PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: AB2500
PH-GEF-Manila Third Sewerage Project
Project Name
Public Disclosure Authorized
Region
EAST ASIA AND PACIFIC
Sector
Sanitation (50%);Sewerage (50%)
Project ID
P089082
GEF Focal Area
International waters
Borrower(s)
Government of the Philippines
Implementing Agency
Dept. of Environment and Natural Resources (DENR)
Environment Category
[ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared
September 20, 2006
Date of Appraisal
August 15, 2006
Authorization
Date of Board Approval
February 15, 2007
Public Disclosure Authorized
1. Country and sector issues
Water quality throughout the Philippines is deteriorating due to high population growth, rapid
urbanization and industrialization. The annual economic loss caused by water pollution is
estimated at PhP 67 billion (US$ 1.3 billion), including losses in health, fisheries production, and
tourism. Metropolitan Manila (MM) is the capital of the Philippines with a population of about
12 million in an area of 640 km². MM is located in the hydraulically complex Pasig River
Laguna de Bay Manila Bay watershed, which includes more than thirty tributaries within the
city. Manila Bay is a pollution hotspot in the southern East Asia Seas region. However, MM is
also an important economic zone, producing 35-40% of the national GDP. All MM waterways
are heavily polluted, with the key watercourses (the Marikina and Pasig Rivers) biologically
dead. Up to 75% of pollution is caused by residential sewage, with the rest originating from
Public Disclosure Authorized
industries. Water is supplied to 90% of the population of MM, but less than 15% of residents are
connected to a sewerage system, and only about half of the effluent collected is adequately
treated. Roughly 85% of the city's households have septic tanks, but the vast majority are not
regularly desludged. Most residents rely on open sewers to drain effluent from their septic tanks.
To guard against the environmental impacts of water pollution, the Philippines has many water-
related laws, but enforcement has been weak and beset with problems that include inadequate
resources and implementation guidelines, poor information, institutional fragmentation, and
inadequate cooperation among government agencies and local government units (LGUs).
Overall Government Strategy. Given the poor baseline conditions in MM, the Medium-Term
Philippine Development Plan (2004-2010) underscores the need to protect the environment in
order to improve quality of life for present and future generations. In creating a healthier
environment for the population and in strengthening the protection of vulnerable and
Public Disclosure Authorized
ecologically fragile areas, the Development Plan focuses on the protection of watersheds through
the adoption of an integrated water resource management system. In accordance with that
strategy, in 2004 the Government of the Philippines (GOP) enacted the Clean Water Act (CWA-

2004), which is an integrated, holistic, decentralized and participatory approach to abating,
preventing, and controlling water pollution.
Institutional fragmentation and the need for partnerships. Currently, the water pollution
control sector in the Pasig River Laguna de Bay Manila Bay watershed is complex and
fragmented. Many government agencies are involved in the sector through their legally
mandated responsibilities for policy and planning, standard setting, regulation and enforcement,
adjudication of disputes, and development of water pollution control projects. The key agencies
include: Department of Environment and Natural Resources (DENR), Metropolitan Waterworks
and Sewerage System (MWSS), Department of Health (DOH), Laguna Lake Development
Authority (LLDA), Pasig River Rehabilitation Commission (PRRC), and local government units
(LGUs).
The main sewerage and sanitation service provider in MM is MWSS, a government corporation
with authority granted by respective local governments to provide water supply, sewerage, and
sanitation services to MM. MWSS fulfils this mandate through its two concessionaires: Manila
Water Company Inc. (MWCI) and Maynilad Water Services Inc. (MWSI). As the main
investors in sewerage and sanitation in MM, MWSS and the two concessionaires play an
important role in ensuring that government priorities are reflected in physical investments within
MM. However, MWSS does not have complete service coverage over the Pasig River Laguna
de Bay Manila Bay watershed. Outside the MWSS area, LGUs, supported by other agencies
such as LLDA and PRRC, are responsible for providing pollution control services.
Given the overlap in mandates of the various agencies and units, the individual efforts by these
organizations to reduce water pollution in MM have not resulted in efficient environmental
improvements. The agencies recognize that greater efficiency and environmental benefit would
be gained by cooperating through a partnership mechanism to create a coordinated approach to
defining pollution priorities, establishing investment plans to address those priorities, sourcing
suitable financing, and monitoring and evaluating project results. A foundation for cooperation
has been established through the implementation of the Manila Bay Environmental Management
Project, which was supported by the Global Environment Facility (GEF), through the
Partnerships in Environmental Management in the Seas of East Asia (PEMSEA). However,
despite the priority accorded this issue by all key agencies, the building of a fully functioning
partnership between the agencies to focus on resolving critical sectoral constraints requires
further time and external support, which would be provided through the GEF-Manila Third
Sewerage Project (GEF project).
Critical Barriers. Under the leadership of DENR, the government has identified the following
critical barriers to scaling up investment in pollution control in MM: a) the public has a very low
awareness of the benefits that sewerage and sanitation bring to society; b) the public's
willingness to pay for sewerage and sanitation is very low and the current tariff structure
provides insufficient incentives for the public to make dedicated connections to separate
sewerage systems; c) in the past DENR has not provided clear guidance to other agencies on the
prioritization of sewerage and sanitation service provision in Metro Manila; d) MWSS'
concession agreements and subsequent renegotiations with the concessionaires through a rate
rebasing mechanism have been based on outdated plans, the targets of which do not maximize
environmental benefits; and e) the current strict end date of the concession agreements set at

