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Republic of the Philippines Department of Environment and Natural Resources Asian Development Bank

AEA Technology In Association With GlobalWorks • CalRecovery • ENR Consultants

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METRO MANILA SOLID WASTE MANAGEMENT PROJECT (TA 3848)

FINAL REPORT

REPORT No. 9

FINANCIAL MANAGEMENT

Project Team

Neil Varey, AEA Technology, Project Director Luis F. Diaz, CalRecovery, Inc., Technical Team Leader

Nick Allen, GlobalWorks, Disposal

Reynor Rollan, ENR Consultants, Disposal Horace Crowe, AEA Technology, Institutional

Levi Buenafe, GlobalWorks, Institutional Luis Diaz, CalRecovery, Inc., Medical Waste Richard Pook, AEA Technology, Financial

Agnes Palacio, GlobalWorks, Financial Linda Eggerth, CalRecovery, Inc., Community Awareness Grace Favila, ENR Consultants, Community Awareness

Manjit Kahlon, AEA Technology, Solid Waste Roger Lopez, ENR Consultants, Social

Joey Sta. Ana, GlobalWorks, Solid Waste

September 2003

ADB TA 3848-PHI: Metro Manila Solid Waste Management Project Final Report �

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Financial Management Report No: 9 AEA Technology

Table of Contents EXECUTIVE SUMMARY................................................................................................................................... i 1. Introduction................................................................................................................................................... 1 2. Local Government Units............................................................................................................................... 1 2.1 Fund Sources....................................................................................................................................... 1 2.2 Fund Application .................................................................................................................................. 5 3. National/Metro Manila Agencies .................................................................................................................. 7 3.1 Department of Environment and Natural Resources........................................................................... 7 3.2 Metro Manila Development Authority................................................................................................... 7

3.2.1 Solid Waste Management Function................................................................................................ 7 3.2.2 Fund Sources.................................................................................................................................. 7 3.2.3 Fund Application ............................................................................................................................. 8 3.2.4 Existing SWM Programs/Projects................................................................................................... 8

4. Health Care Waste ..................................................................................................................................... 11 4.1 Fund Sources..................................................................................................................................... 11 4.2 Fund Applications............................................................................................................................... 12 5. SWM Collection and Disposal.................................................................................................................... 12

5.1 Introduction ........................................................................................................................................ 12 5.2 Existing Operations............................................................................................................................ 13 5.3 Existing Operations with Reductions due to Recycling Improvement............................................... 13 5.4 Landfill Closure Case 1...................................................................................................................... 13 5.5 Landfill Closure Case 2...................................................................................................................... 13 5.6 Further Increased Recycling.............................................................................................................. 14 5.7 Comparison between the different cases .......................................................................................... 14

6. Tariff & Financial Management Reform ..................................................................................................... 15 6.1 Current Situation ................................................................................................................................ 15

6.1.1 Review of Current Tariffs and Proposed Guidelines .................................................................... 16 6.1.2 Strategic Direction......................................................................................................................... 17 6.1.3 Strategy Components ................................................................................................................... 17

6.2 Tariff Development............................................................................................................................. 18 6.2.1 Tariff Structure .............................................................................................................................. 18 6.2.2.Cost Recovery Policy.................................................................................................................... 19 6.2.3. Tariffs/User Charges.................................................................................................................... 21 6.2.4. Tariff Setting Mechanism............................................................................................................. 22

6.3 Corporatization and Private Sector Involvement ............................................................................... 29 6.3.1 Public Funding and Subsidisation ................................................................................................ 29 6.3.2 Corporatization as First Step to Privatisation ............................................................................... 29 6.3.3 The Role of the Private Sector in Household Waste Management Services............................... 30 6.3.4 Promoting & Managing Private Sector Participation .................................................................... 30 6.3.5 Constraints to Corporatisation ...................................................................................................... 32

6.4 Financial Management Reform.......................................................................................................... 32 6.4.1 Understanding True Costs............................................................................................................ 32 6.4.2 True Cost Accounting ................................................................................................................... 34 6.4.3 Social Costs .................................................................................................................................. 35 6.4.4 Financial Management and Monitoring ........................................................................................ 36

6.5 Financing SWM Development ........................................................................................................... 36 6.5.1 Locally Generated Revenues ....................................................................................................... 37 6.5.2 Internal Revenue Allotment .......................................................................................................... 37 6.5.3 Commercial Loans ........................................................................................................................ 37 6.5.4 National Solid Waste Management Fund..................................................................................... 37



6.5.5 Grants and Concessional Loans .................................................................................................. 37 6.5.6 Private Sector Financing............................................................................................................... 37 6.5.6.3 International Sources of Funds.................................................................................................. 39 Funding Source...................................................................................................................................... 39 6.5.7 The Management of the Financing Function................................................................................ 39

6.6 Financial Planning.............................................................................................................................. 40 6.7 Best Practices for Financing SWM .................................................................................................... 43

6.7.1 International .................................................................................................................................. 43 6.7.Domestic .......................................................................................................................................... 43

7. International Best Practices ....................................................................................................................... 46

7.1 Ireland ................................................................................................................................................ 46 7.2 Australia ............................................................................................................................................. 46 7.3 India.................................................................................................................................................... 47 7.4 Uruguay.............................................................................................................................................. 48 7.5 UK ...................................................................................................................................................... 49 7.6 European Union ................................................................................................................................. 49 7.7 Brazil .................................................................................................................................................. 50 7.8 Austria ................................................................................................................................................ 51 7.9 South Africa........................................................................................................................................ 51 7.10 Ecuador............................................................................................................................................ 51

8. Meetings Held ............................................................................................................................................ 52 9. Recommendations ..................................................................................................................................... 52

9.1 Cost Recovery through waste fees.................................................................................................... 52 9.2 Understanding the true cost............................................................................................................... 52 9.3 Corporatisation................................................................................................................................... 52 9.4 Economic Analysis And Economic Efficiency.................................................................................... 52 9.5 Increase the Recycling of Waste ....................................................................................................... 53 9.6 Medical waste .................................................................................................................................... 53

Annex 1 LGU Waste Management Fees ....................................................................................................... 54 Annex 2 Medical Care Waste Disposal of Selected Hospitals ...................................................................... 64 Annex 3 Waste Collection and Disposal Costs Existing Operations ........................................................... 65 Annex 4 Waste Collection and Disposal Costs Existing Operations with Recycling reductions................... 66 Annex 5 Waste Collection/Disposal Costs Existing Operations with landfill charges of US$25 from 2006..67 Annex 6 Waste Collection/Disposal Costs existing Operations with landfill charges of US$25 from 2008 ..68 Annex 7 Waste Collection/ Disposal Costs …recycling reductions/landfill charges of US$25 from 2006.... 69 Annex 8 Meetings........................................................................................................................................... 70



ABBREVIATIONS

� Euro IWMI Integrated Waste Management, Inc.£ Pound Sterling JBIC Japanese Bank for International Cooperation ADB Asian Development Bank JICA Japanese International Cooperation AgencyAUSAID Australian Aid for International Development LBP Land Bank of the Philippines

BOT Build, Operate and Transfer LGC Local Government CodeBPEO Best Practicable Environmental Option LGSP Local Government Support ProgramCAP Campaign Against Plastic Waste (an Indian

Organisation)LGU Local Government Unit

CCPSP Coordinating Council for Private Sector Participation

LOGOFIND Local Government Unit Finance and Development Project

CDF Countryside Development Fund MBUSS Mindanao Basic Urban Services Sector ProjectCESI Chavellier Environ Systems, Inc. MMDA Metro Manila Development AuthorityCIDA Canadian International Development Agency MOA Memorandum of Agreement

