Cost Sharing Framework for Solid

Waste Management
2008

This report results from regional consultations attended by local government unit representa-
tives, as well as consultations and review by a number of government agencies, including the
National Economic and Development Authority, the Municipal Development Fund Office
under the Department of Finance, and the Secretariat of the National Solid Waste Manage-
ment Commission. The NEDA Joint Infrastructure Committee, the Inter-agency Coordinating
Committee Technical Board, and the NSWMC have approved this report in principle. The
institutional arrangement with the MDFO and the loan portfolio have been approved in
principle by the Policy Governing Board of the Department of Finance, although the cost-
sharing framework remains under review because of its budgetary implications.

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 TABLE OF CONTENTS

ACKNOWLEDGMENTS ................................................................................................ vi

ACRONYMS USED ........................................................................................................ vii

EXECUTIVE SUMMARY .............................................................................................. viii

1 INTRODUCTION ...................................................................................................... 10

1.1 Background and rationale.................................................................................. 10

1.2 Objectives .......................................................................................................... 11

2 CONCEPTUAL FRAMEWORK ............................................................................... 12

3 METHODOLOGY ..................................................................................................... 16

3.1 Projecting solid waste generation ...................................................................... 16

3.2 Estimation of revenues and costs ...................................................................... 17

3.3 Estimating national government-local government cost-sharing ...................... 17

3.4 Financing mechanism ........................................................................................ 18

4 STATUS OF SWM IN THE PHILIPPINES .............................................................. 19

4.1 Legal framework ............................................................................................... 19

4.2 Solid waste production ...................................................................................... 20

4.3 Compliance with RA 9003 ................................................................................ 22

5 BENEFITS AND COSTS OF SWM.......................................................................... 24

5.1 Health and environmental costs of solid waste pollution .................................. 24

5.2 Financial costs and revenues from SWM services ............................................ 29

5.3 Benefit-cost analysis of integrated SWM .......................................................... 40

6 LGU FINANCING MECHANISMS FOR SWM ..................................................... 46

6.1 Trends in LGU finance and implications on SWM ........................................... 46

6.1.1 Traditional sources of finance.............................................................. 46

6.1.2 Non-traditional sources of finance ....................................................... 50

6.2 Strategies available for SWM funding .............................................................. 51

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 6.2.1 Capital Investment Costs ..................................................................... 51

6.2.2 1996 LGU Financing Framework ........................................................ 52

6.2.3 ODA grants and loans .......................................................................... 52

6.2.4 Private Sector Participation through BOT and other schemes............. 53

6.3 Recurrent costs .................................................................................................. 55

6.4 Cost-sharing arrangements and their impact on the

national government’s fiscal position ............................................................... 55

6.4.1 Legal Basis for Financing/Funding Support ........................................ 55

7 PROPOSED REVISION OF THE COST-SHARING FRAMEWORK ................... 62

7.1 Cost-sharing framework .................................................................................... 62

7.2 An alternative cost-sharing arrangement to encourage LGU clustering .......... 66

7.3 Possible vehicle for channeling the national government share ........................ 67

7.4 Possible institutional arrangements ................................................................... 68

7.5 Proposed criteria and process ............................................................................ 68

7.5.1 Criteria for availment of the SWM Fund by LGUs ............................. 69

7.5.2 Process for availing of the SWM Fund................................................ 70

8 NEXT STEPS ............................................................................................................. 73

References ......................................................................................................................... 75

List of Figures

Figure 1. Conceptual framework. ..................................................................................... 14

Figure 2. Solid waste exposure pathway. .......................................................................... 24

Figure 3. Revenue source for SWM activities in %, selected LGUs. ............................... 47

Figure 4. SWM expenditures in %, in selected LGUs ...................................................... 50

List of Tables

Table 1. Projected urban population, by income class (in 000’s). .................................... 20

Table 2. Projected solid waste production, by income class. ............................................ 21

iii
Table 3. Composition of solid waste in selected municipalities and cities (in percent). .. 22

Table 4. Type of solid waste disposal facility by region, as of 2nd quarter 2007. ............. 23

Table 5. Disease fraction attributed to water, sanitation, and hygiene.............................. 25

Table 6. Estimated population at risk of diseases due to active dumpsites, 2006. ............ 26

Table 7. Estimated incidence of acute watery diarrhea due to solid waste

pollution, 2006. ................................................................................................................. 26

Table 8. Estimated cost-of-illness for acute diarrhea cases attributable to solid waste. ... 27

Table 9. Estimated cost of clean-up and flood control, 2006............................................ 28

Table 10. DAO 2006-10 guidelines in categorizing disposal facility. .............................. 29

Table 11. Distribution of municipalities and cities based on DAO 2006-10. ................... 30

Table 12. Estimated cost of a sanitary landfill facility, 2006............................................ 31

Table 13. Estimated cost of a disposal facility, by category. ............................................ 32

Table 14. Estimated total investment for solid waste disposal facilities following
DAO 2006-10 category, by income class, 2010-2025 (in million pesos, 2006 prices) .... 32

Table 15. Estimated cost of SWM investment for cities, by income class,
2006 (in thousand pesos). ................................................................................................. 33

Table 16. Estimated cost of SWM investment for municipalities, by income

class, 2006 (in thousand pesos). ........................................................................................ 33

Table 17. Proportion of cities’ additional SWM investment to local government

income, 2006 (income in thousand pesos). ....................................................................... 34

Table 18. Share of SWM investment of the municipal income, 2006. ............................. 35

Table 19. Share of the internal revenue allotment (IRA) to total operating income
of local government units, 2006 (in thousand pesos). ....................................................... 35

Table 20. Estimated maintenance and operating expenses of a SWM facilities

complying with RA 9003, cities, by income class, 2006 (in thousand pesos). ................. 36

Table 21. Total investment costs as percentage of local income, cities by

income class, 2006 (in thousand pesos). ........................................................................... 36

Table 22. Total investment costs as a percentage of local income, municipalities

by income class, 2006 (in thousand pesos). ...................................................................... 36

Table 23. Total investment costs as a percentage of local income, cities and
municipalities by DAO category, 2006 (in thousand pesos)............................................. 37

Table 24. Local government cost of implementing SWM activities, 2006....................... 39

Table 25. Local government net revenue from SWM services, 2006. .............................. 40

iv
Table 26. Present value of financial revenues and costs of a SWM Program, 2006. ........ 42

Table 27. Net present value of economic benefits and costs from SWM
investments, 2006. ............................................................................................................ 44

Table 28. Comparison of IRA appropriations and obligations, 1998-2004

(billion pesos). .................................................................................................................. 47

Table 29. Mismatch between revenue sources and expenditure needs of LGUs. ............. 48

Table 30. Waste generation and budget allocation for SWM by LGU. ............................ 49

Table 31. Estimated LGU subsidies for SWM services (in million pesos, 2004)............. 51

Table 32. Summary of BOT and similar projects as of May 2006. .................................. 54

Table 33. National government-LGU cost-sharing policy for brown

environment projects. ........................................................................................................ 59

Table 34. External effects and potential for internalization by LGUs. ............................. 60

Table 35. National government share of the cost of new SWM investment
under the current DOF scheme (in thousand pesos, 2006). .............................................. 61

Table 36. The cost per LGU for new SWM investment under the DOF cost-sharing
scheme, 2006 (in thousand pesos). ................................................................................... 61

Table 37. Proposed national government cost-sharing scheme. ....................................... 63

Table 38. Estimated national and local government shares in new SWM investments
under the proposed cost-sharing scheme (in thousand pesos, 2006 prices). ..................... 64

Table 39. Estimated national and local government shares in SWM investments
(in thousand pesos, 2008 prices). ...................................................................................... 64

Table 40. New SWM investment cost and grant per local government unit (in thousand pesos,
2008 prices)....................................................................................................................... 64

Table 41. Cash flow coverage ratios for cities, by income class, 2006. ........................... 65

Table 42. Estimated number of disposal facilities and clusters. ...................................... 66

Table 43. Types of projects and facilities under the cost-sharing framework. ................. 70

v
ACKNOWLEDGMENTS

This report is a product of the National Economic and Development Authority and the
National Solid Waste Management Commission of the Government of the Philippines, and
staff of the International Bank for Reconstruction and Development. It was funded by the
Public-Private Infrastructure Advisory Facility, a multi-donor technical assistance facility
aimed at helping developing countries improve the quality of their infrastructure through
private sector involvement. For more information see http://www.PPIAF.org.
The authors would like to thank the following for their kind cooperation in providing ac-
cess to the information used in this study: Deputy Director General Rolando G. Tungpalan,
Assistant Director General Ruben S. Reinoso, Jr., Mr. Elmer H. Dorado and Ms. Dulce Agnes
S. Marqueza of NEDA, Executive Director Zoilo Andin, Deputy Executive Director Emeilita
Aguinaldo, Delia Valdez of the National Solid Waste Management Commission Secretariat.
Thanks are due also to Allan Rotman, Marianne delos Angeles, Sandra Cointreau-Levine,
Helen Habulan, the NEDA Technical Board and INFRACOM who collaborated in providing
valuable comments to this study. Finally, the authors would like to thank the Public-Private
Infrastructure Advisory Facility for its financial support.

Contact Information:

R. Mukami Kariuki, Local Government Platform Coordinator

The World Bank-Philippines: rkariuki@worldbank.org, Tel. +63 2 9173065

Christopher Rey Ancheta, Operations Officer

The World Bank-Philippines: cancheta@worldbank.org,Tel. +63 2 9173075

vi
ACRONYMS USED

BCA Benefit-Cost Analysis

BOT Build-Operate-Transfer
CAR Cordillera Administrative Region
COA Commission on Audit
DAO Department Administrative Order
DENR Department of Environment and Natural Resources
DOF Department of Finance
DOH Department of Health
ECC Environmental Compliance Certificate
IRA Internal Revenue Allotment
LGU Local Government Unit
MDFO Municipal Development Fund Office
MRF Materials Recovery Facility
NCR National Capital Region
NEDA National Economic and Development Authority
NSCB National Statistical Coordination Board
NSO National Statistics Office
NSWMC National Solid Waste Management Commission
ODA Official Development Assistance
RA Republic Act
SLF Sanitary Landfill
SWM Solid Waste Management
WHO World Health Organization

vii
EXECUTIVE SUMMARY

Republic Act 9003, the Ecological Solid Waste Management Act of 2000, pro-
motes effective solid waste management (SWM) in the country through measures for
avoiding the generation of solid waste, reducing waste, and the final, safe disposing
of waste. The Act places local government units or LGUs in the forefront of SWM
activities. To date, however, most LGUs find it difficult to comply with the law.
Among the 1,610 cities and municipalities in the country, only a few have approved
ten-year SWM plans and fewer than 20 LGUs have safe disposal facilities. The most
often cited barriers to compliance are lack of technical capabilities and financial
constraints.
This report is concerned mainly with the problem of inadequate SWM financ-
ing. Its main premise is that the solid waste problem in the country continues to
worsen and that this aggravates the environmental and health costs or externalities
associated with improperly managed and disposed solid wastes. These costs have
significant local and national impact. For example, by factoring in medical expenses,
hospitalization costs, and lost income alone, this study estimates that in 2006, the
cost-of-illness for acute diarrhea cases attributable to solid waste could be as high as
Php 800 million.
This justifies the report’s main recommendation, which is for a revised cost-
sharing framework that can channel financial support from the national government
to LGUs that urgently need to make new investments in improved SWM programs to
meet environmental standards in order to protect public health and the environment.
National government assistance is necessary to cover the cost of externalities because
most LGUs, on their own, simply cannot raise the funds for ecological SWM pro-
grams. To install an ecological SWM program that complies with RA 9003, an LGU
must contend with high capital requirements, investment and recurrent costs associat-
ed with SWM services, and the low willingness to pay of citizens for SWM services.
This study estimates that additional investments in SWM to comply with RA
9003 would be approximately Php3.98 billion for cities (excluding Metro Manila), of
which Php3.1 billion would be needed by 1st Class cities and highly urbanized cities.1
Municipalities would require a total of Php973.2 million of additional SWM invest-
ments. Using the 2006 LGU financial statements submitted to the Commission on
Audit, these investments would eat up most if not all of the net operating incomes of
LGUs. For cities, the additional investments would be as much as 23% of the Internal
Revenue Allotment (IRA) and as much as 45% of net operating income. For munici-
palities, the new investments would require as much as 25% of IRA and as much as
160% of their net operating income.
These large investments will have tangible social and economic returns. Using
benefit-cost analysis, this study offers three benefit scenarios based on avoided costs

1
See Table 14, page 31.

viii
over a period of 15 years: the lowest, a business-as-usual scenario, would result in
benefits valued at over Php 130 million; the medium scenario would result in Php 2
billion worth of benefits; the high scenario would result in benefits amounting to Php
3.6 billion. The cost-benefit analysis shows that there is an economic value, aside
from environmental benefit, to the country to encourage all LGUs to implement RA
9003.
As recommended in this study, the revised cost-sharing framework will make all
LGUs – regardless of income class – eligible for national government support. Based
on its financial analysis, the study proposes that national government share in SWM
investments be 40%, 25%, and 20% for 1st to 2nd, 3rd to 4th, and 5th Class cities,
respectively. For municipalities, the proposed national government shares are 20%,
40%, and 50% for the corresponding income classes (this is consistent with Depart-
ment of Finance policies on national government-LGU cost-sharing for SWM
projects).
The additional investments in SWM would amount to Php4.49 billion for cities
and Php3.21 billion for municipalities. The national government share of this invest-
ment would be approximately Php2.706 billion in 2008 prices. Of the Php2.706
billion, Php1.7 billion can be attributed to the proposed inclusion of 1st to 4th Class
cities. The main vehicle for financing these new investments is the National Solid
Waste Management Fund. Provided for by RA 9003, the Fund currently exists only
on paper. There is a need for the national government to activate it, beginning with
the Php20 million seed money provided for by law. The currently healthy fiscal
position of the national government raises the prospect of freeing funds to build up
this Fund.
In terms of institutional arrangements, the study’s recommendation is for the
National Solid Waste Management Commission to take the lead, as provided by RA
9003, in the technical review of LGU cost-sharing proposals. The Municipal Devel-
opment Fund Office under the Department of Finance is proposed as the office to
perform the review of the net financial capacity of LGUs, fund management, and
cashiering services since it has the experience and expertise.

ix
1 INTRODUCTION

1.1 Background and rationale

Republic Act 9003 (RA 9003), the Ecological Solid Waste Management Act of
2000, provides measures for avoiding the generation of waste, reducing waste, and
the final, safe disposing of waste. The law reiterated that various levels of local
government units or LGUs have the main responsibility for solid waste management
(SWM). However, many LGUs still have not yet complied with the law’s provisions.
For example, among the country’s 1,610 cities and municipalities only a few have
approved ten-year SWM plans. Less than 20 LGUs have safe solid waste disposal
facilities.
Other than the lack of technical capability, the reason often cited by LGUs for
not complying with RA 9003 is the high cost of providing integrated SWM services,
which the law requires. Under RA 9003, LGUs can collect user fees to enable them to
recover the full cost of SWM services by transferring the cost to citizens who demand
these services. However, most LGUs have been reluctant to introduce fees and
charges that can cover all SWM costs. This results in highly subsidized SWM
programs financed through the annual Internal Revenue Allotment (IRA) of LGUs.
RA 9003 also provides for establishing a Solid Waste Management Fund to be
built up from fines, penalties, grants, donations, and the annual General Appropria-
tions Act. The Fund is intended to catalyze broad-based, large-scale SWM interven-
tions. The Fund can cover: (a) products, facilities, technologies and processes to
enhance proper SWM; (b) awards; (c) incentives; (d) research programs; (e) infor-
mation, education, communication and monitoring activities; (f) technical assistance;
and, (g) capability building activities. To date, the Fund has not been established and
its guidelines have yet to be put in place.
In 2004, the Department of Finance (DOF) issued a memorandum that outlined
the government’s financing policy framework and specified a national government-
local government cost-sharing arrangement. Under this framework, 1st to 4th Class
cities are not entitled to grants when implementing brown environment activities such
as SWM. The reason for excluding SWM is that – with the exception of LGUs facing
an impending fiscal crisis – 1st to 4th Class LGUs are considered capable of recover-
ing the full cost of their SWM services.
However, the reality is that most LGUs face financial constraints, high capital
investment and recurrent costs associated with SWM services, low willingness of
citizens to pay for SWM services, and associated environmental and health conse-
quences of improperly managed solid waste. In addition, as much as 30%-40% of the
volume of waste which LGUs have to manage come from street sweepings, parks and
other open spaces as well as waste illegally dumped in waterways and vacant lots,
which cannot be attributed to a given source from whom fees could be collected.
There is an urgent need, therefore, to review the national government-local govern-

10
ment cost-sharing framework in order to arrive at a more realistic arrangement that
would allow LGUs to finance SWM services adequately to meet environmental
standards set to protect public health and the environment.

1.2 Objectives

Overall, the objective of this study is to provide help in developing a more ro-
bust cost-sharing framework. The framework would let the national government
assess the SWM financing needs of LGUs and create incentives that would encourage
them to invest in SWM projects consistent with the requirements of RA 9003. The
team that carried out the study and prepared this report conducted preliminary
meetings with LGUs and national government agencies, after which it drafted a
working paper to aid discussions in several consultation and consensus-building
workshops. These workshops helped identify important elements of a cost-sharing
framework for SWM services, including options on how best to provide incentives to
increase private sector participation.
This report of the results of the study does the following:
a) Calculates potential benefits and costs to help policymakers determine
whether SWM is a worthwhile strategy;
b) Presents alternatives for funding SWM projects, once a determination is
made that SWM has net benefits (crucial to this, the study computes the fi-
nancing gap of LGUs and justifies the need for national government interven-
tion);
c) Reviews the applicability and practicability of the Department of Finance’s
national government-local government cost-sharing arrangement for SWM
projects;
d) Develops a cost-sharing framework characterized by an appropriate financing
mix (national government-LGU-private sector) for each SWM service to en-
courage private sector participation; and,
e) Proposes a strategy and detailed action plan for implementing the cost-
sharing framework.

