Document of The World Bank Report No: ICR1555 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-72050, IBRD-80350, and TF-52826) ON A LOAN IN THE AMOUNT OF $5.0 MILLION ADDITIONAL FINANCING OF $10 MILLION AND A GRANT OF $5.0 MILLION FROM THE GOVERNMENT OF NETHERLANDS TO THE REPUBLIC OF THE PHILIPPINES FOR A LAGUNA DE BAY INSTITUTIONAL STRENGTHENING AND COMMUNITY PARTICIPATION PROJECT November 25, 2014 Environment and Natural Resources Global Practice Philippines Country Management Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective August 30, 2014) Currency Unit = Philippines Peso PHP 1.00 = US$ 0.02 US$ 1.00 = PHP 43.63 FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS COA Commission on Audit DBM Department of Budget and Management DENR Department of Environment and Natural Resources DoF Department of Finance DSS Decision Support System ESSF Environmental and Social Safeguards Framework EUFS Environmental User Fee System GoP Government of the Republic of the Philippines LEAP Laguna Watershed Environment Action Plan LGU Local Government Units within the Laguna de Bay LIDO Letter of Institutional Development Objectives LISCOP-TRP Technical Review Panel of the LISCOP LLDA Laguna Lake Development Authority MDFO Municipal Development Fund Office LLDA-B OD Municipal Development Fund Office MDFO-PGB MDFO’s Policy Governing Board MDFO-TRC Technical Review Committee of the MDFO OM Operations Manual PCO Project Coordination Office of LLDA PDP Public Disclosure Program PMT Project Management Teams at the LGUs RC River Councils RoP Republic of Philippines WRSS World Bank Water Resources Sector Strategy Vice President: Axel van Trotsenburg Country Director: Motoo Konishi Agriculture Global Practice Senior Director: Juergen Voegele Practice Manager: Iain Shuker Project Team Leader: Gerardo Parco ICRR Team Leader: Harideep Singh PHILIPPINES LAGUNA DE BAY INSTITUTIONAL STRENGTHENING AND COMMUNITY PARTICIPATION/LISCOP CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 8 3. Assessment of Outcomes .......................................................................................... 15 4. Assessment of Risk to Development Outcome......................................................... 21 5. Assessment of Bank and Borrower Performance ..................................................... 21 6. Lessons Learned ....................................................................................................... 24 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 25 Annex 1. Project Costs and Financing .......................................................................... 26 Annex 2. Outputs by Component ................................................................................. 27 Annex 3. Economic and Financial Analysis ................................................................. 37 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 41 Annex 5. Beneficiary Survey Results ........................................................................... 43 Annex 6. Stakeholder Workshop Report and Results................................................... 44 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 45 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 57 Annex 9. List of Supporting Documents ...................................................................... 58 Annex 10. Description and Assessment of Cancelled Carbon Finance Operations…. 59 MAP A. Basic Information Laguna de Bay Institutional Country: Philippines Project Name: Strengthening and Community Participation/LISCOP IBRD-72050,IBRD- Project ID: P070899 L/C/TF Number(s): 80350,TF-52826 ICR Date: 11/25/2014 ICR Type: Core ICR REPUBLIC OF THE Lending Instrument: SIL Borrower: PHILIPPINES Original Total USD 5.00M Disbursed Amount: USD 6.80M Commitment: Revised Amount: USD 6.80M Environmental Category: B Implementing Agencies: Laguna Lake Development Authority Cofinanciers and Other External Partners: Netherlands MOFA B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 11/30/2001 Effectiveness: 04/02/2004 04/02/2004 12/16/2008 01/07/2010 07/20/2010 Appraisal: 09/15/2003 Restructuring(s): 01/19/2011 05/12/2011 04/07/2013 Approval: 12/04/2003 Mid-term Review: 01/15/2007 01/15/2007 Closing: 01/31/2009 04/30/2014 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Moderately Satisfactory Government: Unsatisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No Moderately Satisfactory at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) General water, sanitation and flood protection sector 100 100 Theme Code (as % of total Bank financing) Environmental policies and institutions 29 15 Participation and civic engagement 28 14 Pollution management and environmental health 29 50 Water resource management 14 21 E. Bank Staff Positions At ICR At Approval Vice President: Axel van Trotsenburg Jemal-ud-din Kassum Country Director: Motoo Konishi Robert V. Pulley Practice Iain G. Shuker Maria Teresa Serra Manager/Manager: Project Team Leader: Gerardo F. Parco Patchamuthu Illangovan ICR Team Leader: Harideep Singh ICR Primary Author: Harideep Singh F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective of the project is to assist the Borrower to improve the environmental quality of the Laguna de Bay watershed. Revised Project Development Objectives (as approved by original approving authority) The PDO was not revised. However, the PDO indicators in the Project Paper for Additional Financing introduced three material changes: (a) the target of compliance by enterprises was increased from 30% to 91% (to reflect actual achievement at the time of AF preparation); (b) LGUs in all 24 micro-watersheds were to have adopted the multi- stakeholder planning as a part of the municipal development process (to reflect the actual achievement at the time of AF preparation); and (c) the number of micro-watershed intervention sub-projects was increased from 20 to 50 (the project had 33 interventions either already implemented or nearing completion at the time of AF preparation). (a) PDO Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Indicator 1 : At least a 10% reduction in pollution loading for regulated parameter. BOD loading BOD loading = 828MT BOD loading BOD loading reduced by Value (based on the 1080 firms reduced to 656MT reduced by 10% to 10% to quantitative or covered by the from the 1080 745MT from 1080 745MT from Qualitative) environmental user fee indicator firms, or firms, or by 83MT 1080 firms, or system in 2003) by 172MT by 83MT Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Achieved: The actual reduction amounts to 21% of the base BOD loading, and (incl. % 207% of the BOD reduction target of 83MT achievement) Indicator 2 : At least 30% increase in compliance by enterprises. 971 659 enterprises/fir enterprises/firms Value ms with 1239 enterprises, or 507 (enterprises/firms with discharge quantitative or discharge an additional 732 with discharge permits) permits, or an Qualitative) permits, or an firms additional 152 additional 464 firms firms Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Achieved: The actual increase of 732 enterprises with discharge permits is 158% (incl. % of the target of 464 additional firms achievement) All LGUs in the micro-watersheds have adopted multi-stakeholder micro- Indicator 3 : watershed planning as part of their municipal development planning process. Value None All LGUS in 10 All LGUs in All 61 LGUs in all quantitative or micro-watersheds 24 micro- of the 24 project Qualitative) have adopted watersheds micro-watersheds LEAP process have adopted have adopted the LEAP process LEAP process Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Achieved: 100% of the target. All 26 LGUs (with sub-projects) have adopted the (incl. % process. Those without sub-projects that participated in LEAP process have also achievement) adopted the process as part of municipal development planning Micro-watershed interventions that are implemented result in measurable Indicator 4 : reductions in important environmental pressures. All 51 sub-projects All 50 are targeted to At least 5 interventions reduce Value interventions result result in environmental quantitative or None in reduction in reduction in pressures and Qualitative) environmental environmental adverse impacts; 42 pressures pressures are already commissioned Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Achieved: 102% of the target achieved in terms of sub-projects with the intended Comments result of reducing environmental pressures; 42 or 80% of the 51 sub-projects (incl. % have been commissioned already and contributing to alleviating adverse achievement) environmental impacts At least 30 percent increase in the number of men and women from community Indicator 5 : and stakeholder groups that are involved in watershed planning and management 300 percent 1644 men and 30 percent Value increase in women participated 249 men + 162 increase in quantitative or participation: in the stakeholder- women=411 participation: 535 Qualitative) 1644 men and based planning men and women women process Date achieved 12/31/2003 07/31/2010 07/31/2010 07/31/2010 Comments (incl. % Achieved: 300% of the targeted increase in participation achieved achievement) (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : Monitoring and evaluation framework set up and in use M&E framework M&E framework Value and system and system (quantitative No No change improved and in improved and in or Qualitative) use use Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully Achieved (but delayed): The base MIS framework was developed during (incl. % preparation. The system took several years to be improved and become achievement) operational. It was only in the last two years that it generated project monitoring information Indicator 2 : MIS benchmarking completed Value (quantitative No MIS Yes No change Yes or Qualitative) Date achieved 12/31/2003 07/31/2010 07/31/2010 07/31/2010 Comments (incl. % Fully Achieved achievement) Multistakeholder planning process (Lake Environment Action Planning-LEAP) Indicator 3 : conducted in 24 microwatersheds Value 24 micro- 24 micro- (quantitative None No change watersheds watersheds or Qualitative) Date achieved 12/31/2003 07/31/2010 07/31/2010 07/31/2010 Comments Fully Achieved: Multi-stakeholder planning process completed in all 24 micro- (incl. % watersheds (4 during preparation, and 20 during implementation) achievement) Number of micro-watershed sub-projects identified and feasibility studies Indicator 4 : completed Value 50 sub- (quantitative 0 20 sub-projects 51 sub-projects projects or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully Achieved: 102% of the targeted 50 sub-projects identified and feasibility (incl. % studies completed achievement) At least 20 sub-projects approved with adequate time for their implementation Indicator 5 : within the project duration Value 50 sub- (quantitative None 20 sub-projects 51 sub-projects projects or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully Achieved: 102% of the targeted sub-projects implemented achievement) Indicator 6 : Number of Subproject Loan Agreements (SPLA) signed Value (quantitative None 20 SPLAs 35 SPLAs 32 SPLAs or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Partially achieved: 92% of the targeted 35 SPLAs signed. achievement) More than 80 percent of subprojects that are approved for funding are Indicator 7 : implemented and completed. Value 0 20 sub-projects 50 sub- 42 sub-projects (quantitative projects or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Partially achieved: 42 of the 51 sub-projects (82%) actually commissioned and (incl. % operational; remaining 9 are at various stages of construction/ completion achievement) LLDA has implemented the new structure and completed its re-engineering Indicator 8 : program as envisioned in the LIDO. Sustain implementatio New structure Implement new Value Elements of the Approved n of new implemented based structure based on (quantitative Re-engineering Program structure based on approved the Rationalization or Qualitative) developed on the Rationalization Plan Rationalizatio Plan. n Plan Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Achieved: LLDA re-organized as per plan - 16 divisions consolidated into four (incl. % main departments: Water Resources, Policy and Planning, Environmental achievement) Regulatory, and Management Services. Some positions are still vacant though. Indicator 9 : Data management systems improved Data management Value Data management systems Systems improved (quantitative None system completed further and in use or Qualitative) improved and in use Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully Achieved: Decision Support System in place; Laguna de bay Information (incl. % Resource Information System prototype (LDBRIS), PMES, GIS-based achievement) MapServer for industries, aquaculture and shoreland modules completed Indicator 10 : Laguna de Bay Environment Monitor published annually 7 Laguna de 5 Laguna de Bay Value Bay 7 Laguna de Bay Environment (quantitative None Environment Environment Monitors or Qualitative) Monitors Monitors published published published Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully Achieved: 100% of target achievement) Indicator 11 : Modified Environmental User Fee (EUF) formula officially adopted. Value Modified EUF EUFS existed but needed Modified EUF (quantitative No change Formula adopted to be modified formula adopted or Qualitative) since 2007 Date achieved 12/31/2003 07/31/2010 07/31/2010 07/31/2010 Comments Fully achieved: The expansion of the EUFS both in terms of industry coverage (incl. % and regulated parameters has been implemented under the project since May achievement) 2007 Indicator 12 : EUF parameters expanded. No change - three Value 3 parameters parameters for (quantitative Only one parameter (BOD,TSS, Done EUFS or Qualitative) TSS/BOD) coverage retained Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Fully achieved: EUFS now includes three parameters. LLDA seeking Board Comments Approval to include additional parameter (COD); plans to expand EUFS to cover (incl. % nutrients (phosphorous, nitrate) and heavy metals (lead, cadmium, chromium, achievement) zinc, nickel and copper) Indicator 13 : Number of establishments covered by EUFS increased by 300-400 Value 1400 firms, or an 2482 firms, or 3321 firms, or an (quantitative 1000 firms additional 400 an additional additional 2321 or Qualitative) firms 1482 firms firms Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully achieved: 157% of targeted increase in number of establishments to be (incl. % covered by EUFS (2321 versus 1482 enterprises) achievement) Indicator 14 : 85-90% of loan proceeds disbursed At least 85% Value or US$12.75 US$6.83 million (quantitative 0 85-90% million of the disbursed or Qualitative) US$15 million loan disbursed Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Not Achieved: Only 51% of the target of US$12.75 million could be disbursed at (incl. % project closing. After considering cancellations, US$6.83 was disbursed out of achievement) US$9.83 million (70%) Indicator 15 : 16-25% increase in revenue from EUF system No change - 25% increase or 25% increase Value total of Php 68.75 or total of Php Php 130 million, an (quantitative Php 55 million million, an 68.75 million, icrease of Php 75 or Qualitative) increase of Php an increase of million 13.75 million Php 13.75 million Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully achieved: Actual EUFS revenue touched a high of Php 130 million, an (incl. % increase of Php 75 million, or 545% of that Php 13.75 million target achievement) Revenues reinvested in environmental projects through PDF and other Indicator 16 : instruments by LGUs and the private sector Value (quantitative 0 Php 25 million Php 37 million PHP37 million or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully achieved: 100% of committed funds for environmental sub-projects as per (incl. % target disbursed achievement) Operational guidelines for expansion of EUF to new enterprises and their Indicator 17 : collection adopted Value Guidelines already Guidelines Guidelines already (quantitative None developed and adopted and developed and or Qualitative) adopted sustained adopted Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully achieved. achievement) Indicator 18 : Public disclosure of industry and LGU performance occurs at least twice Value 10 PDPs (quantitative None 2 5 completed: 6 - or Qualitative) Industry; 4 - LGU Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully achieved: 200% of the target achieved. PDP activity already mainstreamed. (incl. % New evaluation criteria for LGUs being developed achievement) Measures to upgrade permitting, monitoring, enforcement, policy and planning Indicator 19 : procedures (PMEPP) officially adopted in LLDA Value PMEPP PMEPP (quantitative None PMEPP adopted implemented implemented or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully achieved. achievement) Indicator 20 : Infrastructure strategy adopted by LLDA Infrastructure Value Development Infra development (quantitative None No change Strategy submitted strategy adopted or Qualitative) for LLDA Board Approval Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully achieved. achievement) Operational guidelines for EUF expansion to households and regulation of water- Indicator 21 : use developed Operational guidelines for EUF Operational Value expansion to Guidelines for EUF (quantitative None households and No change expansion and or Qualitative) water use water use regulation regulation adopted adopted. Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully achieved. achievement) Indicator 22 : Annual Conference/Learning Forum conducted Value 7 conferences (quantitative 0 5 conferences 7 conferences conducted or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully achieved. achievement) Public perception survey on effectiveness of IEC programs conducted at least Indicator 23 : twice by end of project. 3 surveys All three surveys Value conducted (3rd conducted. Results Two surveys (quantitative None survey have been shared conducted or Qualitative) conducted by with the Bank 2013) Team Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % Fully achieved. achievement) Number of watershed management-related SB resolutions approved and/or Indicator 24 : enforced Value (quantitative 0 20 resolutions 50 resolutions 56 resolutions or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments Fully achieved: 112% of target (based on the latest count of actual resolutions (incl. % which are enforced) achievement) Indicator 25 : Number of River Council offices established Value (quantitative 0 10 offices Dropped Dropped or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % This indicator was dropped at AF approval. achievement) Indicator 26 : Capacity of 24 RCs substantially expanded by three levels. Value Maturity Index: (quantitative Maturity Index: 4.59 Dropped Dropped 7.59 or Qualitative) Date achieved 12/31/2003 07/31/2010 04/30/2014 04/30/2014 Comments (incl. % This indicator was dropped at AF approval. achievement) G. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/29/2004 Satisfactory Satisfactory 0.05 2 12/22/2004 Satisfactory Satisfactory 0.05 3 06/20/2005 Satisfactory Satisfactory 0.05 4 12/27/2005 Satisfactory Satisfactory 0.05 5 06/15/2006 Satisfactory Satisfactory 0.05 6 12/14/2006 Satisfactory Satisfactory 0.43 Moderately 7 03/15/2007 Moderately Satisfactory 0.55 Unsatisfactory 8 09/18/2007 Moderately Satisfactory Moderately Satisfactory 0.59 9 06/17/2008 Moderately Satisfactory Moderately Satisfactory 1.39 10 12/23/2008 Satisfactory Moderately Satisfactory 1.98 11 06/19/2009 Satisfactory Satisfactory 2.36 12 12/02/2009 Satisfactory Satisfactory 2.67 13 06/23/2010 Satisfactory Satisfactory 3.23 14 02/08/2011 Satisfactory Satisfactory 4.09 15 09/19/2011 Satisfactory Satisfactory 4.37 16 04/01/2012 Satisfactory Satisfactory 4.33 Moderately 17 11/11/2012 Moderately Satisfactory 5.33 Unsatisfactory Moderately 18 06/05/2013 Moderately Satisfactory 5.39 Unsatisfactory Moderately 19 12/26/2013 Moderately Satisfactory 5.80 Unsatisfactory 20 04/28/2014 Satisfactory Moderately Satisfactory 6.01 H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions Closing Date extended by 12 months to January 31, 2010: To enable the local governmental units to complete the sub- 12/16/2008 MS MS 1.98 projects and the Laguna Lake Development Authority to further refine and mainstream the planning, regulatory and ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions economic instruments to manage the lake and its watershed Closing Date extended by six months to July 31, 2010: To enable the affected local governments units to complete the sub-projects whose sites 01/07/2010 N S S 3.00 were submerged by the flooding, and rehabilitate the sub-projects that were damaged, as a result of the flooding caused by Typhoons Ondoy and Santi Closing Date extended by six months to January 31, 2011: To enable the Laguna Lake Development Authority to secure confirmation from the National Economic Development Authority for the 07/20/2010 N S S 3.28 proposed US$10 million Additional Financing, to provide time to the local governmental units to complete three delayed sub-projects, and to allow adequate operation and maintenance of commissioned sub-projects Extension of Closing Date by three months to April 30, 2011: To allow the Office of the 01/19/2011 S S 3.89 President to complete its review of the proposed US$10 million Additional Financing Additional Financing (loan signed): Increase in the sub- projects target from 33 to 50; 05/12/2011 N S S 4.29 two indicators relating to River Councils dropped; and a few time-related activity indicators increased Partial Cancellation: US$4.5 04/07/2013 MS MU 5.33 million of the US$10 million Additional Financing was ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions cancelled due to the project financing terms becoming less attractive, the disruption in implementation resulting from the 2013 local elections, and the difficulties encountered by the local governmental units in securing internal approvals authorizing borrowing for sub- projects I. Disbursement Profile 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Country and sector background. At appraisal in 2003, in the Philippines, land use changes including rapid deforestation, and inappropriate development in upland areas had resulted in approximately 45 per cent of the land area in the country suffering from moderate to severe erosion. The use of chemical fertilizers and pesticides had increased rapidly during 1980-2000, causing increased loading of nutrients and pesticides in the watersheds in the country. Treatment of wastewater from industrial, domestic, and agricultural users was limited, resulting in significant pollution loading into the recipient watersheds. Water quality monitoring undertaken by the Department of Environment and Natural Resources (DENR) in 2001 indicated that 64 percent of the rivers in the country were not suitable for drinking without expensive treatment. DENR monitoring data from coastal areas indicated that water quality degradation was putting fisheries and tourism at risk in many areas. In addition, there were over 900,000 cases of water borne disease each year that cost over 1 billion pesos in medical expenses and hospitalization. Laguna De Bay clearly was a priority watershed in Philippines. Laguna Lake is the largest lake in the Philippines and the second largest freshwater lake in Southeast Asia. Its watershed covers 6 provinces and 61 municipalities and was home to 13% of the population at that time. The lake and its watershed represented a major water resource for the region, a resource that, like in other parts of the country, had degraded significantly. It was estimated that annually about 75,000 tons of organic pollution and 5,000 tons of nutrient pollution were getting discharged into the lake due to a combination of domestic, industrial and agricultural pollution. Additionally, 4 million tons of sediment per year was entering the lake which was accumulating at an estimated 0.5 centimeter per year at the lake bottom. Research had indicated that open water fisheries were becoming unsustainable in many parts of the Laguna De Bay area with consistently declining catch and, based on water quality criteria, recreational use was increasingly getting limited to non-contact activities, although there were some areas that afforded an opportunity for swimming. Poor water quality in Laguna De Bay had also resulted in high levels of water borne diseases, resulting in escalated health costs. In lakeshore areas alone, annual medical expenses due to waterborne diseases were estimated at PhP 10.7 million. Many of the tributaries of the watershed were severely polluted, with a number of urban waterways filled with garbage, decimating many of services they could otherwise provide, and reducing their aesthetic value. Beyond the increased water pollution, much of the environmental degradation of watersheds, including deforestation, increased fertilizer use, and the inadequate treatment of pigfarm waste, was resulting in increased levels of greenhouse gas emissions from these sources. The reasons for this environmental deterioration were not difficult to grasp: (a) rapid population growth, urbanization and industrialization, in particular the uncontrolled human settlements along Laguna River banks and lakeshore areas; (b) expanding development activities in the region, including denudation of forested areas and land conversion resulting in silt accumulation in the lake and its tributaries; and (c) inadequate pollution abatement infrastructure in most industries and agricultural operations. Laguna Lake Development Authority (LLDA) was established in 1969 with the specific mandate for the protection and management, and facilitating sustainable development and balanced growth of the Laguna De Bay region. While operating as an independent lake basin management authority, it lacked the institutional capacity and relevant approaches to adopt regulatory and management