DBM Department of Budget and Management MRF Materials Recovery FacilityDBP Development Bank of the Philippines NCC National Cadet Corps (an Indian Organisation)DENR Department of Environment and Natural

ResourcesNEDA National Economic and Development Authority

DILG Department of Interior and Local Government NGO Non Government Organisation

DOF Department of Finance NSWMF National Solid Waste Management FundDOH Department of Health OECF Overseas Economic Cooperation FundDTI Department of Trade and Industries PDF Project Development Facility EISCP Environmental Infrastructure Support Credit

ProgramPhp Philippine Peso

EPR Extended Producer Responsibility PRMDP Philippine Regional Municipal Development Project

EU European Union PHPP Private Sector ParticipationGATC German Agency for Technical Cooperation SWM Solid Waste Management

GFI Government Financing Institution UNDP United Nations Development ProgramHH Household US$ United States DollarICC Inter-Agency Coordinating Council USAID United States Aid for International DevelopmentIFI International Financial Institution WWF World Wide Fund for Nature


Financial Management Report No: 9 AEA Technology �

EXECUTIVE SUMMARY Local Government Units Sources of funds for SWM include the following:

• General budgetary appropriations which include locally-generated taxes, fees and charges; Internal Revenue Allotment; and other income to which the LGUs are entitled;

• External sources which include Countryside Development Fund (CDF); credit finance instruments;

local and foreign-funded loans and grants, and private sector participation;

• Cost recovery of SWM related activities such as collection of waste fees and imposition of fines for violations; and

• National Solid Waste Management Fund (NSWMF).

The LGUs are mandated by the Local Government Code (LGC) to collect fees for services rendered to its constituents. One of these is the collection of waste management fees from business establishments, where the charges are incorporated in the annual application for business permit. While LGUs are allowed by the LGC to adjust its fees every five years, it is noted that most of these LGUs have not updated their waste fees as allowed by law. From available information on the eight pilot study areas of this TA, at least two LGUs have their Tax Ordinances passed way back in 1992 and another two in 1993. The rates are already outdated and are unrealistically very low. Collection of waste management fees from the residential sector appears to be situational. While it is being done in some isolated barangays, LGU survey reveals that the willingness of households to pay for SWM is quite low. The problems in these areas are political, behavioural and structural in nature. For 2001, Metro Manila LGUs’ expenses for SWM varied from about 5 percent to 24 percent or an average of 13 percent of their total expenditures. A bigger percentage of the SWM expense is spent for payments to private hauling contractors. Obviously, LGUs in Metro Manila are not recovering the full cost of waste collection service. Since it is only the business sector that is paying waste fees, the rate of recovery of SWM expenses is very low. For 2001, the rate of recovery of SWM expenses from waste fees was from (only) 2 percent to 24 percent. The bigger part of the expenses is thus subsidized by the LGUs and included in the General Appropriation for the year. Per capita cost for SWM presents a big disparity ranging from Php 64 per person in Pateros to Php 1,164 per person in Makati. The same is true for cost per ton of solid waste collected and disposed. However, it is important to note that the presentation of this data is mainly focused on the level of expenditure of each LGUs on SWM. It is not passing judgement on the efficiency and cost effectiveness of SWM operations. There are several factors that affect the level of expense of a certain LGU.


Financial Management Report No: 9 AEA Technology ��

National/Metro Manila Agencies Department of Environment and Natural Resources A National Solid Waste Management Fund (SWMF) was established under RA 9003 as a special account in the National Treasury and to be administered by the Commission. Sources include the following: donations, endowments, grants and contributions from domestic and foreign sources; amounts specifically appropriated for the Fund under the annual General Appropriations Act; fines collected under Sec. 49 of the Act based on a sharing scheme between the Fund and the concerned LGU.

The Fund shall be used to support the following activities: products, facilities, technologies and processes to enhance proper SWM; awards and incentives; research programs, information, education, communication and monitoring activities; and technical assistance and capability building activities. However, the Fund still has to be established and a start-up fund needs to be sourced. Even the budgetary appropriation for the operation of the Commission has still to be provided by the National Government. For 2002, the Commission is reportedly utilizing the budget of the Environmental Management Bureau (EMB) for its operation. Metro Manila Development Authority Republic Act No. 7924 stipulates the functions of MMDA that includes the operation and development of sanitary landfills. The following are the fund sources for MMDA SWM operation: General Appropriation; mandatory remittances of its component LGUs; Internal Revenue Allotment; and operating revenues which include collection from traffic fines, permit, clearances. The annual budgetary appropriation to MMDA is used for solid waste operation, improvement of leachate treatment and repair of disposal site drainage system. Current budget includes for about 1,800 tons/day tipping fee. Health Care Medical Waste Regular fund sources of Metro Manila hospitals come from the following:

• National Government Appropriations for general administration, support and operations, and subsidy requirements

• Local government units’ annual budget • Operating revenues (hospital fees and charges).

Aside from hospitals, at least two private companies are likewise involved in the treatment and disposal of health care waste. Most of the private hospitals have contracts with either Chavellier Environ System, Inc. (CESI) or Integrated Waste Management, Inc. (IWMI) for the disposal of health care waste. Most hospitals do not keep a separate record of expenditures for health care waste management. This function is usually incorporated within expenses for house keeping, grounds management or general administration and support services. However, estimates are placed at about 1 percent of total operating cost, based on interviews with private hospital staff. However, for government hospitals, the situation is worse since in some cases, the medical waste is disposed of together with general waste. The hospital administration has no medical waste management plan since there is reportedly no budget. Funds are given to other priorities such as personnel services, equipment and procurement of medicine and medical supplies. Health care wastes of hospitals with contracts with either CESI or IWMI are collected on a daily or weekly basis and costs are about Php 35 to Php 40 per kilo.



Cost Recovery Waste management is a key area for the ‘polluter pays’ principle, through the introduction of service charges (for collection, transportation, treatment and disposal of waste). The Government requires all waste generators to pay for the full costs of waste management services. This ‘polluter pays’ principle must be progressively imposed on all waste generators, at a pace dictated by local conditions and levels of affordability. All sectors of society are required to exercise environmental duty of care over the wastes they generate. All generators of waste must ensure that the waste they generate are properly collected, treated and disposed in accordance with national and local regulations. Penalties will be imposed on those who fail to exercise their responsibility to protect the environment from pollution arising from improperly disposed wastes. Currently, only commercial and industrial organisations are required to pay a waste charge. Very few domestic customers pay any charge. The introduction of service charges and the eventual achievement of full cost recovery are essential for securing the long-term sustainability of waste management services. Municipalities should ensure that revenues from charges, recommended to be collected by either water or electricity utilities (a preferred short-term agency for tariff collections), are directed entirely to the SWM Department and used solely towards improving and sustaining services, through full and transparent accounting procedures. For administrative simplicity, charges on householders should be uniform, with exemptions given to only those groups receiving socio-economic support. Charges on other waste generators should be established through a contractual relationship directly with the service provider, based on quantities and types of waste generated. The initial priority should be to set charges at a level that will enable as high a proportion of the operational cost to be covered. For SWM, this will involve implementing full cost recovery through service charges on households, and other enterprises or waste generators for operational activities associated with waste collection, treatment and disposal. The need for targeted cross subsidy of waste services for low-income groups and enterprises in transition should be identified.