11
2 CONCEPTUAL FRAMEWORK

There are three major justifications for cost-sharing in the SWM sector. These
are: (a) the high environmental and health costs or externalities associated with
improperly managed and disposed wastes; (b) equity considerations; and, (c) econo-
mies of scale associated with SWM services. Improperly managed and disposed solid
waste can result in environmental degradation and affect human health and safety.
For example, leachate from waste material can pollute ground and surface water and
cause disease. Litter that ends up in coastal waters can affect marine life, and waste
thrown into waterways can aggravate flooding and diminish the aesthetic value of
rivers and lakes. Waste dumps release methane gas, which is a very potent green-
house gas in addition to contributing to air pollution.
The externalities associated with solid waste pollution expose not only the host
or on-site area but also neighboring areas, and the entire country to associated health
and productivity impacts. Although the cost of management is borne by the host
LGU, the benefits from proper management are enjoyed by society as a whole. Thus,
given the social costs and benefits of externalities of efficient SWM management,
cost-sharing by the national government is justified.
In the Philippines, most LGUs still use open dumpsites as the final disposal site
for municipal solid waste. Financially, this is the least costly method but it does not
address the environmental, social, and economic costs associated with improperly
disposed and treated waste. The alternative – fully engineered sanitary landfills – are
expensive and beyond the capacity of many LGUs to finance from traditional sources.
Studies like that of Laplante (2003), Sumalde (2004), and Nippon Koei Co., Ltd.
(2006) show that there are large financial gaps in the provision of SWM services by
LGUs.
Laplante’s 2003 study shows that there are large economies of scale in SWM
services. The cost per ton of solid waste of a fully engineered, integrated sanitary
landfill service is lower when the volume of solid waste managed is larger. For this
reason, a smaller number of large facilities makes more sense than many small ones.
However, the investment cost of larger facilities is extremely high and beyond the
capacity of small LGUs. One option is for several small LGUs to pool their resources
into setting up a common solid waste disposal facility. This is called “clustering” and
it enables small LGUs to attain the large solid waste volumes needed for cost-
efficiency, thereby making them attractive to financial assistance from the national
government.
The main constraint in setting up a common disposal facility is the high transac-
tion costs associated with negotiations to find an LGU willing to host the dumpsite.
The high transaction costs, in turn, stem from residents opposing the construction of
the facility (the “not-in-my-backyard” or NIMBY attitude) and from the uncertainty
brought about by the short tenures of LGU executives.

12
 In view of these difficulties in clustering, this study suggests that for LGUs to
comply with RA 9003, the feasible alternative is to construct waste management and
disposal facilities within each LGU. The size and design of these facilities will
depend heavily on the nature, type, and volume of solid waste being generated. The
subsequent sections will discuss this in greater detail.
The traditional approach in funding capital investments and recurrent costs for
SWM projects consists of one or more of the following (Nippon Koei Co., Ltd.,
2006):
a) Transfer of funds from the central government to the LGUs through the In-
ternal Revenue Allotment;
b) LGU’s own revenue sources from taxes, fees, and charges (such as real
property taxes, business taxes and licenses, and other charges) that go into
the LGU’s general fund;
c) Income from local government enterprises, such as water and electricity
utilities; and,
d) Donor funds for projects.

The extent to which present SWM services are funded depends on (a) the avail-
ability of funds at the LGU, (b) financial objectives of the LGU for the SWM sector,
and (c) the LGU policy on cost recovery (Nippon Koei Co., Ltd., 2006). Under RA
9003, user charges – also typically known as garbage fees – are expected to play a
role in an LGU’s cost recovery policy. In many countries, user charges are a signifi-
cant element of public finance. In recent years in the Philippines, there has been a
concerted effort to increase the role of user charges as a source of revenue for local
governments.
Conceptually, user charges or garbage fees are imposed on citizens who demand
or benefit directly from the SWM services provided. The imposition of user charges
reduces reliance on the general fund to subsidize government services where the
benefits accrue to specific individuals or groups. Based on this argument, user
charges should be able to recover the full cost of providing SWM services (such as
collection, transfer, and disposal) enjoyed by specific individuals, groups, institutions
or companies. Costs that cannot be attributed to specific sources (known as “non-
attributable costs”) or costs that benefit the public at large should be subsidized from
the general fund. This would include waste collected from street sweepings, from
illegally dumped waste, from parks and other open spaces, and from water bodies
(esteros, rivers, lakes and seas).
User charges are intended to change behavior and provide strong incentives for
reducing the volume of waste that is generated and, ultimately, the volume that
requires treatment and disposal to landfills. Hence, a user charge should be high
enough to provide a strong incentive for waste generators to change behavior. The
problem with current solid waste user-charges imposed by LGUs is that the amount
collected does not capture the full costs of providing SWM services. In effect, LGUs
end up subsidizing up to 90% of SWM services. This results in depriving other basic

13
services of much-needed resources. Many LGUs, therefore, cannot afford the capital
investment and recurrent cost required by RA 9003.
The cost-sharing framework proposed in this study is derived using benefit-cost
analysis (BCA). It also has been subjected to a consultation process. What the BCA
does is, first, to estimate benefits by quantifying the associated health benefits derived
from proper solid waste management. In addition, the revenues obtained from fees
and other SWM service products are added to the computation of benefits. The BCA
puts into proper perspective the need for cost-sharing and the likely benefit that the
national government can derive from providing assistance to the LGU’s SWM
program. Second, the BCA illustrates the magnitude of the benefits, thereby also
providing a range of the likely financial assistance that can be made available to
LGUs. The consultation process provides concerned agencies the range of acceptable
measures and strategies, as well as validates specific recommendations on the cost-
sharing framework. It also helps in identifying priorities.

Financial LGU
benefits Financing
and costs Gap

NG-LG
Municipal Ecological
Cost Sharing
solid waste SWM
Policy
issues programs
Framework

Social Social
benefits Net
and costs benefits

Legal &
Institutional
Assessment

Figure 1. Conceptual framework.

Figure 1 illustrates the conceptual framework used in the design of the SWM
cost-sharing framework. This study starts with an analysis of municipal solid waste
situations and concerns, including the estimated waste generation of a growing
population up to 2025. The study then examines the solid waste management scenario
based on regulatory provisions (RA 9003 and related Department Administrative
Orders) and best practices of some LGUs. The legal provisions and SWM practices
include segregation, waste collection, waste diversion (recycling and composting),
and safe disposal. These scenarios are then subjected to a benefit-cost analysis. The
financial analysis of the cost of SWM services provides the likely financing gap for
local governments. Further financial capacity using standard leverage measures is

14
used to identify the cost-sharing scheme. The extended benefit-cost analysis defines
the social benefits from good SWM practice and demonstrates the justification for
cost-sharing.
Given the existing DOF memorandum disallowing cost-sharing for 1st to 4th
Class cities, the framework was presented to various stakeholders (LGUs and con-
cerned government agencies) to validate the results, solicit suggestions and comments
to tighten the recommendations, and provide the study a direction in terms of accept-
ability. This final report incorporates the comments and recommendations received
through island cluster consultations, national consultations, and focus group discus-
sions.
In addition, this study also looks at the legal framework for solid waste man-
agement in the country and determines if there are any legal constraints to the
proposed cost-sharing framework. The findings and recommendations are elaborated
in a subsequent section of this report.

15
3 METHODOLOGY

The study’s main methodology is benefit-cost analysis. The estimation proce-

dure uses secondary data and information from various sources like the National
Statistics Office, National Statistical Coordination Board, National Solid Waste
Management Commission (the Commission), and various research studies. The
planning horizon for the estimates is from 2009 to 2025 using 2006 baseline infor-
mation. The planning horizon was chosen to coincide with the standard life of a
sanitary landfill facility. Research data before 2006 are converted to 2006 figures
using consumer price indices.
To estimate the incremental costs and benefits associated with a particular SWM
scenario, the following steps are followed:

3.1 Projecting solid waste generation

Crucial to the management of municipal solid waste is knowing the type and
volume of wastes, where they are generated, and the generation rate. A waste charac-
terization study, therefore, is the first step in SWM planning. Here, solid waste
production is calculated by analyzing the types and volumes of waste produced and
looking at per capita production in existing studies and SWM plans submitted to the
Commission. The waste characterization study also assumes that LGUs will not
collect from all areas within their jurisdiction, but only from urbanized areas where
most of the waste is generated and where the solid waste problem, therefore, is most
severe.
Solid waste generated in very rural areas consists mostly of biodegradable waste
that can be managed easily through backyard composting and use as animal feed. For
local governments in far-flung rural areas, collection and disposal in a central facility
likely will be too expensive.
The following data are used in the projection:
a) Estimated 2006 urban population, using growth rates from the 1995 and 2000
population censuses and percentage of urban population from published data;
b) Solid waste production rate per capita triangulated from waste characterization
data of various studies; and,
c) Categorization of LGUs based on the type of safe disposal category under DENR
Department Administrative Order No. 10, Series of 2006 (DAO 06-10).

The estimated volume of residual solid waste for final disposal from Item b is
used in categorizing LGUs under DAO 2006-10. The Administrative Order classifies
the type of final disposal facility based on the volume of residual waste disposed. The
categories ranged from Category 1 (clay lining without leachate collection) to
Category 4 (full sanitary land fill design with leachate collection and treatment).

16
3.2 Estimation of revenues and costs

Revenues and costs are associated with a disposal scheme using available esti-
mates from research studies and actual expenditures of LGUs based on secondary
information.
a) The financial revenues and costs are derived from research studies, responses to
mailed survey questionnaires, and data provided by a few LGUs with sanitary
landfills. The studies include Sumalde (2004), Laplante (2003), and the
LOGODEV Cavite-Laguna study (1997). The Secretariat of the National Solid
Waste Management Commission also has estimates of the cost of disposal facili-
ties under DAO 06-10 categories developed by the USAID-funded Philippine
Environmental Governance or EcoGov project. Some LGUs also provided actual
expenditures for their SWM programs.
b) The health costs associated with water pollution and sanitation are based on
assumptions of the World Health Organization and the World Bank on the pro-
portion of disease incidence attributable to water pollution and sanitation. In the
absence of data and studies specific to solid waste pollution, the attribution factor
in the study is derived using the proportion of the barangay population at risk in
open dumpsites. The basic data on the incidence of diseases is taken from the De-
partment of Health 2006 Field Health Service Information Survey.
c) Owing to resource and time constraints, the study uses cost-of-illness estimates
from the World Bank’s 2007 Environment Health Monitor: Environmental
Health.
d) Foregone income from restricted activity days due to illness is estimated using
Department of Labor and Employment data on wages, labor participation, rate
and employment rate for 2006.
e) In the absence of data from LGUs on coastal cleanup costs, the study makes an
assumption on the number of full-time coastal clean-up crew employed by LGUs
– an arrangement similar to street sweepers – in addition to an estimate on the
number of coastal clean-up volunteers once a year.
f) Flooding and associated damage to infrastructures might result from clogged
drainage and waterways. The reported 2006 expenses in the Financial Report of
cities and municipalities submitted to the Commission on Audit (COA) for flood
control are used as the estimated preventive expenditure.
g) On the revenue side, the Statement of Income and Expenses in the 2006 COA
Financial Report also indicates collection from garbage fees.
h) The extended benefit-cost analysis uses the shadow price of labor, preventive
expenditures, and cost of illness. The extended BCA should demonstrate the net
social benefits or costs of SWM services.

3.3 Estimating national government -local government cost-sharing

The cost-sharing scheme involves determining the percentage share of the na-
tional and local governments in financing an integrated SWM service. Mainly, this

17
was done by analyzing the financial health of the LGUs, i.e., identifying the financing
gap and the capacity of the LGUs to pay for debts based on their 2006 cash flow,
balance sheets, and income and expenditure statements. The computed amounts are
then converted to 2008 figures by using the appropriate consumer price indices.

3.4 Financing mechanism

RA 9003 provides for a National Solid Waste Management Fund for various
purposes. Funding LGU activities using the Fund is therefore legal. The criteria for
access and management of the fund are discussed in a later section of this report.

18
4 STATUS OF SWM IN THE PHILIPPINES

4.1 Legal framework

The legal framework for SWM is provided by the Philippine Constitution, RA

7160 (Local Government Code of 1991), and RA 9003. Under the Declaration of
Principles and State Policies in Article II of the Constitution, Section 15 provides that
“the State shall protect and promote the right to health of the people and instill health
consciousness among them”. Section 16 of the same Article also provides that “the
State shall protect and advance the right of the people to a balanced and healthful
ecology in accord with the rhythm and harmony of nature”. The right to health and to
a balanced and healthful ecology call for, among others, the proper management,
conservation, or protection of all matters that would have an effect on these rights.
These naturally include proper management of solid waste.
The Local Government Code prescribes the role of LGUs in solid waste man-
agement. Section 17, which deals with basic services and facilities, provides that
LGUs “shall endeavor to be self-reliant and shall continue exercising the powers and
discharging the duties and functions currently vested upon them”. It also provides that
LGUs shall “discharge the functions and responsibilities of national agencies and
offices devolved to them by the Code”. It further provides that LGUs “shall likewise
exercise such other powers and discharge such other functions and responsibilities as
are necessary, appropriate, or incidental to the efficient and effective provision of the
basic services and facilities enumerated [in the Code]”. These include basic services
and facilities either for solid waste disposal or for those related to general hygiene and
sanitation.
RA 9003 is the law on SWM. In summary, it provides for a systematic, com-
prehensive, and ecological solid waste management program with the following
hierarchy of activities: (a) solid waste avoidance; (b) volume reduction through
processing of the waste generated; and, (c) disposal of residual waste.
Under this hierarchy, the primary concern is to avoid generating waste altogeth-
er. The second concern deals with reducing the volume of waste through resource
recovery measures such as reusing, recycling, and composting. Since there still will
be waste that cannot be avoided or reduced, the third concern has to do with the
proper disposal of what is known as “residual waste”.
RA 9003 stipulates the requirements, mechanisms, strategies, and other details
for systematic, comprehensive, and ecological solid waste management, including
prohibitions and penalties. LGUs are responsible for implementing and enforcing RA
9003 within their jurisdictions. The national government, through the National Solid
Waste Management Commission, the Department of Environment and Natural
Resources, and other concerned agencies, is charged with ensuring that LGUs comply
with the provisions of RA 9003. It is the national government that sets the standards,
criteria, and policies to achieve the objectives of RA 9003. In addition, the mentioned

19
agencies are also expected to provide technical and capability building assistance to
LGUs.

4.2 Solid waste production

An important requirement in SWM planning is information about municipal sol-

id waste production and composition. For example, collection strategy depends on the
type of waste, volume, and area or location of waste generators. The design of the
final disposal facility will depend on the type and volume of wastes to be kept in the
facility.
Most cities and municipalities in the Philippines have both rural and urban
populations. Urban populations tend to be the usual beneficiaries of municipal solid
waste services because they generate more waste and, therefore, face bigger solid
waste problems, especially in terms of collection and disposal. The type of waste
generated also changes as an area becomes more urbanized. More and more of urban
solid waste is non-biodegradable, in contrast to rural solid waste, which can be as
much as 80% biodegradable. Thus, SWM strategies will differ among rural and urban
segments of the LGU. A rural SWM strategy lends itself more to household-based
management, such as backyard composting and use of waste as animal feed.
This study deals only with urban waste production in projecting and estimating
costs of SWM, particularly collection and disposal. The per capita urban population is
used as the relevant information in solid waste production and SWM cost estimation.
Using the National Statistics Office percentage of urban population and growth rates2,
the study estimates that the urban population will reach 32.8 million for 121 cities3
and 40 million for 1,489 municipalities in the Philippines by year 2025 (Table 1).

Table 1. Projected urban population, by income class (in 000’s).

Cities Municipalities
Income Class Number Number
2006 2010 2025 2006 2010 2025
1 17 2,085 2,252 2,869 168 8,100 8,747 11,142
2 18 1,541 1,665 2,120 144 4,165 4,498 5,730
3 25 4,567 4,932 6,282 265 5,710 6,166 7,855
4 25 1,200 1,296 1,650 445 6,081 6,567 8,365
5 6 212 229 292 297 2,202 2,377 3,029
6 11 31 33 43
Highly
Urbanized 13 3,323 3,589 4,572
Metro Manila 17 10,956 11,831 15,071
Not Classified 159 2,795 3,019 3,845
TOTAL 121 23,885 25,793 32,856 1,489 29,084 31,408 40,008
Source of basic data: NSO; NSCB.

2
The NSO average annual growth rates from the 2000 population census range from 1.6% to 2.54% for
municipalities and cities.
3
For planning purposes, this considers Pateros, one of the LGUs in Metro Manila, as a city. It is actually
still a municipality.

20
 Corresponding to the estimated urban population and assuming average solid
waste generation of 0.30 to 0.53 tons/capita per day, the solid waste production of
cities would increase from 11,874 tons per day in 2006 to 15,860 tons per day in 2025
(Table 2). For the municipalities, solid waste production is estimated to increase from
8,762 tons per day in 2006 to 11,882 tons per day in 2025. Hence, a total of approxi-
mately 20,636 tons, 22,008 tons and 27,743 tons of solid waste from urban areas will
need to be managed daily throughout the country in 2006, 2010 and 2025, respective-
ly.

Table 2. Projected solid waste production, by income class.

Ave. Gen. Cities (tons per day) Ave. Gen. Municipalities (tons per day)
Income Class (kg/cap/ (kg/cap/
day) 2006 2010 2025 day) 2006 2010 2025
1 0.48 982 1,060 1,351 0.30 2,452 2,598 3,325
2 0.47 712 769 979 0.30 1,263 1,338 1,713
3 0.43 2,052 2,214 2,816 0.30 1,716 1,818 2,327
4 0.37 423 456 581 0.30 1,823 1,931 2,472
5 0.33 67 73 93 0.30 660 700 896
6 9 10 13
Highly Urbanized 0.46 1,578 1,608 1,704 0.30
Metro Manila 0.53 6,061 6,545 8,337 0.30
Not Classified 839 888 1,137
TOTAL:
Tons per day 1,874 12,726 15,860 8,762 9,282 11,882
4,333,94 4,644,81 5,788,95 3,198,29 3,388,06 4,337,06
Tons per year 7 9 9 4 9 2
Source: NSO, NSCB.