2022 limits the borrowing period of any new loans taken by the concessionaires, thereby raising
the cost of investment capital in the sector in coming years. When further considering the
expanded area of the Pasig River Laguna de Bay Manila Bay watershed, an additional barrier
is the lack of viable financial models for private sector investment in sewerage and sanitation in
LGU-controlled areas.
The Government has recognized that the most effective way to ensure that water quality in the
Pasig River Laguna de Bay Manila Bay watershed and in the East Asia Seas improves is
through a strategy that scales up investments in sewerage and sanitation and ensures that
investments are directed in an economically efficient manner based on environmental criteria.
The GOP is committed to addressing the barriers listed above in order to achieve this goal.
Thus, GOP has developed the sector strategy and service provision masterplans, provided legal
background and initiated investment projects in sewerage and sanitation services. Among the
GOP's major investments are the Manila First, Second and Third Sewerage Projects
implemented by MWSS and its concessionaires, supported by the Bank. In addition, the Pasig
River Environmental Management and Rehabilitation Sector Development Program has been
implemented by the Pasig River Rehabilitation Commission with support from ADB. These
actions have positively contributed to service improvements and operating performance of
wastewater facilities, and gradually contributed to reducing the enormous scale of the service
deficiency and pollution problem. The current GEF project is designed to enhance these
previous activities through resolution of several key institutional, legal, financial and technical
barriers in order to enable an investment environment that would allow a scaling up of more
efficient investment in the pollution control sector in the future.
2. Rationale for Bank Involvement
Land-based pollution reduction is a key priority of the Bank in its investment, policy and
capacity building activities in the East Asia and Pacific Region. The objectives of the proposed
GEF project reflect this priority, and are consistent with the World Bank's corporate and regional
environmental strategies.1 Moreover, the GEF and World Bank have agreed to establish a
Partnership Investment Fund for Pollution Reduction in the Large Marine Ecosystems of East
Asia (the Fund). The objective of the Fund is to reduce land-based pollution discharges that
have an impact on the seas of East Asia by leveraging investments in pollution reduction through
the removal of technical, institutional, and financial barriers. In particular, the Fund will finance
activities related to World Bank pollution reduction investment projects that are innovative and
can be replicated in other areas. Expected outcomes of the Fund would be increased investment
in activities that reduce land-based pollution and the replication of cost-effective pollution
reduction technologies and techniques demonstrated by the Fund. A Brief on the Fund (Tranche
1 of 3 Tranches) in the amount of US$25 million was approved by the GEF Council in
November 2005. This GEF project is consistent with the goals and objectives of the Fund and
would be financed under it.
As the provider of significant past and ongoing support for the sewerage and sanitation sectors in
MM, primarily through a series of investment projects under the leadership of MWSS, there is a
1 World Bank, 2001. Making Sustainable Commitments. An Environment Strategy for the World Bank. World
Bank, Washington D.C.; World Bank, 2005, Environment Strategy for the World Bank in the East Asia and Pacific
Region, World Bank: Washington D.C

