Manila Water Company The project consists of financing the 2002-2005 investment program of MWCI, the concessionaire for Metro Manila East.  In 1997, MWCI won a competitive tender to operate the Metro Manila East service zone (1997 population: 4.5 million) under a 25-year concession agreement. It inherited facilities that require significant rehabilitation and to date MWCI has spent approximately US$20 million for its own capital expenditures and close to US$60 million in projects funded through multilateral loans to MWSS. Upon commencement of operations, MWCI delivered an average of 440 millions of liters per day (MLD) to 325,000 households.  Billed volume in the last 4 years has increased 70% to 750 MLD in December 2001. During the same period the number of households served has gone up to 428,000 and the population served has increased from 3.0 million to 4.05 million (from 70 percent to 89 percent). Water availability has also gone up during the last 4 years.  The percentage of areas that have 24-hour access to water has increased from 26 percent in 1997 to 55 percent in 2001.     MWCIs Operating Improvements since 1997 Takeover        Expanded Coverage    67% to 89% of population      Improved 24 hour supply    26% to 83%      Reduced NRW    63% to 51%      Built New Distribution Lines    170 kms       The improvements in coverage and billed volume during the last 4 years were also accompanied by a reduction in NRW, which fell by close to 12 percentage points from 63% of treated water in 1997 to 52% in 2001.  MWCI has pushed up the quality standard from 91% compliant in 1997 to 99.5% in 2001, exceeding the 95% required by the National Standards for Drinking Water.    MWCI inherited 2,165 employees at the turnover date and has reduced this figure to 1,530 without mandatory redundancies, largely through a voluntary early retirement scheme. The vast majority of MWCIs staff are ex-MWSS employees. There have been no reductions in pay.      MWCI Efficiency Indicators 1997-2001            1997       1998      1999      2000      2001       No. of Household Connections (000s)    325    340    390    409    428        Population Served (millions)    3.0    3.1    3.6    3.76    4.05        Staff per 1000 connections    6.3    5.1    4.8    3.8    3.6      Total Operating Cost per cubic meter of billed water    5.95    5.47    5.21    4.77    4.73       The Project as defined includes (i) new water sources development; (ii) service expansion to East and Southeast areas; (iii) network distribution improvement; (iv) other pipe extension and improvement projects; (v) water supply facilities; (vi) non-revenue water (NRW) reduction programs; (vii) sewerage & sanitation services; and (viii) payment of concession fees to Metropolitan Waterworks and Sewerage System(MWSS), the conceding authority. The concession fees finance the portion of MWSSs debt to multilaterals which has been incurred for capital works programs benefiting MWCIs service area, as well as MWSSs counterpart funding toward those programs and its administrative costs.     The impact of inadequate water and sanitation services falls primarily on the poor. Badly served by the formal sector, the poor make their own, often inadequate, arrangements to meet basic survival needs. Many fetch water from long distances or end up paying high prices to water vendors for very small quantities of water or enduring significant coping costs in terms of investments in backup tanks and pumps. The clear need for basic water and sanitation services for the poor assume even greater significance when the linkages with other dimensions of poverty are considered.   Water and sanitation related sicknesses put severe burdens on health services and keep children out of school. Human waste poses a tremendous social cost through pollution of rivers and groundwater.  Thus, improved water and sanitation services contribute to poverty reduction and growth through their impact on, inter alia, health, private sector development, urban development, environment and water resource management. MWCIs investment program, through expansion of coverage in water, sanitation and sewerage, thus makes a significant contribution to the economic development of the Philippines. This positive contribution is amplified by the focus the project has on expansion of coverage to lower income residents through innovative arrangements for connection and payment.     There have been a limited number of successful privatizations in the water and sanitation sector in emerging markets.  IFC''s assistance to MWCI would build upon the earlier IFC privatization advisory work by supporting a concessionaire who has begun to demonstrate the efficiencies and client responsiveness that a private sector provider can introduce to the provision of public services.  By supporting this successful private water concessionaire IFC will send a positive signal to the market and to other governments considering water privatizations. One of the reasons MWCI has approached IFC is because local banks are not offering financing of the appropriate maturity. The sponsors further believe that completing a financing with IFC would be a signal of quality that would help it in later rounds of financing, including a planned IPO. In addition to these practical points, Ayala Corporation, which cultivates a corporate image as a socially responsible company, has expressed interest in IFC for broader developmental reasons. Ayala Corporation perceives that the presence of a prestigious institution such as IFC in MWCI would be good for the Philippines by demonstrating that privatization can work despite the challenges posed by poverty in the Philippines, and that a well-run company can attract financing in an emerging market context.