Table 2 also shows that, on average, higher income cities and municipalities do
indeed generate more wastes. Highly urbanized cities and Metro Manila, for instance,
account for about 64% (2.78 million tons) of the 4.33 million tons generated by all
cities in 2006. That same year, 1st and 2nd income class municipalities contributed
about 42% (1.35 million tons) of the 3.19 million tons generated by all municipalities.
From a sample of municipalities and cities with waste characterization data, bi-
odegradable wastes comprise about 45% to 70% of the total volume generated
(average of 55%; see Table 3). The remaining volume of waste is composed on
average of the following: recyclables, such as durable plastics, metals, glass, and
paper, 28%; residuals, 16%; and special wastes, 1%.
The waste composition figures imply that with effective waste segregation at
source, composting, and recycling, as much as 83%of municipal solid wastes can be
diverted. Only about 16% need to be disposed of in landfills or other final disposal
facilities. New environmentally sound technologies might also be used to reduce the
amount of residuals. Special waste will need special handling and treatment, especial-
ly since special waste should not be mixed with the rest of municipal solid wastes.

21
Table 3. Composition of solid waste in selected municipalities and cities (in percent).
City/ Biode- Special
Province Recyclable Residual
Municipality gradable Waste
Bani Pangasinan 50 30 18 2
Sta. Cruz Ilocos Sur 48 49 2 1
Puerto Princesa Palawan 46 49 4 2
Metro Manila 52 41 7
Panabo Davao del Norte 71 10 17 2
Baguio City 51.6 27.2 21.0 0.2
Koronadal South Cotabato 58.0 24.0 17.0 1
Kidapawan North Cotabato 63.3 24.5 10.7 1.5
Pagadian Zamboanga del Norte 60.8 14.8 23.9 0.5
Tacurong Sultan Kudarat 45.0 32.0 21.0 2.0
Isabela City Basilan 69.5 16.4 13.1 0.9
Davao City 48.1 19.8 31.4 0.7
AVERAGE 55 28 16 1
Source of basic data: SWM Plans.

4.3 Compliance with RA 9003

Since RA 9003 was passed in 2000, many LGUs have not yet complied with its
basic provisions, including the prohibition on using open dumps for disposal. The law
directs local governments to convert existing dumpsites to controlled dumps within
three years from effectivity of the law. It also prohibits the opening of new open
dumpsites and the use of controlled dumps after five years from effectivity.
If RA 9003 were strictly followed, there should be no more open and controlled
dumpsites by this time. However, the National Solid Waste Management Commission
reports that as of 2007, 711 open dumpsites and 272 controlled dumpsites still operate
in nearly all of the country’s regions (Table 4). These dumpsites represent about 61%
of all cities and municipalities. Only 13 sanitary landfills have been granted environ-
mental compliance certificates; construction of some of these is already underway.
The shift to a safer method of solid waste disposal has been beset by a number
of problems. These include: (a) high investment cost of a sanitary landfill; (b)
difficulty in finding a suitable site; (c) lack of technical capability; (d) high front-end
costs (technical studies); and, (e) public opposition stemming from a strong “not-in-
my-backyard” attitude of community members.

22
Table 4. Type of solid waste disposal facility by region, as of 2 nd quarter 2007.
SLF w/ ECC
Open Controlled Sanitary Proposed
Region Under
Dumpsite Dumpsite Landfill Landfill**
Construction*
I 63 21 1 3 4
II 47 10
III 66 7 2 1 11
IV-A 35 50 1 2 21
IV-B 24 7 1
V 74 13 2
VI 93 20 2 3 41
VII 124 52 3 1 38
VIII 78 13 9
IX 12 6 18
X 38 33 4
XI 24 15
XII 1 31
XIII 47 13 1 12
CAR 10 3 1 2 17
NCR 1
TOTAL 711 272 12 13 224
Source: National Solid Waste Management Commission, 2007.
Notes: * The granting of an Environmental Compliance Certificate indicates that the planned sanitary
landfill has passed environmental impact assessment, which is required by law. It is also an indication
that the planned facility is ready for construction. ** The number of proposed sanitary landfills is based
on the SWM Plans submitted by LGUs to the National Solid Waste Management Commission.

To attain economies of scale and reduce capital investment cost, the setting up
of common disposal facilities for a cluster of municipalities and cities is encouraged.
However, finding an LGU willing to host a facility historically has been difficult. A
number of initiatives to cluster have been attempted (Cavite-Laguna, Metro Naga,
Metro Dumaguete) and some are ongoing but none has gone on to implementation. In
certain cases, negotiations failed either because of strong public opposition or because
of a change in local political leadership. The transaction costs of clustering LGUs
toward a common facility have been and will continue to be high.

23
5 BENEFITS AND COSTS OF SWM

5.1 Health and environmental costs of solid waste pollution

Improper disposal of municipal solid waste has a number of negative environ-

mental and health impacts. The pathway for solid waste pollution is shown in Fig-
ure 2. Municipal solid wastes come from residential, institutional, commercial, and
industrial sources. It also either comes from street sweepings, parks, other open
spaces, and illicit dumps or recovered from water bodies.
People who live near or within dumpsites are at risk of various diseases. Leach-
ate from solid waste can contaminate groundwater tables and surface waters. Insects
and pests in open dumpsites are disease vectors. Methane gases from dumpsites can
affect the health of exposed populations and contribute to global warming. Coastal
and marine litter affects aesthetics, causes pollution, and harms marine organisms.
Improperly managed solid wastes also can result in increased flooding and destruc-
tion of infrastructures due to clogged waterways.

Figure 2. Solid waste exposure pathway.

Proper SWM seeks to avoid the hazards that solid waste can inflict on humans
and the environment. SWM services – if provided and implemented properly – can
mitigate these negative externalities and provide positive social benefits. The World
Health Organization and the World Bank estimate that approximately 88% of
diarrhea cases worldwide can be attributed to poor water quality, sanitation, and
hygiene (Table 5). In the same manner, poor water quality, sanitation, and hygiene

24
cause 100% of cholera cases, 100% of helminthiasis cases, 50% of hepatitis cases,
and 50% of typhoid and paratyphoid fever cases.
For solid waste, the disease pathway is usually through direct exposure and wa-
ter pollution due to leachate from dumping areas. However, there is no established
information on the proportion of disease incidence in Table 5 that can be attributed
solely to solid waste pollution. This study thus assumes that the proportion of the
municipal population within the vicinity of open dumpsites is the population with the
highest risk of contracting diseases. If the leachate from dumpsites affect the ground-
water and domestic water supply, then the population at risk might be even greater.
The assumed population at risk in this study is, therefore, still a conservative estimate.

Table 5. Disease fraction attributed to water, sanitation, and hygiene.

Disease Attributable Fraction to Water, Sanitation & Hygiene Source
Diarrhea 88% WHO
Helminthiasis 100% WHO
Typhoid & Paratyphoid 50% WB
Cholera 100% Widely accepted
Hepatitis A 50% WB
Sources: WHO, Preventing Disease Through Healthy Environments, 2006; World Bank, Philippine
Environment Monitor 2006: Environmental Health.

To estimate the potential population at risk, a sample of approximately 10%

from the 711 open dumpsites reported by the National Solid Waste Management
Commission was randomly chosen. Using 2000 population census data and baseline
maps, the study team identified the location of the dumpsites and potentially affected
barangays surrounding the dumpsites. About 389 barangays around 72 dumpsites
were identified and the corresponding barangay population was determined (Table 6).
From this data, it is estimated that approximately 9% to 53% or an average of 27% of
the municipal population might be at risk from water borne diseases due to open
dumpsites. Hence, 27% is assumed as the proportion of the diarrhea cases in 2006
that can be attributed solely to solid waste pollution.
Examining the source data for the estimates, there are two possible explanations
for the relatively higher estimates in certain regions. These are:
a) In areas with bigger rural populations, e.g., Cordillera Administrative Region, a
large proportion of population at risk is attributed to the concentration of people
in the poblacion or town center. This is the area in a municipality where most of
the solid waste is generated and where open dumpsites can be found. Areas out-
side the town are usually very rural and sparsely populated. The same is true for
small island municipalities and barangays.
b) Other areas with higher percentages of population at risk, such as Regions 4, 7
and 10, have larger proportions of highly urbanized cities and municipalities.

25
Table 6. Estimated population at risk of diseases due to active dumpsites, 2006.
# of Bgys. Population of
Total # of # of Municipal %
Affected by Bgys. Around
Region Open Dumpsites in Population of Population
Sample Sample
Dumpsites the Sample Sample at Risk
Dumpsites Dumpsites
1 63 17 80 477,632 106,133 22
2 47 3 11 110,107 10,012 9
3 66 6 26 257,855 75,736 29
4A 35 4 26 166,884 39,503 24
4B 24 2 11 70,409 34,290 49
5 74 6 39 192,081 52,700 27
6 93 5 38 231,378 58,260 25
7 124 11 68 336,908 95,302 28
8 78 6 23 165,259 37,603 23
9 12 1 5 37,448 4,179 11
10 38 3 16 52,764 16,074 30
11 No data
12 No data
13 47 6 34 83,455 44,463 53
CAR 10 2 12 44,358 23,324 53
NCR No data
ARMM No data
TOTAL 711 72 389 2,226,538 597,579 27
Sources of basic data: NSWMC monitoring data; NSO, 2000 Census of Population.

Using the assumed attributable fractions for solid waste, Table 7 shows that
138,948 of the 572, 259 reported cases of acute watery diarrhea cases in 2006 might
be caused by improperly disposed municipal solid waste. The National Capital
Region, Region 3, Region 4 (A and B), Region 7 and Region 13 (Caraga) show
relatively larger numbers of diarrhea cases attributable to solid waste. This is plausi-
ble considering that these regions have more highly urbanized cities, larger propor-
tions of urban population and, therefore, greater volumes of solid waste generated.

Table 7. Estimated incidence of acute watery diarrhea due to solid waste pollution, 2006.
No. due to Water % Population
Age Male Female Both Sexes No. due to SW
Pollution at Risk
Philippines 295,827 276,432 572,259 503,588 27 135,969
NCR 36,294 31,144 67,438 59,345 no data
CAR 9,772 8,950 18,722 16,475 53 8,663
1 14,859 13,934 28,793 25,338 22 5,630
2 14,410 13,561 27,971 24,614 9 2,238
3 27,222 25,048 52,270 45,998 29 13,510
4A 35,340 33,119 68,459 60,244 24 14,260
4B 12,004 11,514 23,518 20,696 49 10,079
5 19,367 17,794 37,161 32,702 27 8,972
6 19,507 19,556 39,063 34,375 25 8,656
7 34,192 31,932 66,124 58,189 28 16,460
8 15,119 14,424 29,543 25,998 23 5,916
9 15,447 14,412 29,859 26,276 11 2,932
10 13,025 13,031 26,056 22,929 30 6,985

26
 No. due to Water % Population
Age Male Female Both Sexes No. due to SW
Pollution at Risk
11 6,456 5,982 12,438 10,945 no data
12 11,525 11,640 23,165 20,385 no data
13 11,288 10,391 21,679 19,078 53 10,164
ARMM no data no data no data no data no data no data
Notes:
1) Attributable Fraction for water, sanitation and hygiene = 88%
2) Attributable fraction for solid waste pollution = 27%
Sources of basic data: DOH, Field Health Information Survey, 2006; WHO, Preventing Disease Through Healthy
Environments, 2006.

The economic cost of morbidity or illness due to acute diarrhea is estimated us-
ing data on the fraction of disease incidence attributable to solid wastes. The cost of
illness includes costs of hospitalization, medical costs and foregone income due to
reduced workdays. This study adopts information on the cost of illness from the
World Bank’s Philippine Environment Monitor 2006: Environmental Health, which
used 1994 Philippine Health Insurance Corporation data on medical expenditures
(hospitalization and medicines) of members. The direct cost of illness was converted
to 2006 prices using consumer price indices published by the National Statistical
Coordination Board.
Foregone income due to illness is estimated using the number of restricted activ-
ity days for diarrhea, which is three days (ENRAP, 2000). Some assumptions are
made for the final estimate of foregone income. First, the study assumes that one
adult takes care of a sick child or elderly and, thus, will have foregone income for
three days. Second, the foregone income is computed only for employed persons;
therefore, the estimated number of cases is further adjusted using information on
employment rate and labor participation rates.
Using the data in Table 7, World Bank data on costs, 2006 shadow wage rate,
employment rate, and labor participation rate, the cost of illness from acute diarrhea
in 2006 is approximately Php800.8 million pesos (Table 8). Of the total amount,
Php29.2 million represents foregone income and Php771.2 million represents the
estimated medical and hospitalization costs. With a good SWM program, these costs
can be avoided and would represent the potential health benefits from SWM.

Table 8. Estimated cost-of-illness for acute diarrhea cases attributable to solid waste.
Particulars Variable 2004 2006
No. of Diarrhea Cases due to Pollution a 507,864 503,588
Attribution Fraction for SW Pollution (Average) b 27% 27%
No. of Diarrhea Cases due to SW Pollution c = (a)(b) 137,123 135,969

Restricted Ability Days for Diarrhea d 3 3

Labor Force Participation Rate e 0.67 0.65
Employment Rate f 0.89 0.92
Total work loss days g = (c)(d)(e)(f) 243,743 242,427
Shadow Wage Rate (2000=100) h 100.32 120
Direct Income Losses i =(g)(h) 24,452,278 29,184,311

27
 Particulars Variable 2004 2006

Medical Expenses (Php/case of diarrhea) j 4,966 5,675

Total Medical & Hospitalization Expenses l = (i)(j) 680,940,000 771,662,683

Total Cost of Illness (In Pesos) m=i+l 705,392,278 800,846,994

US $ Exchange Rate (nominal) n 56.04 51
Total Cost of Illness in US $ o = (m)(n) 12,587,300 15,604,969

There are other environmental costs associated with improperly disposed munic-
ipal solid wastes. These include pollution of surface and marine waters that could
deplete fish and other marine resources, damages to infrastructures from worsened
flooding incidence due to clogged waterways, increased cost of dredging and coastal
cleanups, and loss of aesthetic value.
In order to compute for the cost of coastal cleanup, the study assumes that an
LGU employs at least two persons to do the job on a regular basis. The number is
applied to the estimated 800 coastal municipalities and 10 cities. The salary of these
employees, computed using the shadow wage rate for unskilled workers, is used as an
estimate of the cleanup cost. The estimated cleanup cost is Php50.5 million in 2006.
To estimate flood control costs, the study team was forced to use LGU expendi-
ture data on flood control submitted to the Commission on Audit. This is because
there are no reported LGU expenditure data on dredging and cleanups. Flood control
costs amount to Php60,172,780 and 50% of the expenditure for repairs and mainte-
nance of waterways amounts to Php6.8 million in 2006 (Table 9). The total cost for
both coastal cleanup and flood control is Php117.5 million.

Table 9. Estimated cost of clean-up and flood control, 2006.

Estimated coastal clean-up cost:
No. fulltime personnel 2
Shadow wage rate (Php) 120
No. of working days 260
No. of municipalities 810
Total clean-up cost (Php) 50,544,000
Estimated flood control cost: a
Repairs & maintenance of flood control infrastructure (Php) 60,172,780
Repairs & maintenance of waterways, aqueducts, seawalls,
river walls and others (50% of 2006 expenditure; in Php) 6,806,960
Total flood control cost (Php) 66,979,740
TOTAL (In Php) 117,523,740
In US$ (at P51/$ in 2006) 2,304,387
a
Source of basic data: COA, 2006, Financial Report, Volume III.

28
5.2 Financial costs and revenues from SWM services

The financial cost of an SWM service or program is estimated using data from
LGUs with SWM programs, selected SWM plans, and various Philippine studies on
sanitary landfills. The estimation procedure considers the regulatory environment,
i.e., the DENR’s DAO 2006-10, which provides guidelines in categorizing disposal
facilities. DAO 06-10 has four disposal categories with minimum technical standards
based on the volume of solid waste for final disposal (Table 10). For example, a
municipality that disposes less than 15 tons per day of solid waste is allowed a
Category 1 disposal facility that has drainage, gas venting and pond system for
leachate collection, 60cm clay liner with permeability of k<10-5 cm per second.
Category 4 is a fully engineered sanitary landfill for waste volume exceeding 200
tons/day and is required to have a leachate treatment facility and a combination of
clay and plastic liners. The categorization shows a progression from simple designs to
more sophisticated ones that require stricter technical standards. Implicitly, DAO 06-
10 aims at providing incentives for LGUs to divert waste to avoid fully engineered
and more expensive disposal facilities.

Table 10. DAO 2006-10 guidelines in categorizing disposal facility.

Category 1 Category 2 Category 3 Category 4
75 – 200 > 200
Volume of Waste < 15 tons/day 15 – 75 tons/day
tons/day tons/day
Technical standards:
Drainage
Gas Venting √ √ √ √
Leachate Collection
Leachate Treatment Ponds Ponds Ponds Treatment
60 cm 75 cm 75 cm 60 cm
Clay Liner
k < 10-5 cm/s k < 10-6 cm/s k < 10-7 cm/s k < 10-7 cm/s
HDPE Liner 1.5 mm

Based on 2006 data on solid waste generation without waste diversion, 1,447 or
90% of the 1,610 municipalities and cities can be categorized under Category 1 and
9% under Category 2 (Table 11). Highly urbanized cities, like Metro Manila (14
cities), Cebu and Davao fall under Category 4, while most other highly urbanized
cities fall under Category 3. If LGUs were to follow the minimum 25% waste
diversion under RA 9003, only eight highly urbanized cities will fall under Category
4. Moreover, with a 25% waste diversion rate, 99% of all cities and municipalities
will require only Category 1 and Category 2 disposal facility.