strong rationale for the Bank to continue to support the GOP as it builds an inter-agency
partnership that will address the remaining sectoral barriers. The Bank is in a strong position to
provide necessary support, especially in the key areas of financial innovation, policy and
planning development, information management and institutional strengthening. Furthermore, it
is intended that the results of this GEF project would be scaled up and replicated through future
investment projects, some of which are likely to be financed by the Bank.
Through this GEF project, the GEF would support the implementation of the CWA, and the
Medium-Term Philippine Development Plan. The Plan gives due prominence to the protection of
watersheds and coastal zones through integrated watershed and coastal area management, as well
as the attainment of the country's Millennium Development Goals. The GEF with its aim of
removing barriers to pollution reduction, therefore fits within, and will help promote, the national
plans.

As a member of the ASEAN, the country has committed to reach by 2010, the ASEAN
Harmonized Environmental Quality Standards2 for river water quality, with the highest priority
to be accorded to urban and industrial pollutants. The marine water quality criteria for the
ASEAN region that sets parameters and values for the protection of aquatic and human life is
similarly recognized by the Philippines. The GEF project, with the aim of reducing land-based
marine pollution, therefore also supports these standards.

Finally, the country is one of the coastal states3 in the East Asian region to have signed the
Putrajaya Declaration of Regional Cooperation for the Sustainable Development of the Seas of
East Asia (2003), thereby committing to regional cooperation in addressing transboundary issues
of common concern, which include land-based pollution. The Manila Bay is a pollution hotspot
in the South China Sea, and the GEF project would promote innovative best practice in pollution
reduction, and the dissemination of lessons learned, through the Partnerships in Environmental
Management for the Seas of East Asia (PEMSEA).

Country Eligibility. Philippines is eligible for GEF assistance under the International Waters
Focal Area through the World Bank. The GEF project is eligible for financing under the Fund as
it fulfills all seven necessary conditions as stipulated in the approved Fund Brief, ie it:
a. is located within the coastal watersheds of one of the six East Asian large marine
ecosystems;
b. demonstrates an innovative technical mechanism to combat land-based water pollution;
c. has high likelihood of replication in Philippines and more widely in East Asia;
d. is unlikely to proceed without grant financing from GEF;
e. has necessary co-financing available;
f. has been endorsed by Philippines' GEF Focal Point; and
g. meets all relevant World Bank Appraisal criteria.
2 In September 1997 ASEAN adopted a Framework to achieve long-term environmental goals for ambient air and
river water quality, as defined according to ASEAN Harmonized Environmental Quality Standards
(http://www.aseansec.org/secgen/articles/ann_3.gif).
3 The original twelve countries included Brunei Darussalam, Cambodia, China, Indonesia, Japan, DPR Korea, RO
Korea, Malaysia, Philippines, Singapore, Thailand and Vietnam. Three additional countries joined in 2005 (Lao
PDR, Myanmar and Timor-Leste) making a current total of 15.

3. Objectives

The GEF project supports the identification and removal of institutional, economic, financial and
technical barriers that limit investment in reducing the pollution that reaches the South China Sea
through the Manila Bay. The South China Sea is a part of the international waters environment,
and the GEF project is therefore consistent with GEF Strategic Priorities in the International
Waters Focal Area. By its aim at reduction of land-based pollution discharges that have an
impact on the seas of East Asia, the GEF project responds to the GEF Contaminant-based
Operational Program. Moreover, it addresses the Philippines CAS theme of supporting private
sector platform growth for enhanced access of the poor and disadvantaged groups to basic
services. Finally, in accordance with the Philippines Clean Water Act, it focuses on mitigating
the negative environmental impacts of water pollution in MM.

The GEF project development objectives are to assist the GOP in the Project Areas in: (a)
identifying essential adjustments to administrative, institutional, and regulatory practices and
existing legislations in order to attract private investments in the Recipient's wastewater sector;
(b) increasing the effectiveness of the agencies responsible for water pollution control through
improved coordination; and (c) promoting innovative, simple and effective wastewater treatment
techniques.