functions which were becoming increasingly important to improve the environmental condition of the lake. 1 Although LLDA has been improving compliance through a combination of traditional command-and- control mechanisms and innovative Environmental User Fee System (EUFS), pollution reduction was limited due to insufficient enforcement capacity and a limited scope of the EUFS in terms of pollution parameters and targeted sectors. Coordination with other agencies barely existed and there was no private sector involvement in environmental improvement investments. Compounding the problems resulting from urbanization and development, and an Authority that needed to seriously address environmental issues, was: (a) the limited capacity and involvement of the Laguna De Bay area Local Governmental Units (LGUs) in environmental activities as a result of slow devolution of environmental and natural resource functions, limited environmental planning and financing; (b) lack of institutional structures that could address micro-watershed-based environmental issues that commonly transcended the political boundaries of a single local government jurisdiction; and (c) unorganized and limited participation of civil society at the local level with less than desired engagement of the full range of micro-watershed stakeholders in micro-watershed level environmental planning. This resulted in inadequate regulation and enforcement, inefficient institutional arrangements to undertake action on a watershed basis and to resolve conflicts, and capacity and financial constraints particularly in initiating micro-watershed intervention investments. The government had responded with a range of policy initiatives, notably: (a) Clean Water Act of 2002, which emphasized regional planning, area-based water quality management, improved sewage services, and expanded financing mechanisms, including user fees; and (b) Medium Term Philippine Development Plan (2001-2004), which espoused a strategy of river basin based integrated water resources management approach for water resources planning and investment in the country. Additionally, to improve the financing capacity of LGUs in environmental watershed management, the government had adopted a new National Government-LGU (NG-LGU) cost sharing formula for devolved activities which included favorable terms for development of environmental infrastructure such as landfills and wastewater treatment facilities as well as natural resources management projects. LLDA, at its level, had developed two master plans for the Laguna De Bay watershed, the latest in 1995, which provided the vision for environmental management of the watershed, and for which LLDA had developed an institutional reengineering program (Rationalization Plan) which was already at an advanced implementation stage. LLDA had also already piloted several programs for water quality management, most notably the implementation of their EUFS, and the establishment of River Councils (RCs). The EUFS program successfully targeted the most polluting industries but covered one parameter (BOD), only a limited number of industries, and excluded domestic source which is a significant contributor to organic pollution in the lake. To create institutional structures to address micro-watershed level issues, LLDA had also assisted in setting up (and training) RCs in 22 of the 24 micro-watersheds in the Laguna De Bay watershed, made up of members from the stakeholder groups including municipal and barangay- level local governments, civil society groups, resource user groups (e.g. fisherfolk and farmers), individual citizens and the private sector. RCs were 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 well as a channel for local communication and coordination with LLDA and the LGUs. Some RCs proved to be very useful, and these initial successes strengthened LLDA's resolve to help further strengthen RCs and expand their role in the management and protection of the lake's resources. These two initiatives enjoyed some success but were limited in scope and needed further expansion and strengthening. 2 The unfinished agenda that needed further support included, inter alia, the following: (a) completing the LLDA third and final phase of institutional reengineering; (b) improving environmental planning at the LGU level through institutionalization of micro-watershed-based multi-stakeholder planning in LGU planning and development process; (c) improving planning at LLDA through continued modernization of their data management, monitoring, decision-making tools and regional planning that integrates local micro-watershed planning to generate watershed level investments; (d) expanding further the implementation of both EUFS and market-based instrument pilots to positively affect resource user behavior; (e) generating additional revenues at LLDA to facilitate, on a partnership basis, micro-watershed based interventions through LGUs; and (e) nurturing the RCs to play a convening role in micro-watershed level advocacy, planning and monitoring. It was in this context that an initial Learning and Innovation Loan (LIL) was proposed in 2002 to be prepared in a six month period. Using an integrated and comprehensive approach, the 3-year reform program was expected to expand LLDA’s mandate and functions, re-structure its organization and improve its staffing and enhance its regulatory instruments and incentives. Given the size of the lake, the magnitude of the problem, impacts from household discharge, informal riverbanks and shoreland settlements, and deforestation, the LIL was not intended to bring about a dramatic improvement in the degrading situation in the bay. Rather, it was to support this process by providing an opportunity to develop, test, and fine-tune LLDA’s regulatory program, tools and instruments, develop participatory approaches to watershed co-management, and develop modalities for RCs participation in the context of the transformation of the watershed through sub-project implementation. A small micro-watershed grant-financed sub-projects investment component was proposed to cover only four of the 24 RCs. It was clear that the environmental clean-up of the Laguna De Bay was huge and could not be addressed by the LIL. A larger and more comprehensive follow-on watershed development project was sequentially planned to be initiated in 2005 which would fund a larger cohort of sub-projects through a Specific Investment Loan (SIL) to build on LLDA's institutional capacity building, and co-financing and co-management experiences garnered from the LIL. The Government of the Netherlands also expressed an interest to co-finance, through a technical assistance grant, LLDA’s institutional strengthening activities. The LIL eventually morphed into a SIL 1 with changes in the implementation arrangements and period, but continued to have the same focused LLDA institutional strengthening initiative, piloting participatory LGU-based co-management approach of the watershed, but a significantly expanded component of sub-projects covering all 24 micro-watersheds at its core. At the time of appraisal, a small carbon finance activity was also tentatively proposed to be developed and implemented concurrently with, but not as a part of, the project. Two of the Bank’s carbon funds were expected to purchase emission reductions (ERs) realized from soil carbon sequestration from watershed rehabilitation and methane avoidance from improved waste management. During implementation, Emission Reduction Purchase Agreements (ERPAs) between LLDA and the Bank, as trustee of the Bio Carbon Fund and Community Development Carbon Fund, were signed to provide 1 The LIL was smaller in scope as the sub-projects were to be implemented by the RCs and this would have required considerable strengthening and monitoring; not all RCs may have been in a position to participate. Further, it became apparent that: (a) the Department of Finance could not borrow on behalf of a Government-owned and Controlled Corporation (GOCC); (b) RCs could not receive funding since they were not government instruments; and (c) LLDA did not receive any allocation under the Appropriations Act and did not have enough resources of its own to fund a multi-year World Bank project. LLDA was directed to re-design the project and submit the revised project with all the documentary requirements using NEDA ICC-Secretariat prescribed formats. This resulted in considerable loss of preparation time. Also, with DOF as the loan borrower, LLDA as the implementing agency, MDFO as the fund administrator for the World Bank loan proceeds, and LGUs as implementing partners, a relatively larger project seemed appropriate. 3 additional revenues to LGUs from the sale of carbon offsets. Although this separate initiative did not result in any verified ERs, and the ERPAs with LLDA were eventually terminated, an assessment is provided in Annex 10. Rationale for Bank assistance. The value added of Bank involvement in this operation stemmed from its long-term engagement with LLDA (10 years) and with the water sector in the Philippines (30 years) combined with its global experience and multi-disciplinary approach including experience in regulatory instruments and incentives, watershed planning and management and demand driven municipal investments. The Bank’s Philippine-specific experience in the water and sanitation sector, natural resources management sector, LGU governance, among others, provided a solid comparative advantage in supporting this project. This experience included: (a) assisting water utilities to improve their operational efficiency and accountability to consumers, facilitating private sector participation, and leveraging financial flows into the water and sanitation sector; (b) assisting LGUs to plan and implement sewerage, sanitation and drainage facilities; (c) working with private concessionaires to expand their sewerage management programs; (d) reducing environmental degradation through support for locally generated and implemented natural resource management sub-projects; (e) supporting the implementation of a broad policy and institutional framework in the water sector; (f) financing municipal infrastructure and building capacity of LGUs; and (g) enhancing improved natural resources management by promoting coordinated and sustainable demand driven development activities in a river basin context. This advantage was further strengthened by a partnership with the Government of Netherlands which agreed to provide a grant of US$5 million for the institutional development activities under component 2 of the project, and brought with it considerable knowledge and experience gained from the implementation of the just concluded Sustainable Development of Laguna De Bay project which was focused specifically on LLDA to strengthen its integrated water resources management capability and to establish a GIS-based decision support system. Project contribution to higher level objectives. The Bank’s Country Assistance Strategy (CAS) for the Philippines (Document number: R2002-0083 (IFC/R2002-0076)) specifically mentioned the proposed project as an initiative that would help address the declining resource base in the country. The project also supported the Country Assistance Strategy in that it intended to: (a) encourage environmentally sustainable urban and rural development; (b) improve governance through ensuring civil society participation; (c) assist LGUs to deliver public services more effectively; and (d) ensure environmental sustainability through an integrated approach to watershed management and improved environmental governance. The framework of the World Bank Water Resources Sector Strategy (WRSS) for the Philippines that was being drafted at that stage envisioned an integrated water resources management approach as a long-term goal, and focused 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 included: water supply and sanitation; irrigation and drainage; energy; environmental services; and, other services including industry and navigation. The strategy was also envisioned to improve: the institutional framework; management framework; the development and management of infrastructure; and the political economy of water management and reform. The project supported the CAS and was consistent with the WRSS strategy as it aimed to implement practical actions that were incremental to ongoing work in the environmental services sector in a watershed that was identified as a priority watershed in Philippines. Within the Laguna de Bay watershed, the project was designed to address several issues in the strategy: (a) strengthening the 4 institutional framework including the role of LLDA, LGUs, watershed stakeholders and their coordination through RCs; (b) strengthening the management framework through improved regulatory measures on water quality; introduction of incentives for environmental management through public disclosure of environmental performance; improved planning through the LLDA’s decision support system and participatory micro-watershed planning within RCs; and, increased financing of watershed interventions; and (c) providing a project development and financing framework for development and management of community and small-scale infrastructure for water quality protection. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The objective of the project was to assist the Borrower to improve the environmental quality of the Laguna de Bay Watershed 2. The key indicators to measure the success of the project in achieving its development objective were as follows 3: (a) At least a 10% reduction in pollution loading4 for regulated parameters (organic pollution and suspended solids), and 30% increase in compliance by enterprises 5. (b) All LGUs in at least 10 of the 24 micro-watersheds have adopted multi-stakeholder micro- watershed planning as part of their municipal development planning process (local and 5-year development plan and annual investment program). (c) At least 5 micro-watersheds have implemented interventions, and 50% of the micro-watershed interventions 6 have resulted in a reduction in environmental pressures (for example, pollution loading, erosion reduction as a result of afforestation and improved vegetative cover, and, garbage deposited in waterways). (d) 30% increase in the number of women and men from community and stakeholder groups involved in watershed planning, management and advocacy, as well as improved organizational maturity and expanded membership of River Councils and their Federation 7. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDO was not revised. However, the PDO indicators in the Project Paper for Additional Financing introduced three material changes: (a) the target of compliance by enterprises was increased from 30% to 91% (to reflect actual achievement at the time of AF preparation); (b) LGUs in all 24 micro- watersheds were to have adopted the multi-stakeholder planning as a part of the municipal development process (to reflect the actual achievement at the time of AF preparation); and (c) the 2 This is as per the Loan Agreement. 3 This is from the PAD PDO Section: Key Performance Indicators 4 The baseline related to the pollution loading of 827 tons in the sampled 1,080 enterprises. The reduction target was set for these 1,080 sampled enterprises which, at 83 tons. 5 Number of enterprises with permits was expected to increase from the baseline of 507 to about 659 enterprises as per PAD which was also not huge given that the universe of wet units at that time was estimated at about 1900. 6 This is as per PAD text. In the Results Framework, 60% of the micro-watershed interventions that are implemented were to have resulted in measurable reduction in environmental pressures. The PAD provides an indicative number of interventions at 25-35, whereas the number in the Results Framework is about 20 interventions. The latter number also coincides with the 18-20 interventions indicated in the LIDO. This amounts to about 10-12 interventions out of the 20 that were expected to be implemented under the project to demonstrate a reduction in environmental pollution. 7 There is no mention in the PAD about the target to be achieved as far as the maturity of the RCs is concerned, but the LIDO indicates a baseline to be established through a Maturity Assessment Survey and a target to be set for achievement during implementation. The maturity index was assessed at 4.6 and the target was set at 7.6. 5 number of micro-watershed intervention sub-projects was increased from 20 to 50 (the project had 33 interventions either already implemented or nearing completion at the time of AF preparation). 1.4 Main Beneficiaries, The project had three groups of intended beneficiaries: (a) resource users in the watershed. They were expected to benefit through protection and enhancement of the watershed resources both in the short and long term through reduction in environmental pressures including pollution loading, reduction in erosion and trash disposal in the rivers, and improved environmental condition of the bay watershed. (b) communities in the watershed. The subprojects were expected to provide significant local co- benefits. Depending on the subproject chosen, these benefits could potentially include: improved waste management; improved agricultural productivity; aesthetic improvements; and, providing an alternative fuel source for use by local communities. (c) watershed-related institutions. These included the LGUs, RCs, and LLDA. The three institutions were to embrace a participatory approach to watershed management and determination of the interventions required. The LGUs would receive grants and loans, and also LLDA contribution to their share in the micro-watershed subproject cost in their effort to demonstrate an improved responsiveness towards dealing with watershed environmental problems. RCs would mature as consultative, advisory and advocacy group in the protection and development of the watershed. LLDA would receive substantial technical assistance and support in piloting regulatory instruments, developing policy and strategy, generating financial resources, disseminating bay environmental status information, among other aspects, to transition it from a watershed management agency to an environmental regulation institution. 1.5 Original Components (as approved) Component 1: Micro-watershed Environmental Interventions. This component was to support demand-driven micro-watershed interventions (sub-projects) designed to improve the environmental quality of the watershed through: (a) detailed preparation of sub-projects selected and prioritized based on the results of a participatory micro-watershed-based planning and subproject identification process 8, constituting an integrated program at the micro-watershed level to be implemented concurrently within a micro-watershed by multiple LGUs; (b) implementation of the selected prepared sub-projects by the LGUs, financed through a mix of grants and loans for a sub-project within its jurisdiction 9. It was expected that around 25-35 sub-projects 10 with an average size of US$ 100,000-200,000 in the following four categories would be implemented: (i) waste management and sanitation; (ii) natural resources management; (iii) soil erosion and localized flood prevention; and (iv) eco-tourism; and (c) monitoring and supervision of the implementation of the sub-projects. 8 These sub-projects were to be identified through a participatory planning process (Laguna Micro-watershed Environmental Action Plan - LEAP) involving stakeholders in a micro-watershed. Twenty-four LEAPs were to be completed (four during project preparation). The remaining twenty LEAPs were to be financed under Component 2. 9 The sub-projects were to be financed through a mix of sub-loans and sub-grants to selected LGUs, based on the government’s Cost Sharing Scheme for Devolved Activities that was announced on January 1, 2003. Accordingly, the LGUs were to provide equity in the range of 10-20 percent, and the balance was to be financed through a combination of grants and loans (depending on the income class of LGU) funded by the loan. In addition, LLDA was to provide an equity subsidy to each LGU, not exceeding half the total equity for a sub-project, as an incentive for LGUs to invest in environmental improvement in the context of a micro-watershed. 10 The PAD suggests 25-35 sub-projects whereas the LIDO indicates about 18-20 sub-projects, and the RF indicates a target of about 20 completed sub-projects. 6 The cost associated with the implementation, and the monitoring/supervision activities, of the sub- projects was to be financed through the IBRD loan. The detailed preparation of sub-projects was to be financed through the Government of Netherlands grant. Component 2: Institutional Development. This component was to: (a) assist LLDA to implement its reengineering program, strengthening its role as the apex body for management of the Laguna De Bay watershed. This was to be accomplished through the development, piloting and strengthening of regulatory instruments and approaches to controlling environmental pollution and degradation, strengthening its policy and planning capacity, development and implementation of information, education and communication programs, and the formulation of a strategy for trunk infrastructure development; (b) develop environmental protection and management capacity of LGUs, River Councils and watershed stakeholders in the micro-watershed through the preparation of about 20 LEAPs 11, and provision of training and skill development assistance to LGUs, RCs and community groups within the Laguna de Bay watershed; (c) provide support for project coordination and management; and (d) establish a M&E framework, and disseminate lessons learned. All activities under this component were to be financed through the Government of Netherlands grant. 1.6 Revised Components There was no substantive revision of project components. The US$10 million in Additional Financing was to be used exclusively for the implementation of the 17 additional micro-watershed interventions under Component 1 (33 sub-projects were already achieved under the original loan). The counterpart contribution under Additional Financing was to be used to: (a) carry out the detailed preparation of sub-projects (through LGU resources); and (b) deepen the institutional development initiatives under Component 2 (through LLDA resources). The Government of Netherlands grant which had supported these activities under the original financing had closed (May 31, 2010) by the time the preparation of the Additional Financing commenced. Two indicators relating to outputs for RCs (establishment of offices and building capacity) were dropped. Some output targets were increased to either reflect the already high level of achievement at the time of the Additional Financing preparation, or to provide for implementation of repeat annual activities during the additional three years resulting from extension of the closing date to implement the Additional Financing operation. 1.7 Other significant changes There were three major IBRD-related changes: (a) four extensions of closing date (level 2 restructurings); (b) Additional Financing of US$10 million; and (c) partial cancellation of US$4.5 million (level 2 restructuring). There were also two closing date changes related to the Government of Netherlands Grant Agreement. Extensions of Closing Date. The closing date of the project was extended four times for a total of 27 months, as follows: (a) First closing date extension of 12 months: from January 31, 2009 to January 31, 2010, to enable the local governmental units to complete the sub-projects and the Laguna Lake 11 The RF indicates LEAP for 24 micro-watersheds (although only 20 were to have been prepared during implementation; four were already completed during project preparation), whereas the PAD Annex 2: Project Description indicates LEAPs in 20 micro-watersheds to be carried out during implementation. The component also included preparation of detailed engineering and architectural designs for the sub-projects. 7 Development Authority to further refine and mainstream the planning, regulatory and economic instruments to manage the lake and its watershed. (b) Second closing date extension of six months: from January 31, 2010 to July 31, 2010, to enable the affected local governments units to complete the subprojects whose sites were submerged, and rehabilitate the sub-projects that were damaged, as a result of the flooding caused by Typhoons Ondoy and Santi. (c) Third closing date extension of six months: from July 31, 2010 to January 31, 2011, to enable the Laguna Lake Development Authority to secure confirmation from the country’s National Economic Development Authority for the US$10 million Additional Financing proposal, to provide time to the local governmental units to complete three delayed subprojects, and to put in place adequate operation and maintenance system for commissioned sub-projects. (d) Fourth closing date extension of three months: from January 31, 2011 to April 30, 2011, to allow the Office of the President to complete its review of the US$10 million Additional Financing proposal. Additional Financing of US$10 million. This was approved on April 12, 2011, became effective on July 27, 2011, and the closing date was extended (for the fifth time) by three years, to April 30, 2014. The Additional Financing was expected to: (a) finance the costs of an additional 30 priority micro- watershed intervention subprojects identified in the LEAPs prepared in the 24 micro-catchments to expand LGU coverage and help address the Philippine Supreme Court ruling of December 2008 mandating agencies to clean up and rehabilitate the Manila Bay, which receives water from Laguna Lake through the Pasig River; (b) provide a funding option to the LGUs to undertake rehabilitation of project-financed interventions and other environmental and flood control infrastructure damaged as a result of the 2010 flooding that hit Metro Manila and the neighboring provinces of Laguna and Rizal; and (c) continue some of the key LLDA capacity building initiatives. Partial cancellation of US$4.5 million from the Additional Financing amount of US$10 million on July 11, 2013, due to: (a) the project financing terms for sub-projects becoming less attractive to the LGUs; (b) the disruption in implementation resulting from the 2013 local elections; and (c) the difficulties encountered by the LGUs in securing Monetary Board approvals authorizing borrowing for sub-projects. Additional US$3 million was cancelled at the project closing. Extension of the Netherlands Government Grant Fund Closing Date. This was extended twice, first by 12 months from January 31, 2009 to January 31, 2010, and then by an additional four months up to May 31, 2010, to support the completion and consolidation of the institutional strengthening measures financed by the grant. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Project design and soundness of background analysis. The project correctly identified the severity of the impacts of accelerated development, rapid deforestation, and urbanization on watersheds in the Philippines resulting in nearly half of the area suffering from moderate to severe erosion. Laguna de Bay was picked up as the focus of remediation measures given its importance as a principal watershed in the country and the existence of a development agency for its management. It afforded a possibility for successful intervention that could potentially serve as a model for scaling-up and replication elsewhere in the country. The choice of LLDA as the implementing agency was appropriate, as was the balance between institutional development and the participatory approach to identification and financing micro-watershed interventions to reduce environmental pressures, and the use of the NG- LGU Cost Sharing Scheme for Devolved Activities introduced in January 2003. 8 Project components. The project design was relatively straight-forward with two components, one focused on micro-watershed interventions, and the second on institutional development. LLDA was to be the implementing agency stemming as a natural responsibility from its role as the watershed management agency for the bay. It had prior experience in the implementation of PHRD grants and also the Government of Netherlands funded project. The cost-sharing arrangement provided a clearly defined manner in which sub-project costs could be shared between the national government and LGUs. While some of the features were innovative in the Philippine context, many of the activities were either already piloted, had policy support, or were being undertaken during preparation. (a) LLDA had already assisted in the establishment of RCs in 22 of the 24 micro-watersheds; (b) LLDA had piloted several programs for water quality management, most notably their EUFS since 1996, targeting organic (BOD) pollution in the most polluting industries with reasonable success; (c) the participatory process of identifying micro-watershed investments was being piloted in four micro-watersheds during the project preparation process allowing LLDA and the participating LGUs to gain experience about the approach; and (d) LLDA has already commenced training of LGUs in environmental related activities and was providing a portion of its fish-pen license fees to LGUs for their activities. Adequacy of participatory process in project preparation. Participation of stakeholder during preparation was adequate. The key component of the project was the identification of micro-watershed level interventions. As a part of the preparation process, four LEAPs were conducted. Lessons learned from these LEAPs were used to upgrade the second and third round of LEAPs to be carried out during implementation. RCs convened these consultations and ensured wide and broad participation of stakeholders. The National Commission for Indigenous Peoples which was also consulted agreed to provide advice during implementation. There were consultations with several LGUs and six of the 61 watershed LGUs had already signed sub-project Memorandum of Agreements with LLDA and MDFO to prepare and implement sub-projects with supporting Council Resolutions before project negotiations. Incorporation of lessons from other projects and assessments. A range of lessons learned were incorporated into the project design, which, among others, specifically included the following: (a) using a micro-watershed-based planning process to identify investments and encourage the adoption of the planning framework within LGUs and River Councils. (b) deploying a formal, participatory approach to sub-project development and implementation through the multi-stakeholder River Councils. Stakeholder assessments were to be undertaken to ensure that relevant groups participated or were consulted. (c) building capacity and encouraging efficiency in the permitting, monitoring and enforcement procedures of LLDA; (d) working with LLDA to transition from a watershed management agency to an effective environmental and regulatory agency; (e) training LGUs to implement sub-projects, and also incorporating an operation and maintenance plan in their annual budget for sustainability of the sub-projects; and (f) supporting LLDA to develop a long term trunk infrastructure creation strategy to address issues relating to under-investment in environmental improvement of the bay watershed through private sector partnership, and preparing a prototype project reflecting this new modality. Assessment of risks. The project team accurately identified most of the risks and also the mitigation measures, although the rating for three of the risks could have been more realistic: 9 (a) Risk 1: Regulatory instruments and incentives could be effectively implemented and provide sufficient incentive to modify watershed user behavior. This risk could have been rated Substantial instead of Moderate. (b) Risk 2: Sufficient interest and ability exists among LGUs to borrow for micro-watershed interventions under the project framework which included multiple-LGU borrowing. The rating associated with this risk could have been Substantial instead of Moderate. (c) Risk 3: Newly elected LGU political leadership would remain committed to the project and there would be no political interference in sub-project bidding. This risk could have been rated as Substantial instead of Moderate. Adequacy of government commitment. Throughout the project preparation process, government and other stakeholder commitment to the project remained strong. This was demonstrated, inter alia, by the following actions: (a) the borrower issuing a very comprehensive Letter of Institutional Development Objectives (LIDO) that provided the policy and institutional underpinning for the project and articulated a longer-term government strategy for institutional arrangement in the Laguna de Bay watershed. (b) LLDA establishing the Project Coordination Organization and assigning eight-full time staff prior to project negotiations. (c) representatives of various Provinces and municipalities as well as the League of Municipal Mayors and Vice Mayors in Laguna De Bay region signing a Pledge of Commitment to participate in the project, indicating real interest of local governments in the project. (d) LLDA Board approving the final phase of the Reengineering Plan. (e) DENR demonstrating its commitment to expanding and mainstreaming economic instruments and voluntary disclosure tools as part of its regulatory program for pollution prevention and control by issuing the Administrative Orders (ministerial decrees) for voluntary disclosure of environmental performance in the industrial sector and the mainstreaming of the EUFS. LLDA would be able to introduce the economic instruments on a broader scale based on these decrees. Quality at Entry. QAG assessment rated QAE as Moderately Satisfactory. 2.2 Implementation The Bank missions correctly identified issues affecting, and key actions to be taken to expedite, implementation. The first mission itself highlighted the need for DENR to devolve its Environmental Compliance Certificate (ECC) issuance for sub-projects to LLDA (which was done), the need to reduce the time taken for the very comprehensive LLDA review process (LLDA compacted the internal two-stage review process into a single stage review process), and the need to simplify the requirements of the National Commission on Indigenous Peoples (NCIP) which could have possibly become a disincentive on LGUs to pursue projects involving indigenous peoples and increased sub- project preparation costs and time in areas with no indigenous people (a LLDA-led facilitative group was formed to address IP aspects). Factors affecting implementation under original financing. The institutional development component proceeded more or less as planned. The first batch of LEAPs was initiated with some delay, but most of the consultancies for institutional development initiatives proceeded as scheduled. The availability of funding from the Netherlands government grant, and the already existing LLDA procurement capacity facilitated the timely implementation of this component. Almost all of the institutional development outputs were delivered during the project period and LLDA was able to implement many of the report/study recommendations. 10 For the micro-watershed environmental interventions component, LLDA demonstrated remarkable proactivity in taking actions to expedite implementation progress: (a) It had established a skeletal organizational structure for project management at start-up. While this arrangement worked somewhat efficiently with a small number of sub-projects and the start-up TA activities, as the activities increased, the arrangement increasingly became inadequate. In response, LLDA appointed a person to head the project management unit, empowered heads for each typology cluster of sub-projects, and appointed additional procurement and financial management staff to expedite implementation. (b) Another aspect which was beginning to get affected was the review of EMP for the sub-projects (actions from which were to be incorporated into the DAEDs). LLDA quickly streamlined this review process too by: (i) focusing mainly on the significant or critical impacts with due consideration of the nature and scale of the subprojects; (ii) seeking only commitments to secure all necessary permits instead of making the permits pre-requisites to the EMP approval; and (iii) exempting small subprojects from baseline data and environmental quality monitoring requirements when the subprojects do not directly and significantly impact the environmental quality to be monitored. (c) When initial funding for sub-projects from MDFO (the designated fund administrator within the Department of Finance for the Bank loan proceeds) was somewhat delayed, LLDA stepped in by providing “bridge-financing” facility from its internal resources to kick-start the commencement of work on the approved sub-projects. (d) Given the variable procurement capacity of LGUs, LLDA continuously supported capacity building of LGUs on procurement through regular training of project officers to ensure adherence to agreed procedures. In some cases, despite LLDA capacity building interventions, LGU award of contracts took several months, particularly those which experienced failed biddings. Despite the above, the implementation progress relating to the commissioning of some sub-projects under the original financing was somewhat delayed for two specific reasons: (a) slow generation of the list of sub-projects (which were to emanate from sequential LEAPs over the initial 2-3 years of the project) and preparation of detailed feasibility studies; and (b) difficulties in securing land for the sub- projects. Also, a number of solid waste management sub-projects were included in the project in early 2009 in response to the LGU demand to meet the legal requirements (Republic Act 9003) and the issuance of Executive Order 774 giving the LGUs six months (until June 30, 2009) to reduce solid waste by 50%. A number of LGUs had also received notice from National Solid Waste Management Commission for closure of open dumps, and from the Supreme Court mandating DENR, LLDA, concerned agencies and LGUs to fast track the clean-up and rehabilitation of Manila Bay, including the Laguna de Bay and Pasig River which drain into Manila Bay. It was almost impossible to complete and operationalize this late entry portfolio of sub-projects by the original/extended closing date. A positive side to this was the increase in the willingness of LGUs to start borrowing for environmental improvement projects. Some of the key risks materialized during implementation – adoption of household related EUFS has been held in abeyance, there was no multiple-LGU or high income LGU participation in the project, and many LGUs withdrew from the project following changes in leadership; in fact the political tension resulted in reduced operational effectiveness of several RCs and the dropping of two indicators relating to RCs when the Additional Financing was approved. Typhoons Ondoy and Santi in 2009 affected almost a third of the sub-projects portfolio. A number of sub-projects partially damaged and the locations of some proposed sub-projects were submerged making civil works commencement difficult. Although the affected sub-projects were covered by 11 contractor warranty for repairs and rehabilitation, the typhoons affected the timely completion and operationalization of these sub-projects. Mid-term Review of February 2007. The Bank MTR project team rated the overall implementation performance as Moderately Unsatisfactory, placing the project at risk. The Micro-watershed Environmental Interventions component was rated Unsatisfactory. The review identified all of the above issues (slow generation of sub-projects, delayed feasibility studies, land availability issues) as contributing to delayed implementation of the micro-watershed interventions. The review also clearly appreciated the efforts undertaken by the LLDA to improve implementation such as developing project protocols, building a sub-projects action plan and ensuring full time attention of key officers and staff on subproject development, streamlining the issuance of Environmental Compliance Certificate (ECC)/Certificate of Non-Coverage (CNC), and developing a template for the Environmental Management Plan (EMP) for the sub-projects. A comprehensive list of actions was agreed and implemented during the months following the MTR which obviated further slackening in implementation, with the rating getting upgraded to Moderately Satisfactory. Among the key process and organization-related actions implemented included: (a) realignment of LLDA’s procurement procedures with those of the Philippine Procurement Law; (b) further consolidation of the internal review processes of the LLDA and the simplification of the role of the DENR-led multiagency Technical Review Panel in the second level review to streamline and facilitate the sub-project review and approval process; (c) the hiring of a Project Management Specialist and two Construction Supervision Monitoring Specialists; (d) the awarding of contracts for the last round of LEAP in the remaining 12 micro-watersheds and the initial identification of additional sub-projects; and (e) the formulation of technical specifications for the sub-projects and the development of prototype for the materials recovery facility to facilitate the future preparation, review and approval of the sub-projects. While the post-MTR measures did improve performance, the project eventually had to seek an extension of the closing date by 18 months to complete the approved sub-projects, including those that were severely affected by Typhoons Ondoy and Santi. Factors contributing to delayed implementation under additional financing. The AF supported 18 sub- projects, with eleven operational sub-projects, and the remaining seven at various stages of construction at closing. A number of reasons contributed to this situation: (a) preparation of feasibility and engineering studies relating to sub-projects and procurement capacity building of LGUs suffered a setback with the closure of the Netherlands grant which had financed these activities under the original loan. These had to be financed by LGUs from internal resources or by LLDA respectively; (b) the NG-LGU scheme, the basis of financing the sub-projects, was temporarily suspended in 2011; (c) demand from LGUs for sub-projects dropped dramatically under the very different borrowing environment of high liquidity and lower interest rates, in which the sub-loan terms offered by the project became unattractive; (d) the Philippine Central Bank issued a circular requiring the LGUs to submit a Monetary Board Opinion relating to the implications of LGU borrowing on its financial position before the release of the first tranche for a sub-project; and (e) the local elections of May and October 2013 affected the process of approval of sub-projects resulting from bi-partisan politics with new LGU functionaries coming in. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Design of the M&E system: During preparation, an M&E framework was developed which highlighted inputs, outputs, and outcomes, and attempted to collect information at three levels: 12 environmental sustainability of the watershed, LLDA organizational effectiveness, and stakeholder involvement. Most of the indicators under each level were simple and straightforward but put together these presented a complex design issue. Implementation of the M&E system: Given the wide array of indicators (several PDO indicators and close to 30 intermediate indicators) that had been pulled in from the project Logical Framework, the LIDO, the Institutional Memorandum of Agreement between LLDA, DoF, and DENR, and other indicators and targets, operationalizing the comprehensive M&E system was a challenge. This was supported using the project funds under the Institutional Development component. The actual implementation of the M&E system was somewhat delayed but became fully operational in the seventh year of the project. The status and issues of the infrastructure sub-projects were well-reported and the information provided was accurate and up-to-date as validated. Also, the status of the intermediate outcome indicators was adequately reported for both components, permitting the LLDA management and Bank missions to get a clear picture of the issues for management action. Utilization of the M&E system: After the initial delays in the M&E, to generate information for the MTR mission, a consultancy was awarded to initially develop the core M&E system module, and then gradually build on to it other modules to generate additional indicators. It was noted though that even as the comprehensive M&E system was being set up, LLDA consistently submitted reports twice a year and/or during review missions reflecting the status of the original financing sub-projects as well as AF sub-projects (starting 2008), and discussions on mainstreamed institutional strengthening tasks of Component 2. The last reporting year submissions included detailed discussions on the status of completed sub- projects under the original financing as well as the status of sub-projects under the additional financing. It also included substantive discussions on the status of the mainstreamed Component 2 (Institutional Development) tasks and programs, and provided updates to the key results indicators. The report also contained substantive evaluation and analysis of the status, progress, issues and constraints encountered and impacts of the various technical assistance tasks, and provided recommendations or proposed plan of actions to resolve issues. Needless to say, this monitoring report was easily the best ever produced by LLDA. 2.4 Safeguard and Fiduciary Compliance Environmental Assessment. Compliance with this policy was mixed. There were four stages at which sub-project environmental aspects were reviewed and monitored: (a) preparation of EMPs, identifying critical environmental issues, mitigating actions required, and the indicators that needed to be monitored to assess compliance. This was completed for all sub-projects; (b) obtaining the required pre-construction clearances to begin work on a sub-project 12. With the exception of the Paete Wastewater Facility for which the shoreland development clearance has yet to be obtained, all sub- projects have secured all of the required permits and clearances, including getting the final clearance from LLDA; (c) monitoring contractor compliance with EMPs during construction to ensure that the required actions to mitigate construction related environmental impacts were taken. This was 12 This could include any or a combination of the following: Locational clearance, DENR tree-cutting permit, building/construction permit, site free from flooding, Protected Area Management Board certification in case site is within protected area, Shoreland Development Clearance, and Environmental Compliance Certificate indicating compliance with Philippine Environmental Impact Statement Systems. This would also include proof of land acquisition, NCIP clearance, proof of consultation with, and no objection from, PAPs, agreed compensation plan in case of relocation and resettlement, among other things. 13 obligatory on the LGU project management units and no substantive issues of non-compliance were reported during the implementation period; and (d) taking mitigating actions during the operational phase. While all of the sub-project types have significant beneficial environmental impacts (such as reduction in the volume of residual wastes brought to the sanitary landfill through segregation, recycling, reuse and composting; prevention and control of flooding; wastewater discharge quality improvement; and reforestation), operational inadequacies were observed in some requiring remediation actions to be taken (see Annex 2). Involuntary Resettlement. Compliance with this policy was satisfactory. A majority of the sub- projects were constructed on land owned by the proponent LGUs. Where required, land acquisition was effected through one or more of the following options: outright purchase, lease arrangement for a period longer than sub-project life, land donation, usufruct arrangement, and land exchange for transfer of ownership from the LGU to an IP community (Tanay, Rizal). Where sub-projects required right of way, this was obtained through land donations and grants. Except for one pending expropriation case filed for the Pangil material recovery facility sub-project road right of way, all land acquisition was done in consultation with, and after securing the consent of, affected land owners. There was only one sub-project with a relocation and resettlement compliance requirement. The Rodriquez LGU had to relocate and resettle 397 families of illegal settlers from their ecotourism sub- project site. A detailed Resettlement Action Plan (RAP) was prepared by the LGU. Most of the affected families were accommodated in the relocation site at Phase 1-D Kasiglahan Village, Barangay San Jose. Relocation of a few families is pending as the development of the Sitio Sapo resettlement site was delayed due to issues relating to the Development Permit and Environmental Compliance Certificate. The construction of this resettlement site is underway, led by the LGU in collaboration with National Housing Authority for land development, and an NGO for social preparation and house construction. Indigenous Peoples. Compliance with this policy was satisfactory. There are two sub-projects with IP presence: (a) Tanay Microwatershed Enhancement Sub-project; and (b) Rodriguez Eco-tourism Sub- project. In both cases, Free and Prior Informed Consent (FPIC) of the IPs was obtained in compliance with the Indigenous People Right Act (IPRA) of 1997. In Tanay, the IPs participated in activities relating to agroforestry, livelihoods development and reforestation. A Memorandum of Agreement (MOA) was executed between the indigenous cultural community of the Dumagat and Remontado tribes, the LGU of Tanay, the NCIP, and the LLDA as per NCIP's FPIC Guidelines. The Remontado tribes of Tanay received ownership of 93 hectares land from the LGU for the area that was reforested by them as paid laborers. Goat production was also attempted in this IP community. The LGU of Tanay received a Certification Precondition (CP) for their sub- project from NCIP. In Rodriguez, the consultations were held in response to the IP claim that they had a religious ritual site within the sub-project area. Earlier public consultations by the LGU with the illegal settlers (considered as project affected persons or PAPs) within the sub-project site revealed that no IP communities or their ancestral domain would be affected by the sub-project. The NCIP conducted field-based investigations in the sub-project area and provided the clearance to Rodriguez LGU which then signed a revenue-sharing MOA with the IPs providing them 3 percent of the sub-project revenue. Financial Management. The financial management system of the project was for the most part during the implementation period rated as Moderately Satisfactory. This rating was due to delayed 14 submission of liquidation reports by sub-project recipients and delayed submission of interim and audited financial reports to the Bank as required by the Loan Agreement. Deficiencies identified were addressed by the implementing agencies and there was no indication of any substantial weakness in the control framework of the project. The overall financial management system operated well and needed only intermittent support from the Bank. Procurement. In the Bank assessment, the procurement procedures followed were in reasonable compliance with the provisions of the Loan Agreement. 