29
Table 11. Distribution of municipalities and cities based on DAO 2006-10.
Without Waste Diversion With 25% Waste Diversion
Category
Number of LGUs Percent Number of LGUs Percent
Category 1 1,442 89.6 1,495 92.9
Category 2 142 8.8 93 5.8
Category 3 10 0.6 14 0.9
Category 4 16 1.0 8 0.5
TOTAL 1,610 100.0 1,610 100.0

Table 11 implies that most municipalities and cities might not need sophisticat-
ed disposal facilities since their volume of waste are, on average, relatively small.
Other SWM programs that encourage waste reduction and household-based manage-
ment of biodegradable wastes and recyclable wastes might already substantially
reduce the need for an expensive disposal facility. It is equally important, therefore,
that SWM programs focus on waste reduction and alternative technologies to process
residuals, in tandem with alternative safe disposal of wastes. The other implication is
the need for common disposal facilities. Since the volume of waste is too small for
the majority of LGUs, clustering of municipalities can result in economies of scale.
Indeed, the engineering estimates for Category 4 sanitary landfill proposed for
Cavite and Laguna (CALA) indicate the presence of economies of scale (LOGODEV
1997). CALA cost data estimates show that the larger the capacity of the disposal
facility, the lower the cost per ton of waste (Table 12). The presence of economies of
scale, therefore, should be an incentive for shared, large capacity common disposal
facilities instead of a single facility per LGU.4
Although there are clear advantages in clustering LGUs, the present institutional
set-up proves to be very difficult for clustering. As previously mentioned, transac-
tions costs are very high and prohibitive. In what follows, the study assumes that
instead of clustering, each municipality and city (except Metro Manila) will construct
its own disposal facility according to the Commission-proposed (and DAO 06-10)
guidelines on the appropriate disposal facility for a particular projected waste volume.

4
Note that the facilities for Puerto Princesa City, San Fernando City, and Bais City were constructed
prior to DAO 2006-10. Hence, Puerto Princesa and San Fernando, although would have qualified for
Categories 3 and 2, respectively, constructed fully engineered landfills at relatively higher cost than the
engineering estimates of the CALA study. Bais City became the model concept for DAO 06-10 since it
constructed a lower-cost Category 2 type disposal facility, which is appropriate for its status as a
“Category 2” city. Globally, the average cost of a fully engineered sanitary landfill ranges from US$10
to US$ 15 per ton.

30
Table 12. Estimated cost of a sanitary landfill facility, 2006.
Engineering Estimate Actual Cost
San
Ho Chi

CALA 11

CALA 21

CALA 31
Particulars Fer- Puerto
Minh, Bais
nando, Princes
Vi- City1
La a City1
etnam2 1
Union
DAO 2006-10 Category 4 4 4 4 4 4 2
Capacity (MT/day) 600 300 40 3000 46 58 23
Lifespan (yrs) 10 10 10 20 15 20 10
Annualized Cost
(Php/mt)
1. Development Phase
Mapping & other pre-
dev activities 14
Geotechnical investiga-
tion & other studies 17
Construction of SLF
Cells 74
Scale House & leachate
plant 15
On-site MRF &
Transfer station 9
Subtotal 127 161 203 129 589 884 102
2. Depreciation / Land n.d. n.d. n.d. 145 n.d. n.d. 181
3. Operations &
Maintenance 134 211 417 399 280.3 334 193
4. SLF Closure & n.d. n.d. n.d.
Closure Maintenance 75 n.d. n.d. n.d
TOTAL COST (In
PhP/ton) 261 371 619 748 869 1,218 476
In US$/ton (Php51/$,
2006) 5.12 7.29 12.15 14.67 17.04 23.89 9.32
Notes: 1No disaggregated development phase cost data available. 2The Ho Chi Minh City SLF is built
on marshland, which increased the facility’s cost. Development costs shown in the table are 20% lower
to correct for additional engineering specifications to make the facility safe.
Sources of basic data: LOGODEV, CALA Study, 1997; City Government of Bais City; City Govern-
ment of San Fernando; Solid Waste Management Plan, Puerto Princesa City; Vector Engineering,
SWAPP Conference presentation, Baguio City, November 2007.

The estimated cost of Categories 1-4 facilities shows that a less sophisticated
and less technically stringent disposal category would be cheaper to build than a
Category 4 facility (Table 13). Since Categories 1-3 require clay lining, it should be
noted that the cost of a clay-lined facility might be higher than one with plastic lining
due to higher transport and hauling costs, especially in places where there are no
bentonite clay deposits available nearby. Moreover, the cost per ton does not include
the cost of land, as well as maintenance and operation. Nevertheless, Table 13
provides government with a conservative indicative figure on how much investment
will be needed given the projected volume of wastes from 2010 to 2025. For cities,
excluding Metro Manila, the estimated investment cost would be approximately
Php3.2 billion (Table 14). The 1,489 municipalities would require close to Php1.1
billion worth of investment to make their SWM compliant.

31
Table 13. Estimated cost of a disposal facility, by category.
Cost per ton: Min Max Ave. 2006
Category 1 7.5 16 11.75
Category 2 30 48 39.00
Category 3 60 225 142.5
Category 4 225 225.00

Table 14. Estimated total investment for solid waste disposal facilities following DAO
2006-10 category, by income class, 2010-2025 (in million pesos, 2006 prices)
Income Disposal Cost for Cities Disposal Cost for Municipalities
Class Cat 1 Cat 2 Cat 3 Cat 4 Total Cat 1 Cat 2 Cat 3 Cat 4 Total
No. 7 10 17 109 59 168
1
Php 83.7 698.5 782.2 100.2 353.9 454.1
No. 18 18 123 21 144
2
Php 331.8 331.8 84.5 73.2 157.7
No. 25 25 264 1 265
3
Php 841.9 841.9 143.4 4.3 147.7
No. 4 21 25 444 1 445
4
Php 4.8 102.3 107.1 152.8 3.3 156.0
No. 2 4 6 297 297
5
Php 1.4 14.1 15.546 55.8 55.8
No. 11 11
6
Php 0.8 0.8
No. 1 10 2 13 0
HUC
Php 13.0 1,003.7 888.5 1,905.2 0
No. 146 13 159
NC
Php 54.5 53.8 108.3
No. 6 76 20 2 104 1,394 95 0 0 1,489
Total
Php 6.2 1,387.0 1,702.2 888.5 3,983.8 538.5 434.6 0 0 973.2

Assuming that cities undertake additional investments in bioreactors to process

biodegradables, at Php300,000 per unit bioreactor with a capacity of 1 metric ton per
day, the estimated total additional investment cost would be approximately Php952
million (Table 15). The cost to 1st Class cities would be approximately Php553
million. Moreover, if the cities will comply in establishing Materials Recovery
Facilities to further cut down on wastes to be disposed of, then the 104 cities would
have to invest approximately Php3.7 million more, of which the 1st Class cities’ share
would be Php2.2 million.

32
Table 15. Estimated cost of SWM investment for cities, by income class, 2006 (in
thousand pesos).
Income Class # of Cities SLF Bioreactor MRF Total SWM Investment
1 30 2,585,882 553,719 2,159 3,141,760
2 18 331,815 153,975 600 486,390
3 25 179,248 138,513 540 318,301
4 25 107,189 91,424 356 198,969
5 6 15,546 14,560 57 30,163
Total 104 3,219,680 952,191 3,712 4,175,583

For the 1,489 municipalities, the infrastructure investment in SWM needed to

comply with RA 9003 and DAO 2006-10 is approximately Php3 billion (Table 16).
About Php1.9 billion or 63.5% of this would go to composting facilities or bioreac-
tors. The relatively larger investment in bioreactors vis-à-vis disposal facilities for
municipalities is expected since 94% of 1,489 municipalities are classified as Catego-
ry 1 and 6% as Category 2, both of which are relatively low cost. The price of a
bioreactor is not dependent on the DAO 2006-10 categories but fixed based on its
capacity. Hence, the total investment cost would depend on the number of units
required to process a given volume of waste. The computation assumes a one-ton per
day size of bioreactor, which is priced by the Department of Science and Technology
at Php300,000 per unit.

Table 16. Estimated cost of SWM investment for municipalities, by income class, 2006
(in thousand pesos).
Investment Cost (In thousand pesos, 2006)
Income Class # of Municipalities
SLF Bioreactor MRF Total
1 168 454,084 530,470 2,068 986,622
2 144 157,674 273,251 1,065 431,990
3 265 147,715 371,198 1,447 520,360
4 445 156,040 394,346 1,538 551,924
5 297 55,708 142,883 557 199,148
6 11 785 2,013 8 2,805
Not Classified 159 108,338 181,418 707 290,463
TOTAL 1489 1,080,344 1,895,578 7,391 2,983,312

The next important question is whether LGUs can afford the required SWM in-
vestment. Tables 17 and 18 show the estimated proportions of the additional SWM
investment to local government income. Assuming LGUs would use their Internal
Revenue Allotment or IRA, from which 20% is earmarked for development projects,
the additional SWM investment on average would eat up another 14% of the total
IRA of cities (Table 17). First Class cities, which include the highly urbanized ones,
would have to spend 23% of their IRA – a proportion that exceeds the mandated 20%
development fund allocation. Second Class cities would have to use 11% of their
IRA, and the 3rd to 4th Class cities approximately 2% to 6% of their IRA in addition
to what they have been currently spending on SWM. Particularly for the 1st Class

33
cities, the figures imply that LGUs would need to find other sources to finance the
new investment shortfall in order to meet the requirements of RA 9003.
Looking at the total operating income of cities, which is composed of IRA plus
revenue (local taxes) and non-revenue (permits and fees) collections, additional SWM
investments would be from 2% for 5th Class cities to 13% for 1st Class cities. Since
LGUs have operating costs and other programmed capital expenditures, the study
team compared the new SWM investment to the net operating income, i.e., the
income from operations before taxes, interest payments, subsidies and other extraor-
dinary incomes.
The share of the additional SWM investment would be 45% of the net operating
income of 1st Class cities, 32% for 2nd Class cities, 16% for 3rd Class cities, 14% for
4th Class cities, and 5% for 5th Class cities. This means that if the LGU has other
financial investment obligations (e.g., interest, loan amortization and maturing
government debt securities that need to be paid), it will have to weigh the new
investment against these obligations. If it seeks to cover the new SWM investment
with a fresh loan, it will have to consider the implication of this new loan on its fiscal
position.

Table 17. Proportion of cities’ additional SWM investment to local government income,
2006 (income in thousand pesos).
Income SWM as % of Total Operating SWM as % Net Operating SWM as %
# of Cities IRA
Class IRA Income of TOI Income NOI
1 30 13,758,320 22.84 24,710,282 12.71 7,040,690 44.62
2 18 4,518,970 10.76 6,850,384 7.10 1,514,875 32.11
3 25 5,733,338 5.55 7,873,525 4.04 1,930,971 16.48
4 25 4,486,389 4.43 5,532,012 3.60 1,419,050 14.02
5 6 1,461,057 2.06 1,700,965 1.77 581,141 5.19
Total 104 29,958,074 13.94 46,667,168 8.95 12,486,727 33.44

For municipalities, the proportion of additional SWM investment to the net op-
erating income is higher (19% to 26% of net operating income) for the lower income
classes than the 1st Class municipalities (18% of net operating income) (Table 18).
This shows that 1st Class municipalities might have more difficulty in meeting the
additional investments in SWM, as these will have greater impact on their incomes,
whether from IRA or other locally sourced incomes.

34
Table 18. Share of SWM investment of the municipal income, 2006.
# of Municipal Income (In thousand pesos)
Income
Municipal- SWM as % Total Operating SWM as Net Operating SWM as
Class IRA
ities of IRA Income % of TOI Income % of NOI
1 168 15,074,301 6.55 25,123,926 3.93 5,595,068 17.63
2 144 8,250,633 5.24 10,343,481 4.18 1,899,489 22.74
3 265 12,112,316 4.30 14,527,348 3.58 2,490,148 20.90
4 445 14,807,681 3.73 17,476,337 3.16 2,989,288 18.46
5 297 7,110,491 2.80 7,899,509 2.52 1,064,024 18.72
6 11 80,213 3.50 89,907 3.12 10,635 26.38
Not
159 1,150,572 25.25 1,248,875 23.26 180,784 160.67
Classified
TOTAL 1489 58,586,208 5.09 76,709,382 3.89 14,229,437 20.97

Table 19 confirms that the proportion of IRA to total operating income among
municipalities can go as high as 92% for municipalities not currently classified. The
difference between 1st Class and 2nd Class municipalities is about 20 percentage
points, which indicates that 1st Class municipalities are not as dependent on the IRA
as 2nd Class municipalities. For cities, excluding Metro Manila, their IRA is approxi-
mately 56% (for 1st Class cities) to 86% (5th Class cities) of total operating income.
The figures show that local governments outside of Metro Manila are dependent on
their IRA for more than 50% of their operating income.

Table 19. Share of the internal revenue allotment (IRA) to total operating income of
local government units, 2006 (in thousand pesos).
Income Class 1st 2nd 3rd 4th 5th 6th Unclassified
CITIES
Internal Revenue
13,758 4,519 5,733 4,486 1,461
Allotment
Total Operating
24,710 6,850 7,874 5,532 1,701
Income
% of IRA to TOI 56 66 73 81 86
MUNICIPALITIES
Internal Revenue
15,074 8,251 12,112 14,808 7,110 80 1,151
Allotment
Total Operating
25,124 10,343 14,527 17,476 7,900 90 1,249
Income
% of IRA to TOI 60 80 83 85 90 89 92
Note: The above figures exclude Metro Manila. On average, the percent of IRA to TOI for MM is 21%.

The cost of implementing a good SWM program is much more than the invest-
ment for infrastructures shown in the previous tables. The larger cost would be the
recurrent costs (maintenance and operating expenses) that LGUs would have to
budget for annually. The projected annual maintenance and operating expenses of all
the facilities would be approximately Php453 million total for all cities and would
constitute from 0.29% to 2.9% of IRA (Table 20).

35
Table 20. Estimated maintenance and operating expenses of a SWM facilities complying
with RA 9003, cities, by income class, 2006 (in thousand pesos).
Income Class MOOE IRA MOOE as % of IRA
1 162,911 13,758,320 1.18
2 129,454 4,518,970 2.86
3 129,454 5,733,338 2.26
4 26,898 4,486,389 0.60
5 4,284 1,461,057 0.29
Total 453,001 29,958,074 1.51

If we tally all solid waste infrastructure investments plus the technical studies
required to put up these infrastructures (i.e., mapping and geo-technical studies) then
the amount that the cities would have to invest would further increase from Php52
million for 5th Class cities to Php4.1 billion for 1st Class cities (Table 21). These
figures represent 30% and 4% of IRAs, respectively and, definitely, much more in
terms of net operating income.

Table 21. Total investment costs as percentage of local income, cities by income class,
2006 (in thousand pesos).
Total SWM Investment as % of
Investment Cost (In thousand pesos)
Local Income
Income # of
class Cities Mapping Geotech % of Total % of Net
Bio- Total % of
SLF MRF Operating Operating
Studies Studies reactor Cost IRA
Income Income
1 30 312,348 385,842 2,585,882 553,719 2,159 3,839,950 27.91 15.54 54.54
2 18 86,856 107,292 331,815 153,975 600 680,538 15.06 9.93 44.92
3 25 78,134 96,518 179,248 138,513 540 492,953 8.60 6.26 25.53
4 25 51,572 63,706 107,189 91,424 356 314,247 7.00 5.68 22.14
5 6 8,213 10,146 15,546 14,560 57 48,521 3.32 2.85 8.35
Total 104 537,122 663,504 3,219,680 952,191 3,712 5,376,209 17.95 11.52 43.06

Table 22. Total investment costs as a percentage of local income, municipalities by

income class, 2006 (in thousand pesos).
Total SWM Investment as
Investment Cost (In thousand pesos, 2006)
% of Local Income
Income # of % of
Class Mun. Map- Geotech % of Net
Bioreac- % of Total
SLF MRF Total Operating
ping Studies tor IRA Operating
Income
Income
1 168 19,949 14,249 454,084 530,470 2,068.2 1,020,821 6.77 4.06 18.25
2 144 10,276 7,340 157,674 273,251 1,065.4 449,606 5.45 4.35 23.67
3 265 13,959 9,971 147,715 371,198 1,447.3 544,291 4.49 3.75 21.86
4 445 14,830 10,593 156,040 394,346 1,537.5 577,346 3.90 3.30 19.31
5 297 5,373 3,838 55,708 142,883 557.1 208,359 2.93 2.64 19.58
6 11 76 54 785 2,013 7.8 2,935 3.66 3.26 27.60
Not
Classi- 159 6,822 4,873 108,338 181,418 707.3 302,159 26.26 24.19 167.14
fied
TOTAL 1489 71,285 50,918 1,080,344 1,895,578 7,391 3,105,516 5.30 4.05 21.82

36
 With respect to municipalities, Table 23 shows that new solid waste infrastruc-
ture investments and required technical studies would average around 5% of IRA or
about 4% of total operating income. The total cost of these investments range from
about Php2.9 million for all 6th Class municipalities to Php1 billion for all 1st Class
municipalities.