4. Description
The GEF project is a companion to the on-going Manila Third Sewerage Project approved by the
Bank in 2005. GEF project components 1 through 4 aim at identification of impediments to
cooperation among sector agencies, and to non-conventional investments in sewerage and
sanitation. Components 5 and 6 would assist MWSS in pursuing higher investments in sewerage
and sanitation by its concessionaires and in piloting suitable technology for septage disposal.
Component 7 provides technical assistance to help with project management, monitoring,
evaluation and dissemination. The summary follows.

Component 1: Partnership strengthening component would: (a) strengthen partnerships
among the Recipient's agencies responsible for water pollution control to improve coordination
and effectiveness, through carrying out studies of successful pollution control and wastewater
management partnership models worldwide, and identifying and carrying out measures for
improving existing administrative, institutional, and regulatory practices; (b) establish an
integrated partnership information center in DENR to consolidate existing data concerning the
wastewater sector which would then be disseminated to stakeholders in said sector; (c) integrate
water quality monitoring systems of the Recipient's agencies responsible for water pollution
control; and (d) expand the public assessment of water services to include sewerage and
sanitation services.

Component 2: Planning and Policy Development component would (a) update the sewerage
and sanitation master plans and applicable standards for the MWSS's jurisdiction areas; (b)
refine policies, procedures, and guidelines for regulating the providers of septic tank desludging
service; and (c) develop procedures and standards for implementing the Recipient's Clean Water
Act and the Sanitation Code.

Component 3: Innovative financing component would help the government in developing and
testing innovative financing arrangements to attract private sector investment in the sewerage
and sanitation sector, including provision for technical assistance.

Component 4: Use of market-based incentives component would assist the LLDA in
improving its environmental user fees systems and implementing market-based incentives in
such systems through provision of technical assistance.

Component 5: Rate rebasing component would provide technical assistance and training to
MWSS and the Recipient's relevant government agencies for the preparation and negotiations of
2007/08 rate rebasing in the water and wastewater sector.

Component 6: Joint sewage and septage treatment plant component would upgrade a
selected sewage treatment plant in Quezon City to a combined septage and sewage treatment
plant, including the first year trial operation of the combined septage and sewage treatment plant.

Component 7: Project management component would provide technical assistance and
operating support to assist DENR in implementing, coordinating, monitoring, evaluating, and
supervising the GEF project and disseminating the Project's results and outcomes.

5. Financing
Source: ($m.)
BORROWER/RECIPIENT 84.46
GLOBAL ENVIRONMENT FACILITY
5
Total
89.46

6. Implementation
The GEF project would be financed from the GEF Trust Fund managed by the Bank and forms
an integral part of the MTSP for which the Bank recently extended a loan. Both the GEF project
and MTSP would be appropriately coordinated and sequenced to ensure optimal results.
Through the mutual relationship between GEF, UNDP, UNEP and the Bank, the GEF project is
institutionally linked to the Strategic Partnership for Sustainable Development of the LMEs of
East Asia, its financing arm the Strategic Partnership Investment Fund for Pollution Reduction
of the LMEs of East Asia, and its regional agency, the Partnership in Environmental
Management for the Seas of East Asia (PEMSEA).

The GEF project would be implemented by several agencies with DENR providing the
leadership. Coordination of these agencies and day-to-day management of the GEF project
would be carried out by the Unified Project Management Office (PMO) within DENR. General
administration, including procurement, financial management, and consolidation of regular
progress reports and the implementation completion report for the Bank/GEF, would be provided
by the Foreign Assisted and Special Projects Office (FASPO), also within DENR. Both of these
organizational units have adequate capacity and experience with foreign financed projects. In
addition, they would be supported by consulting services provided under the GEF project.

The GEF project implementing agencies are DENR's Environmental Management Bureau
(EMB), the Metropolitan Waterworks and Sewerage System (MWSS), the Pasig River
Rehabilitation Commission (PRRC), and the Laguna Lake Development Authority. Each of
these agencies has appointed a coordinator who would be responsible for implementing a
respective component of the GEF project in close cooperation with the PMO and FASPO.