2.5 Post-completion Operation/Next Phase All sub-projects were initiated and implemented by LGUs which provided their share of equity and borrowed funds under the project to bridge the financing gap. The ownership of all sub-projects rests with the LGUs. Of the 51 sub-projects initiated under the project, seven sub-projects in Rizal, Sta Maria, Rodriguez, Liliw and Panguil LGUs were to get completed only after the project closing date, and required additional funding. The LGUs and/or MDFO have agreed to provide financing from its Second Generation Funds, to complete these sub-projects (see Annex 2). For the four main types of sub-projects, namely, material recovery facilities, flood control structures, wastewater treatment facilities and reforestation, there is no revenue source and the sustainability of these sub-projects depends almost entirely on the staff assigned to, and the funds allocated under the annual budget of the proponent LGUs, for the sub-projects. Most LGUs of operational sub-projects have made budgetary provisions; in a few cases this has fallen short of the requirement and affected the maintenance of sub-project equipment. Eco-tourism sub-projects are revenue generating sub-projects which need to be operated on a commercial basis. These subprojects have generated significant increases in the income of the LGUs. Ecotourism subprojects in Panguil, Cavinti, Siniloan and Pakil have constantly increased their revenues providing LGUs with more resources for environmental projects. Most LGUs do not have staff with the required enterprise management capability. To improve the performance of these subprojects there is a need to link up with the Department of Tourism to build capacity and also create a separate management team within the LGUs for eco-tourism enterprises. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Overall Rating: Substantial Relevance Relevance of Objectives. The project objective, based on the current Country Partnership Strategy (CPS) for 2015-2018 (Report No. 78286-PH) dated May 14, 2014, continues to remain highly relevant. The support for improving watersheds and reducing pollution remains aligned with the CPS Engagement Area 4.2: improved natural resource management and sustainable development. It indicates continued strategic support to the government of Philippines in its efforts to reduce environmental pollution from gaseous, liquid and municipal wastes. Three key indicators provided in the CPS relate to: integrated water resources management, reduced pollution in Manila Bay, and additional support through flood control measures. Relevance of design and implementation. The design and implementation (at micro scale implementation level) continues to retain its relevance. The project aimed to pilot an approach which could be scaled up in the post-project period. Developing micro-watershed level sub-project interventions through a participatory process involving LGUs, communities and civil society organizations is critical in securing stakeholder buy-in. 15 Should a future project explore scaling up, some additional aspects that could be considered for the project design would relate, inter alia, to the following: (a) financing sub-projects – although LGUs did provide their share of equity and borrowed funds for the sub-projects, their capacity to scale up is seriously constrained by their ability to borrow, capacity to manage, and limited funds for operation and maintenance; (b) multi-LGU proposals – although this was an expectation at appraisal, a collaborative approach to group-financing of an intervention in a common watershed area by two or more LGUs did not materialize due to issues relating to operation and maintenance of the sub-projects, risk of non-payment of loans, and the consequent implications on the credit rating of the proponent LGUs; and (c) application of regulatory measures – by monitoring only those entities that obtain permits (and leaving out others from the ambit of control resulting in partial regulation), the system is inequitable and creates perverse incentives by penalizing only those who are willing to subject themselves to monitoring and enforcement of regulation. 3.2 Achievement of Project Development Objectives Overall Rating: Substantial Achievement The Development Objective was substantially achieved. Reduction in pollution load in the Laguna Lake area. There are two broad groups of interventions that reduced the environmental pressure on the bay: (a) direct impact through micro-watershed sub- projects; and (b) indirect impact through behavioral changes. (a) Pollution reduction impact of micro-watershed sub-projects. The project supported 51 micro- watershed level interventions - 33 sub-projects under the original project, of which two have yet to become operational; and 18 sub-projects under AF. The actual impact on pollution reduction has been assessed only for the 33 sub-projects since seven sub-projects under AF have yet to become operational, and the remaining eleven AF sub-projects have been operational for less than six months prior to the closing date. For this group, therefore, it is premature to determine the impact on reduction in pollution load. The outcome indicator did not specify any quantifiable target of pollution reduction from sub-projects; the only requirement is that the sub-projects should contribute to pollution reduction. This indicator is satisfied by all sub-projects, with the pilot clearly demonstrating the possibility of working with micro-watershed interventions generated on a participatory basis and financed jointly by LLDA and LGUs. All but two (which are not yet operational) of the original financing sub-projects have contributed to a measurable reduction in environmental pressures of the lake in terms of reduced amount of solid waste in dumpsites, reduced BOD and TSS and reduced encroachment. The sub-projects also generated a total of 328 jobs directly hired by the LGUs to operate and maintain the facilities. Impact of material recovery facility, sanitary landfill, and rehabilitation of dumpsites. The project financed 20 sub-projects in this category (19 operational but eight with some operational issues) which contributed to an 80% 13 reduction in the quantity of solid waste that 13 This is based on the solid waste production pre-project (693 tons) and post-project (139 tons) as per the LLDA waste load model. 16 would have otherwise ended up in open dumpsites and/or eventually in the Laguna Lake. This represents about 550 metric tons of solid waste properly processed through segregation, reuse and recycling daily, and an annual BOD reduction of about 307 metric tons. This BOD reduction constitutes about 0.4% of the total BOD disposal in the Laguna Lake. These initiatives also resulted in the closure of 17 dumpsites and rehabilitation of 23 LGU-operated open dumpsites as part of the general solid waste management strategy of the project. Impact of waste water treatment facilities (WWTFs). The project financed the construction of three WWTFs for the abattoirs of Nagcarlan, Sta. Cruz and Lucban. The first two WWTFs are already operational and have both contributed to the reduction of BOD of the receiving tributaries and consequently of the Laguna Lake, thereby enabling the LGUs to comply with the effluent standards. Since the operation of the WWTFs, the treated effluent discharged by these facilities has consistently improved, with both facilities now discharging effluent with BOD values significantly lower than the national standard (BOD value from treated effluent is < 10 ppm as opposed to 50 ppm for the effluent limit). This has been validated by the monitoring and analysis of water samples done by LLDA. It is estimated that about 5 metric tons of BOD discharge was reduced. The Sta. Cruz WWTF which treats the effluent from the municipal slaughterhouse is quite remarkable. It reduces contaminant levels by 99% with no electrical energy input. It uses an anaerobic digestion process followed by an engineered reed bed. The system comprehensively treats the wastewater from the slaughterhouse. Impact of the flood control structures. Three flood control structures were established under the project which protected an area of about 374 hectares. Testimonies from the Taytay and Baras stakeholders indicated that these sub-projects were responsible for the quick abatement of flooding in the sub-project areas during Typhoon Ondoy and the flooding that came with it. These structures were also instrumental in reducing the incidence of water-borne diseases, destruction of property, and crop damages during floods. Impact of reforestation. The Tanay sub-project with 90 hectares of plantation and 30 hectares of grassland contributed to reducing waste load reduction of 3.4% in terms of Total Suspended Solids. Impact of eco-enhancement/eco-tourism. These have had a positive impact on the environment as well as on the local economy. It has helped stem widespread deforestation and has served as a valid justification for conservation of natural resources. Municipal Ordinances were executed declaring ecotourism areas of Panguil and Pakil watersheds as protected zones. A total of about 133,000 hectares have been the target area of the sub-projects, constituting 35% of the total Laguna Bay watershed area. The eco-tourism sub-projects have also been generating revenues for the recipient LGUs. Information on total revenues generated since commissioning for four of the six eco-tourism sub-projects is as follows: Pakil Php4.4m, Tanay Php3.1 million, Cavinti Php1.9 million, and Panguil Php10.0 million. The revenues from these facilities assist the LGU in the management of the site and maintenance of the quality of the water bodies and the watersheds. (b) Pollution reduction impact from behavioral changes. This has occurred through two distinct initiatives: Actions taken by 1,080 indicator firms (identified for monitoring at appraisal) to reduce pollution. This resulted from EUFS modification based on project-financed study recommendations to cover three parameters (instead of only one). This was done under 17 Component 2 of the Project on Institutional Strengthening. Specifically, this was achieved by strengthening of market based instruments i.e the EUFS. LLDA increased the number of parameters monitored and improved the web based reporting of monitoring reports as part of the project activities. The target has been exceeded in regard to reduction of pollution loading from the monitored industrial and commercial enterprises, where over the 2003-2012 period, BOD loading declined by 21% from 828 MT to 656 MT (compared to the project target of 10% reduction to 745 MT). As was clarified by the Bank Task team early in project implementation, the outcome indicator (10% reduction in pollution for regulated parameters) referred only to reduction in pollution from regulated enterprises and not from all sources, which was established to be the 1,080 enterprises in the 2003 baseline. This was an appropriate clarification of a seemingly ambiguous indicator, given the early stages of institutional development for LLDA, and the limited investment under the project. Enterprise compliance through issuance of permits. Under Component 2, a web based system for registration of new industries in the Laguna Lake area was established. This made it more efficient and easy for new industries to register for a discharge permit. The system also facilitated the on line submission of self-monitoring reports. With regard to the cumulative compliance target of 971 enterprises, there has been a substantial increase in the number of firms holding valid permits from the baseline of 507 to 1,239 firms (128% of target). More importantly, the number of firms holding valid permits, as a proportion of the total number of wet pollution firms, increased from 27% to 38%, indicating a significantly higher level of compliance ex-ante, allowing for mitigating actions to be incorporated at the project design stage itself. Number of establishments covered by EUFS. This increased by 2,321 compared to the project target of 1,482 establishments (157% of target) indicating that a substantially larger number of enterprises now have the motivation to improve their operational performance to reduce pollution given the penal fee associated with the quantity and composition of the discharged pollutants. Again, this can be attributed to LLDAs new on line system for submission of monitoring reports which is part of Component 2. A more efficient tracking and monitoring facility has allowed LLDA to systematically monitor industries through targeted visits. Monitoring of effluent discharge are more systematically planned and carried out. This increased efficiency of LLDA has led to the behavior changes which have been observed. Building capacity for participatory planning and management of the micro-watersheds. A major project accomplishment was the development of the Laguna Environmental Action Plan (LEAP) through multi-stakeholder consultations covering all 24 micro-watersheds/catchments of Laguna de Bay and the LGUs using these for their development planning activity. (a) Participatory stakeholder micro-watershed planning. The project succeeded in coalescing support among LGUs, civil society and industries for concerted action to improve the water quality of Laguna Lake. Community members actively involved in watershed management have increased four-fold, from 411 (249 men and 162 women) at the start of the project, to 1,644 (1,080 men and 564 women) or 300% increase, exceeding the project target of 30%. While LLDA began organizing River Councils in1996, it was through the LEAPs that the RCs served as the forum for sharing information and free discussion of issues on environmental protection, watershed management, sub-project identification and prioritization. It was the support of the project that resulted in substantive planning and subsequent implementation of 51 environmental projects by 26 LGUs. 18 (b) Participatory LGU development planning. The LLDA assisted the LGUs in all 24 micro- watersheds in updating their Municipal Development Plans for 2010 by integrating LEAP outcomes into their development planning processes. The LGUs were required to update their Municipal Development Plans in 2010. It was also during that period that the participatory LEAPs were completed for the 24 micro-watersheds. Being one of the dominant partners in the lake basin participatory LEAP process, the LGUs were provided with outputs which served as reference points for their local planning. The LEAP outputs consisted of ecological profiles, micro-watershed vision, mission, and priority sub-projects. The project also provided assistance by enhancing the data through application of GIS and preparation of technical maps. The LEAPs covered all micro-watersheds of the lake, thus encompassed and assisted all 61 partner LGUs in various phases of their micro-watershed and development planning process. Of the total sub-project cost of US$8.2 million, the LGUs provided US$0.7 million, LLDA provided US$0.7 million, and the government contributed US$6.8 million (through project funds). Most LGUs have also made budgetary allocations for operation and maintenance of the sub-projects. 3.3 Efficiency Overall Rating: Modest Component 1: The ex-post financial viability of representative sub-projects under original financing was assessed for the sub-project types. Barring wastewater treatment facility (which had no fee collection in place, but there are only three such sub-projects in the portfolio), all other sub-project types exhibited a positive IRR and NPV. For the sub-projects supported under additional financing, an ex-ante analysis was carried out based on the appraisal of the sub-projects. All sub-project types, except flood control, showed positive IRR and NPV. All sub-project types are expected to deliver positive economic rates of return (see Annex 3 for details). Component 2: A number of 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 of the existing environmental user fee system (as a result of the project activities) to include a larger number of enterprises and two other parameters (TSS and COD) generated additional revenues of approximately Php38 million in 2013. Furthermore, the implementation of the water abstraction pricing policy in one sector yielded an additional Php11 million. Both these are promising sources of revenue for LLDA. For example, an even wider application of the modified EUFS to cover the enterprises operating without permit and those not yet under the EUFS could yield revenues of about Php250 million. Applied to the power generation sector as a rent capture mechanism, water abstraction fees could yield revenues up to Php285 million on an annual basis. Under a conservative hypothesis that the 2013 additional revenue of Php50 million only would be generated, limited solely to the above two sources, from year 5 to 15, the net present value (using a 12% discounting factor) of these revenues amount to about PhP280 million or US$7 million, well in excess of the total cost of Component 2 of the project, and about 54% of the total project cost of US$13 million. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The project clearly had the following achievements: 19 (a) The PDO, design and implementation arrangement continue to remain relevant. The support for improving watersheds and reducing pollution remains a high priority for Philippines, and is fully aligned with the CPS. (b) All of the PDOs were achieved: (i) the 51 micro-watershed sub-projects implemented exceeded the project target of 50, all either contributing, or designed to contribute, to reducing environmental pollution, and demonstrating the possibility of working with mirco-watershed interventions generated on a participatory basis and financed jointly by LLDA and LGUs; (ii) the number of industrial units seeking issuance of permits, coverage by EUFS, and the reduction in the pollution load of selected units exceeded project targets; and (iii) the participatory micro-watershed planning exercise was completed for all 61 LGUs in the 24 micro-watersheds which incorporated the LEAP results into their development planning process; the civil society participation through RCs was very broad, and the collaborative model of LLDA-LGU joint-identification and financing of environmental sub-projects was successfully demonstrated. (c) All sub-projects type investments under component 1, and revenue streams from component 2 activities yielded positive ERRs. There were some shortcomings though. (a) While the project design is indeed relevant, should a future project explore scaling-up, the project design and implementation model could benefit from some adaptation. (b) The impact of the micro-watershed interventions in demonstrating pollution reduction was somewhat affected by the fact that 31 sub-projects are operating sustainably; nine had yet to be commissioned at project closing, and another eleven were facing some sort of operational difficulties or were just commissioned. (c) This project had a 10 year implementation period and was able to disburse less than 50% of the original and AF loans. On balance, the overall outcome rating was assessed as Moderately Satisfactory. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Not applicable. (b) Institutional Change/Strengthening The institutional changes at LLDA have been the result of a comprehensive rationalization of its structure initiated years ago. The project worked with LLDA to complement its last phase re- engineering initiatives with the introduction of a number of regulatory instruments, development of a decision support system, upgrading its permitting, monitoring and enforcement system, and making stakeholder awareness generation about the quality of the lake watershed area an important part of its remit. All of these changes have been absorbed and embraced by LLDA which is now operating as a solid regulatory and watershed environment management agency with a substantially higher level of revenue stream from EUFS which is only expected to increase in the future. Measures taken are detailed in Annex 2. (c) Other Unintended Outcomes and Impacts (positive or negative) The LEAP process involved 61 LGUs and identified about 100 micro-watershed level interventions. Only 26 LGUs participated in the project to actually implement the 51 sub-projects. Many of the remaining LGUs ended up implementing the environmental improvement sub-projects on their own, either using: (a) local funds (in the case of affluent LGUs - cities and highly urbanized municipalities 20 preferred to use their own resources for two specific reasons: they were able to borrow funds at relatively low cost due to their high credit-worthiness; and they received a smaller grant for the sub- projects from the government under the project; or (b) outsourced funds from donations from private citizens and companies, grants from other government agencies such as Dept. of Agriculture, Dept. of Agrarian Reform (in the case of lower income class LGUs which did not have the means to put up the LGU equity requirement or provide the land for the sub-projects since land for the sub-project site could not be acquired with Bank loan proceeds). Examples of some sub-projects identified under the project but implemented by LGUs not assisted by the project are: flood control sub-project and MRF sub-projects of Lumban, Calauan and Sto. Tomas, and the waste-water treatment facility of San Mateo. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 4. Assessment of Risk to Development Outcome Overall Rating: Substantial The capacity building at LGUs and RCs was more from the objective of making the participatory approach to watershed improvement a success, and this was indeed effective. The risk associated with the LGU/RC institutional development outcomes is moderate. The LGUs deployed the LEAP outcomes to inform their development planning during the project period. Whether they will continue this initiative depends on the next planning cycle and political context that the specific LGU operates in. For the RCs, their viability is inextricably linked with the LGU leadership since they are closely intertwined with the LGUs. LLDA has plans to transform these RCs into Water Quality Management Area institutions in specific watersheds (pursuant to the Philippine Clean Water Act), and have these work closely with the proposed river basin authorities. The RCs would play a critical role in providing a platform to bring civil society voice in the improvement of the Manila Bay-Pasig River-Laguna Lake watershed. In this context, LLDA has already started piloting the transformation of the RCs into IWMCs in two micro-watersheds (Silang-Santa Rosa and Cabuyao) to generate lessons and improvements for other sub-watersheds for sustained stakeholder and LGU engagement. The risk to micro-watershed sub-projects-related development outcomes is assessed as Significant, mainly due to sustainability issues, and attributed to a range of reasons: (a) operation and maintenance funding. Although the LGUs are obligated to provide annual budgetary support for O&M of the sub- projects, experience during implementation has shown that this may not always be forthcoming or adequate. Already several sub-projects are affected by operation and maintenance issues. This could be the result of paucity of resources at the LGU level (particularly in case of the low-income LGUs) or even political factors; (b) commercial nature of some sub-projects. This is specifically so for eco- tourism or environmental enhancement sub-projects which require a commercial private-sector attitude to the O&M. The LGUs continue to regard this as a routine investment: there is no separate management team for such sub-projects, and accounting is on cost-center type approach rather than as a profit center. There is a need to work closely with the Department of Tourism and perhaps put a private sector management arrangement in place; and (c) household attitude and income streams from some sub-projects. The sustainability of the material recovery facilities depends on the upstream segregation of the waste at the household level which is not happening in all sub-projects. Further, the financial viability of such sub-projects depends on the levy of collection fees, sale of recyclables and compost. In many sub-projects, there is no collection fee and there is limited market for the sub- project generated compost. Also, the cells will be filled up soon, and getting additional sites for filling could pose a problem. 