term

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Additional Annex 11 : Environment and Social Safeguards Framework PHILIPPINES: Laguna de Bay Institutional Strengthening and Community

ParticipationlLlSCOP

Project Area

The project area includes the entire Laguna De Bay watershed, which contains a 900 km2 Lake and a catchment area o f 2,920 km2 comprising 24 microwatersheds and their r iver systems. Approximately 10 mi l l ion people l ive in the area which i s largely rural on the east side, heavily urbanized o n the west side and a mixture o f per i urban, rural and urban in between. The land use includes 29% (78,880 hectares) o f built-up and industrial areas; 52% (141,440 hectares) o f agricultural areas; 14% (38,080 hectares) o f grassland; and 5% (13,600 hectares) o f forested area. It also contains 1 protected area, the 42 km2 Mt. Makaling Forest Reserve.

Indigenous Peoples

The watershed contains a population o f approximately 24,799 indigenous dumagats and remontados belonging to 21 distinct tribal communities in the mountain barangays o f Tanay, Rodriguez and Antipolo, Taytay, Pilil la, Morong, San Mateo, Cardona, Teresa, Jala-jala and Binangonan, al l in the Province o f Rizal. Very few o f these people have been mainstreamed into the general population and most s t i l l practice their traditional forms o f livelihood, swidden agriculture and gathering o f forest products. Those few who are mainstreamed (in Taytay, Pilil l ia, Morong, San Mateo, Cardona, Teresa, Jala-Jala and Bingangonan) work as laborers, factory workers, informal sector or as professionals.

Subproject Types

LISCOP will fund subprojects identified and developed through a participatory, multistakeholder planning process referred to as Laguna D e Bay Watershed Environmental Act ion Planning (LEAP). The project wil l take an open menu approach to identify only those subprojects that improve the environmental quality o f the Laguna D e Bay watershed as evaluated by estimates of impact o n priori ty issues such as: sediment loads; nutrient loads; organic pollution loading; vegetative cover and garbage disposed in rivers. The typical subproject size i s expected to be between US$150,000 and US$200,000, though it may be higher or lower depending on demand and the type o f proposal. Subprojects are expected to include: solid waste management including r iver trash removal systems and recycling centers; community-level sanitation and treatments systems; livestock manure biogas systems; agro-forestry; reforestation and revegetation; sediment control structures; riparian buffers; and watershed conservation and ecotourism projects.

Environmental and Social Safeguard Frameworks

Environmental and Social Safeguards Frameworks have been developed to: (i) ensure selected subprojects are designed to be beneficial to the watershed and negative environmental and social effects are minimized or avoided; (ii) any negative effects are identified and appropriate mitigation measures are developed and implemented as part o f the subproject; (iii) in cases where indigenous peoples are affected by or participate in a subproject, appropriate measures are taken to include them in the various stages o f project development and implementation; and (iv) in cases where land acquisition or loss o f assets are necessary, compensation i s provided to affected persons.

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The environmental and social safeguards framework are consistent with the fol lowing policies:

a. Wor ld Bank OP 4.01 Environmental Assessment b. Wor ld Bank OP 4.04 Natural Habitats c. Wor ld Bank OP 4.09 Pest Management d. Wor ld Bank OP/BP 4.12 Involuntary Resettlement e. Wor ld Bank OD 4.20 Indigenous People f. Wor ld Bank OP 4.36 Forestry g. Wor ld Bank OPN 1 1.03 Cultural Property h. Presidential Decree (PD) 1586: The Philippine EIA System i. DENR Administrative Order 2003-30 j. Philippine Republic A c t (RA) 8371, Indigenous People’s Rights Act.

The guidelines and frameworks integrate these policies into the project planning and implementation process, taking advantage o f i t s participatory nature and the complementarities o f the objectives o f LISCOP and the above policies. The micro-watershed planning and sub-project development processes and their relationship to the policies are outlined in the table at the end o f the Annex and the detailed framework (including the Environmental Assessment Framework, Land Acquisition, Resettlement and Rehabilitation Framework and I P Policy Framework) are contained in the project’s Operations Manual. Orientation-briefing sessions will be conducted early o n the project by the Bank’s Manila-based safeguards specialist for the LLDA staff and participating LGUs.