Table 23. Total investment costs as a percentage of local income, cities and municipalities
by DAO category, 2006 (in thousand pesos).
Cities Municipalities
DAO
Category Total New Investments Total New Investments
# #
Cost/IRA Cost/IRA

1 6 4% 1,394 4%
2 73 8% 95 12%
3 23 31%
4 2 44%

It was previously shown in Table 14 that cities and municipalities fall into dif-
ferent DAO categories depending on their projected solid waste generation. Table 24
shows that the cost of new investments as a proportion of IRA monotonically rises for
higher DAO categories. That is, LGUs that require larger sanitary landfills to accom-
modate their solid wastes are more hard-pressed for funds since they would have to
spend a higher proportion of IRA to fund these new investments. For instance, the 25
cities that are required to invest either in a Category 3 or a Category 4 disposal
facility would have to spend around 33% to 44% of IRA to finance all the necessary
solid waste investments. These amounts are significant since more than half of the
cities’ total operating income is sourced from IRA.
Apart from investments in SWM facilities, LGUs provide cleaning and collec-
tion services. Survey data from 48 LGUs without sanitary landfills show that, on
average, 23 cities (excluding Metro Manila) spend about Php4.4 million on solid
waste management services while 15 municipalities spend Php0.81 million (Table
25). Personnel and garbage collection have the biggest operating expenses.
RA 9003 mandates LGUs to convert and close down open dumpsites after 3 to 5
years from effectivity of the law. This means that by 2006, ideally, there should no
longer be any open dumps being used for disposal. However, none of the municipali-
ties reported any expenditure on open dumpsite conversion (upfront cost item) and
disposal facility maintenance (MOOE item). This pattern is consistent with the
study’s data, which show that 711 out of 1,232 LGUs (57%) monitored by the
National Solid Waste Management Commission still use open dumpsites for disposal.
The establishment of a materials recovery facility (MRF) is also mandated by
RA 9003, yet, none of surveyed municipalities show MRF expenses. The pattern of
expenditure in 2006 indicates that SWM services provided by the surveyed munici-
palities are mainly collection and disposal. For instance, 1st Class municipalities
report an average of Php336,000 expenditure on service contracts for garbage

37
collection. For other municipalities, garbage collection might be done using their
general services personnel and own equipment as reflected in their expenses.
On the revenue generation side, the typical sources of revenue from solid waste
services are garbage fees and sale of recyclable materials and compost. These
revenues, however, cannot cover the full cost of SWM services, even for waste
collection. Data from the 48 LGUs with revenue and cost information show that
subsidy can be as high as 97%. This subsidy would have to be sourced from locally
generated funds since the amounts exceed the 20% of IRA mandated by law for
development projects (Table 26).

38
Table 24. Local government cost of implementing SWM activities, 2006.
Cities, Income Class (Php‘000) Municipalities (Php‘000)
MM
Income class 1 2 3 4&5 Subtotal 1 2&3 4&5 Subtotal
Number of LGUs 10 4 5 4 23 10 6 5 4 15
UPFRONT COST 3,269 11,296 1,208 1,551 17,323 1,699 662 482 119 1,264
Equipment Depreciation 1,435 4,059 1,091 1,098 7,683 1,291 551 389 62 1,003
Disposal Facility Depreciation 135 692 24 41 893 0 8 93 57 158
Open Dump Conversion 100 2,500 0 41 2,641 0 0 0
MRF 1,500 3,600 30 358 5,488 0 0 0
Training 0 260 0 0 260 0 0
ECC and IEC 99 185 62 11 357 408 103 103
MAINTENANCE & OPERATION 33,070 19,418 9,413 22,002 83,902 600,483 7,681 2,382 820 10,883
Wages 15,162 9,458 4,245 5,154 34,018 28,266 2,832 1,343 417 4,593
Equipment Maintenance 575 3,043 2,639 251 6,508 3,585 474 295 34 803
Power and fuel 2,342 1,347 898 68 4,654 2,729 521 178 79 777
Supplies 1,169 382 175 20 1,746 1,100 36 274 5 314
Travel 70 22 38 47 177 49 22 9 0 30
Disposal Facility Maintenance 100 128 500 2,919 3,647 59,300 0 0 0 0
Tipping Fee 0 0 0 0 0 174,105 0 0 0 0
Garbage Collection Contract 11,405 4,500 580 13,000 29,485 273,870 2,016 0 0 2,016
Other Support services 189 112 44 281 626 149 141 170 273 584
Other Costs 2,057 426 294 263 3,041 57,329 1,639 113 13 1,765
BACKEND COST 0 0 0 0 0 0 0 0 0 0
TOTAL 36,339 30,714 10,620 23,553 101,225 602,182 8,343 2,864 939 12,147
Average (Php/LGU) 3,634 7,678 2,124 5,888 4,401 60,218 1,391 573 235 810
Source of basic data: Sumalde, 2004; survey data, this study.

39
Table 25. Local government net revenue from SWM services, 2006.
Govt. Fee Govt. Non-
#. of Total Net Revenue % Local
Income Class Based Fee Based Total Cost
LGUs Revenue (Cost) Subsidy
Revenue Revenue
Cities 55,795,782 1,223,815 57,019,597 534,164,607 -477,145,009 89
1 10 47,884,280 226,958 48,111,238 340,930,620 -292,819,382 86
2 4 1,936,036 180,563 2,116,599 81,304,209 -79,187,610 97
3 5 5,130,257 777,424 5,907,681 81,059,533 -75,151,852 92
4&5 4 845,209 38,871 884,080 30,870,245 -29,986,165 97
Metro Manila 10 231,672,811 329,114 269,282,009 3,410,047,574 -3,140,765,565 92
Municipalities 970,526 1,058,299 2,028,825 56,296,756 -54,267,932 96
1 6 610,654 0 610,654 38,877,451 -38,266,798 98
2&3 5 339,809 456,423 796,232 13,515,886 -12,719,654 94
4&5 4 20,063 601,876 621,939 3,903,419 -3,281,480 84
Note: See Appendix Table 5 for details.

The implication from previous tables is that the 20% development fund of the
IRA will not be enough for new investments in SWM sufficient to comply with the
law. This is particularly the case for 1st and 2nd Class cities given that there are other
equally valid spending priorities. For 3rd and 4th Class cities, the estimated total
expenditures, if they were to comply with RA 9003, would require an allocation of
about 2% to 4% of IRA. These figures still do not include investments in MRFs,
bioreactors, and technologies that process residuals and reduce the volume of waste.
If these capital investments were to be added, a larger proportion of IRA would be
required to support SWM services. Compliance with the law, therefore, implies that a
large proportion of an LGU’s annual budget would be eaten up in providing SWM
services at the expense of other basic services and sectors for which the 20% devel-
opment fund is intended. Given this scenario, financial assistance is justified to bridge
the financing gap for upfront capital investments in SWM.

5.3 Benefit-cost analysis of integrated SWM

The net benefit estimation of a SWM service assumes the following:

a) Each municipality constructs a disposal facility according to DAO 06-10 specifi-
cations appropriate to the projected level of solid waste generation.
b) Assumed life of the disposal facility or sanitary landfill is 15 years, from 2010-
2025, while other infrastructures such as the materials recovery facilities and
composting facilities have a lifespan of five years.
c) The avoided environmental health cost is assumed as benefit that can be derived
from the additional SWM investments complying with RA 9003.
d) It is assumed that only 50% of diarrhea cases from solid waste can be avoided,
i.e., 50% of cases could be due to exposure of waste pickers, garbage collectors,
and landfill workers.

40
e) The full 50% health benefits or avoided health cost from the SWM program can
only be attained after four years.
f) Clean up cost assumes two fulltime employees receiving minimum wages
adjusted to reflected shadow wages. The study adopts the NEDA figure on shad-
ow wage rate, which is 0.66 for unskilled workers.
g) Revenues, like garbage fees, and expenditures for flood control and repairs of
waterways are taken from the 2006 Statement of Income and Expenses submitted
by LGUs to the Commission on Audit. For the expenditure on waterways, the
figure is bundled with repairs for river walls and seawalls; therefore, the study
assumes 50% of the reported cost could be attributed to solid waste.

The estimated present values of the streams of revenues and costs of a SWM
program complying with existing laws show that if the level of revenue generation
were business-as-usual (i.e., at current level), LGUs would incur net financial losses
(Table 26). If garbage fee collection is increased by 5%, LGUs still would not recover
their investments after the 15-year period. LGUs would have to increase their
efficiency in collecting garbage fees or increase fees by 10% annually to attain
positive benefits in 15 years. The result implies that jump-starting appropriate SWM
activities to comply with the law through a cost-sharing scheme would have financial
gains if coupled with even minimum improvements in revenue collection.
Capital investment in SWM infrastructure and accompanying ecological waste
management activities would have net social benefits. Under Scenario 1 (business-as-
usual) in Table 27, benefits from avoided health, clean-up, and flood damage costs
from would make the net present value positive over a 15-year period. Scenario 1
assumes that LGUs will invest in integrated SWM activities and the accompanying
infrastructure without waste diversion and without increasing garbage fee collection.
Scenario 2 assumes that the avoided health cost increases from 20% to 50% in
four years and avoided costs from clean up and flooding increase to 50%. These
conditions would then increase the present value of net benefits to Php2.08 billion.
Presumably, once the stakeholders or communities feel the positive impact of better
solid management, they become more willing to pay for garbage collection.
In Scenario 3, garbage collection is increased by a conservative figure of 5% in
addition to the benefits from avoided health and clean-up costs. In this scenario, the
present value of net benefits increases to Php3.6 billion in 2006 prices. This amount
would be enough to offset the national government share in the cost of jump-starting
SWM compliance by LGUs. If SWM performance were improved further, the net
social benefits would be more than enough to offset the costs of LGU and national
government expenditures.
There are other benefits from sound SWM. Management and capture of methane
and other gases from a disposal facility could be traded in the clean development
market. Moreover, managing these greenhouse gases from landfills has climate
change mitigation effects that have both local and global benefits.

41
Table 26. Present value of financial revenues and costs of a SWM Program, 2006.
Scenario 1: Scenario 2: Scenario 3:
Financial Cost-Benefit Analysis
Business as Usual 5% Increase in Garbage Fees 10% Increase in Garbage Fees
A. Revenues
Garbage Fees 5,277,717,492 6,971,026,199 9,462,019,800
Recyclables 1,986,787,486 1,986,787,486 1,986,787,486
Composts 2,051,097,718 2,051,097,718 2,051,097,718
PV of Total Revenue 9,315,602,696 11,008,911,403 13,499,905,004

B. Cost (Php)
1 Development Phase
Mapping & other pre-dev activities 19,763,358 19,763,358 19,763,358
Geotech investigation & other studies 23,878,309 23,878,309 23,878,309
Construction of SLF & Leachate plant 1,846,575,316 1,846,575,316 1,846,575,316
Composting Plant (Bioreactor) 2,851,487,406 2,851,487,406 2,851,487,406
On-site MRF & Transfer station 13,388,081 13,388,081 13,388,081
2 Depreciation 2,468,970,802 2,468,970,802 2,468,970,802
3 Operations & Maintenance 2,312,486,737 2,312,486,737 2,312,486,737
4 SLF Closure & closure maintenance 1,286,646,756 1,286,646,756 1,286,646,756
5 Tax (12% VAT on Capex) 565,374,096 565,374,096 565,374,096
PV of Total Cost 11,388,570,862 11,388,570,862 11,388,570,862
Net Present Value (2,072,968,166) (379,659,459) 2,111,334,142

42
Notes:

a) Estimated lifespan of facility is 15 years; bioreactor and MRF = 5 years.

b) Total cost of the SW disposal facilities is estimated using the DAO 2000-10 categories for all LGUs.

c) Total volume of solid waste to be disposed to the facilities is 2,078,136 mt/yr for 15 years from 2010-2025.

d) Mapping & other pre-dev activities is estimated at Php17.05/mt

e) DOST estimated the cost of bioreactor with capacity of 1 mt/day at Php300,000/unit.

f) On-site MRF & Transfer station is estimated at Php11.55/mt of recovered recyclable materials.

g) Discount rate is 10%.

h) Government taxes included are the extended value-added tax for capital expenditures only. Import duties and shipping costs are not included since these costs will need more information on
the materials to be imported and the exporting country.

i) Garbage fee data was taken from the 2006 Financial Report of Local government units published by the Commission on Audit. The revenues for recyclable materials and composts were
estimated based on survey data.

43
Table 27. Net present value of economic benefits and costs from SWM investments, 2006.
Scenario 3:
Scenario 1: Scenario 2:
Present Value of Social Costs and Benefits 50% Avoided Costs by Year 4 and 5%
Business as Usual 50% Avoided Costs by Year 4
increase in Garbage Fee Collection
A. Revenues
Garbage Fees 5,277,717,492 5,443,480,134 6,971,026,199
Recyclables 1,986,787,486 1,986,787,486 1,986,787,486
Composts 2,051,097,718 2,051,097,718 2,051,097,718
Avoided Cost of Illness 1,340,087,300 2,898,169,904 2,898,169,904
Avoided Cost of flooding & clean-up 196,656,880 425,304,420 425,304,420
Total Revenue 10,852,346,876 12,804,839,663 14,332,385,727

B. Cost (Php/MT)
1 Development Phase
Mapping & other pre-dev activities 19,763,358 19,763,358 19,763,358
Geotech investigation & other studies 23,878,309 23,878,309 23,878,309
Construction of SLF & Leachate plant 1,846,575,316 1,846,575,316 1,846,575,316
Composting Plant (Bioreactor) 2,851,487,406 2,851,487,406 2,851,487,406
On-site MRF & Transfer station 13,388,081 13,388,081 13,388,081
2 Depreciation 2,468,970,802 2,468,970,802 2,468,970,802
3 Operations & Maintenance 2,210,274,824 2,210,274,824 2,210,274,824
4 SLF Closure & closure maintenance 1,286,646,756 1,286,646,756 1,286,646,756
Total Cost 10,720,984,852 10,720,984,852 10,720,984,852
Net Present Value 131,362,024 2,083,854,811 3,611,400,876

44
Notes:

a) Cost of Illness and Cost of Flooding and Clean-up are based on the computations in Tables 8 and 9. Scenario 1 assumes 20% of the computed costs as avoided costs or benefits from SWM
services. In Scenario 2, the 20% avoided cost-of-illness and cost-of-flooding and clean-up in year 1 is increased annually to a maximum of 50% by year 4 - 15.

b) The revenues from recycling and composting are assumed constant for both scenarios. In Scenario 3, in addition to Scenario 2, it assumes 5% increase in garbage fee collection.

c) Personnel cost for Operations and Maintenance is estimated using the shadow price of unskilled labor provided by the National Economic and Development Authority (NEDA), which is 66%
of the wage rate.

d) Other assumptions are the same as the financial analysis, i.e., discount rates, planning horizon, and unit costs.

45
6 LGU FINANCING MECHANISMS
FOR SWM

Financing of SWM activities comes from both traditional and non-traditional

sources. Traditional sources include those contributed by the national government
(e.g., IRA) and other charges embedded in a particular LGU’s revenue source (e.g.,
real property tax, business taxes, licenses, fines, etc.). The non-traditional sources
might include user charges in various forms.
At present, a large part of SWM services and activities are financed from tradi-
tional sources. The landmark Ecological Solid Waste Management Act of 2000 (RA
9003) provided the institutional and legal foundation for all LGUs to impose fees and
user charges to pay for the cost of solid waste activities. Currently, however, LGUs
continue to finance SWM services in an ad hoc manner. This is because there are no
definitive procedures on how to collect fees and charges from households and
businesses. Other existing statutes, such as the Local Government Code and the Local
Tax Code, are not explicit in providing guidelines for adoption, calculation, and
imposition of user charges (Nippon Koei Co., Ltd. (2006). Moreover, many LGUs are
wary of imposing garbage fees from all generators, especially from households for
fear of political backlash.
Part of the challenge is to come up with an integrative picture on the options
available for the LGUs in financing SWM activities. This section builds on previous
studies to review some strategies available for local governments, and to assess their
advantages and disadvantages. It will also examine the impact of cost arrangements
and fiscal transfers from national to local governments on the national government’s
fiscal position.

6.1 Trends in LGU finance and implications on SWM

6.1.1 Traditional sources of finance

Traditional sources continue to be the main contributor in LGU budgets for fi-
nancing various SWM activities and services. These primarily come from national
transfers to local governments (IRA is the most important) and from own-source
revenues of the LGU themselves. The IRA is a fixed share that LGUs receive from
the central government and this is set at 40% of the actual internal revenue tax
collections of the central government three years prior to the current year (Manasan
(2004)). By law, at least 20% of IRA should be earmarked to finance development
projects and activities. IRA is so important that LGUs are dependent on it for about
69% of their total revenues and 73% of their expenditures.
Table 28 compares IRA appropriations and obligations. It is clear from this table
that shortfalls in LGU IRA from the mandated share was worst during periods when
the national budget was re-enacted (i.e., 2001 and 2004). IRA allocation is also

46
frozen and not automatically given when the national government experienced large
budget deficits. However, this situation is no longer expected to occur because of a
Supreme Court ruling that IRA is to be automatically appropriated and released by
the national government to the LGUs every year without need of going through the
annual General Appropriations Act process. If Congress enacts a new General
Appropriations Act in time for 2008, IRA is expected to hit Php184 billion. It is also
expected to increase in subsequent years following the recent fiscal consolidation due
to new tax measures such as the RVAT.
This is good news since most LGUs highly depend on the Local Development
Fund to finance their SWM services (Cardenas (2005)). A 2006 World Bank study
shows that some LGUs source more than 60% percent of their SWM budgets from
the IRA (Figure 3). This heavy dependence on IRA is more prevalent among
municipalities, which have low tax bases and thus are unable to generate sufficient
own-source revenue.

Table 28. Comparison of IRA appropriations and obligations, 1998-2004 (billion pesos).
1998 1999 2000 2001 2002 2003 2004
(1) Mandated IRA share 81.3 100.9 121.8 131.9 134.4 141.0 150.3
40% of net BIR revenues 3 years back
(2) Appropriations 81.0 96.8 111.8a 111.8 134.4 141.0 141.0
(3) Obligations 76.9 95.3 114.3b 115.8 134.4 141.0 141.0
(1) less (3) 4.4 5.6 7.5 16.1 0.0 0.0 9.3
a
Php10 billion of the Php121.8 billion mandated share was put under “unprogrammed funds” by a
member of the Senate.
b
In the course of the budget year, Php2.5 billion was transferred from the “unprogrammed fund” to the
“programmed” portion of the budget.
Source: Department of Budget and Management as presented in Manasan (2004).

100%

80%

60%

40%

20%

0%
Calamba Cebu Dagupan Gen San Panabo Roxas

Real Property Tax Business Tax IRA and national gov't SWM fees

Source: Nippon Koei Co., Ltd., 2006

Figure 3. Revenue source for SWM activities in %, selected LGUs.