5. Assessment of Bank and Borrower Performance 21 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (QAE) Rating: Moderately Satisfactory The project design focused on the critical aspects of institutional strengthening and participatory approach to identifying the relevant micro-watershed interventions. It built on LLDA’s existing rationalization plan to bring in regulatory instruments, develop decision support systems to facilitate policy planning, and introduce other initiatives, rooting these in a very comprehensive Letter of Institutional Development Objectives reflecting solid government commitment to LLDA and its transformation into a regulatory development authority. It also piloted the participatory LEAP approach during preparation itself to pre-test the process and also generate a bundle of initial sub- projects to kick-start project implementation. It weaved sub-project financing into the NG-LGU cost sharing program, and worked with the Netherlands Government to provide the complementary grant funding for capacity building of LLDA, LGUs and RCs. It even had LLDA prepare a preliminary M&E system which was to be upgraded during implementation. For the more difficult and innovative interventions, studies were proposed – extending EUFS to households, creating trunk infrastructure with private participation, effluent and water trading, among others. Some of these helped provide a platform for the introduction of the desired measures (such as water abstraction pricing). The safeguards aspects were also addressed in a very comprehensive manner. The project appears to indicate that it would relieve the environmental pressures on the Laguna Lake; however, given that the interventions focused predominantly on behavioral change of industrial and commercial enterprises which contributed less than 30% of BOD loading, and the very small number of micro-watershed sub-projects that it was going to support, it was in reality more of a demonstration pilot. It did not however: (a) expand the scope of the project significantly even as it upgraded it to a Specific Investment Loan from a Learning and Innovation Loan; (b) take upstream actions to ensure multiple-LGU financing; (c) incorporate realistic mitigation actions for risks related to dispersed procurement emanating from varied capacity in a large number of LGUs under AF; (d) anticipate the potentially weak participation of the low-income LGUs (equity contribution and borrowing issues) and the high income city LGUs (low grant share in funding and high interest rate on the loan) resulting from the application of the NG-LGU financing arrangement; and (e) factor in potential delays in land acquisition for sub-projects and compliance with environmental and social safeguards requirements. On balance, the QAE is rated as Moderately Satisfactory. The QAG assessment had also rated QAE as Moderately Satisfactory. (b) Quality of Supervision (QoS) Rating: Moderately Satisfactory The project had an average of two support missions each year, and each mission had a full complement of technical, fiduciary and safeguards specialists. The missions reviewed all aspects of project implementation, identifying key issues to resolve for expeditious progress. During different phases of implementation, the team focused on getting the pipeline in place, getting the financing arranged, reducing delays resulting from sub-project preparation studies, review and approval process (by LLDA and other agencies), examining the quality of contractor performance, ensuring compliance with safeguards aspects, among others. Throughout implementation, the team highlighted the deficiencies in the development of the M&E system and its implementation. Unfortunately, despite repeated reminders, and actions by LLDA, the system continued to be sketchy and provided only partial information towards the end of the project implementation period. The MTR was instrumental in refocusing LLDA management to address bottlenecks in implementation. The team also 22 opportunistically identified the scope for an additional financing operation after the Philippine Supreme Court ruling of December 2008 mandating agencies to clean up and rehabilitate the Manila Bay. It proactively recommended cancellation of loan funds when the potential of undisbursed balance became clear. Finally, it combined the last review mission with the ICRR mission to prepare LLDA for any additional information that may be required for the preparation of the completion report. The team could have explored the possibility of rating the project implementation performance in the Unsatisfactory range in the early years of implementation, could have flagged the project as a potential problem project, and could have possibly advanced the MTR mission to address some of the factors affecting implementation. Perhaps the continued satisfactory performance of the Institutional Development activities, and the sequential nature of the project activities (with completion of some Component 2 activities such as LEAP preceding initiation of Component 1 sub-project related activities) kept the team from doing so. On balance, the Quality of Supervision is rated as Moderately Satisfactory. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory See sections 5.1 (a) and (b) above. The QAE assessment shows some deficiencies in preparation and QoS demonstrated some good work done by the Bank team, and some avoidable deficiencies. On balance therefore, the Overall Bank Performance is rated Moderately Satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory During preparation, the borrower demonstrated ample commitment to the project through issuing the Letter of Institutional Development Objectives which laid out the path to re-engineering LLDA. The letter also provided a clear understanding of the government’s expectations from the project through a comprehensive set of outcomes and a detailed annualized plan for LLDA re-organization. During the initial implementation year, the project was not included in the 2005 approved General Appropriations Act (GAA) due primarily to the significant cut in that year’s DENR budget. During 2006, project implementation was fraught with the uncertainty that the 2006 GAA, which was to provide an allocation for approved sub-projects, would not be passed by Congress because of the differences between the House of Representatives and the Senate versions of the GAA. The release of the 2006 budget cover happened only as late as early 2007, allowing the second batch of seven sub- projects to proceed with the bidding and awarding of the contracts. LGUs are unable to bid out their sub-projects without assured financing even if these were technically ready. Then there was uncertainty relating to the continued application of the NG-LGU financing scheme in 2011, which had also rendered the cost-sharing scheme unattractive due to the smaller grant portion to LGUs compared to that offered through other ODA-funded projects. The last two extensions (totaling to nine months) of closing date resulted from the time required to secure confirmation from NEDA for the additional financing project, and from the time required by the Office of the President to complete its review. The requirement for the LGUs to obtain the Certificate of Borrowing (Debt Service) Capacity from the Bureau of Local Government Finance in case it did not have the Seal of Good Housekeeping rendered some LGUs ineligible to participate in 23 the project, and the need to obtain the Monetary Board Opinion to have loan tranches released under the project delayed implementation. Towards the end of the project, the government agreed to finance the completion of the five sub- projects under the additional financing operation that had spilled over beyond the closing date which indicated a commitment to the objectives of the project. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory LLDA worked hard in collaboration with the Bank team to prepare the project. It addressed issues that were identified by the Bank as impeding expeditious implementation by taking actions to simplify the sub-project review and approval process (from a three-tier to a two-stage process), reduce the complexity in the process for providing environmental clearance, provide bridge financing for sub- projects while allocation from the Municipal Development Fund Office was awaited, procure contract supervision consultants’ services, support LGUs with their procurement needs, among others. This showed its commitment to the project. It implemented most of the components satisfactorily and worked with the LGUs and RCs to secure their participation during the LEAP preparation process and implementation of sub-projects. It prepared the Borrower’s Completion Report well ahead of project closing. Perhaps the one area where LLDA fell short of project expectation was the development and implementation of project M&E system. The ad hoc system provided virtually none or only partial information during most of the implementation period making project management difficult. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory See Sections 5.2 (a) and (b) above. Although LLDA’s project implementation performance was acceptable, the critical aspect relating to an inadequate M&E system during the initial years of implementation for project management was a serious challenge. Coupled with budget allocation and sub-project financing issues which could not be resolved by the government on time and which contributed to delayed implementation, the Overall Borrower Performance could have been rated as Moderately Unsatisfactory. However, given the overall Moderately Satisfactory Outcome rating, the overall Borrower Performance is rated as Moderately Satisfactory. 6. Lessons Learned (a) Catalyzing community support through education, field days and provision of grant funding demonstrated the potential for civil society support. A suitable funding scheme in the form of community grants to NGOs and community groups for “clean-up” activities and watershed management intervention program, as was originally proposed in the Learning and Innovation Loan, could have further deepened the participatory approach to watershed planning and management. (b) The Philippines is replete with laws and regulations relating to pollution, liquid and solid waste management, but enforcement has been inconsistent. That enterprises have demonstrated their willingness to participate in the Environmental User Fee System, and to comply with regulations, when such regulations are seen to be consistently and fairly applied, shows that they are not averse to a system of penalties for environmental pollution. To the extent there was non- 24 compliance, the ‘Public Disclosure Program” introduced under the project was an effective tool for motivating firms to comply. This suggests that “Third Party Monitoring” of compliance with environmental laws and regulations, perhaps through an NGO, may provide an alternative approach to bring about polluter attitudinal changes on regulations and compliance. (c) More attention needs to be given to the operation and maintenance of sub-project facilities. There are a number of cases under the project where sustainability suffered. LGUs should be required to identify how they will operate and maintain facilities co-financed with LLDA as part of the sub-project design. Commercial sub-projects are best left to the private sector in the absence of management capacity and resources at the LGU level. (d) Solid waste/garbage landfill capacity. Sanitary landfill facilities are another gap in environmental management infrastructure. Although many LGUs have set up materials recovery facilities and composting facilities under the project, they do not have adequate capacity in sanitary landfills for their residual (unrecyclable) wastes. This results in a mismatch between solid waste collection, treatment and disposal requirements, and undermines investment in upstream facilities. (e) Private sector participation in watershed management. The investment required to rehabilitate the watershed is huge and the LLDA/LGU partnership is not sufficient to achieve this objective. Private sector partnership (PSP) modalities such as build-operate-transfer or develop-build- operate and partnership with LGUs to implement infrastructure projects are clearly a priority for the Laguna de Bay watershed. A Strategy for Trunk Infrastructure Development has already been prepared and LLDA now needs to explore the possibility of its implementation in the coming years. (f) Integrated approach to watershed management. Future projects should undertake a comprehensive watershed management approach by complementing measures to reduce industrial pollution with actions to curb waste emanating from domestic households and informal settlements along riverbanks and shoreland areas, and from soil erosion and sedimentation resulting from deforestation and landuse change. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies None. (b) Co-financiers None. (c) Other partners and stakeholders None. 25 Annex 1. Project Costs and Financing 14 (a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD millions) Appraisal (USD millions) A. Micro-watershed Environmental 17.13 8.23 46.1 Interventions B. Institutional Development 6.20 5.04 81.3 Total Baseline Cost 23.33 13.27 55.5 Physical Contingencies 1.10 0.00 0.00 Price Contingencies 0.50 0.00 0.00 Total Project Costs 24.93 13.27 51.9 Front-end fee IBRD 0.08 0.08 100.0 Total Financing Required 25.01 13.35 52.1 (b) Financing Appraisal Actual/Latest Percentage Type of Source of Funds Estimate Estimate of Co-financing (USD millions) (USD millions) Appraisal Borrowing Agency (LLDA) 3.73 1.56 41.8 International Bank for Reconstruction and 15.00 6.83 43.3 Development Local Govts. of Borrowing Country 1.28 0.72 56.3 NETHERLANDS: Min. of Foreign Affairs / Parallel 5.00 4.24 84.8 Min. of Dev. Coop. Total Financing Required 25.01 13.35 52.1 14 Appraisal estimate includes AF loan of US$10 million. 26 Annex 2. Outputs by Component Component 1: Micro-watershed Environmental Interventions This component financed civil works, equipment, consultant services for designing and implementing environmental interventions (sub-projects) identified through a participatory planning process (Laguna Micro-watershed Environmental Action Plan - LEAP) involving stakeholders in each of the 24 micro-watersheds. The LEAP process identified priorities and interventions which constituted an integrated program of sub-projects that was then implemented within micro-watersheds by the proponent LGUs. Each LGU borrowed for a sub-project within its jurisdiction. The actual LEAP process for the 24 micro-watersheds was financed under Component 2. The financing of sub-projects was premised on the Government’s revised NG-LGU Cost Sharing Scheme for Devolved Activities. Accordingly, the LGUs provided equity in the range of 10-20 percent, and the balance was financed through a combination of grants and loans (depending on the income class of LGU) funded by the loan. In addition, LLDA provided an equity subsidy to each LGU, not exceeding half the total equity for a sub-project, as an incentive for LGUs to invest in environmental improvement in the context of a micro-watershed. The final output of this component is implemented sub-projects, either operational or not yet commissioned. The table below provides an assessment of performance against the key indicators for this component. KEY OUTPUT INDICATORS UNDER COMPONENT 1 15 Indicator Original Revised Actual Comments Target Target Achievement A. Sub-projects financed 20 33+17=50 33+18=51 Sub-projects implemented under original financing were 33; incremental AF target was 17, taking total to 50 sub-projects Material Recovery There was no indication of 17+5=22 1+1; two not yet Facility/Landfills the number of sub-projects operational Wastewater Treatment for each type. This was to be 3+4=7 1+2; three not yet Facilities (including determined during operational constructed wetlands) implementation based on the Flood Control Structures outcome of the LEAPs. 3+2=5 0+1; one not yet operational Agro-forestry and 1+1=2 0+1; one not yet Reforestation operational Eco-tourism/ 6+4=10 0+2; two not yet fully Environmental operational Improvement facilities Sanitary Landfills 1+1=2 15 The second number under A refers to additional financing targets/achievement. 27 Indicator Original Revised Actual Comments Target Target Achievement Rehabilitation of 2+1=3 Dumpsites B. Sub-projects not yet 9; Mostly due to delayed start-up of sub-projects under additional operational financing; only two sub-projects from original financing in this list C. Sub-projects with 11; These consist of: partially operating facilities, digesters needing de- operational issues sludging, bio-reactors not functional or requiring rehabilitation, open dumping at adjacent sites, solid waste accumulating at the sites, slaughterhouse needing rehabilitation, eco-tourism facilities deteriorated D. Number of micro- At least 5 All 24 micro- watersheds with micro- watersheds implemented sub-projects watersheds E. Sub-project 10 sub-projects All 50 51 sub- Although all sub- interventions resulting in (50% of original sub- projects projects are expected to reduction of target of 20) projects reduce environmental environmental pressures pressures, 9 have yet to be commissioned and 11 have operational issues F. LGUs participating in Number of 26 LGUs The 24 micro- the project LGUs in 24 from 24 watersheds have 66 micro- micro- LGUs. Not all could watersheds not watersheds participate due to the planned limited funding available in the project STATUS OF SUB-PROJECTS FINANCED UNDER THE PROJECT No. LGU No. Sub-project Status Comments of of LGU SP I. ORIGINAL FINANCING 1 Tanay 1 Environmental Improvement Operational 2 Material recovery facility Operational 3 Rehabilitation of Old Operational Dumpsite 4 Reforestation Operational 5 Local Flood Control Operational 2 Teresa 6 Material Recovery Facility Operational 3 Morong 7 Material Recovery Facility Operational Process improvement underway 4 GMA 8 Cluster Material Recovery Operational Only one of three Facility clusters operational 5 Sta Cruz 9 Material Recovery Facility Operational 10 Waste Water Treatment Operational Digesters need de- Facility sludging 6 Kalayaan 11 Material Recovery Facility Operational 28 No. LGU No. Sub-project Status Comments of of LGU SP 12 Sanitary Landfill Operational 7 Liliw 13 Material Recovery Facility Operational Bio-reactor not operational 14 Rehabilitation of Dumpsite Operational 8 Cavinti 15 Environmental Enhancement Operational 9 Siniloan 16 Material Recovery Facility Operational Open dumping at adjacent site 17 Environmental Enhancement Operational 10 Nagcarlan 18 Material Recovery Facility Operational Bio-digester needs to be de-sludged 19 Waste water treatment facility Operational Needs replanting of reeds; slaughter house needs rehabilitation 11 Majayjay 20 Environmental Improvement Operational Facilities deteriorated; rehabilitation required 12 Baras 21 Local Flood Control Operational 13 Taytay 22 Local Flood Control Operational 14 Angono 23 Material Recovery Facility Operational 15 Pila 24 Material Recovery Facility Operational Bioreactor and shredders to be rehabilitated 16 Victoria 25 Material Recovery Facility Operational Solid waste accumulating at site 17 Panguil 26 Material Recovery facility Operational 27 Environmental Improvement Operational 18 Pakil 28 Material Recovery Facility Operational Solid waste accumulating at site 29 Environmental Improvement Operational 19 Mabitac 30 Material Recovery Facility Operational 20 Antipolo City 31 Material Recovery Facility Not fully Equipment delivery operational pending 21 Lucban Material Recovery Facility 32 Operational Waste Water Treatment 33 Not fully Slaughter house Facility operational construction pending II. ADDITIONAL FINANCING 23 Paete 34 Waste Water Treatment Operational Facility 35 Material Recovery Facility Operational 36 Sanitary Landfill Operational 37 Rehabilitation of Old Operational Dumpsite 24 Rodriguez 38 Environmental Improvement Not fully To be completed operational under the LLDA 29 No. LGU No. Sub-project Status Comments of of LGU SP 39 Flood Control Not Bridge Financing operational (20%) 40 WWTF Wetland Not operational Teresa 41 Eco-tourism (Learning Operational Resource Center) 42 WWTF Not Awaiting installation operational of water supply 25 Sta Maria 43 Material Recovery Facility Operational Panguil 44 Agro-forestry Not fully Completion of three operational components to be financed locally 26 Rizal 45 Ecological Enhancement Not fully Completion to be (Ecotourism) operational funded locally 46 Material Recovery Facility Not operational Liliw 47 Ecological Enhancement Operational Applied for LLDA’s (Green Tourism) Bridge Financing to cover payment for Variation Orders 48 Enhancement of MRF Operational Angono 49 WWTF Operational 50 Flood Control Operational Victoria 51 Enhancement of MRF Operational This cohort of sub-projects is expected to have a positive impact on the environmental quality of the Laguna de Bay lake contributing to reduced environmental pressure, as follows: (a) MRF/Sanitary Landfill sub-projects: (i) Improvement in the management of solid waste by the LGU; and (ii) reduction in the volume of residual wastes to be brought to the sanitary landfill through segregation, recycling, reusing and composting; (b) Flood Control sub-projects: Provision and/or improvement of waterways and stream bank stabilization to prevent flooding and soil erosion, reduce water-borne diseases, loss of crops and property destruction; (c) Eco-tourism sub-Projects: Environmental enhancement through the development of parks and recreation facilities to protect the areas from degradation; many sub-project areas declared as protected areas; (d) Wastewater Treatment Facility sub-projects: Improvement of the slaughterhouses' wastewater discharges in terms of water quality to comply with the DENR effluent standards; (e) Constructed Wetlands sub-projects:- Improvement in the management of liquid wastes by the LGU to reduce the concentration of pollutants prior to discharge into the lake; and (f) Agro-forestry sub-projects: Environmental protection and enhancement through sustainable agriculture and reforestation, resulting in reduced total suspended solids loading. The subprojects were funded through a mix of equity (contributed by LGUs and LLDA), grants and loans from the project. The rough breakup of the total cost of the sub-projects (US$8.23 million) is as 30 follows: Bank financing: 83%; LGU financing: 8.5%; and LLDA financing: 8.5%. This indicates a successful financial partnership in undertaking environment improvement investments. As required under the participating agreement, the LGUs have also provided budgetary allocation for O&M (although inadequate in some cases) for the Bank-financed sub-projects. Component 2: Institutional Development This component financed (entirely through funds provided by the Government of Netherlands Grant) consultant services, goods, training and outreach activities to enhance the capacity of LLDA, LGUs, River Councils and community groups through two main sub-components: Sub-Component 2A. Enhancing LLDA capacity, through: (a) improving regulatory instruments and approaches; (b) strengthening policy and planning; (c) strengthening information, education and communication program; and (d) formulating a strategy for trunk infrastructure; and Sub-Component 2B. Strengthening of stakeholders in micro-watersheds, through: (a) preparing Laguna Micro-watershed Environmental Action Plans; and (b) training and skills development of LGUs, RCs and community groups. KEY OUTPUT INDICATORS UNDER SUB-COMPONENT 2A ENHANCING LLDA CAPACITY Indicator Original Target Actual Achievement (a) Improving regulatory instruments and approaches A. Environmental user Modify the EUFS; extend Done. The scheme was modified and fee system for industry it to cover three implemented from 2010; and two additional parameters rather than parameters have been added to the one BOD just BOD; develop metric in the original scheme – COD and TSS. operational guidelines to Guidelines for expansion of EUFS to new expand EUFS to new enterprises prepared and adopted; and number enterprises; increase of enterprises covered by EUFS increased to number of establishments 3,321. covered by EUFS from 1,080 to 2,482 B. Environmental user Carry out a study to Done. Study carried out and guidelines fee system for explore expansion of developed. households EUFS to households and develop operational guidelines C. Water and effluent Carry out a study to Done. Study carried out and guidelines pricing and trading explore introduction of developed. system the system D. Public Disclosure Carry out 5 rounds during Done. Six disclosures for industry and four Program the project period disclosures for LGUs were carried out. E. Permitting and Measures to upgrade Done. The system has been upgraded and monitoring/enforcement permitting, monitoring, computerized, and the recommended policy system enforcement, policy and and planning procedures adopted. Due to planning procedures slow internet speed and user desire to officially adopted physically submit documentation, adoption 31 Indicator Original Target Actual Achievement level among users is low. (b) Strengthening policy and planning F. Water and sediment Improve monitoring and Done. Capacity strengthened and monitoring quality monitoring and reporting (more expanded in additional locations covering a reporting frequently and in more range of additional water quality parameters. locations), including strengthening equipment and capacity G. Decision support Develop a state-of-the-art Substantially Done. DSS has been developed system (DSS) system that uses and is being used extensively. Integration environmental modeling with other LLDA databases and systems and monitoring databases underway. to describe and predict the environmental quality of the watershed, by integrating it into other LLDA databases, providing better data and parameter estimation (c) Strengthening Information, Education and Communication Program H. Annual learning Conduct 7 fora or Done. forum conferences during project period I. Learning resource Set up and operationalize Substantially Done. The center has been center (LRC) a civil society managed constructed but its operationalization is LRC pending. J. Laguna de Bay Release 7 publications Done. Environmental Monitor during the project period K. Information and Carry out IEC campaigns Done. education campaign and three perception surveys (d) Strategy for Trunk Infrastructure L. Strategy Develop a participatory Done. The strategy has been developed and trunk infrastructure adopted by LLDA, and a fund created. A strategy to include PPP prototype project has been developed but approach; create a Public implementation is pending. Infrastructure Fund; and develop a prototype infrastructure project (a) Improving regulatory instruments and approaches Activity 1: Expansion of the environmental user fee system. LLDA uses a wastewater charge formula through the EUFS using BOD as a pollutant parameter. The expansion of the EUFS both in terms of industry coverage and regulated parameters has been implemented under the project since May 2007. Since then, industry coverage has increased to 3,321 (baseline: 1080) surpassing the target of 2,482 firms. Two additional parameters were introduced, namely total suspended solids (TSS) and a combination of TSS and biochemical oxygen demand (BOD) (baseline: BOD only). It now plans to 32 begin work on expanding EUFS to additional parameters, i.e., to nutrients (phosphorous, nitrate) and heavy metals (lead, cadmium, chromium, zinc, nickel and copper). Working with the bay area LGUs, LLDA has recently signed agreements with Quezon, Binan, Marikina, and Antipolo cities to make LLDA clearances a pre-requisite for the issuance of a business permit by the LGU. This will enable LLDA to do a better upstream assessment of environmental issues relating to proposed businesses, identifying mitigating actions required prior to approval, and actions required during