Environmental Issues

The nature and scale o f subprojects are such that the vast majority will result in only minor and easily mitigable negative environmental effects (ie, those associated with small construction works and minor natural habitats conversion issues). Although the cost o f the subprojects will limit the size o f infrastructure projects, in some cases, municipal environmental infrastructure such as small wastewater treatment plants or trash disposal facilities may be proposed. The effects o f these subprojects may be slightly more complicated.

Implementation and Monitoring Arrangements

The environmental assessment process was discussed with DENR and a programmatic approach was developed in order to reduce redundancy and processing time and to be consistent with the LISCOP’s advocacy o f using the micro-watershed as the basic planning unit. The approach will use the L E A P process and associated micro-watershed characterization and subproject identification and viability analysis to undertake an environmental assessment that would be consistent with DENR guidelines. The EA would be done for the shortlist o f subprojects developed as part o f the micro-watershed planning and DENR would issue an environmental compliance certificate (ECC) for the subprojects in a micro-watershed.

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Wor ld Bank OP 4.01 on Environmental Assessment i s integrated into this process. Where the pol icy provided more detail than the DENR regulations (for example in the content o f EMP) this will be incorporated into the L E A P process and the requirements o f the environmental assessment o f the shortlist o f subprojects. Fo r the safeguard policies that are linked to the environmental assessment process (pest management; natural habitats; forests; and cultural property), they are integrated as part o f the LEAP’S micro-watershed characterization, subproject identification and viabi l i ty analysis processes as outlined in the operations manual and in the table in t h i s Annex. Any plans associated with these policies would be developed, along with the detailed environmental management plan prepared for the selected subproject. The E M P will be developed using the pre-approved guidelines and will be submitted as part o f the subproject appraisal report at which time DENR has the option to review the plan. The Bank will review the EIA reports o f the f irst 12 micro-watersheds and will clear the EMPs o f the selected subprojects.

To ensure compliance during implementation, the detailed engineering design o f the subproject and the program o f work o f the Proponent LGU will incorporate relevant measures in the EMP. Environmental compliance monitoring and audit will be joint ly undertaken by LLDA and DENR, with the participation o f the River Councils and their consituent stakeholders.

The detailed institutional arrangements are described in as part o f the Operations Manual.

Social Issues

While not expected to be common, there may be instances where small scale resettlement, land acquisition or loss o f assets may occur. There may be instances also that subprojects may affect indigenous peoples or their ancestral domains.

Implementation and Monitoring Arrangements

The micro-watershed planning process will integrate the provisions o f OD 4.20 Indigenous Peoples and OP 4.12 Involuntary Resettlement. For the I P pol icy the participatory nature o f the L E A P will be used to mainstream the involvement and concems o f these groups. A stakeholder analysis will be undertaken at the beginning o f the process to identify any indigenous groups in the micro-watershed. Where IPS are present, the framework includes: I P involvement in the planning process through representation in the L E A P process; supplemental consultations for tribal groups and an advisory role o f the National Commission for Indigenous Peoples- Region IV (NCIP-IV); and the development o f an indigenous peoples development plan, where necessary.

The micro-watershed planning process identifies potentially project-affected person(s) (PAPS) through the baseline data collection and project identification process. As part o f the subproject preparation and appraisal, the Proponent LGU will be required to comply with the Land Acquisition, Rehabilitation and Resettlement Framework prescribed in the Operations Manual. N o subproject will be approved unless the required documents for the acquisition o f land for the project or payments o f asset losses are presented, together with the subproject proposal. In addition, land acquisition database and tracking system will be developed and integrated into the project’s M I S for regular updating by project staff and for easier monitoring by both the LLDA and the Bank. T o ensure that the project complies with the social safeguard framework, a prior social review and clearance by the Bank’s Safeguard Specialist will be applied for the f irst 12 subproject applications. For the rest, the Bank can conduct post safeguard review/audit every 6 months.