Once operational services charges have become widely accepted, the long-term aim should be to increase the rate of cost recovery (through service charges) to cover all capital investment and the recurrent costs. The rate of increase will generally depend on the rate of socio-economic development. As a result all viable alternative cost recovery mechanisms should also be explored.

Other non-household generators of municipal waste (such as shops, hotels, companies and enterprises) should be charged for the full cost of services. Cost recovery policy can be used to provide direct influences both on waste generation and the implementation of a waste hierarchy. This it does by shifting emphasis from the true financial cost of SWM, i.e. what it costs to operate the SWM system, to considering the social and economic cost of SWM to society. In other words a cost recovery policy would calculate the real cost to society of a certain level of SWM service provision by valuing a broader range of criteria, often termed positive and negative externalities, such as human health or environmental impact. Given efficient market conditions, this would allow greater economic efficiency by encouraging an optimal level of SWM services at least cost to society. Future Cost Recovery Mechanisms Full cost-recovery means inclusion of all capital and operational and closure costs for all aspects of services provided, including an element that reflects the marginal external costs associated with ensuring that SWM minimizes social and environmental impacts on the environment. The range of options which will be evaluated include grouping together charges for waste collection, treatment and disposal into a single municipal management service charge, and/or and linking waste management charges to other services (such as wastewater treatment, water, or electricity).



Understanding Existing Costs, True Cost Accounting and Sustainable Financing An essential step prior to the introduction of market mechanisms is that the municipal authorities should fully understand the costs of existing services by undertaking independent audits of the costs of all parts of the waste management service. At a minimum these should identify all components forming management and operation costs of the primary waste collection, the transfer stations/local collection points, secondary collection/haulage, treatment and disposal. Current costs will form an essential basis for later agreements on the level of government funds and/or service charges to be provided for by these market services. All existing municipal and district authorities should introduce true cost accounting systems for waste management services (identifying all social, hidden and transferred costs). Itemized accounts should identify annual capital and operational costs, creating separate cost centres for each part of the waste management service. Municipal authorities should introduce the concept of sustainability into their financial management procedures, and continue to search for innovative methods of financing. Long-Term Financial Planning The SWM Departments should prepare long-term Financial Plans setting out all areas of required capital and recurrent expenditure, covering the same time period as Waste Management Plans. These Financial Plans should include projected annual costs of investment capital (including repayment rates) and operation and maintenance costs covering staffing, equipment, monitoring, vehicles and infrastructure. Sources and amount of revenue should be identified including the level of required government subsidy and fees from waste generators. Financial Plans should integrate and identify the affordability of proposed future developments for waste management services.

Following the establishment of contracted services, potential contractors should provide similar detailed financial assessments as part of their tender submissions for proposed services. Corporatization Government wishes to introduce the principles of the market into its urban services. Services that have historically been managed and operated by government often resulted in low performance and high management levels. Market mechanisms will be progressively introduced in order to deliver the social and economic benefits derived from improved efficiency and innovation. During the transition process the role of government will change: it will remain responsible for implementing and regulating these services, which are subject to market mechanisms, and will provide essential monitoring and enforcement of required standards as carried out through an independent environmental protection agency. This will ensure that an equally high standard of environmental protection is applied to all. Economic Analysis And Economic Efficiency Economic analysis of alternative collection, treatment and disposal options should be presented within Waste Management Plans. Analysis should include a balanced assessment of capital, operation and maintenance costs of alternative scenarios, including costs of transportation/haulage and different treatment/disposal options. Analysis should also include analysis of risks, social costs and sensitivities. This analysis will ensure that the chosen mix of options represents the best value-for-money for services that provide acceptable levels of environmental protection. All development plans for improved services, should not only address the full direct costs of the service provision, but also additional marginal costs, and/or benefits derived from measures that are designed to manage wastes in the most optimal way. This includes measures designed to minimize waste generation. Waste Recycling The initial ‘funding’ for the future SWM function should be focussed at mechanisms and facilities to reduce the waste taken to dumpsites by increased recycling, and should be undertaken at the same time as any tariff impositions are introduced. There is an awareness of the recycling function already, and so it would be easier


Financial Management Report No: 9 AEA Technology �

politically to press for increased recycling than it would be for the introduction of waste fees, though the latter is an important element of the future funding strategy.


Financial Management Report No: 9 AEA Technology 1

1. Introduction The financial report looks at the present expenditure and funding arrangements of the LGUs in the Metro Manila area as far as obtainable data allows. The records kept within the LGUs are not sufficiently comprehensive to enable the true picture of the financial status of the LGU SWM function to be fully realised. The figures have been obtained from the LGUs themselves, and from visiting these LGUs the consultants were not totally confident that the figures provided gave a complete picture of the situation. This understanding is confirmed by other earlier studies. Furthermore, each LGU funds the SWM function in a different way, and so direct comparisons between LGUs are fraught with difficulty. Nevertheless, the figures supplied by the LGUs have been used as these are the best available, though the above caveat should be considered at all times. In addition, the cash flow for SWM collection and disposal for the next ten-year period has been examined and different scenarios produced. These are analysed, and recommendations made. Some aspects of health care waste are covered, but a fuller description is included in the main specialised report. Future funding arrangements for SWM are examined together with their implications for the financial functions within the LGUs. The financing of government activities and functions has become a key policy issue especially in a developing country like the Philippines. In general, the issue is the ever-rising local expenditures creating intolerable fiscal pressures to local governments. The current scenario demands that the LGUs must find innovative approaches in doing things. They must also have access to financial resources if they are to meet the ever-increasing demand for services. In Metro Manila, one of the major concerns of LGUs is solid waste management.

2. Local Government Units

2.1 Fund Sources

Sources of funds for SWM includes the following: • General budgetary appropriations which include locally-generated taxes, fees and charges; Internal

Revenue Allotment; and other income to which the LGUs are entitled; • External sources which include Countryside Development Fund (CDF); credit finance instruments; local

and foreign-funded loans and grants, and private sector participation; • Cost recovery of SWM-related activities such as collection of waste fees and imposition of fines for

violations; and • National Solid Waste Management Fund (NSWMF). For LGUs, the regular budgetary appropriation forms part of the General Fund. This fund is available to LGUs to pay for capital outlays, personnel services, maintenance and other operating expenses, and debt servicing. For external fund sources, CDF of the LGUs’ respective Congressman are sometimes available for selected capital works or equipment acquisition. Another source of external fund for SWM is from private sector. The BOT (Build Operate and Transfer) Centre under the Department of Trade and Industries (DTI), formerly the Coordinating Council for Private Sector Participation (CCPSP) has ongoing activities for LGUs geared at promoting LGU-Private Sector partnership by providing assistance in the arrangement of financing for BOT projects. Other non-BOT arrangements include service contract, management contract, joint venture agreement, franchise agreement, and lease contract.