operation of the facilities, thus affording LLDA better control on permitting, monitoring and enforcement. Activity 2. Study for EUFS expansion to households. The approach and guidelines to expansion of EUFS to households were prepared. LLDA went further by attempting a pilot in the Lucban water and sanitation sub-project, but this was dropped due to its high cost (about US$1 million). There are plans to introduce the scheme at the small lakeshore municipality of Paete. However, this entails seeking an agreement between the municipal government, the residents and LLDA. No such talks have yet been initiated. The LLDA Board of Directors has deferred the implementation of EUF for households in view of socio-political implications. Based on the recommendations of the Study on the Expansion of EUFS funded by the project, LLDA has invoked its authority to grant surface water use rights in the Laguna de Bay Region for a price. It has commenced collection of domestic use water abstraction fee (only from Maynilad Water Services, Inc. under its Water Permit for 300MLD of raw water at this stage), using a three-tier fee structure: • Resource charge ranging from Php0.30 to Php0.20 depending on the volume of raw water abstracted. • Minimum guaranteed payment of Php450,000 per month. • Fixed fee of Php500,000 subject to 10% annual increase, subject to additional Php500,000 when the actual abstraction exceeds the approved limit. Pricing of water for other sectors is expected in the near future. Activity 3: Study for water (and effluent) pricing and trading. Following the results of the study, a draft action plan was formulated that spelled out the key activities involved in piloting the effluent trading system at the San Cristobal River area. IEC activities for industries located along and/or discharging wastewater into the river was undertaken. In addition, the validation of barangay boundaries and the profiling of San Cristobal watershed were completed in May 2009. Unfortunately, no industry expressed interest to participate. LLDA has now outlined tasks to be undertaken towards the piloting of the ETS and continues to gather data for the eventual estimation of the Total Maximum Daily Load for the Santa Rosa Sub Basin which has now been identified as a suitable pilot area. Activity 4: Public disclosure program (PDP). Public disclosure is a mechanism that makes use of information to create public pressure and motivates the polluters to reduce their pollution and comply with environmental regulations and standards. Six PDP cycles have already been held for industries and LGUs surpassing the project target. Activity 5: Upgrading of permitting, monitoring and enforcement (PME) procedures. The task covers the upgrading of the permitting monitoring and enforcement procedures of the LLDA as part of its 33 regulatory mandate for the judicious management of the natural resources and protection of the environment of the Laguna de Bay Region. The operationalization of several modules and sub-systems was completed. These include billing and assessment of discharge permits (DPs), monitoring and inspection of DPs, legal cases, self-monitoring reports, on line application for clearances, monitoring and processing. The on line application of clearances was launched in December 2008 and since then about 300 firms have signed up. However, based on the feedback from firms, manual-based application is preferred over on line application. The intermittent internet service connection appears to be making on line application difficult. LLDA is planning to address this and also issue a policy that will require all firms to apply on line instead of manually. On line application would facilitate permit processing and approval, and reduce the time required from four months to one month. This system will be linked with the Decision Support System and other LLDA databases to provide an integrated information system for effective monitoring. (b) Strengthening policy and planning Activity 1: Water and sediment quality monitoring and reporting (WSQMR). This component aims to upgrade and enhance the systems and operations of the LLDA laboratory for a comprehensive monitoring of water and sediment quality in the Laguna de Bay basin. A total of 13 water quality parameter charts was targeted to be prepared. To date, the preparation of eight control charts for TSS, chemical oxygen demand, BOD, oil & grease, lead, nickel, copper and zinc has been completed. The preparation of charts for other five parameters (color, pH, cadmium, iron, chromium) is on-going as part of the interim work program of the Environmental Quality Management Division (EQMD). In addition, the review of the laboratory’s operating procedures is also on-going as part of the interim work program of EQMD. The annual proficiency testing and inter-laboratory calibration by the Environmental Management Bureau of the DENR have already been completed. In terms of water and sediment quality monitoring, the Resource Management and Development Division (RMDD) has established four additional lake and eight additional river sampling stations and submitted Quarterly Water Quality Reports. Further, LLDA has added four sampling stations on the Laguna Lake and disseminated the monitoring results through Laguna de Bay Website and the Laguna de Bay and River Water Quality Reports to raise community awareness about water quality. Activity 2: Developing a decision support system (DSS). The DSS, which is an important tool for policy planning of LLDA, has been developed and is being used extensively. It provides simulated results on the potential beneficial and adverse impacts of the Bank-financed sub-projects. This was also used in estimating the actual impacts of operational sub-projects in terms of waste load contributions to the lake. These calculations relating to BOD loading reduction from project-funded solid waste management sub-projects have been continuously refined using solid waste generation data from the actual operation of solid waste facilities. The project also assisted LLDA in improving the availability and accessibility of management information for policy making and strategic planning through the newly developed Laguna de bay Information Resource Information System prototype (LDBRIS). The LdBRIS will integrate the PMES and the GIS-based MapServer for industries. The aquaculture and shoreland modules are already complete but awaiting completion of the PMES for connectivity. (c) Strengthening Information, Education and Communication Program 34 Activity 1: Annual learning forum. The LLDA has aggressively raised the level of awareness of the stakeholders, communities and even legislators, as well as local, regional and national officials with regard to the impacts of the settlement along the shoreland and danger zones of the lake through the media and other presentations. Activity 2: Learning and resource center. The objective of the set-up and support of a Learning and Resource Center is to provide access for all stakeholders in the watershed to information on the Laguna de Bay watershed and other relevant information. The LRC has been constructed. LLDA invited proposals from the civil society for the operation of the LRC. Unfortunately this was unsuccessful as no bidders participated. LLDA is now intends to re-bid with the eligibility expanded to academic institutions, foundations and others as opposed to civil society only as in the original plan. If there are no takers, then LLDA would have to operate it based on its priorities for such type of facility and offer services for capacity building and training, stakeholders networking and sharing of knowledge and experience, and as a showcase to highlight its tools and instruments. Activity 3: Publication of the Laguna de Bay Environment Monitor (LdBEM). The LdBEM is designed to serve as a communication medium that would bring to the public’s attention timely, relevant, research-based data on the status of the lake and its bearing on water quality. LLDA has already completed seven yearly publications of the LdB Environment Monitor. Activity 4: Information education campaign. In order to create better understanding of the LLDA as an institution including its various programs and solicit stakeholders’ support, an IEC component was included in the LISCOP project. At the aftermath of Typhoon Ondoy, LLDA has aggressively conducted IEC to raise and improve the environmental consciousness of the stakeholders and the community on the challenges the lake is facing as well as the achievements of LLDA and partnership arrangements with the LGUs. LLDA has also conducted three perception surveys. (d) Formulating a Strategy for Trunk Infrastructure A participatory strategic framework for trunk infrastructure development in Laguna Lake with focus on private sector participation was developed, and a project development facility established. Both activities are undertaken with LLDA staff and stakeholders, to ensure ownership and provide knowledge transfer. The trunk infrastructure strategy was approved by LLDA’s Board, including the establishment of the Infrastructure Promotion and Development Facility (IPDF) within the LLDA. A prototype infrastructure project (as required under the project) has yet to be developed. KEY OUTPUT INDICATORS UNDER SUB-COMPONENT 2B STRENGTHENING STAKEHOLDERS IN MICRO-WATERSHEDS Indicator Original Target Actual Achievement (a) Laguna Micro-watershed Environmental Action Plans A. Prepare LEAPs 20 LEAPs, one for each Done of the remaining 20 micro-watersheds (four were developed during preparation) (b) Training and Skills Development of LGUs, RCs and Community Groups 35 B. Train LGUs No physical target Done C. Train River Councils No physical target Done D. Number of River 10-12 River Council Dropped (as a part of the revised indicators Council offices offices for AF project) established E. Capacity of River The 24 River Councils At end of original project, the average Councils substantially have an average maturity maturity index was lower at 3.51. Dropped (as enhanced by at least index of 7.59 a part of the revised indicators for AF project) three points on average maturity index (of 4.59 at baseline) (a) Preparing Laguna Micro-watershed Environmental Action Plans (LEAPs). This sub-component supported the participatory micro-watershed planning process in 20 micro-watersheds (four were undertaken during project preparation). The process was facilitated by River Councils and involved the LGUs, private enterprises and community groups in a micro-watershed. (b) Training and Skills Development of LGUs, RCs and Community Groups. This activity was done to determine, define and delineate the training and capability building needs of the partner LGUs, the RC and the middle level managerial and operating personnel, portray their socio-demographic characteristics and detail/illustrate these needs as the primary basis for designing and implementing a Training and Capability Building Program for LLDA. A total of 74 trainings were conducted for LLDA and LGUs. Only three training programs were conducted for the RCs. These trainings were on various and wide-ranging topics, from procurement, financial management and accounting, project development, construction supervision monitoring, environment and social safeguards to technical and more specialized trainings. Based on an independent evaluation on the effectiveness and contributions of these training programs, feedback from both LLDA and the LGUs confirmed that these indeed were useful and enhanced their capabilities and job performance. LLDA also conducted a total of 13 forums and/or conventions on livelihood and gender-and-development topics with some 356 participants from LGUs. Although RCs were eventually dropped from further capacity building, these are important institutions for watershed and water quality management. The reasons for dropping the two RC-related targets D and E above are as follows: (a) the voluntary nature of organization, insufficient powers and functions, and lack of financial resources resulted in a piecemeal approach to river rehabilitation activities with no significant discernable impacts; and (b) the RCs needed to be strengthened in terms of strategic planning, board governance, operation and maintenance, program implementation, resource generation and utilization, and networking. Their capacity building and training requirements needed to be identified and capacity building initiatives directed to fill those gaps separately since the needs and situation of each RC was different from the other. 36 Annex 3. Economic and Financial Analysis Component 1: Micro-watershed Environmental Interventions This component aimed to support environmental sub-projects that addressed micro-watershed wide priorities. Since the generation of these sub-projects was demand-driven, economic and financial analyses of the sub-projects could be performed on a case by case basis as they were developed and appraised during implementation as a part of the LEAP process. One key criterion was that no sub- project with a less than 15% internal rate of return or economic rate of return was to be approved for inclusion in the project. During implementation, the participatory stakeholder consultation process recommended close to 100 sub-projects in five main categories: (a) Material Recovery Facility (MRF) and landfill; (b) Environmental Improvements/Enhancements; (c) Waste Water Treatment Facility (WWTF) for Slaughterhouses; (d) Flood Control (FC) Facility; and (e) reforestation/agro-forestry. Given the limited project financing and as a result of other constraints, 51 sub-projects were approved for inclusion in the project (33 under the original financing and 18 under the additional financing). The quantifiable benefits derived from each intervention type are identified (see Table below). Table 3.1 Benefits Derived from Sub-project Types Sub-project Benefits Material Recovery (a) Sales from recovered non-biodegradable waste and organic fertilizer Facility from compost, collection fees from institutional wastes; and (b) avoided cost on medical expenses due to air-borne diseases (economic) Environmental (a) Revenues from use of facilities; and (b) avoided cost due to damage Improvement on flooding and sedimentation (economic). Agro-forestry (a) Revenues from sale of produce; and (b) carbon sequestration (economic) Landfill (a) Revenues from collection fees from institutional waste; and (b) avoided cost of medical expenses due to air-borne diseases (economic). Flood Control (a) Avoided cost on damage to properties and agricultural crops, medical expenses due to water-borne diseases (economic). Wastewater Treatment (a) Revenues from collection fees from use of the facilities. Facility A. Sub-projects Financed under Original Financing: Ex-Post Analysis of IRR/ERR Of the 33 sub-projects implemented under the original financing, 31 have commenced operation, some with about 2-3 years of functioning. Based on a 15-year operational period, the IRR and ERR of specific sub-project types was computed. To determine the economic viability of the subprojects, the financial prices were converted to economic prices using the parameters set by NEDA under its Investment Coordination Committee (ICC) Project Evaluation Procedures and Guidelines. For a developing country like the Philippines, the economic opportunity cost of foreign exchange (or the shadow exchange rate) is often higher than the official or market exchange rate. The ICC guidelines call for a foreign exchange premium of 20 percent. Hence, the shadow exchange rate (SER) of 1.2 for tradable component of material inputs was used. On the other hand, the economic opportunity cost of labor (or the shadow wage rate) for unskilled workers is often taken to be less than the project wage rate and the ICC guidelines suggest a shadow wage rate of 60 percent for unskilled labor. The same viability indicators (such as NPV, IRR and BCR) are used in the economic cost-benefit analysis. 37 Of the four types of sub-projects, the wastewater treatment sub-project yielded a negative NPV since no fee was being collected. There were three sub-projects of this type (no information was available about fee collection in other two sub-projects). Agro-forestry provided the highest NPV and IRR but there is only one sub-project of this type. The environmental improvement sub-project showed a reasonable IRR and positive NPV (6 sub-projects of this type). The MRF sub-project (the largest cohort with 17 interventions) also yielded a positive IRR and NPV. In sum, barring three of the 33 sub-projects, all yielded positive IRR and NPV. Table 3.2 Financial Viability Indicators by Sub-project Type Sub-project IRR NPV@1.8% 16, over 15 BCR (%) years, (In Million PhP) Material Recovery Facility 8 4.10 0.80 Environmental Improvement 11 19.76 0.97 Agro-forestry 37 78.0 1.80 Waste Water Treatment Facility Neg 17 Neg Not calc In terms of ERR, all sub-project types yielded high rates of return and BCR, indicating the positive externalities emanating from the sub-projects. The NPV was lower due to high discount rate (12%) used for the analysis. Table 3.3 Economic Viability Indicators by Sub-project Type Sub-project EIRR NPV@12%, over 15 BCR (%) years, (in Million PhP) Material Recovery Facility 17 2.10 1.28 Environmental Improvement 12 0.72 1.08 Agro-forestry 27 62.0 2.30 Waste Water Treatment Facility 30 3.30 1.54 The analysis shows that all interventions are economically viable, but the wastewater treatment sub- project type fails from the financial standpoint. B. Sub-projects Financed under Additional Financing: Ex-Ante Analysis of IRR/ERR The Additional Financing basically supported the component on Micro-watershed Environmental Interventions using the demand–driven approach. Of the 18 sub-projects implemented, eleven were very recently commissioned (within six months prior to project closing), and others have yet to be commissioned. As such, operational data to re-compute the IRR/ERR is not available. However, an ex-ante summary at appraisal of the sub-project type IRR/ERR is provided. 16 Opportunity cost of capital considering the Treasury Bill rate in 2010; this has reduced to about 1.9% in the second quarter of 2014, further reinforcing the financial viability of the sub-projects 17 No fee was collected; as such there was no income stream from the WWTF sub-projects resulting in a negative NPV 38 Results of the analysis based on appraisal data in Year 2011 showed that four out of the five sub- project types show viability (Table 3.4). The Landfill sub-project provided the highest IRR of 22%, while the Flood Control (FC) sub-project rendered non-viable results. The Environmental Enhancement sub-project has the highest NPV and benefit-cost ratio of 1.22. Table 3.4 Financial Viability Indicators by Sub-project Type Subproject IRR (%) NPV@4.2%, over 15 BCR years, (In Million PhP) Material Recovery Facility 20 8.91 1.07 Environmental Improvement 18 28.68 1.22 Landfill 22 5.61 1.21 Flood Control Not - - Viable Waste Water Treatment Facility 15 2.85 1.10 All sub-projects yielded positive EIRR and BCR > 1. The MRF sub-project reflected the highest EIRR of 37%. The highest NPV and BCR were realized by the sub-project on Environmental Improvement. Table 3.5 Economic Viability Indicators by Sub-project Type Subproject EIRR (%) NPV@12%, over 15 BCR years, (in Million PhP) Material Recovery Facility 37 11.28 1.24 Environmental Improvement 36 29.70 1.78 Landfill 36 2.95 1.60 Flood Control 24 12.99 1.57 Waste Water Treatment Facility for 24 2.51 1.49 Slaughterhouse The analysis showed that all interventions are economically viable, but the flood control sub-project type fails from the financial standpoint. FC sub-project is a non-income generating sub-project but has huge positive environmental impact and has equally significant economic benefits. This type of sub- project is worth pursuing but would need the Government’s assistance for its sustainability. Component 2: Institutional Development A number of activities to be undertaken under Component 2 are not expected to immediately generate additional fiscal revenues for LLDA (such as studies and policy planning support). However, the expansion of the existing environmental user fee system (as a result of the project activities) to include a larger number of enterprises and two other parameters (TSS and COD) generated additional revenues of approximately Php38 million in 2013. Furthermore, the implementation of the water abstraction pricing policy in one sector yielded an additional Php11 million. Both these are promising sources of revenue for LLDA. For example, an even wider application of the modified EUFS to cover the enterprises operating without permit and those not yet under the EUFS could yield revenues of about Php250 million. Applied to the power generation sector as a rent capture mechanism, water abstraction fees could yield revenues up to Php285 million on an annual basis. Under a conservative 39 hypothesis that the additional revenues of Php50 million in 2013 would be generated, limited solely to the above two sources, from year 5 to 15, the net present value (using a 12% discounting factor) of these revenues amount to about PhP280 million or US$7 million, well in excess of the estimated total costs of Component 2 of the project. 40 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Patchamuthu Illangovan Task Team Leader SACAA Environmental aspects Chirstoper (Ray) C.Ancheta Municipal Engineer Local government GWADR aspects Ernesto Diaz Financial Management Specialist Financial Management Benoit Laplante Environmental Economist Environmental aspects Jose Tiburcio Nicolas Social Safeguards and Participation Social aspects Specialist Rene SD Manuel Procurement Specialist GGODR Procurement aspects Mariana M. Montiel Legal Counsel LEGLE Legal aspects John Morton Environmental Engineer GURDR Environmental aspects Anju Sachdeva Office Manager (Washington D.C.) GURDR Project processing Josefo Tuyor Environmental Assessment Specialist OPSOR Environmental aspects Sutthana Vichitrananda Program Assistant I Project Costing Project costing Maya Gabriella Villaluz Environmental Engineer GENDR Environmental aspects Stephen Lintner Peer Reviewer Safeguards Geoffrey Spencer Peer Reviewer Natural resources GAGDR management David Wheeler Peer Reviewer DECEE Environment and energy Supervision/ICR Senior Rural Development Specialist/ Harideep Singh GAGDR Rural development aspects ICRR author Preselyn Abella Finance Officer CTRLN Financial management Agnes Albert-Loth Sr Financial Management Specialist GGODR Financial management Jonas Garcia Bautista Consultant GENDR Procurement aspects Ernesto Diaz Consultant Safeguards aspects Victoria Florian S. Lazaro Operations Officer GURDR Project processing Rene SD. Manuel Senior Procurement Specialist GGODR Procurement aspects John Morton Environmental Specialist GURDR Environmental aspects Jose Tiburcio Nicolas Operations Officer Project processing Maria Loreto Padua Social Development Specialist GURDR Social aspects Natural resources Gerardo F. Parco Operations Officer GENDR management Joseph G. Reyes Financial Management Specialist Financial management Noel Sta. Ines Senior Procurement Specialist GGODR Procurement aspects Tomas JR. Sta.Maria Financial Management Specialist GGODR Financial management Josefo Tuyor Senior Operations Officer OPSOR Safeguards aspects 41 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY01 18 47.50 FY02 2.01 FY03 14 43.59 FY04 29 104.27 T 61 197.16 Supervision/ICR FY04 2 6.93 FY05 27 66.03 FY06 23 66.33 FY07 21 30.98 FY08 25 45.51 FY09 4 55.65 FY10 33.87 FY11 37.75 FY12 41.01 FY13 46.65 FY14 88.74 T 102 519.45 42 Annex 5. Beneficiary Survey Results Not applicable. 43 Annex 6. Stakeholder Workshop Report and Results Not applicable. 