The detailed institutional arrangements are described as part o f the operations manual.

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LEAP and DENR Proiect programmatic

OP4.01 OP 4.04 Env. Natura l

Habitats Identification o f existing critical and natural habitats wi l l be pari o f baseline data gathering.

Subprojects that significantly degrade or convert natural habitats wi l l not be short-listed.

Subprojects involving any conversion or degradation o f critical natural habitats wi l l not be fmanced.

rest Management Plan, where applicable, will be

Compliance Certificate.

Forests

teps

easibility o f ibpro jects

C u I t u r a I Property Peoples

Indigenous

ENR rogrammatic A process

he feasibility udy wi l l include ivironmental ipacts o f the ibproject and the ,st for iplementing the MP.

Steps M i c r o - watershed Planning (LEAP)

(EMP) w i l l be developed based on pre-approved guidelines and wi l l be submitted as part o f the

EL process Assessment Baseline data Baseline data collection wi l l be collection will made consistent be made with D A O consistent 2003-30. with OP 4.01

Short-listed subprojects Short-listed identified through subprojects the L E A P wi l l be identified subjected to an through the environmental L E A P wi l l be impact subjected to assessment an

The draft EA wi l l impact be presented to assessment the public and the E A through a public will be made hearing after available to which i t w i l l be the public by submitted to the the LGU, RC D E N R forthe a n d L L D A issuance o f an Environmental

Annex B

environmental

OP 4.01 Env. Assessment

The feasibility study will include environmental impacts o f the subproject and the cost for implementing the EMP.

Environmental Management Plan (EMP) w i l be developed based on pre-approved guidelines that w i l l be consistent with

the potential impact o f the project on forests and the rights and welfare o f local communities.

Subprojects involving any large scale commercial harvesting o f natural forests, conversion or degradation o f critical forests or critical natural habitats, including downstream or adjacent areas wi l l not be fmanced.

Community forestry or agoforestry wi l l be eligible provided that i t meets other eligibility

KiT- atural labitats

hnpacts on natural habitats wi l l form part o f h e feasibilit study.

o f physical cultural resources in the micro-watersh ed will be part o f baseline data gathering.

The E A wi l l evaluate the potential effects o f subprojects on physical cultural resources and wi l l suggest ways they can be avoided or minimized.

Where effects will occur, appropriate govemment minishies will be informed.

OP 4.09 Pest

Management nvironmental ,sessment wi l l :tennine if :sticides wi l l be .ocured or i f sticide use and anagement wi l l ;affected by e subprojects.

iggestions wi l l :made on how avoid or l imit

e use o f ,nthetic iemical sticides.

PN 11.03 u l tura l

)P 4.09 ‘est Management

O D 4.20 Indigenous

The feasibility study wi l l include cost o f implementing the Pest Management Plan, if required.

OP4.36 I O P N 11.03 1 OD 4.20

analysis will identify indigenous groups in the micro-watershed and ensure they participate and actively involve in process.

Supplemental consultations with tribal communities wi l l be undertaken to ensure concems are incorporated in planning process.

)P 4.36 ‘orests

community forestry projects w i l l have to be designed meet para 12 o f policy.

m e r e relevant, l e markets for orest products dl be evaluated 1 l ight o f the full mge o f forest oods in services rom a /ell-managed xest.

igoforestry mrojects w i l l iclude measures 3 enhance iodiversity and ontrol invasive pecies. m y plans :levant to ieeting para 12 f policy, nhance iodiversity or ontrol o f ivasive species, nd manage

roperty \Peoples I

cost o f restoring and preserving cultural property will form part o f the feasibilit) study.

The feasibility study wi l l include cost for doing the Field-Based Investigation by NCIP-IV and t h e acquisition o f Free and Prior Informed Consent (FPIC), where applicable

Consent (FPIC), i f

ickage.