In Navotas, for example, a private contractor just recently started operating a controlled dump where portion of the City of Manila’s solid waste is disposed for a fee. Navotas is expecting a significant share from the tipping fee of this facility, reportedly estimated to be about Php1 million monthly. Similarly, a number of loans and grants are available for utilization by the LGUs for their development projects. The lending operations of the various financing agencies (e.g. ADB) are aimed at rapidly urbanizing areas, creditworthy LGUs and social/environmental projects. Several projects that provide technical assistance are currently on going. There are other multilateral and bilateral fund sources that are not SWM-specific but can be availed of by LGUs upon application and approval. The LGUs are mandated by the Local Government Code (LGC) to collect fees for services rendered to its constituents. One of these is the collection of waste management fees from business establishments, where the charges are incorporated in the annual application for business permit. The rates vary per type and capacity of the business establishment, which are embodied in the LGUs Local Revenue Code or the Local Tax Ordinance. While LGUs are allowed by the LGC to adjust its fees every five years, it will be noted that most of these LGUs have not updated their waste fees as allowed by law. From available information on the eight pilot study areas of this TA, at least two LGUs have their Tax Ordinances passed way back in 1992 and another two in 1993. The rates are already outdated and are unrealistically very low. For instance, a big restaurant such as Jollibee or McDonalds pay Php 17.00 per day for waste collection service when the City collects at least a truckload of solid waste every day from each of these type of business establishments. A comparative review of data on waste management fees collected by several LGUs in Metro Manila by business type is presented in Annex 1. Detailed data on LGUs’ collection of waste fees, total local income, SWM expenses and total expenses for year 2001 are presented in Table 1. Subsequent analyses presented in this section are based on this information. Table 1 – Data on LGUs’ Income and Expenditures, 2001

LGU Waste Fees 1 Local Income 2 SWM Expenses 3 Total Expenses 4 Caloocan 20,714 657,435 42,716 1,491,883 Las Pinas 12,820 414,004 22,067 4,467,316 Malabon 3,777 136,081 76,361 1,219,353 Valenzuela 10,427 429,423 2,988 292,836 Quezon City 56,107 2,368,986 52,804 1,358,644 Manila 57,589 2,815,984 574,990 4,558,818 Navotas 1,850 94,290 52,370 432,394 Pateros 406 22,551 94,123 430,373 Marikina 7,053 460,673 91,377 850,009 Taguig 4,040 275,560 160,458 1,814,072 Muntinlupa 7,012 491,287 46,701 1,059,651 San Juan 3,137 292,276 941,828 1,129,801 Mandaluyong 7,247 730,947 357,077 5,270,998 Pasay 5,473 609,778 43,974 778,475 Pasig 11,414 1,519,402 418,577 348,800 Makati 13,835 3,187,442 243,807 734,606 Paranaque 3,114 730,607 182,893 62,186 Notes: Total Waste Fees collected from business establishments. Local Income includes taxes, fees and charges collected by the LGU (excludes IRA, borrowings and grants).

Total expenses for SWM. Total current year expenses of LGU.



Collection of waste management fees from the residential sector appears to be situational. While it is being done in some isolated barangays, LGU survey reveals that the willingness of households to pay for SWM is quite low. The problems in these areas are political, behavioural and structural in nature. Political interventions are sometimes hindering LGUs in imposing user fees. Many LGU constituents have the perception that the LGU is supposed to extend all services, hence introducing fees and charges are next to impossible. For first class subdivisions and villages, waste fees are incorporated in the association annual dues particularly in areas where the association takes charge of waste collection. In some middle class residential areas, people are actually paying small-time haulers (using carts) to collect their waste. These areas are oftentimes inaccessible to the LGUs waste trucks due to narrow roads or being in the coastal areas. The average waste fee is about Php 40.00 to Php 50.00 per household per month. Total waste fees collected by LGUs from business establishments go to their General Fund. For 2001, total waste fees collected vary from a very minimal 0.4 percent to 3.2 percent of total local income. These are presented in Figure 1. Figure 1 – Percentage of Business Waste Fees as to Total Local Income, 2001

3.2%

3.1%

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2.4%

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Manila

Navotas

Pateros

Marikina

Taguig

Muntinlupa

San Juan

Mandaluyong

Pasay

Pasig

Makati

Paranaque

Average All LGUs

Obviously, LGUs in Metro Manila are not recovering the full cost of waste collection service. Since it is only the business sector that is paying waste fees, the rate of recovery of SWM expenses is very low. For 2001, rate of recovery of SWM expenses from waste fees was from (only) 2 percent to 24 percent. The bigger part of the expenses is thus subsidized by the LGUs and included in the General Appropriation for the year. Comparative data is plotted in Figure 2.



Figure 2 – SWM Cost Recovery Rate, 2001

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Republic Act 9003 provides for the collection of fines for violation of the Act. Rule XVII, Section 4 of the Implementing Rules and Regulations of RA 9003 provides that “the collection of fines under the penal provisions of the Act may be conducted by the Local SWM Board/Local SWM Cluster Board or any other authorized body. The collections shall be receipted. Alternatively, the Local SWM Board/Local SWM Cluster Board and/or any duly authorized body shall retain the 40% portion of the collected fees from fines and remit 60% of the same to the Fund, as prescribed herein. Thereafter, the retained percentage is deposited under the Local Fund, the procedure for which shall be defined by the Local SWM Board/Local SWM Cluster Board.” Several of the Metro Manila LGUs have ordinances regulating waste disposal and providing penalties for violation thereof. Some of these are Marikina, Taguig, Las Pinas, Paranaque, and Navotas. For Marikina, the City Council recently passed an ordinance increasing the fine against violators of the local anti littering code from Php 20 to Php 500. The offender will pay the penalty upon issuance of the sanitation citation ticket by members of the waste Management Office. If the offender fails to pay the fine 72 hours from receipt of the ticket, the City Legal Officer will file appropriate charges. The SWM sector for municipal waste is currently characterized by public sector financing and service provision with limited private involvement. Investment decisions are predominantly technology and supply driven with little reference to issues of affordability, financial sustainability or economic efficiency. The supply of public finances bears little direct relationship neither to the development of SWM policy nor to attempts to influence waste generation or the quality of SWM services. It is recognised that the introduction of tariffs is an important element both for cost recovery and for the development of corporatization in the sector (for the definition of corporatization please see section 6.3.2), particularly with respect to the development of private sector operators and investment financing. However it is also crucial to stress that tariffs constitute only one element of a broader cost recovery policy which, to be effective, needs to be integrated into a systematic and comprehensive reform of municipal SWM financial management systems. The collection of some form of SWM tariff, while not commonplace, is developing. At present only commercial and industrial properties are obligated to pay waste fees, but they are at a very low level. Legislation states that these can be changed only every five years. Currently only isolated barangays charge for domestic waste collection and disposal: only two such barangays have been identified during the study. This component



focuses on the development of a suitable cost recovery and financial management policy as the framework for the determination of individual tariffs.

2.2 Fund Application

While some LGUs have a separate SWM office which has its own budget and accounting record, a number of LGUs still have their SWM function incorporated with other departments such as the Mayor’s Office, Administrator’s Office, Environmental Office or simply included in the Non-Office account. In such cases, the true cost of SWM is very difficult to determine. A more accurate data analysis on the cost-efficiency in SWM is only possible if explicit information on expenditure for SWM is made available. For 2001, Metro Manila LGUs’ expenses for SWM varied from about 5 percent to 24 percent or an average of 13 percent of their total expenditures. Details are shown in Figure 3. A bigger percentage of the SWM expense is spent for payments to private hauling contractors. Valenzuela, Malabon and Marikina collect their waste by administration. Figure 3 – Percentage of SWM Expenses as to Total LGU Expenditures, 2001

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Details on the computation of SWM costs, both on a per capita and per weight basis, are presented in Table 2 and likewise shown in Figure 4. The disparity of per capita cost is very significant, ranging from Php 64 per person in Pateros to Php 1,164 per person in Makati. It would appear that the lowest cost per tonne is achieved by the LGUs that collect their waste by administration such as Valenzuela and Malabon. The disparity is true for cost per ton of solid waste collected and disposed. However, it is important to note that the presentation of these data is mainly focused on the level of expenditure for each LGU on SWM. It is not passing judgement on the efficiency and cost effectiveness of SWM operations. There are several factors that affect the level of expense of a certain LGU.