44 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR (As of March 2014) Background Information The Laguna de Bay, also known as Laguna Lake, is the country's largest freshwater body that covers part or whole of the territories of five provinces, 12 cities and 54 municipalities, including 9 cities and municipalities of the National Capital Region (NCR). The total basin population as of May 2010 was estimated at 14.6 million or about 14% of the country's total population. Rapid urbanization over the last 30 years has resulted in large areas of the watershed being converted to industrial, commercial and residential use. Along with this, the lake's water quality has declined from increased sedimentation from denuded uplands, contaminants from agricultural activities, domestic wastes, industrial discharges, effluents from dumpsites and intensification of fish production. There are no treatment systems for domestic waste in the watershed area and most industries and agricultural operations do not have adequate pollution abatement systems. Until recently, most of the solid wastes collected by LGUs end up in open dumpsites with leachate flowing into the lake. Beginning in 2004, the LISCOP Project with US$5.0 million loan from the World Bank and a US$5.0 million grant from the Netherlands Government provided assistance to the Laguna Lake Development Authority (LLDA) and to Local Government Units (LGUs) to support environmental management. The LISCOP Project has been directed towards the need to safeguard the ecological integrity of the Laguna de Bay and its watershed while in the process addressing the challenges (i.e. environmental degradation, conflicting and competing use, i.e. industrial and residential and agriculture to some extent, and weak institutional arrangements that would support the resolution of conflicting interests of stakeholders) that confront its sustainability. Starting 2011, Additional Financing from the World Bank amounting to US$1 OM was provided for LISCOP implementation to upscale the number of LGUs availing of financing and the number of environmental sub-projects for greater impact to the environment and stakeholders. Project Goals and Project Components The overall goals of the LISCOP are to improve the environmental quality of the Lake and its watershed and to strengthen the development governance that will support its sustained management. LISCOP involves two strategic interventions, which are also the two major components of the project, namely: Component 1 on Co-managed investments for Watershed Development and Component 2 on Strengthening Institutions and Instruments. As a major institutional player in the management of the Lake, the LLDA is clearly poised for an institutional and structural reinforcement, which remains one of the most pressing issues that challenges its viability and effectiveness as the key agency at the helm of the Laguna de Bay Region. Recognizing the constraints to full LLDA transformation, it has, through the LISCOP Project, opted for an incremental shift towards the full realization of its development aspirations as the apex body for the Lake and its watershed. Through Component 2, LLDA addresses some of the key issues through policy and institutional reforms and modernization of the regulatory tools as well as planning and economic instruments. Component supports the implementation of environmental interventions (subprojects) by the local government units using community and participatory approaches, by applying the institutional and policy reforms introduced under Component 2 which is the heart and soul of the Project. As designed, LISCOP provides the convergence from which other existing LLDA initiatives may be linked, through the conduct of the following: • Financing support to the lake watershed interventions through the implementation of demand- driven sub-projects involving single LGU sub-projects and multiple LGUs under one umbrella 45 micro-watershed sub-project; and in the process harness and deepen the participatory and partnership approach in planning and implementation since effective lake management must consider the balancing of interests of all players; • Empowering the LGUs as partners in the management of the Lake in the areas of providing sustainable options and access to the tools necessary to increase their capacities to respond to critical and emerging issues in the management of the Lake; • Systematic approach to micro-watershed assessment, sub-project planning identification and prioritization through the conduct of the Lake Environmental Action Planning (LEAP) process; • Expansion of the LLDA's market-based instruments particularly the Environmental User Fee System (EUFS) by introducing additional pollutant parameters, user fee for households, and pricing of raw water abstraction; • Creation of the Prototype Planning and Development Unit (PPDU) for preparation of an infrastructure development plan and pilot testing a large scale infrastructure for the Lake; • Extensive IEC and the systematic information collection, monitoring, reporting and dissemination; and • Capability-building interventions directed at the LLDA and LGUs and River Councils. The Project has been implemented since 2004 and since May 2011 it is now on its Additional Financing phase with a $1 0.0 M funding from the World Bank and an extension period of three years which will officially end on 30 April 2014. With the same project design, financing scheme and institutional and project management arrangements as the Original Financing, the AF is the response to the clamor of LGUs in putting up their solid waste management facilities. The LGUs were in a rush to comply with Republic Act 9003 (Ecological Solid Waste Management Act) and respond to the issuance of Executive Order 774 early this current year giving the LGUs six months (i.e. to June 30 2009) to reduce solid waste by 50 percent. Corollary to the EO issuance was the recently served notice of closure by the National Solid Waste Management Commission to those LGUs which continue to operate open dumps with threats of penalties for continued violation. The Supreme Court, in its December 2008 decision, has influenced this sense of exigency by mandating the DENR, LLDA concerned agencies and LGUs to fast track the cleanup and rehabilitation of Manila Bay, including Laguna de Bay and Pasig River which drain into Manila Bay. Project Performance The project is on track to meet its development objective and KPIs. Based on its progress and achievements to date, it is evident the project is directly contributing to enabling the LLDA LGUs, communities and other stakeholders achieve improved environmental quality in the Laguna de Bay and its watershed despite a slow start, LISCOP to date has attained, even surpassed, the targets for 29 of its 31 KPIs, while two River Basin Councils indicators were dropped cognizant of the organizational constraints facing these organizations. As of report date, of the 18 subprojects pipelined under the US$1 0 million additional financing, three (3) subprojects are physically completed, nine (9) are under construction and are projected to be completed by closing date. The remaining five (5) subprojects are projected to be completed beyond the closing date but until August 2014 using the proposed financing facility of the MDFO, with LLDA still providing for the subsidy for 50% of the LGU equity. 46 Apart from being responsive to the urgent demand from LGUs, the LISCOP financing has enabled LLDA to proactively pursue a number of opportunities, including: • piloting the implementation of the EUFs to households through both (a) the Lucban water and sanitation subproject (representing a moderate sized upland municipality with population of about 45,000) using conventional treatment technology; and (b) a possible Paete wastewater treatment subproject (representing a small lakeshore municipality with population of about 25,000) using constructed wetlands technology; • assisting LGUs in updating their Municipal Development Plans scheduled for 2010 by integrating the outcomes and processes of LISCOP's lake environmental action planning or LEAP; • utilizing the project's current focus on construction of various subprojects to review and refine LISCOP subproject design, contracting, contract supervision and contract management processes and various outputs; • adopting the Place Stories or other digital story-telling software to document LISCOP's many successful subprojects using a short format that is readily accessible on-line; • reviewing project progress and experiences to date to draw lessons learned in all aspects of facilitated integrated watershed management; and • further deepening the mainstreaming and institutionalization of various planning, regulatory and market-based instruments within LLDA as well as capacity building and strengthening of the RCs. Aside from the regular reporting of the LISCOP performance score card under the Monitoring and Evaluation System, the institutional framework (discussed in section 1.5 of this document) installed to monitor the Project's achievements and implementation bottlenecks as well as the accorded actions/resolutions taken shall always be there to safeguard and ensure the physical and financial implementation of the second extension of the Project. Component 2 activities shall continue to support the capacity building efforts of the LISCOP in strengthening the institutions and instruments of the key Project stakeholders to sustain the initial gains of the Project and consequently achieve its end-goal of improving the environmental quality of the Laguna Lake region thru a sustained management by empowered governance. Sustainability Mechanisms For more than 1 0 years of implementing the LISCOP Project, approaches have been developed to sustain the initiatives of the Project. These development initiatives include the following: (i) identification and financing of 53 environmental subprojects of which 36 are completed, 13 ongoing, 2 at procurement stage and 2 for dropping/cancellation; (ii) continuous mainstreaming and refining of various planning tools like the lake environment action planning or LEAP , regulatory tools and economic instruments; (iii) continuous conduct of the LLDA Annual Learning Forum with various stakeholders and publication of the annual Laguna de Bay Environment Monitor; (iv) continuous capacity building for LGUs and River Councils through formal-on-the-job trainings and cross project visits; and (v) the approval and implementation of much needed rationalization or re-engineering of the LLDA which would strengthened LLDA's institutional governance over the management of the lake watershed. Mainstreaming these LISCOP initiatives within the LLDA and to other key project 47 stakeholders, specifically the river councils and LGUs, would ensure the sustainability of LISCOP interventions. Key Project Outcomes Initial years after the LISCOP project was launched, progress was initially slow due to the need to get LGU "buy-in" and to develop lake environmental action plan (LEAP) identifying environmental management priorities. Subsequently, there have been significant accomplishments, but the impact on Laguna Lake is still modest, given both the large size of the Lake and its watershed and the relatively small size of the LISCOP project. That said the project was designed as a first phase with goal being to develop and showcase deepened multi-stakeholder involvement in lake management and to modernize the planning, regulatory and economic instruments used by the LLDA in managing the lake and its watershed and apply those strengths and enhancements to the piloting of LGU implementation arrangements in various micro-watersheds. The following summarizes the main outcomes of the project. i) lmproved solid waste management: The project's support to the LGUs has also led to the upgrading of 23 out of the 41 LGU-operated open dumps in the Laguna lake watershed (about 56%) . An assessment of 17 material recovery facilities (MRFs) with composting has shown that these MRFs have diverted some 500 metric tons of solid waste annually, which would have ended up in open dumps and the lake itself. In total, LISCOP has supported 26 (43%) out of the 61 municipalities and cities in the whole Laguna Lake implement a total of 53 subprojects, majority of which is on solid waste management (31 or 58%) . Other subprojects are on wastewater treatment system for municipal slaughterhouse (3 or 6%), local flood control (5 or 9%), natural resource management (3 or 6%), environmental enhancement and eco-tourism (10 or 19%), among others. ii) lmproved capacity of LGUs. An independent assessment of the impact of LISCOP's capacity building program found LGUs are demonstrating increasing responsiveness to the environmental problems of the lake and its watersheds. There has also been a strengthening of capacity for participatory Local Environment Action Planning (LEAP) in each sub- basin, along with identification, implementation, operation and maintenance of environmental enhancement subprojects. The assessment also found improvements in procurement and financial management, and some mainstreaming of the LEAP process into local planning and development processes. iii) lmproved capacity of LLDA. The project has resulted in a refocusing of LLDA from being primarily a regulatory authority, to an institution capable of catalyzing and supporting LGUs and other stakeholders to improve the environmental quality of the Laguna de Bay watershed. LLDA's improved planning, regulatory and economic instruments are also contributing to behavioral changes of staff and their capacity to regulate establishments within the Lake watershed. LLDA also continues to provide a regular venue for social learning, dialogue and feedback via the Annual Learning Forum. iv) Reduced BOD loading. Industrial establishments have responded positively to the Environmental User Fee System (EUFS) and the Public Disclosure Program (PDP) as evidenced by the reduction in their average industrial BOD loading of 657.96 MT/ year as of 2012 from 828 MT/year in 2003. As of 2012, average industries' contribution per firm to total BOD loading in the lake from 0.8MT in 2003 to 0.75MT in 2012, indicating that industrial firms are shifting to more efficient and cleaner production technologies. 48 Key Lessons Learned LISCOP has gained major lessons during the first three years of the OF implementation period (between 2004-2009), to wit: (i) no budget cover for LISCOP for two successive years (2005-2006) to finance the environmental subprojects; (ii) steep learning curves of both LLDA and the participating LGUs; (iii) long gestation period of subprojects because of the multi-stakeholder and micro- watershed approaches which are innovations being supported by LISCOP; (iv) effect of the 2007 Elections and (v) difficulties encountered by the LGUs in securing appropriate and acceptable land documentation requirements that LLDA regards as part of its due diligence assessment of proposed subprojects. During the Additional Financing phase, among the major constraints that have affected the implementation process are: (1) limited technical capacity of the LGUs in the preparation of the Feasibility Study and Detailed Architectural and Engineering Designs; (2) difficulties in securing acceptable land documentation requirements; (3) steep learning curves specifically for first time LGUs availing ODA-funded projects; (4) adverse climatic conditions causing delay in construction works; and (5) effect of the May and October 2013 local elections which lengthened the implementation process; additional documentary requirements, such as Monetary Board Opinion, imposed by the DOF and Bangko Sentral ng Pilipinas; and shifts in the leadership of the final approving body in the MDFO. Over the two phases of implementation, it is obvious that limited capacity of LGUs, impact of local elections, land documentation requirements and changes in project documentation and approval process, and finally shifting of decision makers were the common issues that had affected project implementation. More significantly, LISCOP implementation has brought out a number of advantages which may well be a model for the management of other large water bodies, e.g. Manila Bay and its interconnected waterways. In particular, the capacity of LLDA to use its own resources to co-finance selected sub-projects was effective in leveraging LGU and community support. Hereunder are some lessons with recommendations: On LGU financing and co-management o The catalyzing of community support through education, field days and provision of some grant funding, has demonstrated the potential for even greater civil society support. Part of the same lesson is that even more can and should be done in this regard, possibly through "Community Grant Schemes" providing funding, (on a competitive basis) to NGOs and community groups for "clean-up" activities and related programs. o More attention needs to be given to the mechanisms for Operation and Maintenance of Subproject Facilities. o Co-management interventions need to show results and concrete benefits to stimulate participation and commitment. o Operating an efficient, effective, environmentally sound projects require building administrative capacity for LGUs and technical capacity for designing, operating, maintaining and monitoring each part of the process o Incentives must be reinforced to motivate resource users. LISCOP project is a dynamic and continuous development work. It requires the interplay of various sectors. It does not rely on what is planned because in the process, there are unforeseen "turbulences" and even influences that affect project implementation. As a development work, the process never ends because: 49 1. The highly political nature of the LGU leadership requires development of strategies towards establishing a more dynamic, focused and sustainable management of sub-projects. 2. The project must have at least one effective champion who can become a significant project implementation player. Effective championship should begin as early as conceptualization stage and continue until project operations. 3. Project implementation requires flexibility and thrives on open and creative interaction among project partners. On tools and instruments for effective environmental regulations and enforcement The Philippines is replete with laws and regulations relating to pollution, liquid and solid waste management, but enforcement has been inconsistent. A lesson from this project has been the willingness of enterprises to participate in the payment of Environmental User Fees, and to comply with regulations, when such regulations are seen to be consistently and fairly applied. To the extent there was non-compliance, the 'Public Disclosure Program" introduced under the project was an effective tool for motivating firms to comply. This suggests that "Third Party Monitoring" of compliance with environmental laws and regulations, perhaps through an NGO, may afford another means to bring about attitude changes on regulations and compliance. Development Impacts of the Project The transformation of LLDA from essentially a Regulatory Authority, to a self-financing Development Agency with regulatory functions, has brought out a number of advantages which may well be a model for the management of other large water bodies, e.g., Manila Bay and its interconnected waterways. In particular, the capacity of LLDA to use its own resources to co-finance selected sub-projects was effective in leveraging LGU and community support. Some lessons with recommendations documented in the report include on LGU financing and co-management; and on tools and instruments for effective environmental regulations and enforcement. Performance of the WB, Borrower/ Executing Agency and Implementing Agencies World Bank: Satisfactory Reviews of project implementation were conducted twice yearly and the Bank formally reported on performance of Dutch Trust Fund every year. Aide Memoirs discussed with the borrower at the conclusion of each review were comprehensive and, where needed, follow-up actions were closely monitored. A mid-term review was conducted as scheduled, the key outcome being the streamlining of three review processes for sub-projects into one, thereby overcoming a implementation bottleneck. Parameters: responsiveness of WB to issuance of NOLs, prompt action on withdrawal applications and transfer of funds to designated account, timely actions and advice on safeguards issues referred to WB Task Team, provision of technical assistance in subproject preparation/ implementation, among others. Internally within the Bank, Independent Evaluation Group (lEG) reviews the rating done by WB Task Team. 50 Department of Finance as Borrower/Executing Agency: Moderately Unsatisfactory With constant follow ups, the DOF endorsed within the set timeframes all the requests for time extensions of the Original Financing and Additional Financing to the World Bank. The Department supported the LLDA's request for harmonization of the Project Appraisal Document and Loan Agreement (section 2.7 Compliance to Loan Covenant) by its endorsement to the Bank. However, the DOF assumed a hardline position on LLDA's request for AF re-structuring for meritorious reasons (refer to refer to section 3.2.2 on Financing Incentive Support to LGUs of the PCR), setting aside the appeal of LLDA for consistent application of precedent-setting decisions on NG development assistance to LGUs. 1 This almost led to inability to move LISCOP Project Additional Financing. Laguna Lake Development Authority (LLDA) as Implementing Agency Rating: Satisfactory LLDA remained fully committed to the project throughout its implementation and was proactive in assigning staff to undertake the various institutional strengthening aspects of the project. A high degree of cooperation was evident between the LLDA Project Management and the World Bank Task Team. Aide Memoirs in recent years reflect consistent satisfactory ratings for procurement and safeguard compliance. Financial management has been rated Moderately Satisfactory because of the late submission by MDFO of the Audit Report. Further, as a clear evidence of LLDA's commitment, it continued providing equity subsidy to LGUs even in the face of the closure of the Dutch Grant in April 2010 and will continue providing such financing subsidy beyond 30 April 2014 to enable LGUs with unfinished subprojects to fully complete their implementation until around August 2014 (Board Resolution No. 454, Series of 2014). Municipal Development Fund Office as Co-Implementing Agency, Rating: Moderately satisfactory The tight timetable in the Additional financing was a result of delay in the approval of 9 sub-projects by the Policy Governing Board due to a shift in leadership and changes in the documentation requirements and approval processes. These have caused cancellation of US$4.5M and extension of 5 sub-project implementation. However, in the overall, the MDFO Management has facilitated the processing of the subproject documents and endorsement thereof to the PGB within its normal procedures. Selective application of 50-50%, 80-20% and 90-10% scheme for certain ODA-funded projects (e.g., PROP, MRDP and ARCDP) to the disadvantage of other LGUs in view of the suspension by the Office of the President of the NG-LGU cost sharing scheme in November 2011 without any clear option on the way forward. Local Government Units (LGUs): Moderately Satisfactory Of the 21 participating LGUs under OF, 16 or 76%% performed well in terms of managing the operation of their respective facilities. It has been observed that LGUs have funding allotment for their subprojects including support staff to ensure its operation. However, based on contract administration, procurement and financial management, most LGUs had exhibited delays due to slower absorption of ODA processes and guidelines. Sustainability criterion for sub-projects under AF will have to be judged in succeeding years as these subprojects are newly established. 51 NEDA-Central and Regional Offices: Satisfactory From the conceptualization to the final stage, NEDA has been very consistent in providing project review and evaluation. Annual status report is submitted to NEDA based on prescribed format. An annual review was conducted and result of assessment is presented to the agency for validation and comments. Findings and evaluation are also presented including the rating and ranking of LLDA performance relative to other ODA projects on a quarterly basis during the Project Implementation Officers (PIO) meeting convened by NEDA-Monitoring and Evaluation Staff LLDA requests for time extensions for the OF and the AF were promptly endorsed to DOF for final endorsement to the World Bank. For the envisioned re-structuring scheme for the AF, rather than acting on the proposal, the NEDA Secretariat merely refer the matter to the PGB-MDFO for decision for reason that accordingly, the former has no jurisdiction on such and only the PGB could decide on proposed amendment or revision of the NG-LGU cost sharing scheme. Unfortunately, LLDA was referred it to the DOF Secretary for final decision. This key decision point happened in the midst of the shifting of leadership of the PGB. Hence, couple with the changes in the requirements and processes for subproject approval, the delayed decision making exacerbated the already tight timelines. In the end, the final decision of the DOF Secretary was to maintain the existing financing scheme, thus a loss of around one and a half years, or half of the 3-year implementation period before the actual subproject approval for the AF. Conclusion and Recommendations Given the dynamics within the watershed arena, the success of LISCOP project cannot be gauged solely based on pre-defined parameters. One should look into the project's own merits within the context of innovativeness and perceived benefits derived by stakeholders and key players (i.e. LGUs, LLDA, lake users, etc.). Innovative features/best practice of the LISCOP Project which may be replicated include, among others: i) The LEAP step-wise approach: Multi-Stakeholder Involvement in IWRM. ii) Financing Incentive support to LGUs. iii) Grant incentive to LGUs to be treated as LLDA's Performance-Based Grant. iv) Effective and creative use of user gees - leveraging for LGUs' participation in environmental improvement. v) 1mplementing carbon emission reducing projects. vi) Public disclosure of industry and LGU performance. vii) Mainstreaming through the organization of LISCOP innovations and best practices. Recommendations The following are the specific recommendations derived from the LISCOP Project implementation: a) Accessing Bridge Financing for Unfinished Sub-projects at Closing Date. Out of the 18 approved sub-projects (involving 11 LGUs) under LISCOP AF, completion of the five (5) remaining sub- projects (5 LGUs) will likely be affected by the project closing date on 30 April 2014. This covers the completion of the civil works ranging from 50% to 100%. Likewise, releases of funds will be extended to cover around 20% to 70% of the cost of the civil works or until final completion. These unfinished subprojects will require around Php55.0M to complete after project closing (Table 6). As discussed during the 4th World Bank Implementation Support Mission in September 2013, the Municipal Development Fund Office (MDFO) of the Department of Finance will provide the transition financing to LGUs after closing date, with the LLDA providing the equity subsidy to enable them to complete 52 the implementation of their respective subprojects, thus fulfilling the commitment to the LGUs thereby sustaining partnership in the management and protection of the lake and its watershed. Therefore, as a parallel action to the MDFO's assistance to LGUs, the LLDA Board, in its meeting in January 2014, approved the funding assistance of LLDA equivalent to the 50% share (Php3,613,750.00) of the equity or of the partner LGUs of the remaining sub-projects to be extended to cover the full implementation of the sub-project (Board Resolution No. 454, Series of 2014). Action Required: Formalize the provision of bridge financing from MDFO for remaining five (5) subprojects, for approval by its Policy Governing Board in March 2014; execute a supplementary agreement to existing SFA between the concerned LGU and MDFO based on new fund sourcing (MDFO) and financing scheme. b) Addressing Priority Infrastructure Investment Needs. Investments in environmental