47
 The danger of depending too much on IRA is that SWM spending competes
with other LGU priorities. It is apparent from Table 29 that even with their IRA,
LGUs still experience shortfalls in their share of general government revenue sources
vis-à-vis their share of general government expenditures. It is no wonder that poorer
cities and municipalities devote less than 3% of their LGU income to SWM services
(Nippon Koei Co., Ltd. (2006)).
Table 30 shows that even if LGU income were defined to be IRA plus other ad-
ditional income sources (tax income, rental income, fees, etc.), the LGU budget
allocation for SWM would remain dismal. Table 30 further shows that for low-
income, small LGUs, the average budget for SWM as a percentage of LGU income
would be less than 3%.

Table 29. Mismatch between revenue sources and expenditure needs of LGUs.
Ratio of Own- Ratio of Own- Ratio of LGU Surplus/ Surplus/
Source Revenue Source Revenue Expenditure to (Deficit) (Deficit)
to Gen. Gov’t Plus IRA to Gen. Gov’t Without the With the IRA
All LGUs Revenue Gen. Gov’t Expenditure IRA
Revenue Net of Debt
Service
% % % % %
1985 5.62 9.88 12.01 -6.39 -2.13
1987 4.36 7.35 10.55 -6.20 -3.21
1989 4.63 7.61 11.10 -6.47 -3.50
1991 4.31 8.20 12.65 -8.33 -4.44
1993 5.81 14.20 19.99 -14.18 -5.79
1995 5.30 15.14 21.85 -16.54 -6.71
1997 5.86 15.89 21.47 -15.61 -5.57
1999 6.36 19.21 23.05 -16.69 -3.84
2001 6.32 18.89 25.73 -19.41 -6.85
2003 6.85 21.21 25.41 -18.56 -4.20

Average
1985-1991 4.62 8.13 11.30 -6.67 -3.17
1992-2003 6.09 17.85 22.96 -16.87 -5.12
Source: Manasan (2004).

48
Table 30. Waste generation and budget allocation for SWM by LGU.

Source: Sumalde (2005).

Of the small budget devoted to SWM, the greater proportion goes to salaries of
SWM workers. On average, salaries account for 55% of SWM expenditures for the
sample LGUs in 2004 (Figure 4).

49
 100%

80%

Others
60%
Maintenance

40% Fuel and oil

Salaries
20%

0%
Cebu Dagupan Gen San Panabo Roxas

Source: Nippon Koei Co., Ltd., 2006.

Figure 4. SWM expenditures in %, in selected LGUs

6.1.2 Non-traditional sources of finance

Non-traditional sources include various forms of user charges. Cardenas (2005)
documents existing examples from several LGUs:
 Olongapo City charges household garbage fees by “attaching” the amounts to the
electric bill.
 Marikina City generates income through: (1) monthly rentals of its Materials
Recovery Facility; (2) garbage fees for establishments; and (3) fees for special
garbage collection trips.
 Dumaguete City charges an amount for every tagged sack of waste disposed of by
households and business establishments. Only wastes in the tagged sacks are col-
lected by SWM enforcers.
 In Makati City, Barangay South Cembo generates revenues through sales of
recyclables collected from households.

These non-traditional sources require strong political will for enforcement. If

enforcement is weak, dumping behavior might change for the worse. For instance,
for volume or weight based fees (Dumaguete City, for example), households might
prefer to throw their garbage in unauthorized places just to avoid the higher fees. On
the other hand, if the user charge per unit is high enough and enforcement is strong,
households might be encouraged to reduce their waste and resort to recycling and
composting to avoid the user charge.
For a few entrepreneurial LGUs, fee based revenues are substantial and make up
the bulk of the total. This is the case with innovative LGUs such as Olongapo City
(Php18 million), Baguio City (Php7 million) and Dumaguete City (Php4 million).
Notwithstanding these relatively substantial amounts, they are still barely enough to
finance the SWM services of most of the LGUs. The fiscal gap in the provision of

50
SWM services is significant and even more pronounced for LGUs that have not
adopted any scheme to generate revenue. The Nippon Koei Co., Ltd. (2006) study for
the World Bank showed similar results and confirms a wide fiscal gap, which will be
funded, in all likelihood, through the IRA and the general fund (Table 31). This
would sacrifice, however, funding for other basic services.

Table 31. Estimated LGU subsidies for SWM services (in million pesos, 2004).
Items Calamba Cebu Dagupan Gen San Panabo Roxas
Estimated SWM
24 54.11 13.5 17.53 3.84 8.87
expenditure
Reported garbage
1.5 8.79 1.44 1.6 0.36 0.27
fee collection
Estimated subsidy
22.5 45.32 12.06 15.93 3.48 8.6
for SWM services
Subsidy level as %
93.80% 83.80% 89.30% 90.90% 90.60% 97.00%
of SWM expenditures
Source: Nippon Koei Co., Ltd., 2006.

Having seen these large fiscal gaps in the provision of SWM services, the next
section will dwell on the options available to LGUs for funding these services. It will
discuss the inherent advantages and disadvantages of each scheme.

6.2 Strategies available for SWM funding

In general, there are two types of SWM costs that LGUs will need to fund (Nip-
pon Koei Co., Ltd. , 2006). These are:
 Capital/investment costs, which go toward developing and expanding facilities,
and purchasing and replacing plant and equipment; and,
 Recurrent (i.e., operating and maintenance) costs incurred in the actual provision,
management, and administration of SWM services.

6.2.1 Capital investment costs

If LGUs cannot obtain non-traditional sources of revenue, most of them will

continue to rely on the Local Development Fund (20% of IRA) for capital invest-
ments. For small capital investments, the Local Development Fund might suffice.
However, for large-scale SWM investments such as the development of an integrated
sanitary landfill (with materials recovery facilities, composting, and processing of
some residual waste), LGUs will generally find it difficult to rely on their own
budgets. This calls for alternative financing arrangements to fill in the gap. Some of
the funds accessible to LGUs are the following:

a) Special dedicated financing windows from government financial institutions such

as the Development Bank of the Philippines and the Land Bank of the Philip-
pines, with funds sometimes coming from multilateral agencies like the Asian
Development Bank and the World Bank or even from the national government

51
 itself. One example of a SWM financing window is the Kreitenstalt für
Wiederaufbau-Credit Line for Solid Waste Management channeled through the
Development Bank of the Philippines.
b) Grants from multilateral financing institutions such as the Japan Bank for
International Cooperation.
c) Loans or Official Development Assistance from multilateral financing institutions
or sovereign countries (e.g., People’s Republic of China).
d) Funds from the Department of Finance’s Municipal Development Fund Office.
e) LGU bond issuances.
f) National Solid Waste Management Fund created under RA 9003.

Apart from the different funding sources, a possible avenue for LGUs is private
sector participation. One example is the Build-Operate-Transfer (BOT) arrangement.

6.2.2 1996 LGU financing framework

The Department of Finance formulated its 1996 LGU Financing Framework in
response to the Local Government Code. Despite the increased LGU share of
national government revenues after the ratification of the Code, LGUs still do not
have enough to pay for the delivery of various services including SWM. The DOF
Framework aims primarily to encourage the private capital market to participate more
in local government financing. The Framework segments LGUs depending on their
creditworthiness: low-income LGUs obtain funds from the DOF’s Municipal Devel-
opment Fund Office, middle-income LGUs access funds from government financial
institutions and upper-income LGUs obtain funds from private financial institutions.
(DOF Memorandum, February 2007).
As an LGU’s creditworthiness improves, it could “graduate” to being able to ac-
cess funds from the private capital market. The DOF Framework also provides for
the development of an LGU bond market. However, gains have been limited
(Manasan (2004)). Notwithstanding the 12 LGUs that successfully issued more than
Php1.4 billion worth of bonds, private capital never really seemed to be a significant
source of LGU financing. Thus, government financial institutions and the Municipal
Development Fund Office continued to be the dominant source of LGU finance,
accounting for 76% and 7%, respectively, of total LGU borrowing in 2000. Lower
effective interest rate charges by the Municipal Development Fund Office also create
a disincentive for more creditworthy LGUs to attempt to access the private capital
market.

6.2.3 ODA grants and loans

Rarely are Official Development Assistance or ODA grants and loans channeled
directly to LGUs. Grants and loans are normally coursed through the different
government financial institutions that serve as conduits for these funds, with the
national government providing sovereign guarantees for the foreign borrowing.
Government financial institutions shoulder part of the administrative and foreign

52
exchange risks. One attractive feature of ODA grants is that it relaxes constraints on
the LGU budget by providing the funds under concessional terms. That said, there are
three crucial elements in using ODA grants and loans:

a) Before funds from grants and loans are made available to LGUs, great care must
be taken in the preparation of feasibility studies, specification of detailed engi-
neering designs, and project supervision during implementation;
b) Close coordination between the LGU, national government agencies (two of the
most important are the Department of the Interior and Local Government and the
Department of Environment and Natural Resources) and the concerned govern-
ment financial institution that acts as the conduit of these grants and loans; and,
c) Provision of training to LGU personnel who will handle the SWM service or
facility.

The first element will assure reasonable pre-qualification requirements that

could aid in the selection of competent suppliers and contractors. Moreover, it will
spell out each party’s responsibility once the project is underway. The second
element will ensure that projects meet certain environmental and other legislative
requirements. It also will be a critical element in identifying eligible projects to be
financed by the government financial institution. The third element will strengthen
the capabilities of LGU personnel to handle SWM service and facility concerns. The
Kreitenstalt für Wiederaufbau-Credit Line for Solid Waste Management, for instance,
includes a technical assistance component apart from the usual credit component.
Unless these three elements are strengthened, it is doubtful whether LGUs will
have the absorptive capacity for effective use of these funds for SWM. Once these
are present, however, grants and loans might be a viable tool to wean LGUs away
from heavy dependence on the Local Development Fund. However, this may again
foster the dependence of LGUs on government financial institutions and might even
become a disincentive for them to find financial sources from private sector entities.

6.2.4 Private sector participation through BOT and other schemes

There are a number of variants of possible private sector participation in LGU
development projects.5 The most popular for large-scale, capital-intensive invest-
ments is the BOT scheme. Like Official Development Assistance grants, BOT takes
pressure off from budget constraints since it is the private sector rather than the LGU
that makes the investment. Moreover, BOT relieves the LGU from the responsibility
of running the project; with their role shifting to that of supervising the private
investor/operator.. However, BOT schemes also have their fair share of problems,
mostly stemming from guarantees given to winning bidders. Examples of these
guarantees are:

5
These include, but are not limited to, Build-Operate-Transfer (BOT), Build-Transfer (BT), Concessions
or Long-term Leases, and Service Contracts.

53
 Sovereign guarantees, where loans incurred by the Builder-Operator are repaid in
the event that he defaults;
 Guarantees against foreign-exchange fluctuations;
 Take-or-pay or Minimum off-take guarantees, where the Builder-Operator is paid
a minimum return regardless of the extent of the public’s use of the facility; and,
 Performance Undertaking guarantees that assures compensation to the Builder-
Operator for government’s failure to deliver on certain promises.

Although there have been quite a number of BOT projects involving LGUs as of
2006, none of these have been projects in SWM services or activities.6 In fact, Table
32 shows that as of May 2006, no SWM BOT project has ever been implemented.7

Table 32. Summary of BOT and similar projects as of May 2006.

Sector No. of Projects Project Cost
Power 42 9,507.36
Transport 7 2,546.00
Water 5 7,839.40
Information Technology 8 277.02
Property Development 11 55.74
Health 1 1
Others 2 415
Total 76 20,641.52
Source: DTI-BOT Center.

Despite the anemic (non-)performance of LGUs in private sector participation,

this remains to be a viable avenue for project financing once certain variables are met:
 First, the national government, in general, and LGUs, in particular, should select
the most efficient, cost-effective or investment-ready operator;
 Second, the national government also should choose the most appropriate plan
and design; and,
 Third, a regime that encourages the optimal number of entrants and investors is
installed.

In the long term, the capability of LGUs to tap this promising source of financ-
ing should be well developed. For the present, unless the funds from these sources
(whether in full or in cost-sharing with the national government) are forthcoming,

6
BOT projects of LGUs that have been completed include the Mandaluyong City Marketplace, Dapitan
Public Market, and the Talisay City Hall. Joint ventures between the Bohol Provincial Government and
Salcon Consortium operate the Bohol Provincial Electric System and the Bohol Water Supply System.
Five BOT projects were under construction as of June 2004. These were the Binirayan Administrative
and Commercial Center in Antique, the Bocaue Public Market and Commercial Center, Tarlac City
Public Market, Roxas Commercial Center in Isabela, and the Matnog Integrated Bus Terminal in
Sorsogon. Six projects are in the pipeline. These are the ICT projects of Koronadal, Kidapawan and
Cavite City; General Santos City Integrated Transport Terminal and Commercial complex; Davao del
Norte Integrated Water Resource Development Project and Rehabilitation of Olongapo City’s Electric
Power Distribution System.
7
The two projects under “Others” are the Samal Island Resort Estate Development and the Pabahay sa
Riles.

54
LGUs should finance their SWM investments from their own budgets, something
equally problematic due to competing priorities.

6.3 Recurrent costs

Recurrent expenditures are financed from either (1) fiscal transfers from the na-
tional government (IRA), (2) LGU’s own-source revenue (i.e., through taxes, fees,
and charges), or (3) income from enterprises such as water and electricity supply.
Apart from the IRA, the contribution of garbage fees to total income is meager
(Nippon Koei Co., Ltd. (2006)). Thus, the LGU is left with no other recourse but to
fund recurrent SWM expenditures through its IRA.
The key point is to adopt a cost recovery policy to finance these expenditures.
Here, an integral component is that the LGU should clearly establish its overall
objective of the cost recovery policy (Nippon Koei Co., Ltd. (2006)). It matters,
therefore, whether the strategy attempts over time to (a) achieve full cost recovery by
progressively raising user charges until full cost recovery is achieved; (b) how cost-
sharing will be provided using other local revenue sources; and (c) what is the target
level of cost-sharing as a proportion of the total costs of SWM service provision that
can be met from other revenue sources.
It is crucial and inescapable that full cost recovery should be the ultimate agen-
da, or else the provision of SWM services will be heavily dependent on continuing
subsidies (Nippon Koei Co., Ltd. (2006)). However, it should be noted also that user
fees can be collected only for waste whose source can be directly identified. Cost for
properly managing street sweepings, waste collected from open areas, illegal dumps
and waterways will have to be covered by the LGU.

6.4 Cost-sharing arrangements and their impact on the national

government’s fiscal position

6.4.1 Legal basis for financing/funding support

In line with the Department of Finance’s LGU Financing Policy Framework, the
Investment Coordination Committee-Cabinet Committee on December 12, 2002 and
the NEDA Board in March 2003, approved the “Guiding Principles and National
Government-Local Government Unit Cost-sharing Policy in the Evaluation and
Processing of Projects Involving Devolved Activities.” Under this Cost-sharing
Policy, 1st to 4th Class cities are not entitled to grants from the National Government
for brown environment-related subprojects. These subprojects include, but are not
limited to, solid waste management projects, drainage, sewerage, and sanitary support
facilities,.
In February 2007, the DOF issued a Memorandum adopting the abovemen-
tioned LGU Financing Policy Framework and “National Government – Local
Government Cost-sharing Policy” for application to all related projects and programs
requiring cost-sharing between the national government and LGUs that might be in
process, or for processing, by the Investment Coordinating Committee. The Memo-

55
randum was issued to all heads of national government agencies, government owned
and controlled corporations, government financial institutions, and LGUs.
Considering that 1st to 4th Class cities are the ones in greatest need of SWM fa-
cilities because of their population size and their corresponding volume of waste,
there is sufficient ground to pursue a reconsideration of the above policy. First to 4th
Class cities need financing or funding support so that they can address their solid
waste problems in compliance with the requirements of RA 9003.
The legal bases for national government to give funding support to LGUs for
SWM activities are found both in RA 7160 and RA 9003. Section 17(f) of RA 7160
provides that the national government or the next higher level of LGU “may provide
or augment the basic services and facilities assigned to a lower level of local govern-
ment unit when such services or facilities are not made available or, if made availa-
ble, are inadequate to meet the requirements of its inhabitants”. The basic services
and facilities include solid waste disposal systems, environmental management
systems, and services or facilities related to general hygiene and sanitation.
Section 17(g) of RA 7160 further provides that the basic services and facilities
enumerated in the Local Government Code shall be funded from:
 The share of LGUs in the proceeds of national taxes and other local revenues;
and,
 Funding support from the national government, its instrumentalities and govern-
ment-owned or controlled corporations, which are tasked by law to establish and
maintain such services or facilities.

Section 17(g) likewise provides that any fund or resource available for the use
of LGUs shall be allocated first for the provision of basic services or facilities
enumerated in the Local Government Code before applying the same for other
purposes.
RA 9003, Section 47, gives LGUs the authority to collect solid waste manage-
ment fees. It provides that LGUs “shall impose fees in amounts sufficient to pay the
costs of preparing, adopting, and implementing a solid waste management plan” and
to pay the actual costs incurred by the LGU in collecting the local fees. It recognizes,
however, that the fees collected might not be sufficient to finance solid waste man-
agement activities of the LGUs.
Chapter IV of RA 9003 provides for the grant of incentives to individuals, pri-
vate organizations and entities, non-government organizations (NGOs), enterprises,
and LGUs. Section 45(a) thereof provides that “rewards, monetary or otherwise, shall
be provided to individuals, private organizations and entities, including NGOs that
have undertaken outstanding and innovative projects, technologies, processes and
techniques or activities in reuse, recycling and reduction”. The reward shall be
sourced from the National Solid Waste Management Fund, the creation of which is
provided in RA 9003. Rule XVI, Section 1(a) of the implementing rules and regula-
tions (IRR) of RA 9003 includes LGUs among those that will be entitled to such
rewards.