Table 2 - Annual Per Capita SWM Cost, 2001

LGU’s SWM Expenses 1 Total

Population 2 Coverage

Area 3 Per Capita Cost (P)

Waste Generated4

Cost Per Ton (P)

Makati 418,577 449,583 80% 1,164 76,141 5,497 Pasay 243,807 358,670 100% 680 75,930 3,211 San Juan 46,701 118,927 90% 436 22,659 2,061 Quezon City 941,828 2,196,874 100% 429 465,078 2,025 Caloocan 357,077 1,190,087 100% 300 251,941 1,417 Paranaque 182,893 454,579 100% 402 96,234 1,900 Manila 574,990 1,597,841 100% 360 338,263 1,700 Mandaluyong 94,123 281,426 95% 352 56,599 1,663 Pasig 160,458 510,412 100% 314 108,054 1,485 Muntinlupa 91,377 383,331 85% 280 68,978 1,325 Taguig 120,949 472,329 100% 256 99,992 1,210 Navotas 43,974 232,845 95% 199 46,829 939 Las Pinas 76,360 477,791 100% 160 101,148 755 Marikina 52,804 395,316 100% 134 83,688 631 Valenzuela 42,716 490,579 80% 109 83,084 514 Malabon 22,067 342,447 100% 64 72,496 304 Pateros 2,988 58,016 80% 64 9,826 304 Average All LGUs 3,353,114 8,724,695 98% 393 2,047,118 1,695 Notes: Total expenses for SWM (Php). Source: NSO, 2000 Census of Population and Housing. A growth rate of 2.36% was used to estimate 2001.

Percentage of population serviced by LGU waste collection. Projected waste generation at 0.58 kg/capita/day.

Figure 4 – Per Capita SWM Cost, 2001 (Php)

Average All LGUs

Caloocan

Las Pinas

Makati

MalabonMarikina

Muntinlupa

Navotas

Paranaque

Pasay

Pasig

Pateros

TaguigMandaluyong

Manila Quezon City

San Juan

Valenzuela-

200

400

600

800

1,000

1,200

1,400



3. National/Metro Manila Agencies

3.1 Department of Environment and Natural Resources

A National Solid Waste Management Fund (SWMF) was established under RA 9003 as a special account in the National Treasury and to be administered by the SWM Commission. LGUs may avail of the Fund to initiate SWM activities or engagements. The Fund shall be sourced from the following:

• Donations, endowments, grants and contributions from domestic and foreign sources; • Amounts specifically appropriated for the Fund under the annual General Appropriations Act; • Fines collected under Sec. 49 of the Act based on a sharing scheme between the Fund and the

concerned LGU. The Fund shall be used to support the following activities:

• Products, facilities, technologies and processes to enhance proper SWM; • Awards and incentives; • Research programs, information, education, communication and monitoring activities; • Technical assistance and capability building activities.

However, the Fund still has to be established and a start-up fund needs to be sourced. Even the budgetary appropriation for the operation of the Commission still has to be provided by the National Government. For 2002, the Commission is reportedly utilizing the budget of the Environmental Management Bureau (EMB) for its operation.

3.2 Metro Manila Development Authority

3.2.1 Solid Waste Management Function Republic Act No. 7924 stipulates the functions of MMDA that includes the operation and development of sanitary landfills. In line with this function, there are two controlled dump sites being managed by MMDA: Montalban and Navotas. A Memorandum of Agreement (MOA) with the concerned LGU and MMDA specifies the operational arrangement.

• Montalban has a reported total capacity in excess of 5 million cubic metres. To date, it already holds about 1 million cubic metres of waste. MMDA expects to utilize this facility for the next five years. The land is privately owned and is operated by the owner. MMDA pays tipping fee of Php 600.00 per ton. Of this amount, Php 150 goes to the LGU and Php 450.00 to the private operator. MMDA has staff on site (Supervisor and Volume Checker) to monitor the operation.

• The Tanza controlled dumpsite in Navotas has an area of about 11 hectares with a reported capacity

of approximately 0.75 million cubic metres. MMDA pays tipping fee shared by the private operator and the Municipality of Navotas.

3.2.2 Fund Sources The following are the fund sources for MMDA SWM operation:

• General Appropriation • Mandatory remittances of its component LGUs • Internal Revenue Allotment (IRA)



• Operating Revenues which include collection from traffic fines, permit, clearances 3.2.3 Fund Application

• Maintenance and Other Operating Expenses (Php mil.)

Year Php Mil 2000 424 2001 419 2002 451 2003 453

• The annual budgetary appropriation to MMDA is used for solid waste operation, improvement of

leachate treatment and repair of disposal site drainage system. Current budget includes for about 1,800 tons/day tipping fee.

• No expense for personnel services since staff is detailed from other MMDA units. The mandatory

remittances of component LGUs and the IRA (funding from central government to the MMDA) are used for personnel services. MMDA SWM Operation has 52 staff detailed from other units. While the SWM Office has an allocation for 81 permanent positions, these are all vacant. The Department of Budget and Management (DBM) approved these positions two years ago under the reorganization under RA 7924.

• No budget for capital outlays since this is taken from savings from other units/departments or from

the special fund under the Office of the President. For its long-term plan, the current administration is working on obtaining a site in Quezon Province to be developed as sanitary landfill site. It is estimated to cost about Php1.5 billion and will provide for: acquisition of land, transfer station, railway, development of landfill, sorting/recycling area, conveyor and waste treatment facilities.

3.2.4 Existing SWM Programs/Projects A number of loans and grants are available for utilization by the LGUs for their development projects. The lending operations of the various financing agencies are aimed at rapidly urbanizing areas, creditworthy LGUs and social/environmental projects. Similarly, several projects that provide technical assistance are currently on going. There are other multilateral and bilateral fund sources that are not SWM-specific but can be availed of by LGUs upon application and approval. A partial list is provided in Table 3.



Table 3 – On-Going ODA Projects/Facilities on Solid Waste Management Project Title Funding Agency Implementing

Agency Components Total Project Cost

Implementation Schedule

Project Site

Integrated SWM Programme for LGUs in the Philippines

German Agency for Technical Cooperation (GTZ)

Department of Environment and Natural Resources (DENR)

Provision of an integrated SWM programme for LGUs

Regions VI, VII, and VIII

Philippine Environmental Governance Project

United States Agency for International Development (USAID)

DENR Capability building for environmental governance of DENR and LGUs

Northern Luzon, Central Visayas, and Mindanao

Formulation of Ecological SWM Plan for LGUs

Japan Bank for International Cooperation (JBIC)

DENR Formulation of a generic SWM plan for LGUs

2002-2003

Munoz City, Legaspi City, & Butuan City (2002-2003)

Metro Manila SWM Project

Asian Development Bank (ADB)

DENR Capacity Building; RA 9003 Implementation Support to MM LGUs, MMDA and NSWMC; Medical Waste Mgt.; Waste Disposal; Specialist Consultant Support.

