Water

Country Water Action: Philippines
Water Sector First in Line for Flexi-Financing Option
(April 2006)

While preparing for a project to rehabilitate a major aqueduct threatening collapse and cutting off more than 50% of Manila’s water supply, ADB’s project plans took a positive twist.

The ADB Board of Directors approved in August 2005 several new financing instruments and modalities that will give governments much greater flexibility in terms of planning their borrowing, linking this more efficiently to project readiness, reducing transaction costs, eliminating currency mismatches and encouraging co-financing.

One of these new instruments is the multitranche financing facility. It targets large projects with standalone components and long-term investment programs. The Philippines is one of the first opportunities to apply this new financing instrument in the water sector. ADB is working on a pair of subprojects aimed at rehabilitating aqueducts and improving the raw water supply and treatment to Manila.

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“The MFF acts essentially as a line of credit,” said Rudolf Frauendorfer, a senior urban development specialist at ADB and the project officer for the MWSS investment proposal. Through the MFF, ADB approves an umbrella amount of financing upfront, later enabling clients to convert part of this into individual loans in support of individual subprojects. With an MFF, the government is not obliged to use the entire amount and the transaction does not accrue the type of commitment fees typically associated with stand-alone projects.

The new financing facility for MWSS could also give the government an option of borrowing in pesos, which is made available by the local currency financing instrument also approved by the ADB Board in 2005. “Revenues from water services are generated in pesos, so why not make financing available in pesos?” Frauendorfer said.

Customers will share the costs of the aqueducts subprojects (the first two proposed sub-projects under the MFF package). According to estimates laid out in the project proposal, MWSS will raise the average tariff from P16.56 per cubic meter to P21.36. Based on average consumption rates, the average bill for customers will be approximately P487.69, which is 1.94% of average household income.

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Understandably, consumers will want to know what their increased tariffs and the new loan package will be buying them.

Some of the possible subprojects that could be financed should such a facility be approved include:

• Subproject 1 - to improve the outlet system of the Angat Dam and repair the Umiray-Angat Transbasin water diversion tunnel system, which was damaged during a 2004 typhoon. ADB financed the $70 million construction of the Umiray-Angat tunnel in 2000. It transports 20-30% of Manila’s water supply.
• Subproject 2 - to build a new water supply aqueduct from the Angat Dam and rehabilitate an existing aqueduct, which carries 50% of Manila’s water supply but is at risk of collapsing.

A third possible subproject to construct two water treatment plants will be explored through a technical assistance grant in 2006. Financing for the plants would come from the MFF package.

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The proposed rehabilitation will also address MWSS’ serious issues with water losses in its system, or non-revenue water. Despite targets set by the two concessionaires that took over service delivery for the Metropolitan area in 1997, nonrevenue water remains high. Manila Water Company, Inc., responsible for West Manila, reports it has exceeded its target by reducing non-revenue water from 65% to 35%. The more troubled, but recovering, concessionaire for East Manila, Maynilad Water Services, Inc., still posts non-revenue water at reportedly 70%.

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Read about ADB’s new financing approaches.