56
 Section 45(b) of RA 9003 provides for an incentive scheme “for the purpose of
encouraging LGUs, enterprises, or private entities, including NGOs, to develop or
undertake an effective solid waste management, or actively participate in any pro-
gram geared towards the promotion thereof.” The incentives given include the
extension of grants to LGUs and incentives to host LGUs.
Thus, under Section 45(b)(4), “provinces, cities, and municipalities whose solid
waste management plans have been duly approved by the National Solid Waste
Management Commission or who have been commended by the Commission for
adopting innovative solid waste management programs may be entitled to receive
grants for the purpose of developing their technical capacities toward actively
participating in the program for effective and sustainable solid waste management”.
In this connection, Rule XVI, Section 1(b) of the Implementing Rules and Regula-
tions of RA 9003 provides that under the National Solid Waste Management Fund,
the provinces, cities and municipalities with Commission approved SWM Plans, shall
be entitled to receive project grants for a range of SWM activities.
With regard to incentives to host LGUs, Section 45(b)(5) of RA 9003 provides
that LGUs that host common waste management facilities shall be entitled to incen-
tives. In line with this provision, Rule XVI, Section 1(a)(5) of the IRR of RA 9003
provides that

The Commission shall promulgate within one (1) year following the
effectivity of these IRR specific guidelines that will provide specific
incentives, aside from giving grants and other financial assistance
packages, to LGUs hosting or offering to host SWM facilities. The
principle by which this package of incentives is designed revolves
around the recognition of paying for the access granted to the pre-
sent and future use of resources that are within the localities. The set
of incentives may include, among others, targeting subsidies for
specific use of resources like water and power; plowing back certain
percentage of the profits generated from the facility to support de-
velopment initiatives of the LGUs or payment of royalties for con-
tinued operation of the facilities. The Commission shall task DENR
to undertake a study that will look into the specific aspects of these
incentives and present to the public within a year the results of the
said study.

In line with financing SWM, RA 9003, Section 46, creates as a special account
in the National Treasury, a Solid Waste Management Fund to be administered by the
National Solid Waste Management Commission. The Fund shall be sourced from the
following: (a) Fines and penalties imposed, proceeds of permits and licenses issued
by the Department of Environment and Natural Resources under RA 9003, donations,
endowments, grants and contributions from domestic and foreign sources; and, (b)
amounts specifically appropriated for the Fund under the annual General Appropria-
tions Act.
The Fund shall be used to finance the following:

57
 Products, facilities, technologies and processes to enhance proper solid waste
management;
 Awards and incentives;
 Research Programs;
 Information, education, communication and monitoring activities;
 Technical assistance; and,
 Capability building activities.

LGUs can avail of the Fund based on their approved 10-year SWM plan. Specif-
ic criteria for the availment of the Fund shall be prepared by the Commission.
In summary, there is no legal impediment for the provision by national govern-
ment of financing support to LGUs for SWM activities. By creating the Solid Waste
Management Fund, RA 9003 actually mandates national government to provide this
funding support.
Equally important to note is that RA 9003 does not qualify in terms of which
class of LGUs is eligible for grants or for funding from the Solid Waste Management
Fund. What the law provides is that provinces, cities, and municipalities are entitled
to receive grants or to avail of the Solid Waste Management Fund, subject to compli-
ance with certain requirements prescribed by law. These requirements do not include
the income class of the LGU.
Based on the foregoing and given the policy enunciated by RA 9003, coupled
with the need of all LGUs for funding support to fully comply with the requirements
of RA 9003, it is recommended that the NG-LGU Cost-sharing Policy – particularly
that for Cluster 3 – and the corresponding DOF Memorandum be reconsidered. There
is need for a new NG-LGU Cost-sharing Policy that entitles all LGUs, regardless of
income class, to receive grants for SWM projects from the national government.
The Investment Coordination Committee approved a cost-sharing scheme be-
tween the national government and LGUs for LGU projects with social or environ-
mental objectives. This specified the percentage of project cost that could be given as
capital grants and the types of projects and income classes of LGUs that would be
eligible for grants.
For instance, for brown environmental projects (to which SWM services and ac-
tivities belong), 5th and 6th Class cities and 1st and 2nd Class municipalities and
provinces can avail of 20% grants; 3rd and 4th Class municipalities and provinces can
avail of 40% grants; and 5th and 6th Class municipalities can receive 50% grants.
LGUs are required to provide counterpart equity; the rest of the project cost can be
borrowed from the Municipal Development Fund Office at market-based interest
rates with a maturity of 15 years inclusive of a three-year grace period on the princi-
pal (see Table 33 for details). The NEDA Board approved the revised guidelines in
March 2003.

58
Table 33. National government-LGU cost-sharing policy for brown environment
projects.
Municipalities and Provinces Cities
LGU Income Class
Loan Grant Equity Loan Grant Equity
st nd
1 and 2 60 20 20 80 0 20
3rd and 4th 45 40 15 80 0 20
th th
5 and 6 40 50 10 60 20 20

On the strength of these revised guidelines, some LGUs put environmental pro-
jects in the pipeline for national government funding assistance. However, they
stopped pursuing these projects when a joint memorandum from the secretaries of the
Department of Finance and the Department of Budget and Management announced in
August 2004 that the national government would no longer provide grants and
subsidies to LGU-devolved programs, activities, and projects.
This joint memorandum was issued to stave off an impending fiscal crisis during
that time. At present, however, the momentum for a fiscal turnaround is gaining
headway; this means the prospect of a return of national government subsidies for
projects with positive spillover effects are much higher and imminent.
In principle, subsidies cannot be ruled out. SWM activities have tremendous
positive non-monetary externalities, which warrant government sharing in finances.
For instance, without partial cost-sharing, LGUs would not have any incentive to
pursue and improve their SWM services any further. One consequence is to drive
away potential business investors and tourists who might be averse to filthy surround-
ings. The lack of cost-sharing might compel an LGU to use open dumps instead of
sanitary landfills; this potentially creates greater environmental, health, safety, and
aesthetic damages.
It is precisely to avoid these unwanted externalities of improperly managed solid
waste that the national government has set environmental standards for SWM, which
LGUs are now mandated to follow. Table 34 shows the various external effects that
an LGU might not be able to “internalize” (i.e., take on as its own). This would justify
cost-sharing from the national government. The difficult choice in such projects is
often not, whether some form of public support is required, but rather the more
technical issue of the extent of such subsidies and the manner in which these are to be
given.
It is difficult to determine beforehand the implications of this SWM cost-sharing
arrangement on the national government’s fiscal position without determining the
amount of capital investments needed by LGUs. Subsidies would make sense with
large-scale capital investments. Laplante (2003) estimated the incremental cost of
switching and upgrading to a sanitary landfill from a low of about US$700,000 to a
high of over US$5 million under severely stringent assumptions (which tend to
underestimate the true cost).

59
Table 34. External effects and potential for internalization by LGUs.
Nature of External Effects Potential Significance
Pollution of surface water
Pollution of surface water
Population of vermin
and pest
Air quality (noise, smoke,
odor)
Public health
Visual amenity
Source: Laplante (2003)
Potential for Internalization by LGU
Partial to no internalization
The benefits of reducing pollution of surface
water are only partly internalized since the
High impact of surface water pollution is not limited
to the LGU undertaking a landfill project. If
the open dump site is downstream of the LGU,
then no internalization is taking place.
Partial to no internalization
The benefits of reducing pollution of surface
water are only partly internalized since the
High impact of surface water pollution is not limited
to the LGU undertaking a landfill project. If
the open dumpsite is downstream of the LGU,
then no internalization is taking place.
Complete internalization
Under the assumption that population of
Moderate vermin and pest has a very localized impact,
the LGU will completely internalize the
benefits of controlling this population.
Partial to complete internalization
If air quality problems are very localized, the
LGU will almost completely internalize the
High benefits of improved air quality. If neighbor-
ing communities also suffer from reduced air
quality, the LGU will only partly internalize
the benefits of improved air quality.
Partial to no internalization
The benefits of increased public health are
only partly internalized since the cost of
High various health impacts caused by the open
dump is only partly supported by the LGU. If
health care costs are completely financed by
the national government, then no internaliza-
tion of public health impact is taking place.
Partial internalization
The improvement in visual amenity brought
about by improved landfill facilities benefit
not only the citizens of the LGU but also all
Moderate other citizens whose visual amenity is
adversely impacted by the open dumpsite.
Hence, the benefits of improved visual
amenity are only partly internalized by the
LGU.

This study has done a back-of-the-envelope calculation of how the LGU cost-
sharing arrangement would impact the national fiscal position. It applies the current
cost-sharing scheme to the estimated new SWM investments needed for LGUs to
comply with RA 9003 as described in section 4.2 (financial costs and revenues).
Under the scheme, the estimated total national government financial exposure would
be about Php936 million, of which about PhP930 million would go to the 1,489

60
municipalities and PhP6 million to the 5th and 6th Class cities in 2006 prices (Table
35). The municipalities would have to shoulder Php1.054 billion in new capital
investments for loan and equity or approximately Php708,000 each (Table 36).
Without national government cost-sharing, the 48 1st and 2nd Class cities, would have
to spend about Php3.6 billion or about Php76 million per city sourced from either
their general fund, loans, or private sector investors. For the 50 3rd and 4th Class cities,
the additional investments would be approximately Php10.3 million each, while the 6
5th Class cities would need to allocate about Php2.01 million.

Table 35. National government share of the cost of new SWM investment under the
current DOF scheme (in thousand pesos, 2006).
Municipalities and Provinces Cities
Income
class SWM SWM
Loan Grant Equity Loan Grant Equity
Investment Investment
1st & 2nd 1,418,612 851,167 283,722 283,722 3,628,150 2,902,520 0 725,630
3rd & 4th 1,362,747 613,236 545,099 204,412 517,271 413,817 0 103,454
th th
5 &6 201,953 80,781 100,976 20,195 30,163 6,033 6,033 6,033
Total 2,983,312 1,545,185 929,798 508,330 4,175,583 3,322,369 6,033 835,117
Note: Municipalities with no income classification are grouped with income class 5 & 6. Metro Manila is
excluded in the scheme.

Table 36. The cost per LGU for new SWM investment under the DOF cost-sharing
scheme, 2006 (in thousand pesos).
Estimated Share of Each Municipality Estimated Share of Each City
Income Total Total
No. Grant LG Share No. Grant LG share
class Investment Investment
1st & 2nd 312 4,547 909 3,637 48 75,586 0 75,586
3rd & 4th 869 1,568 627 941 50 10,345 0 10,345
5th & 6th 308 656 328 328 6 5,027 1,005 2,011
Total 1489 2,004 624 1,379 104 40,150 58 39,976

No doubt, the cost-sharing will help ease the budget constraints experienced by
poorer municipalities. The question is whether the national government can sustain
this arrangement. If the national government continues to consolidate its fiscal
position in the next few years then this type of arrangement might be sustainable. It
is important, however, to manage the cost-sharing scheme so that it will not end up
being a disincentive to LGUs who might decide to look for alternative sources of
financing.
Moreover, it is important to note that a large chunk of the expenses incurred by
LGUs is of the recurrent type. Sumalde (2005) estimates that operating expenses eat
up over 90% of SWM costs . Operating costs averaged around Php43 million for
LGUs listed by the Solid Waste Management Association of the Philippines8 and over
Php200 million for other types of LGUs. Here, caution must be exercised in continu-
ously giving subsidies since LGUs might in turn be too dependent on national
government transfers even for their operations.
8
The Solid Waste Management Association of the Philippines provides training and linkages to help
LGUs finance and comply with the Solid Waste Management Act.

61
7 PROPOSED REVISION OF THE
COST-SHARING FRAMEWORK

There are substantial costs and benefits from solid waste management. Health
damages and clean-up costs are incurred by local governments and communities.
Both local and national governments incur costs from improperly managed solid
wastes since government contributes substantially to maintaining the health of all
communities. Good solid waste management, therefore, will benefit communities,
local governments, and the national government.
Indeed, the financial and economic analysis of a SWM program that complies
with RA 9003 indicates that positive net benefits could be enjoyed. The costs used to
manage health impacts and clean-ups from solid waste pollution, if avoided, are about
14% of the estimated benefits. A cost-sharing scheme, therefore, can channel back to
the LGUs a portion of the benefits from good solid waste management.

7.1 Cost-sharing framework

This study recommends inclusion of 1st to 4th Class cities in the cost-sharing
scheme for SWM. The allocation of national government and local government costs
is based on the following premises:
a) LGUs subsidize from 84% to 98% of current SWM costs for activities that fall
short of the requirements of the law.
The expenditure on SWM is already 5% to 10% of the cities’ IRA; hence,
any new investments for a complete, integrated SWM system (safe disposal facil-
ity, composting facility, MRFs, and facilities to process residuals) would raise
SWM expenditures to over 30% of IRA. The additional financial requirement
would be taken from the LGU’s general fund and would result in cutting back
funds for other development programs.
b) There are substantial costs from the negative externalities posed by improperly
managed solid waste.
Preventing or minimizing these negative externalities results in net benefits
to society as a whole. 9The benefit-cost analysis shows that avoiding the cost of
negative externalities would bring net benefits even with strategies that do not
include the minimum waste diversion required by law. Combined with other good
SWM practices, the social net benefits would be obviously larger. The financial
assistance from the national government through a cost-sharing scheme could
jump start the implementation of good SWM activities.

9
To demonstrate the extent of water pollution from improper solid waste management, attached as
Annex _ is the water quality of some areas near dumpsites as monitored by the Environmental Manage-
ment Bureau.

62
 Table 37 shows the cost-sharing arrangement recommended by this study. The
40% national government share for 1st and 2nd Class cities and the 20% share for 3rd
and 4th Class cities are based on the estimated proportion of new capital investment in
integrated SWM to the net income from operations of LGUs. Although, almost all
LGUs outside Metro Manila depend on their IRA for as much as 92% of their total
income, IRA is not necessarily the best benchmark for two reasons. First, there are
LGUs (e.g., 1st Class cities and municipalities) that are less dependent on IRA than
others. Second, only 20% of the IRA received by LGUs should go to development
projects such as solid waste management. Other portions of the IRA are already
earmarked by law to other sectors. Thus, using the 20% development fund of the IRA
as benchmark would make it difficult for LGUs to raise new investments for SWM
without locally sourced funds.

Table 37. Proposed national government cost-sharing scheme.

Municipalities and Provinces Cities
LGU Income Class
Natl Gov’t Grant LGU Share Natl Gov’t Grant LGU Share
1st and 2nd 20 80 40 60
rd th
3 and 4 40 60 25 75
5th and 6th 50 50 20 80
Notes: The proposed scheme does not include Metro Manila. The proportion of national government grant to LGUs
is based on the proportion of new SWM to the net operating income of LGUs. However, for the municipalities, the
DOF cost-sharing scheme to take into consideration the high dependency of lower income class municipalities to the
IRA. For the cities, the proportion of new SWM investment to the net operating income of 5 th and 6th Class cities is
approximately 10%. However, to provide bigger incentive and accounting for higher dependency to IRA, the 20%
DOF cost-sharing scheme is maintained.

The study also does not recommend the inclusion of Metro Manila in the gen-
eral cost-sharing scheme. This is because Metro Manila has special SWM require-
ments and management arrangements with the LGUs handling segregation and
reduction-at-source plus collection and the Metro Manila Development Authority
handling final disposal. Metro Manila cities also do not depend on IRA. Based on the
2006 Financial Report, the proportion of IRA to total operating income of Metro
Manila LGUs is only about 21%. Their expenditures in SWM are already over 90%
of IRA, which shows that locally sourced funds are enough to support new SWM
investments. The special nature of Metro Manila might also require a special type of
SWM assistance, possibly in the form of technical assistance and negotiating with
neighboring LGUs to host bigger facilities, as validated in consultations held with
them in the course of this study.
The estimated cost used in determining the allocation does not include the in-
cremental recurrent cost of running an SWM program that complies with the law. The
proposed cost-sharing scheme would require approximately Php2.516 billion in 2006
prices (or Php2.705 billion in 2008 prices) as grant from the national government.
This should be made available within a five-year period to give urgency to SWM
(Tables 38 and 39).

63
Table 38. Estimated national and local government shares in new SWM investments
under the proposed cost-sharing scheme (in thousand pesos, 2006 prices).
Cities Municipalities
Income Class New SWM New SWM
Grant LGU Share Grant LGU Share
Investment Investment
1st & 2nd 3,628,150 1,451,260 2,176,890 1,418,612 283,722 1,134,890
3rd & 4th 517,271 129,318 387,953 1,362,747 545,099 817,648
th th
5 &6 30,163 6,033 24,130 201,953 100,976 100,976
Total 4,175,583 1,586,610 2,588,973 2,983,312 929,798 2,053,515

To provide more urgency to the huge solid waste problem faced by highly ur-
banized cities, it is recommended that the grant be made available to them for a
period shorter than five years. This means that Php1.56 billion might be needed in the
next two to three years to encourage 1st and 2nd Class cities (including the highly
urbanized classified as 1st Income Class) to invest in SWM infrastructures that would
comply with RA 9003 and DAO 2006-10 provisions (Table 39).

Table 39. Estimated national and local government shares in SWM investments (in
thousand pesos, 2008 prices).
Cities Municipalities
Income Class
Grant LGU Share Grant LGU Share
st nd
1 &2 1,560,529 2,340,793 305,085 1,220,338
rd th
3 &4 139,054 417,163 586,141 879,211
5th & 6th 6,487 25,947 108,579 108,579
Total 1,706,070 2,783,903 999,805 2,208,129

On average, each municipality would enjoy Php0.671 million in grants from the
national government and spend Php1.483 million in new SWM investments (Table
40). Cities, on average, would be entitled to approximately Php16.405 million each in
national government grants. Specifically, 1st and 2nd Class cities would each be
entitled to Php32.5 million in grants and spend about Php49 million from other
sources to finance the balance of their SWM investments. The 3rd and 4th Class cities
would enjoy Php2.9 million in grant each and spend about Php8.3 million of their
own funds. Finally, the estimate shows that with the proposed scheme, 5th Class cities
would each enjoy Php1.08 million in grants and source from their own funds about
Php4.3 million to finance new SWM investments.