8 LGUs in Metro Manila

Public and Private Sectors Convergence for Solid Waste Co-Governance on Urban Poor Communities

United Nations Development Program (UNDP)

DENR Fund support for MRF’s 2002-2004

Laguna (2002-2004)

Local Government Units Support Credit Program

JBIC Land Bank of the Philippines (LBP)

Loan funds to LGUs to construct urban sector infrastructure components such as water supply, drainage, flood control, sewerage, solid waste and other environmental projects.

P 2,282 million 1999-2005 LGUs

LGU Private Infrastructure Development Facility

ADB Coordinating Council for Private Sector Participation (CCPSP)

TA loan for design development of facility and preparation of sample projects; Main facility for funding of infrastructure sponsored by private sector and/or credit worthy LGUs.

Php 120 million 2000-2002 Nationwide



Project Title Funding Agency Implementing Agency

Components Total Project Cost

Implementation Schedule

Project Site

Community-Based Ecological Waste Management

UNDP Metro Manila Development Authority (MMDA)

Provides funding for 10 pilot MRF’s/barangays, capability building, and development of tools.

2002-2004 10 LGUs in Metro Manila

Learning Program in Elementary School

JICA Metro Manila Development Authority (MMDA)

Integrates SWM in elementary curriculum

Makati, MM.

ECOGOV USAEP DENR Capability building and training; Preparation of SWM Plan; Preparation of manuals and IEC materials;

2001-2003 Nationwide (2001-2003)

Local Government Support Program (LGSP)

Canadian International Development Agency (CIDA)

DILG/NEDA Capability building; trainings and study tours; SWM options.

Php 750 million 1999-2005 (Phase 2) Western Visayas and Mindanao LGUs (1999-2005 Phase 2)

Philippine Regional Municipal Development Project (PRMDP)

ADB and AusAID Department of Interior and Local Government (DILG)

Training; study tour; infrastructure support.

Php 1,585 million 1996-2002 Cities of Puerto Princesa, Iligan, Cagayan de Oro, Tagbilaran, Bacolod, Lucena and Iloilo. (1996-2002)

Mindanao Basic Urban Services Sector Project (MBUSS)

ADB DILG and Land Bank of the Philippines (LBP)

Capacity Building and loan funds for infrastructure.

Php 4,000 million 2001-2005 LGUs in Mindanao (2001-2005)

LGU Finance and Development Project (LOGOFIND)

WB Department of Finance (DOF)

Loans/grants for LGU Sub-Projects; TA for LGU Training and Capacity Building; TA for LGU Resource Mobilization

Php 4,000 million 1999-2004 Nationwide (1999-2004)

Environmental Infrastructure Support Credit Program II (EISCP)

JBIC Development Bank of the Philippines (DBP)

Pollution Control, occupational health and safety improvement, use and/or management of natural resources, environmental infrastructure projects, waste treatment and disposal.

Php 8,500 million 2000-2006 Private sector nationwide (2000-2006)



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4. Health Care Waste 4.1 Fund Sources

Regular fund sources of Metro Manila hospitals come from the following:

• National Government Appropriations for general administration, support and operations, and subsidy requirements

• Local government units’ annual budget • Operating revenues (hospital fees and charges).

Metro Manila Hospitals as with regards to fund sourcing can generally be classified as follows:

• National Government Appropriations

1. Department of Health • Regional/Central, e.g.

o East Avenue Medical Centre Jose Reyes Medical Centre • Corporate Board, e.g.

o Philippine Heart Centre o National Kidney and Transplant Institute o Lung Centre of the Philippines o Philippine Children’s Medical Centre o Philippine Institute for Traditional & Alternative Health Care

2. Department of National Defence, e.g.

• PNP General Hospital • AFP Medical Centre • Veterans Memorial Medical Centre

3. Department of Labour and Employment, e.g.

• Seamen’s Hospital 4. Chartered Hospitals, e.g.

• UP-Philippine General Hospital • Tondo General Hospital

• Local Government Units, e.g.

• Ospital ng Makati • Pagamutang Bayan ng Malabon • Ospital ng Maynila

• Private (Board of Trustees)

1. Religious, e.g. • University of Santo Tomas Hospital • St. Luke’s Medical Centre

2. Private Corporation 3. Family Corporation, e.g.

• Fairview General Hospital • Perpetual Help Rizal Medical Centre�



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Aside from hospitals, at least two private companies are likewise involved in the treatment and disposal of medical waste. Most of the private hospitals have contracts with either Chavellier Environ System, Inc. (CESI) or Integrated Waste Management, Inc. (IWMI) for the collection, treatment and disposal of medical waste. IWMI has secured a Php 42 million loan from DBP for the acquisition of pyrolysis and other equipment. The loan is funded under the Environmental Infrastructure Support Credit Program (EISP). The equipment is expected to replace the existing incineration facilities. The wastes to be processed include medical, pathological, infectious and pharmaceutical with daily capacity of 10 tons.

4.2 Fund Applications

Most hospitals do not keep a separate record of expenditures for health care waste management, as this function is usually incorporated in expenses for house keeping, grounds management or general administration and support services. However, estimates are placed at about 1 percent of total operating cost, based on interviews with private hospital staff and the Department of Health However, for government hospitals, the situation is physically worse since in some cases, the medical waste is disposed of together with general waste. The hospital administration has no medical waste management plan since there is reportedly no budget. Funds are given to other priorities such as personnel services, equipment and procurement of medicine and medical supplies. It is important that each hospital has a designated annual budget for the SWM function, and that this is used solely for this purpose. Medical wastes of hospitals with contracts with either CESI or IWMI are collected on a daily or weekly basis and costs are about Php 35 to Php 40 per kilo. The results of a random survey of hospitals show that 75 percent have contracts with one of the two private contractors while the remaining 25 percent dispose of their medical waste by administration. Not all the hospitals were surveyed for this financial data, and only about a fifth of the hospitals responded. Table 4. Medical Waste Disposal

No. of Hospitals Percentage Private Contractor 27 75% Chavellier 17 IWMI 10 By Administration 9 25% Incinerator 6 Other Methods 3 36 100%

5. SWM Collection and Disposal 5.1 Introduction

The costs of collection and disposal operations are taken from section 2.2, and are used here to determine the costs borne by each LGU. This section shows the cash flow projections for the different LGUs over the ten-year period given different scenarios. There are five different scenarios considered:

1. Existing operations continuing as at present – the status quo case 2. The above together with an improved recycling element which can be considered as the future base

case 3. As 2 above, but because of the closure of the landfill sites in Metro Manila, it includes the cost of

haulage to, and the gate costs of, a new sanitary landfill. This is to commence in 2006.