subprojects by LGUs, particularly on solid waste management need to be scaled up to include more investments in sanitary landfills, water and sanitation, but most importantly municipal wastewater treatment systems in the densely populated West Bay region, particularly the sub-basins of Marikina, Napindan-Taguig, San Cristobal, Manggahan and Angono where BOD loading is high. b.l Domestic discharges as the main source of pollution. While LGU investment on environmental subprojects, particularly on solid waste management, has increased, a big gap remains in addressing domestic wastes from the households which are discharged without treatment directly into the lake. The results of the LLDA study on BOD loading in the lake showed that the gains achieved in controlling industrial discharges through regulations and the use of economic instruments (e.g., EUFS and Public Disclosure Program) is being undermined by the untreated discharges coming from the households. One of the biggest challenges, therefore, in terms of improving the water quality of the lake is to address domestic discharges. This will require huge capital investment on wastewater treatment facilities as well as social investments in terms of awareness raising and education to achieve positive behavioral changes. Unfortunately, this type of investment is a low priority among most participating LGUs under LISCOP, and at the same time, the available financing under LISCOP is inadequate to fully financed such types of projects. b.2 Solid waste/garbage. Sanitary landfill facilities are another gap in environmental infrastructure. Many LGUs have set up Materials Recovery Facilities (MRF) and Composting Facilities under LISCOP but do not have sanitary landfills for their residual (unrecyclable) wastes. b.3 Informal settlements along river banks and shore/and areas. Related to the problem of domestic wastes are the informal settlements along river banks and the lake's buffer zone. These structures are difficult to connect to any municipal sewerage or wastewater system and solid waste is hard to control. But more importantly, the encroachment of the buffer zone not only of the lake and rivers, but also of waterways, endangers the ecological integrity of the water systems, expose vulnerable communities and exacerbate flooding occurrences and flood risks. Action Required (b.l to b.3): Consider these much-needed investments/interventions in the succeeding financing phase (Integrated Water Quality Management Project). c) Deforestation and degradation of the watershed. The Laguna de Bay Regional GHG Emissions Inventory undertaken under LLDA's Carbonshed Project with World Bank/ Japan Support, pinpoint areas vulnerable to land use changes including rapid deforestation and its associated effect on soil erosion and sedimentation in the Laguna de Bay. These are the areas in need of mitigation strategies particularly those that support improved watershed management. There are broadly three geographic 53 trends. In the west bay where Metro Manila is located, the forest cover is minimal. In the northern and eastern portion of the watershed, there are still large areas of forest cover and in many sub-catchments regeneration of forest is occurring and deforestation is relatively less significant. However, in the southern portion of the watershed, particularly the Pagsanjan and Calauan catchments, deforestation is severe of which 90% is due to conversion to grassland with the remainder predominantly due to conversion to cropland and settlements. Action Required: Ensure that these areas are covered by the National Greening Program, otherwise make strong representations with the DENR. d)Implementing the trunk infrastructure strategy. This strategy was developed under component 2 of LISCOP and adopted by the LLDA through Board's approval. Private sector partnership (PSP) modalities (BOT, DBO) and partnership with LGUs to implement infrastructure projects have been identified as priority for the Laguna de Bay watershed and improvement of the capacity of the LLDA to implement the infrastructure interventions to complement LGU interventions. This strategy identifies several private sector partnership (PSP) modalities (BOT, DBO) and partnership with LGUs to implement infrastructure projects that have been identified as priority for the Laguna de Bay watershed for which investment cost can be considered under the next financing operation (IWQMD). Action Required: This strategy needs to be implemented by LLDA to continue to build capacity of the LLDA to implement the infrastructure interventions to complement LGU interventions. e)Further institutional strengthening of LLDA, LGUs and River Councils. The institutional reforms and mechanisms established in LISCOP needs to be further refined, strengthened and mainstreamed within LLDA and LGUs. On the other hand, the roles of River Councils/FARMCs in policy formulation, planning, monitoring and enforcement need to be strengthened by further capacity building especially in terms of financial independence. River councils 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 well as a channel for communication between LLDA and the LGUs. Action Required: Mainstreamed innovations and enhancement of regulatory tools and market-based instruments, together with streamlined and improved processes and overall governance should continue to be supported by LLDA. f) Integrated Watershed Management Councils at the Sub-Watershed Level. To further sustain participatory management of the lake and its watershed, a multi-stakeholder Integrated Watershed Management Council at the sub-watershed level will be institutionalized in the Laguna de Bay Region starting in 2010 pursuant to the provisions of the Philippine Clean Water Act (Republic Act No. 9275) of 2004. There are 24 sub-watersheds in the entire Laguna de Bay Region. The strengthening of RCs figures well into this initiative, with each of the existing RCs in specific sub-watershed serving as the core for formation of IWMCs. Action Required: LLDA should continue its on-going piloting of the establishment of IWMC in two micro-watersheds (Silang-Santa Rosa and Cabuyao) and generate lessons and improvements in the process for other sub-watersheds with sustained stakeholder and LGU engagement. 54 Borrower Comments on the ICR ICR Reference Comments 2.3. Monitoring and Evaluation Design, Please take note that LLDA religiously submits Implementation and Utilization report twice a year and/or during World Bank Review Mission reflecting the status of the OF Sub- Utilization of the M and E System projects as well as the AF Sub-projects (starting 2008) and discussions on mainstreamed tasks of the LISCOP Component 2 “It was only in the last year that the report included discussions on the status of completed sub-projects under the OF as well as the status of sub-projects under the Additional Financing 3.1. Assessment of Outcomes Please include the following statement in the 2nd Relevance of Design and Implementation paragraph: The uniqueness of LLDA's mandate as amended (1983) lies in its developmental, regulatory and proprietary at its core functions. While LLDA has been perceived as a STRONG environmental regulatory agency, LISCOP design and implementation aimed to operationalize/strengthen its developmental functions which have been in existence (since 1966 under RA 4850) in the first place, e.g., engaging stakeholders such as LGUs and RCs in financing/implementing environmental improvement subprojects., using its generated environmental information to create public awareness and steer then into action Please include this statement in the 3rd paragraph The LGUs had difficulty to comply with LGU equity despite the subsidy (up to 50%) provided by the LLDA through its Project Development FUnd (PDF). These include also the issue on willingness of specific LGU to host the project, especially in the case of MRF and composting, sanitary landfill. 3.2. Assessment of Project Development The LLDA fully agrees that LISCOP Project has Objective. Item (c) succeeded “developing the institutional and operational mechanisms for LLDA to sustain the clean-up operations needed for Laguna Lake; and (c) building capacity for participatory planning financing and management of fully agree”. As 55 ICR Reference Comments stated in the LLDA LISCOP PCR,"... the strengthening of LLDA and the watershed users and its institutional partners, the LGUs and RCs, remains as the heart and soul of the project. The co-managed investments using the World Bank loan proceeds in implementation of environmental sub-projects are the tools/incentive mechanisms to enable the shifting in mindsets and behavioral changes towards participatory planning and sub-project implementation at the micro-watershed level... "this despite the limited LISCOP fund available for financing environmental infrastructure (also, please refer to transmittal letter dated March. 3.2. Achievement of the Project LLDA would like to clarify that generating revenue development Objectives. Item (h) is not EUFS' primary objective. Changing of mindsets of decision makers in regulated establishments and investing in wastewater treatment systems to bring them to improved compliance, the utmost purpose of the System. Analysis of actual monitoring data of establishments under EUFS shows that those firms covered since the System started have diminishing payments of user fees to LLDA. The increment to user fee collection mainly comes from those newcomers in the System. 3.4. Justification of Overall Outcome We agree with the overall outcome rating Rating "Moderately satisfactory". However, we respectfully submit LLDA's stake on this paragraph. To build the justification for the overall LISCOP rating heavily on the ROIs/ financial and economic returns ("reducing pollution pressure" or environmental impacts of micro-watershed intervention) may risk the chance of securing the final approval of the ICR by the WB panel. Please consider paragraphs 3 and 4 of the transmittal letter dated March 24. 56 Annex 8. Comments of Co-financiers and Other Partners/Stakeholders An Implementation Completion Memorandum for the Netherlands Grant was prepared upon its closing in 2010. No comments on the ICR were received. 57 Annex 9. List of Supporting Documents Project Appraisal Document Project Paper for Additional Financing LLDA Letter of Institutional Development Objectives Three Survey Results Report from the consultancy firms Public Disclosure Program Results Presentation by LLDA Aide Memoires for each of the 16 review missions Implementation Completion Memorandum for the Netherlands Government TF Grant Project Completion Report by LLDA (March 2014) ICR Mission (March-April 2014) Powerpoint Presentation by LLDA Financial Information by LLDA on select micro-watershed environmental interventions LLDA revenue statement (2003-2014) indicating income from EUFS Final Sub-project Completion Status Report and Environmental Compliance Report (April 30, 2014) by WB Project Team Safeguards Update Report (April 2014) by WB Project Team 58 Annex 10. Description and Assessment of Cancelled Carbon Finance Operations 1. Background: The objective of the Laguna de Bay Community Waste Management Carbon Finance Projects 18 was to implement a set of small scale waste management projects in the Laguna de Bay watershed. The project was expected to finance the purchase of emission reduction credits produced from a series of small scale composting and other sub-projects implemented by local governments units (LGUs) and private sector entities in the Laguna de Bay Region. The expected purchases were based on an Emission Reduction Purchase Agreement (ERPA) with the Laguna lake Development Authority (LLDA), which acted as an intermediary between the World Bank and local sub-project proponents. As originally conceived, the carbon finance project was to include two components: (i) Watershed rehabilitation. This component covered the implementation of a series of small-scale watershed-rehabilitation sub-projects to increase forest cover in areas such as stream banks, grasslands, brush lands and croplands while reducing the greenhouse gas carbon dioxide (CO2) through its sequestration in the tree biomass during growth. These sub-projects were expected to include stream-bank rehabilitation, reforestation in upland areas and agro-forestry. LLDA was to be the coordinating entity in charge of identifying local governments and other sub-project proponents to develop sub-ERPAs to purchase emission reductions from localized activities. These emission reductions would then be sold by LLDA to the World Bank-managed Bio Carbon Fund. After several years of delays, the Bio Carbon Fund component was dropped because the local entities could neither secure land nor qualify under CDM rules. (ii) Waste management. This component covered the implementation of a series of small-scale waste management composting sub-projects in the region that would reduce the emissions of the greenhouse gas, methane (CH4) that is produced during the uncontrolled degradation of waste in disposal sites, polluted waterways and certain types of wastewater treatment plants. LLDA finalized agreements with local governments and other sub-project proponents to purchase emission reductions from 18 sub-projects. These emission reductions were to be sold by LLDA to the World Bank-managed Community Development Carbon Fund (CDCF). The waste management (composting) component was developed as two “bundles” of projects. The two bundle approach was necessitated due to timing of project identification and preparation. The first bundle of projects was registered as a CDM project on March 16, 2008, The validation process (which leads to registration) of the second bundle was stopped in the summer of 2012 when the decision was made to terminate the ERPA between CDCF and LLDA, which is described in more detail below. 18 The Clean Development Mechanism (CDM) is a project-based flexible offset mechanism under the Kyoto Protocol that allows the crediting of emission reductions from greenhouse gas abatement projects in developing countries. These projects are commonly referred to as Carbon Finance projects because emission reductions are measured in tons of Co2 equivalent. In order for credits to be issued, a project design document (PDD) is prepared and validated by a third party auditor and then registered with the UNFCCC. Following registration, emission reductions are monitored according to a monitoring plan in the PDD and periodically verified by a third party auditor. Once reviewed by the UNFCCC, certified emission reductions are issued. 59 The composting projects included 18 sites (See Table 1) with widely varying populations from 11,000 to 570,000. They are all in the Laguna de Bay region. Table 1: Cities in the 2 Bundles. Bundle 1 Municipality/City Province General Mariano Alvarez Cavite Kalayaan Laguna Liliw Laguna Morong Rizal Sta. Cruz Laguna Tanay Rizal Teresa Rizal Bundle 2 Santa Rosa Laguna Pakil Laguna Pangil Laguna Mabitac Laguna Pila Laguna Nagcarlan Laguna Siniloan Laguna Angono Rizal Victoria Laguna Antipolo Rizal Lucban Quezon Waste Management Project Background The World Bank has had an ongoing engagement with the Department of Natural Resources and Environment (DENR) and LLDA on environment and natural resource issues. Sector studies (“Natural Resources Management Way Forward Action Plan for the Philippines”) and the Philippines Environment Monitor series identified key issues relevant to watershed management in the country, including the need for an integrated approach to address watershed priorities, establishment of accountability mechanisms to improve natural resource and environmental governance, and market- based incentives for pollution management. Through implementation of LISCOP, the World Bank assisted with watershed management improvements in the Laguna de Bay region through institutional strengthening of LLDA. In addition, there was support for market-based incentives, participatory planning, and financing of local investments with an aim to improve environmental conditions. LLDA, based on the framework developed through LISCOP and adapted to meet the needs of CDM projects, identified sub-projects that were CDM eligible and that met the basic technical, financial, safeguards and other criteria agreed under the LISCOP project. Implementation. The local government and private sector sub-project proponents were responsible for sub-project implementation. Through LISCOP, LLDA provided overall supervision and technical support during implementation of the sub-projects. Monitoring and Verification. The projects were expected to follow a strict monitoring plan approved by the CDM Executive Board to determine the emission reductions achieved. In addition, community 60 benefits were to be monitored based on an agreed framework. Each sub-sub-project proponent was to be responsible for collecting data during sub-project implementation. LLDA was responsible for aggregating sub-project data and doing quality checking. Overall, the quality of the Project at entry was promising, but there were significant delays in implementing sub-projects, followed by technical problems that significantly reduced the amount of compost produced and resulted in lower than expected volumes of emission reductions. 2. Post-Approval Experience and Reasons for Cancellation The Waste Management Project encountered a number of technical problems starting shortly after commissioning. ER totals: For the registered bundle (Bundle 1), the total organic waste that was composted remained steady during the three-year period of the first monitoring report (2009-2011), but it was far lower than expected in the project design document (PDD) that was registered with the UNFCCC. As a result, the estimated ERs for this period represented only 6 percent of the PDD amount. There are a number of factors that contributed to this significant under-delivery. First, CER estimates in the PDD were based on waste generated on the basis of LGU population and a number of other assumed parameters that have proven to be overestimated. Second, there were delays in implementation, which were already addressed by requesting a one year change of start of crediting period from the UNFCCC, but even with an additional year, all composting facilities in Bundle 1 were not yet on line during this first three years of the monitoring period. Third, there have been problems with equipment malfunctions and equipment that has not performed at or near the expected capacities. In addition, many composting facilities have a transient workforce as a result of the changes in the leadership at the LGU level and it is difficult to constantly provide sufficient training to operate the bioreactors. Monitoring issues: The constant turnover of LGU employees applies not only to the operation of the bioreactors, but the required monitoring as well. As a result, quality assurance/quality control of the data submitted at the sub-project officer level, as well as at the higher levels (consolidation, computation, supervisory) was not consistent. This further delayed the finalization of the first three- year monitoring report as erroneous data remained despite repeated requests by the local consultant and LLDA staff. For example, the raw data mentioned above affected the computations and quality of the results and it took LLDA more than five months to obtain the revised data. In addition, the consultant found that some project sites were not closely following the monitoring plan in terms of recording measurements of certain inputs such as diesel consumption which at two sites were being measured using a soft drink bottle. Conclusion: Based on the experience of trying to complete the first monitoring report, for less than 900 emission reductions, it was highly likely that a DOE would find even more issues as part of a verification site visit that would, at best, require deviations to the monitoring plan, and in a worse case, result in a negative validation at a cost of at least $20,000 19. Over time, the risks of completing 19 If the DOE is unable to verify the ERs, you are still obligated to pay them for their auditing activities which at the time of ERPA termination were about $20,000 per verification. 61 verifications would likely increase due to the ongoing turnover of project site staff and the lack of local resources to address these issues, resulting in incomplete monitoring reports that could not be verified. It is important to note that there has been a great deal of enthusiasm for the development of these composting facilities. But as discussed, the projects were not well suited to the CDM’s strict rules and regulations as well as the high transaction costs to verify emission reductions. Addressing the lack of capacity to follow the monitoring plan over the long-term would be, at the very least very costly, and likely unsustainable. Given the extremely small number of potential ERs and high cost of CDM monitoring and supervision, pursuing verification of the first monitoring report was deemed an extremely high risk endeavor. The CDCF and LLDA agreed that the risks and costs outweighed the potential for CER revenue and agreed to terminate the ERPA in 2012. 3. Bank Performance The World Bank prepared and appraised the project, negotiated the legal agreements, and supported the client in the process. The team included several staff with long experience in the energy, finance/financial management, and environment sectors. While the technical and financial problems of the composting facilities were outside the control of the World Bank team, there could have been certain measures taken to mitigate the risk of under- performance of the composting projects. The contract ERs in the ERPA relied too heavily on the PDD estimates; more conservative figures would have mitigated some of the loss. The World Bank could have provided more technical assistance early on to ensure that equipment would perform properly. The World Bank, with the help of a local CDM consultant, worked very closely with LLDA for years to identify and improve the monitoring process at the LGU level, but the costs of doing so proved unstainable given the cost to train and retrain LGU staff over the long term. 4. Borrower Performance LLDA was responsive on all issues, including operational problems, emission reductions monitoring, and safeguards compliance. LLDA was always forthcoming with information and provided production updates and ER monitoring reports in a timely manner. Despite the technical problems that resulted in lower than expected ER volumes, LLDA worked closely with the World Bank and the LGUs to improve CDM monitoring practices. However, the high rate of turnover of personnel at the sub- project level and resulting problems with the quality of monitoring data proved to be problems that that LLDA could not hope to resolve over the long term. LLDA did comply with all Safeguards requirements and inquiries and was very helpful during World Bank supervision missions. 5. Lessons Learned Despite the termination of the waste management ERPA, the project design provides a potentially replicable framework for performance-based financial incentives for implementation of results based programs environmental programs with local governments. For example, the structured monitoring and verification protocols, LLDA’s role in supervision and monitoring and third party verification were expected to provide a transparent and accountable approach to encourage public accountability and sustainability of project investments. While almost all projects were implemented, the CDM 62 monitoring requirements proved too complex for local capacity to handle. Nevertheless, there was general enthusiasm for the projects in each LGU. Currently, there are a number of activities devoted to improving and streamlining the development and monitoring of carbon offset projects and there are numerous lessons from the Laguna de Bay experience that can help improve future project design including simplified monitoring and reporting as well as greater oversight of procurement and maintenance of project technology, and improving incentives for local governments to ensure successful operation and monitoring of carbon finance projects. The project also provides a demonstration of the use of an intermediary to allow small-scale projects to access carbon finance. This experience with LLDA could inform the design of new types of carbon finance instruments and market mechanisms with a replicable example for other intermediaries and projects that seek to raise awareness of climate change and the benefits of local, small scale applications to reduce greenhouse gas emissions. Estimates for emission reductions have to be prepared in a conservative manner taking into account the risk of underperformance. For the first few years of the project cycle, emission reduction volumes were lower than the amount of ERs estimated to be generated by the projects at the appraisal stage (as reflected in the PDD). Contracting for the purchase of a smaller volume of emission reductions than the amount projected at the appraisal can mitigate the risk of underperformance by the project, especially for the early stages of operation. Unfortunately in this case, since the project’s performance was significantly lower than projected, even these conservative amounts of contracted emission reductions were not met. Local incentives are important for environmental investments to be successful. The revenues and benefits of environmental investments often accrue beyond the jurisdiction of the LGU, or beyond its time horizon. Therefore, investments in environmental improvements are generally not a priority for LGUs given their scarce resources in meeting the demands for basic social services. Additionally, environmental investments are often affected by poor operation and maintenance of environmental infrastructure during implementation. The original project structure helped address these issues by providing financial incentives for investments, but the CDM monitoring requirements and delays in CER payments offset those incentives in the case of this project. 63 MAP 64