7. Sustainability
The GEF project has been designed to ensure that all activities are carried out within an
implementation framework that will develop into a long-term partnership between key agencies
and will build human capacity within these agencies. This "learning by doing" approach to
partnership development, which will encourage agencies to work together towards specific,
achievable project outcomes, will also ensure that the partnership framework developed under
the GEF project is sustainable beyond the project's implementation period. Furthermore, as the
GEF project outcomes include enhancements to inter-agency consultation and decision-making
processes, improved policies, regulations and plans, the GEF project as a whole would increase
sustainability of pollution reduction activities by changing the institutional and investment
environment in MM.

8. Lessons Learned from Past Operations in the Country/Sector
Given the overlap in mandates of the various agencies and units involved in pollution control,
individual efforts by these organizations had not been effective and greater efficiency would be
gained by building partnerships for defining pollution priorities, establishing investment plans,
sourcing suitable finance, and monitoring and evaluating project results. The GEF project
therefore builds on the foundation established through the Manila Bay Environmental
Management Project's inter-agency collaboration started in 2000, which has been used as a
stepping off point for developing the partnership between the relevant agencies responsible for
environmental and coastal issues. It was envisaged that such a partnership, which would be
established under this GEF project, would generate an enabling environment for scaling up
investments in the sector.

Furthermore, the GEF project design reflects the lesson learned through previous Bank
operations that the environmental targets of the concession agreements do not fully reflect GOP
objectives because the government had insufficient information during the rate rebasing exercise
of 2002-03 to prioritize environmental issues during its negotiations with the concessionaires.
Expert assistance during the GOP's preparation and negotiations for the 2007-08 rate rebasing
will help ensure that the GOP's priorities are properly defined and discussed during that
negotiation exercise.

9. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project
Yes
No
Environmental Assessment (OP/BP 4.01) [X]
[
]

Natural Habitats (OP/BP 4.04)
[ ]
[X]
Pest Management (OP 4.09)
[ ]
[X]
Cultural Property (OP 4.11)
[ ]
[X]
Involuntary Resettlement (OP/BP 4.12)
[ ]
[X]
Indigenous Peoples (OP/BP 4.10)
[ ]
[X]
Forests (OP/BP 4.36)
[ ]
[X]
Safety of Dams (OP/BP 4.37)
[ ]
[X]
Projects in Disputed Areas (OP/BP 7.60)*
[ ]
[X]
Projects on International Waterways (OP/BP 7.50)
[ ]
[X]
10. List of Factual Technical Documents

a. Philippines GEF Manila Third Sewerage Project
Vol. 1 of 8: Main text and figures;
Vol. 2 of 8: Environmental management plan summary;
Vol. 3 of 8: Annex on Public Consultations;
Vol. 4 of 8: Annex on septage and sludge disposal in Lahar Area;
Vol. 5 of 8: Bio solids management strategy;
Vol. 6 of 8: Regional environmental assessment (REA);
Vol. 7 of 8: Environmental and social assessment framework;
Vol. 8 of 8: Initial environmental examination: prototype treatment plant for sewage--
septage project

b. Assessment of FASPO procurement capacity, Procurement Plan (FASPO), and
Procurement Manual (FASPO)

c. Financial management assessment review of DENR

d. Concept Paper: Implementation of the Manila Bay Coastal Strategy

e. TOR for Rate Rebasing Component

f. Initial Environmental Examination (MWSI)

g. Dissemination and Replication Strategy in the Project Document "GEF Manila Third
Sewerage Project (GEF-MTSP)". In TF055659 - GEF PDF B-PHILIPPINES: MANILA
THIRD SEWERAGE PROJECT (MTSP): Reports and Studies

h. Detailed financial analysis of MWSS and MWSI including the implication of the
Restructuring Agreement of MWSI that covers the period out to 2013.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the
disputed areas

11. Contact point
Contact: Luiz Claudio Martins Tavares
Title: Sr. Water & Sanitation Spec.
Tel: (202) 473-0597
Fax: (202) 522-1787
Email: Ltavares@worldbank.org

12. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Email: pic@worldbank.org
Web: http://www.worldbank.org/infoshop