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4. As 3 above, but to commence in 2008. 5. As 3 above, but with an improved recycling operation

All the above have the very conservative assumptions of a 1% increase in annual population, together with a 1% economic growth rate. The latter is assumed to equate to extra waste generation. All costs and prices are at constant 2003 figures. 5.2 Existing Operations

Annex 3 shows the cash flow projections for the period 2003 – 2013 assuming that there is no material change in the method of operations. This cash flow projection is based on the latest figures produced by the LGUs and extrapolated using the population and economic growth rates mentioned above. It must be emphatically stressed that the figures produced by the LGUs do not necessary state the true picture as the records kept by these LGUs are not based on cost centres, and so the costs produced are imprecise. Several departments can cover the actual costs of SWM, and these records not necessarily coordinated. In addition, the records kept by the LGUs are not consistent between each other, and so comparisons between each LGU, even though inevitably made, are not necessarily accurate as each LGU is probably measuring the cost in a different manner. 5.3 Existing Operations with Reductions due to Recycling Improvement

This scenario is based upon the existing operation, but is assumed to have an improved collection of recyclables, together with an element for increased collection efficiency. The sale of the recyclables is assumed to cover the cost of its separation, with the net benefit being the corresponding decrease in waste being transported to the dumpsite. The recycling efficiency is assumed to take the current recycling at 10% to 25% over the period to 2005. From 2006 onwards, this rate was assumed to drop to a 1% per annum improvement in recycling. In addition, collection efficiency was assumed to improve by 1% per annum throughout this 10-year period. This can be considered the base case for the following scenarios. The results of this analysis are shown in Annex 4. 5.4 Landfill Closure Case 1

RA 9003 states that all landfill sites, both controlled and uncontrolled, must be closed by year 2006. Annex 5 shows the cost for SWM, assuming that all the current landfill sites are closed, and that all wastes have to be hauled to a sanitary landfill site outside Metro Manila. The marginal cost for this is assumed to be an extra US$25 per tonne to allow for this extra transport and gate fees. All other assumptions are based on section 5.3 above. 5.5 Landfill Closure Case 2

This is identical to the landfill closure case 1, except that it is delayed two years, and is shown in Annex 6. To enable a sanitary landfill to be designed, constructed and in operation by 2006, is considered to be a somewhat optimistic situation, and so a second scenario was developed based on the landfill sited being closed in year 2008 to enable all the engineering work to be undertaken. All other assumptions remain the same.



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5.6 Further Increased Recycling

Another scenario was developed on the case described in section 6.4 above. In this case, it was assumed that there was greater recycling, and this rate was increased from the 1% in that scenario to an increased figure of 5% increase per year. This is shown in Annex 7.

5.7 Comparison between the different cases

The following Figure 5 shows the comparative costs over the ten-year time scale. Figure 5 SWM Projected Annual Costs

SWM Projected Annual Cost

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Year

Php

mill

ion

Existing Existing plus reductionLandfill Closure Case 1 Landfill Closure Case 2Case 1 with more recycling

This figure dramatically shows the rapidly escalating cost of SWM if it continues in its present manner and no mitigating action is taken. By assuming a reduction in deposited waste due to an increase in recycling, the existing scenario is changed and becomes an almost constant figure. This shows that the reduction in deposited waste is fundamental to the budgets for the LGU SWM operations. This is further reinforced in a later scenario. Under legislation, the current landfills will have to be closed, and the waste transported to new sanitary landfills. The cost of this is shown by the two graphs shown above with a step increase. This step increase is due to the considerable extra costs of haulage of the solid waste to the new sanitary landfills and their tipping fees, and results in an approximate increase of two thirds over the base case once this new scenario has commenced. The only difference between these two scenarios is the two-year delay in the start of the operations.



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The final scenario is based on the year 2006 case but with an increased rate of recycling from an annual increase of 1% to an annual figure of 5%. This shows an initial increase because of the extra haulage costs but then, as a result of the impact of the additional recycling, there is a dramatic reduction in annual SWM cost, and from these figures, it would appear that the costs of this scenario would break even with the existing cost regime in about the year 2012. It is apparent from the above graphs that the reduction in the amount taken to landfill is a fundamental factor in the cost of the SWM function in Metro Manila. This is evidenced both with the existing case that is analysed with and without a recycling reduction, and with the even more spectacular reduction illustrated in the scenario for year 2006 when new sanitary landfill is introduced which has increased recycling and with this reduction of material taken to landfill, there is a sharp fall in the cost over the years. The initial ‘funding’ for the future SWM function must be to reduce the waste taken to tip by increased recycling, and must be undertaken at the same time as any tariff impositions are introduced. There is an awareness of the recycling function already, and so it would be easier politically to press for increased recycling than it would be for the introduction of waste fees, though the latter is an important element of the future funding strategy. This factor is described in greater detail in the following section.

6. Tariff & Financial Management Reform 6.1 Current Situation

Privatisation has been recognized as a necessary objective for public sector utility services. Major changes have already occurred in the water sector with the electricity sector currently being addressed. The stated objectives of these reforms for SWM, with respect to financial aspects, are to:

• Develop mechanisms allowing for financially affordable and sustainable development of SWM; • Increase the level and quality of SWM service provision; • Increase financial resources through user charges/tariffs, but also private sector participation; • Influence future waste generation patterns.

Reform of SWM financing must be put in context with the current unsustainable situation, characterized by:

• Public budget constraints that hamper the large scale development of comprehensive SWM infrastructure which fully addresses the need for safe and sanitary treatment of waste and reduced environmental impact;

• The absence of viable and uniform cost recovery mechanisms that do not facilitate the widespread market entry of private sector investors/service providers nor the development of viable alternative financing mechanisms;

• The low efficiency level of service provision due to a lack of performance targets, financial accountability and incentives to change;

• Investment decisions that are driven by technology and supply criteria as opposed to affordability, suitability and long-term sustainability. This often results in the wastage of scarce public funds, the development of inappropriate systems and no overall increase in the quality of service provision;

• Waste generation patterns not being influenced by financial instruments, and the true social and economic cost of waste management, with a view to reducing and minimising waste.

• SWM continues to be regarded and valued as a free public good as opposed to being valued using economic criteria. This results in wastage and little real incentive to improve services from minimum to optimal levels

It should be stressed, that the sole introduction of tariffs is not the ultimate solution and will not, in itself, solve the above unless it is placed within a broader strategy of financial reform.



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6.1.1 Review of Current Tariffs and Proposed Guidelines This section represents a generalized review of the existing situation, and it should be stressed that the Consultant is unable to provide a comprehensive overview of required tariff charge levels, each of which will be unique to each urban centre. The views expressed below are therefore the Consultant’s best opinion based on the information available. Collection of some sort of SWM tariff occurs but is restricted to:

• The collection of maintenance fees by private contractors in modern housing units which include janitorial work and waste collection;

• Generalized tariffs on a variety of waste generators in the industrial and commercial sectors, and no collection in the domestic sectors.

Tariffs for commercial and industrial organisations are currently generally set substantially below full cost recovery levels. The imposition of cost recovery for both this and the domestic sector is designed to allow a reduction of public funding, greater focus on environmental related investments, the development of a SWM market, and to encourage private (local and foreign) investment. Tariffs should follow the principle of eventual full financial cost recovery but there is a realistic recognition of the difficulties in achieving this based on inequalities of ability to pay. Items that could be considered are:

• Whether the tariff will cover the entire SWM chain or just some of its constituent parts. • What the pace of tariff increase should be based on, and the speed of progression from simple

coverage of operational costs to full cost-recovery; • The permissible profit level. Currently this is referred to as low or ‘minimal’ on the basis that SWM is a

public utility. As discussed later, it is strongly recommended to introduce flexibility in order not to diminish the value of tariffs in attracting private commercial/investors. The imposition of strict limits would have this affect and can be avoided by introducing better financial assessment and public scrutiny in investment decisions and tariff setting;

• The collection method, being either as a part of an existing utility charge or a separate/dedicated SWM system. At present there are three different methods of fee collection in five different municipalities out side the Metro Manila area. These are:

o City of Olongapo that has its waste fees collected alongside the electricity charges. o Municipality Dinalupihan that has its waste fees collected alongside the water charges. o City of Iloilo that has its waste fees collected alongside its property taxes. o Lipa City collects Php10 per month billed with water supply o Batangas collects Php10 per month billed with electricity bills

Other key aspects include that:

• Municipalities should be free to determine the domestic tariff rate that can be applied, either on a per capita or household basis, or on a surface area basis, and it is anticipated that this will be a flat rate for domestic properties. The variable charge for industrial and commercial properties is set nationally.