OP 4.12 Involuntary

Resettlement ollect data :cessiuy to lentify project Tected :rson(s).

1P 4.12 ivoluntary esettlement

The feasibility study w i l l include cost foi acquiring the land and payment of assets following the Land Acquisition, Resettlement and Rehabilitation Process Framework.

ubmission o f Need o f lonation or leed o f Sale or rgy. or lunicipal ertification thal ie subproject t e is located in

- 66 -

package.

OP 4.09 Pest Management Pest Management Plan, where applicable, will be included as an obligation

.elevant/

OP4.01 Annex C and wil l be submitted as part o f the

OP4.36 OPN 11.03 Forests Cultural Property

Related Physical Cultural plans, Resources Plan where implementation, applicable, where applicable, wil l be wil l be included included as as an obligation.

obligation. a n

Relevant/ DED will

forest products wil l be made part lof EMP. 1

relevand applicable measures wil l be included in the detailed engineering design and bid documents.

nplementation of Implementati Involvement o f Jbproj ect on of National

subproject package.

mplementation mplementation o o f any IP policy subproject

Steps

Subproject Loan Agreement (SPLA)

letailed :ngineering lesign and lidding locuments

iubproject :onstruction n d lperation & laintenance

Monitoring and Evaluation

I D 4.20 mdigenous eoples ‘ompliance with ’ Policy ramework will e included as an bligation

lot applicable.

DENR programmati E E A process EMP implementati on included as an obligation.

elevand Iplicable .easures in the MP will be cluded in the :tailed igineering :sign and bid xuments will dude mpliance ith EMP and mditions in ,e ECC

nplementation ‘Subproject MP by LGU id Contractor

Monitoring o f compliance by DENR and LISCOP Project Coordination Office.

OP 4.12 Involuntary Resettlement

Compliance wit1 Land Acquisition, Resettlement an Rehabilitation Policy Framework will be included as 81 obligation.

Relevand applicable measures will be included in the detailed engineering desig and bid documents

IP 4.01 nv. Assessmen1

MP nplementation icluded as an digation.

elevanW iplicable easures in the MP will be cluded in the :tailed igineering desig i d bid lcuments.

nplementation o Jbproject EMP i LGU and &actor

lonitoring o f impliance wil l ! done through ISCOP Project >ordination ffice and WE3 ipervision issions.

pplicable ieasures wil l be icluded in the etailed ngineering design nd bid documents.

IP 4.04 Natural Habitats EMP implementatio n included as an obligation.

elevanti iplicable ieasures will : included in ie detailed igineering :sign and bid xuments.

nplementation Fsubproject leasures by GU and ontractor

Monitoring of compliance wil l be done through LISCOP Project Coordination Offce and WB supervision

applicable measures wil l be included in the detailed engineering design and bid documents.

ieasures by LGU subproject nd Contractor measures by

LGU and Contractor

Monitoring o f Community compliance wil l foreshy wil l be done through involve LISCOP Project monitoring Coordination for Office and WE compliance supervision with para missions. 12.

~~

a way that cultural properties wil l be avoided andior impacts minimized during subproject construction. Any additional,

Historical issues as part o f measures by LGU Museum (NHI) subproject and Contractor in subproject that wil l impact cultural properties NHI will monitor NCIP-IV wil l Monitoring o f implementation of mitigation management done through measures. team. Subproject LISCOP Project

wil l have Coordination grievance Office and WB redress, and supervision monitor and missions. document 1P role and participation.

advise the project compliance will b

- 67 -

Additional Annex 12: Letter of lnstiutional Development Objectives Philippines Laguna de Bay Institutional Strengthening and Community

Participation/LISCOP

Republic of the Philippines Dep~rtment of Environment and Natural Rlesourcas

%%6&20 i 328-%%-33 ts 3s

Vlsayas Avenue, Ditiman. Ouwon City, t 100 Tel Nos. 15321 929-66-26 to 29 1632) 829-6242

923-7041 to 43

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- 69 -

- 70 -