• Tariff levels should be included in municipal master plans that in future should include issues of affordability, particularly with respect to cost recovery options. It is envisaged that public funding will decrease in relation to increases in cost recovery;

• Cost recovery; tariff levels or revenue streams may not be guaranteed by local government and such a

mechanism should not be used as an incentive for private investment. The principal financial incentive should be tax concessions.



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6.1.2 Strategic Direction Given the current situation and the move towards corporatization, three interdependent issues will be focussed upon:

1. Tariffs; 2. Corporatization of existing services and the development of private sector service provision and

financing; 3. Financial management reforms, as required to support the previous two issues.

While the importance of introducing tariffs is recognized as a priority, the need to adopt a holistic approach is stressed, particularly in order to ensure that the maximum benefit is derived from the tariffs and from the financial and operational benefits of the private sector. 6.1.3 Strategy Components This section will present the 3 components in detail, and the approach can be summarized in Table 5 as follows: Table 5 Strategic Components

Strategy Component Item Notes Tariff Development Cost Recovery

Policy Tariffs represent only one aspect of cost recovery. Cost recovery should aim to be sustainable. Transparency and open accounting essential.

Tariffs Tariffs have wider role than simple cost recovery. Implementation requires: tariff principles, structure, progressive nature, and calculation and approval mechanism. Must be placed in context of wider financial reform.

Corporatization & Private Sector Involvement

Public Funding & Subsidisation

Full cost recovery not realistic goal – requires continued public funding Public funds should be used strategically – this is important role for state

Corporatization as First Step to Privatisation

Government must create market environment. Before service contracts awarded operators must adopt corporate accounting and governance.

Promoting & Managing Private Sector Participation

State has important role in developing SWM market. Must create investment climate through use of variety of tools. Must monitor private sector.

Financing SWM Development

Several financial sources available. State role is to assist in effective financial engineering

Financial Management True Cost Accounting

Base for all tariff and cost of service development. Not currently applied.

Reform Social Costs Must be considered when developing tariffs. Financial

Management & Monitoring

Likely to result in cost savings. Cannot monitor effectively without effective financial systems.

Financial Planning

Financial considerations of sustainability and affordability must be included in budget allocations.



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6.2 Tariff Development

The introduction of tariffs for public utility services must account for the fact that they are traditionally regarded as public goods, and therefore public perception and ability and willingness to pay will play important roles in the successful introduction of tariffs. As a result, a successful tariff policy must account for a wider range of issues, over and above cost recovery and financial efficiency, including:

• Ability to pay, and with the goal for progressive increases in charges over time; • Demonstration of value for money; • The introduction of transparency and accountability in public accounts; • User differentiation.

Therefore tariffs must form an integral part of a larger framework of reforms needed to support the effectiveness of tariff collection, as well as effective use of internal and external funds. This section will firstly discuss the development of a cost recovery policy.

6.2.1 Tariff Structure

6.2.1.1 Industrial and Commercial

The only current tariff structure is for commercial and industrial waste generators. This is in universal operation and the categories and rates are laid down in statute, and the tariff structures for selected Metro Manila LGUs are shown in Annex 1. There are 18 different sub categories, and all elements of the charging rate are specified, and these fee rates can only be changed every five years. Thus, there is no flexibility in the current system. This is not a direct problem as all categories are defined and can be used as a basis in the future. The only problem currently is that the rates as stated by statute are unreasonably low and in many instances do not cover the current cost, yet alone the full operating cost. It is important that these rates are revised immediately to a level that covers the full operating cost. There are many ways that this can be done:

• The present system can be used, though the rates need to be thoroughly revised • Usage based charging is also another way of funding. By charging by the dumpster or other similar

type of container, there is a direct linkage between the polluter pays principle and the fee charged. 6.2.1.2. Domestic

A few LGUs operate some sort of domestic tariff, either for the entire LGU or in most cases, in selected communities or barangays. From a limited feedback, it appears that households acknowledge the necessity to pay for the service. Where this is done, it is on the household flat rate basis rather than on any usage based tariff, as the latter would be extremely difficult to enforce, and would therefore be unworkable. It is recommended that this approach become universal amongst all the LGUs in Metro Manila, and that it should be charged out at a flat rate per household. There will need to be some discussion amongst the different LGUs as to how this is to be enforced. It could be:

• A uniform amount for every household in Manila, or • A rate dependant on the value of the house or apartment.

The latter would be fairer as it would allow the richer households to pay more as they would probably generate more waste than the poorer households. Also there would be an additional benefit in so much that these households could possibly subsidise the lower income group.



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6.2.1.3 Charging mechanisms, Pay as you throw Principle Traditionally waste producers pay for waste collection through property taxes or a fixed fee, regardless of how much—or how little—waste they generate. Pay-as-you-throw (PAYT) breaks with tradition by treating waste collection services just like electricity, gas, and other utilities. Households, commercial or industrial users pay a variable rate depending on the amount of service they use. Most communities with PAYT charge residents a fee for each bag or can of waste they generate. In a small number of communities, residents are billed based on the weight of their trash. Either way, these programs are simple and fair. The less individual’s throw away, the less they pay. Communities where this is practiced have reported significant increases in recycling and reductions in waste, due primarily to the waste reduction incentive created by PAYT. Less waste and more recycling mean that fewer natural resources need to be extracted. In addition, greenhouse gas emissions associated with the manufacture, distribution, use, and subsequent disposal of products are reduced as a result of the increased recycling and waste reduction PAYT encourages. PAYT is an effective tool for communities struggling to cope with soaring municipal solid waste management expenses. Well-designed programs generate the revenues communities need to cover their solid waste costs, including the costs of such complementary programs as recycling and composting. Residents benefit, too, because they have the opportunity to take control of their waste collection bills. One of the most important advantages of a variable-rate program may be its inherent fairness. When the cost of managing waste is hidden in taxes or charged at a flat rate, those who recycle and prevent waste subsidize their neighbours' wastefulness. Under PAYT, people pay only for what they throw away. Pay as you throw, can be a variable rate or a unit pricing system, it allows residents, residential units, commercial customers, such as shopping malls and industrial users to pay for a waste collection service based upon the amount of waste they generate. Most schemes operate on the principle of the more you use the more you pay. This works with a flat rate charged per container of a specific size per residential/commercial/industrial user, with any additional container required by the user then charged at a much higher rate. Most experience suggests that a “one container” service becomes the preferred way. Some systems allow residents etc to haul the waste themselves; they continue to pay the mandatory collection fee and are then charged at the transfer station, MRF, junkshop etc., a fixed rate per tonne or per container size. There are various methods in common usage for actually getting the payments though charging through other utility service providers. A further simple payment mechanism is though the advance purchase of the actual bags, containers or for a “tag” which can be purchased from the Town Hall, or from a Barangay Captain etc which is then fixed to the container or bag. These tags can then be collected by the refuse collector, at the point of collection, at the disposal site etc., and can then be reused, resold for further use. The use of different types or colours of tags is also a way for charging different rates for different types of waste, or for different container sizes. 6.2.2. Cost Recovery Policy A principal objective of privatisation is to increase available funds while decreasing the burden of SWM on public resources. This requires direct revenue generation from waste producers and users of services or “direct cost recovery”. Cost recovery is itself only one of several financing possibilities that need to be considered on its own merit, and to be combined appropriately with other economic instruments. Howeve

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