Table 40. New SWM investment cost and grant per local government unit (in thousand
pesos, 2008 prices).
Share per City Share per Municipality
Income Class
No. Grant LGU Share No. Grant LGU Share
1&2 48 32,511 48,767 312 978 3,911
3&4 50 2,781 8,343 869 675 1,012
5&6 6 1,081 4,324 308 353 353
Total 104 16,405 26,768 1,489 671 1,483

64
 Where would cost-sharing funds come from? Under RA 9003, a National Solid
Waste Management Fund is supposed to be established with a seed fund of Php20
million. In fact this seed fund has not yet been provided and if it were, it would still
amount to a little less than 20% of the required national government share. This
means other sources of financing for SWM cost-sharing need to be identified. There
is also a need to develop technical guidelines in fund access and institutional ar-
rangements in fund management.
There are several options open to LGUs to finance their share of the new SWM
investments. One obvious source is the local fund, i.e., LGUs’ revenue and non-
revenue incomes. Another way of financing is to look for private sector groups
willing to invest in and manage the facilities. A third option is to borrow from
financial institutions or from the Municipal Development Fund Office.
Based on the 2006 cash flow of cities, in general, the 1st and 2nd Class cities
would have the most difficulty in loan repayment given the negative estimated term
debt repayment margin and narrow debt service cover (Table 41). Note, however, that
the 1st Class cities in Table 41 include Metro Manila, which accounts for 32% of the
long-term liabilities of all cities in the Philippines. Hence, 1st Class cities outside
Metro Manila might have better debt cover ratios than what the data in Table 41
shows.

Table 41. Cash flow coverage ratios for cities, by income class, 2006.
Income Class
st nd
1 2 3rd 4th 5th
Interest Cover (Times) 15.60 13.35 13.20 33.60 15.42
1,461,186.0
EBITDA 12,835,974.55 971,420.42 1,062,076.53 479,542.79
6
Interest Payments 822,909.80 72,763.86 110,717.39 31,613.44 31,105.59
Debt Service Cover 0.97 (0.47) 2.04 1.87 1.96
Debt Repayment
(103,260.87) (413,696.58) 366,846.21 172,790.65 95,291.16
Margin
1,461,186.0
EBITDA 12,835,974.55 971,420.42 1,062,076.53 479,542.79
6
Net Cash used for
9,964,752.32 1,103,881.25 741,335.33 691,233.90 285,020.54
Capex
Term Debt Repayment
2,871,222.23 (132,460.83) 719,850.73 370,842.63 194,522.25
Capacity
Interest Payments 822,909.80 72,763.86 110,717.39 31,613.44 31,105.59
Payments of Loans +
2,151,573.31 208,471.89 242,287.13 166,438.54 68,125.50
Debt Securities
Note: The figures for 1st Class cities include Metro Manila, except the two special cities (Manila and
Quezon City).

65
7.2 An alternative cost-sharing arrangement
to encourage LGU clustering

What has been proposed in this study is a second-best scenario. In this scenario,
each LGU constructs a disposal facility suitable only for its projected residual waste
generation. The first-best scenario is where a cluster of LGUs will share a common
facility. This is more cost-efficient since the disposal cost per unit of solid waste is
less for bigger and more sophisticated sanitary landfills. The biggest barrier, howev-
er, is the high transactions costs in clustering and the social acceptability of hosting a
common waste disposal facility.
For those LGUs that decide to form a cluster, it is recommended that the nation-
al government shoulder an additional 5% of the investment cost.
Assuming operation of a 15-year disposal facility in 2010, Table 42 below indi-
cates that, excluding Metro Manila, if the planned facility is Category 2 with a
capacity of 70 tons per day, then 142 facilities will have to be constructed and ten
LGUs will need to share one common facility. If ten Category 1 and 2 LGUs decide
to cluster and put up a Category 3 facility, 153 10-ton per day capacity landfills will
be needed to accommodate 83.5 million tons of waste in 15 years. If a 300 ton per
day-capacity Category 4 facility is planned, 56 facilities will be needed with 28 LGUs
sharing one facility.
A cluster of 28 LGUs, however, might no longer be feasible given transactions
costs, possible long distances between LGUs, and the small island configurations in
certain provinces. What might be feasible are maximum clusters of 10 or less, which
according to Table 42 will require either 142 70-ton per day capacity facilities
(Category 2 type) plus 23 300-ton per day-capacity Category 4 facilities.

Table 42. Estimated number of disposal facilities and clusters.

Solid waste volume, SLF capacity # of SLFs to be # of LGUs per

2010-2025 (tons) constructed cluster
Tons/day Category
Scenario 1 54,602,521 70 2 142 10
Scenario 2 28,921,782 300 4 18 8
Scenario 3 8,357,029 300 4 5 2
Scenario 4 3,948,864 400 4 2 1
Scenario 5 83,524,303 100 3 153 10
Scenario 6 91,881,332 300 4 56 28
Scenario 7 37,278,811 300 4 23 7
Note: See Appendix Tables 1 & 2 for details in the solid volume estimate per category and income class.
Scenario 1: The Category 1 LGUs share a Category 2 facility.
Scenario 2: The Category 2 LGUs share a Category 4 facility.
Scenario 3: The Category 3 LGUs share a Category 4 facility.
Scenario 4: The Category 4 LGUs share a Category 4 facility.
Scenario 5: The Category 1 and Category 2 LGUs share a Category 3 Facility.
Scenario 6: The Category 1 and Category 3 LGUs share a Category 4 facility.
Scenario 7: The Category 2 and Category 3 LGUs share a Category 4 facility.

Using the proposed cost-sharing arrangement to encourage clustering, the esti-

mated exposure of the national government in undertaking a scenario 1 plus a

66
scenario 7 would amount to roughly Php3.8 billion (54 million tons x 39 x 10% plus
37 million tons x 225 x 45%). This would be equal to around Php1.4 million per
cluster using a Category 2 landfill and Php164 million for each cluster utilizing a
Category 4 landfill.
Apart from giving the incentives, the biggest challenge is how to persuade
LGUs to form clusters. The strong prevailing NIMBY attitude must be addressed. A
review of all legal and institutional bottlenecks toward this goal is of primary im-
portance to achieve the desired benefits of economies of scale.

7.3 Possible vehicle for channeling the national government share

Although it is currently inactive, the Solid Waste Management Fund provided

for in RA 9003 is the logical vehicle for channeling funding support for the SWM
activities of LGUs.
As a special account in the National Treasury, the Fund is subject to government
rules and regulations on deposits, disbursements, reporting, and auditing pursuant to
Joint Circular No. 1-97 issued on January 2, 1997 by the Commission on Audit,
Department of Budget and Management, and Department of Finance. The joint
circular prescribes the rules and regulations for the implementation of the provisions
of Executive Order No. 338 dated May 17, 1996 requiring the deposit by National
Government Agencies of all cash balances to the National Treasury. It covers all cash
balances except the following:
 Cash advances for salaries and wages and petty disbursements;
 Accounts with banks maintained for funding checks issued by central/regional
offices for the operational requirements of regional offices/districts/operating
units;
 Revolving funds expressly created and authorized by law and authorized to be
deposited in a government financial institution; and,
 Cash accounts owned by government-owned and/or controlled corporations and
local government units.

As a special account in the National Treasury, disbursements from the Fund

shall be subject, among others, to the issuance of a Notice of Cash Allocation from
the Department of Budget and Management, in accordance with existing government
accounting and auditing rules and regulations. In this regard, the procedural guide-
lines for the collection, disbursement and management of the Solid Waste Manage-
ment Fund will have to be issued jointly by the Commission as the administrator of
the Fund and the Budget and Management Department.
At one of the regional consultations conducted by the study team, there was a
proposal that the grant or subsidy be given to LGUs through a direct transfer of
money to a local SWM fund to be established by LGUs. There are impediments to
this proposal however:

a) There would be no legal basis for this transfer because the creation of local SWM
funds by LGUs is not provided under RA 9003. It is only the Implementing Rules

67
 and Regulations of RA 9003 that allows LGUs to establish a local SWM fund
through an ordinance. As far as RA 9003 is concerned, it only created the nation-
al SWM Fund.
b) Assuming for the sake of argument that this transfer is allowed, a vehicle from
which the national funds will be taken and the corresponding mechanism for such
transfer will still have to be created. What this proposal actually provides is the
receptacle of the grant but not the vehicle through which national funds constitut-
ing the grant will be coursed.

Given the foregoing, the National Solid Waste Management Fund remains the
most logical vehicle. The initial funding for the Fund can come from national
government appropriations as mandated in the law. However, as already pointed out,
the seed fund of Php20 million will not be enough. Should the national government
approve this cost-sharing framework, it could allocate the said national government
cost share and place it in the Fund.
Another option would be to tap the funds managed by the Municipal Develop-
ment Fund Office under the Department of Finance. Discussions with the Office
show that they have sufficient second-generation funds, which they can lend out for
investments in SWM. However, said second-generation funds cannot be used as
grants. Given the Office’s experience in managing grant funds for LGU projects, the
national government might also choose to use the Office as the avenue to channel the
national government share in this cost-sharing scheme.

7.4 Possible institutional arrangements

By law, the National Solid Waste Management Commission oversees all SWM
activities in the country. The Commission is also supposed to manage the National
Solid Waste Management Fund. It is thus proposed that the Commission serve as the
manager of the Fund that will be set aside as national government share in the cost-
sharing. The drawback is that the Commission neither has the experience nor
expertise to manage this type of fund. It also does not make sense for the Commission
to hire new staff and try to develop an in-house capacity for funds administration.
More reasonable would be to bring in an existing institution that already has that
capability and experience and this would be the DOF’s Municipal Development Fund
Office. The Office can handle the cashiering of the Fund. Based on consultations
with senior officers of the Office, it is amenable to such an arrangement. The tech-
nical evaluation will still be done by the National Solid Waste Management Commis-
sion. Once projects are approved for funding, they can then be sent to the MDFO.
Details of this are discussed in the next section.

7.5 Proposed criteria and process

Based on a review of the proposed guidelines for the National Water Quality
Management Fund and consultations with the secretariat of the National Solid Waste

68
Management Commission and some stakeholders, the following criteria and process
for availing of the SWM Fund are proposed.

7.5.1 Criteria for availment of the SWM Fund by LGUs

These criteria cover eligibility requirements, guidelines for setting priorities
among qualified LGUs, and eligible projects and activities.

A. Eligibility requirements for LGUs

1) Proponent LGU has a 10-year SWM plan approved by the National Sol-
id Waste Management Commission.
2) Project/activity to be funded is designed from the approved SWM plan
of the proponent LGU.
3) Only one project/activity per LGU.
4) LGUs may avail of the Fund only once every three years but not for the
same project/activity.
5) LGU is committed to contribute counterpart funds.

During consultations by the study team, it received a proposal to in-

clude not just cities and municipalities but also provinces and barangays
among LGUs eligible for the Fund. There is no legal impediment to this
proposal; however, the LGU – regardless of its nature – must still satisfy all
eligibility requirements. For barangays, the greater concern is the extremely
large number of barangays in the country (about 42,000 according to the
National Statistics Office).

B. Guidelines for setting priorities among qualified LGUs

Because the SWM Fund will not be adequate to cover the needs of all
LGUs, it is necessary to put in place specific guidelines for setting priorities
among qualified LGUs. The following order of priority is recommended:

1) An LGU that will serve as the host of a common facility for a cluster will
receive the highest priority.

2) The LGU is highly in need, based on the following hierarchy of conditions:

 Environmental/health/social impact; critical issue
 Urgency in relation to the environmental/health/social impact
 Low financial capacity to finance project on its own

3) The Secretariat of the National Solid Waste Management Commission will

prepare a checklist with numerical ratings to be used in determining which
LGUs are highly in need based on the above hierarchy.

4) The LGU is the core or center LGU of the province/city/municipality.

5) An LGU availing of the Fund for the first time will have a higher priority
over an LGU that has already availed of the Fund.

69
 C. Eligible projects and activities

Table 43 lists the projects and activities that can be funded by the SWM
Fund as well as the LGUs that can avail of the Fund based on the project or ac-
tivity:

Table 43. Types of projects and facilities under the cost-sharing framework.
Type of project/activity Who can avail
1. Acquisition of solid waste collection equipment Cities, Municipalities, Barangays
2. Establishment of materials recovery facilities Cities, Municipalities, Barangays
3. Disposal management
a) Closure and rehabilitation of open or Cities and Municipalities
controlled dumps
b) Establishment of sanitary landfills Cities and Municipalities; Provinces
(Categories 1 to 4) or any of its components may avail to finance clustering
activities
c) Alternative technologies for residual waste Cities, Municipalities, Barangays
Note: The above projects may be funded
individually or in combinations of a+b or a+c
4. IEC activities Cities, Municipalities, Provinces,
Barangays
5. Research activities to be conducted by LGUs Cities, Municipalities, Provinces,
Barangay

D. Amount of grant

The amount of the grant will be based on the approved national government-
local government cost-sharing framework for SWM projects. At present, the Imple-
menting Rules and Regulations of RA 9003 impose a funding ceiling of Php1.5
million for each project. The same provision states that the Secretariat of the Nation-
al Solid Waste Management Commission will review the funding level every three
years. This provision of the Implementing Rules and Regulations will have to be
amended to make it consistent with the approved cost-sharing framework.

7.5.2 Process for availing of the SWM Fund

A. Application

1) Pro-forma application addressed to:

The Chairman
National Solid Waste Management Commission
Attn: Executive Director
The Secretariat, Environmental Management Bureau-DENR
Visayas Avenue, Quezon City

Thru: The Regional Director

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 Environmental Management Bureau – DENR Region ___

2) Attachments to the application:

i. Approved 10-year SWM plan

ii. Detailed project proposal
iii. Proof of LGU counterpart funds
- Sangguniang Panlalawigan/Panlungsod/Bayan/Barangay Reso-
lution on the availability and commitment of LGU counterpart
funds or
- Loan approval from financial institution, or
- Contract with private investor
iv. Work and financial plan for the proposed project
v. Council Resolution authorizing the Mayor to sign the
Grant Agreement with the NSWMC

3) Applications shall be submitted only through the EMB Regional Offic-

es.

The National Solid Waste Management Commission Secretariat will issue

pro-forma application forms together with a project proposal template.

B. Evaluation

1) Initial evaluation of applications:

i. The initial evaluation of the application and attachments to deter-

mine completeness will be undertaken by the Regional SWM Co-
ordinators. The evaluation shall be completed within 10 working
days from receipt of the application.
ii. If submitted documents are incomplete, the Regional SWM Coor-
dinator will not accept the application and will immediately require
the proponent to submit additional information/documents.
iii. If submitted documents are complete, the Regional SWM Coordi-
nator will endorse and transmit them for further evaluation to the
Commission Secretariat.

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 2) Evaluation by Commission Secretariat:

i. The Commission Secretariat will evaluate project proposals en-

dorsed by the Regional SWM Coordinators based on the criteria
for availment of the SWM Fund.
ii. The evaluation will be completed within 22 working days from re-
ceipt of the application and attachments from the Regional SWM
Coordinators.
iii. Based on the evaluation, the Commission Secretariat will submit
their recommendation either for approval or denial to the Commis-
sion.
iv. Applications indorsed/endorsed to the Commission for decision
will be included in the agenda of the Commission’s next regular or
special meeting.

C. Approval/Disapproval

1) Approval or denial of grant applications will be made by the Commis-

sion.

2) Decisions will be made during regular and/or special meetings of the

Commission. The decision will be contained in a Resolution issued by
the Commission.

3) If the application is turned down, the Commission will inform the pro-
ponent in writing why the application was denied.

4) If the application is approved, the draft of the Grant Agreement will be

sent proponent together with the official notice of approval.

D. Work and financial plan

1) Applications for grants approved by the Commission will be included

in the annual work and financial plan to be prepared by the Commission
Secretariat.

E. Grant Agreement

1) Prior to the release of the grant, a Memorandum of Agreement will be

executed between the Commission and the proponent.

2) The Grant Agreement shall contain, among others, the terms and condi-
tions of the grant:

72
 - Specify the work plan and time table when things are to be accom-
plished
- Specify the performance indicators
- Provide for the opening by the LGU of a Special Account for the
Grant
- Provide for the conversion of the grant into a loan if the propo-
nent/grantee does not perform its obligations.

3) The signed Grant Agreement must be ratified by the Council.

F. Fund release

1) After the ratification of the Grant Agreement, the NSWMC shall give
formal advice to the Fund Cashier to release the Grant to the propo-
nent/grantee.

2) The Fund Cashier shall release the grant to the proponent/grantee in

phases as provided in the Grant Agreement.

G. Reporting

1) The grantee will submit reports with pictures to the Commission Secre-
tariat through the EMB Regional Office (specifically the SWM Coordi-
nator) providing complete details on the use of the funds and the
progress or completion of the activity or project as against targets set in
the work and financial plan.

2) The Regional SWM Coordinator shall verify the reports submitted by

the grantee and shall monitor compliance by the grantee.

3) If found acceptable, the Regional SWM Coordinator will transmit

his/her recommendation to the NSWMC Secretariat.

4) The Commission Secretariat will review the evaluation/ recommenda-

tions of the Regional SWM Coordinator. If needed, the Secretariat can
validate the actual work done on the ground.

5) If found acceptable, the NSWMC Secretariat will inform the Fund

Cashier to release the subsequent tranche or final payment to the Grant-
ee.

6) The NSWMV Secretariat shall submit monthly reports of the progress

of each grant to the Commission.

73
7) These reports shall be included and discussed in the regular and/or spe-
cial meetings of the Commission and shall form part of the Annual Re-
port of the NSWMC to the Oversight Committee.

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8 NEXT STEPS

Once this SWM cost-sharing framework is approved at the Cabinet level, it is

proposed that the national government decide on the source of funding. Sources of
funds could be the national government's own revenues (which can then be channeled
to the National SWM Fund or the DOF’s Municipal Development Fund Office),
bilateral and multilateral grants, and loans from development partners.
The DOF should then formally issue the revised Cost-sharing Framework
amending the one adopted in 2004. For its part, the National Solid Waste Manage-
ment Commission should then issue the necessary guidelines on the criteria for
eligibility and the process of availing of the Fund. A draft of these Guidelines is
contained in the annexes of this study. Provisions of the existing Implementing Rules
and Regulations of RA 9003 inconsistent with the approved cost-sharing framework
should also be amended.
It is strongly recommended that the cost-sharing framework first be piloted in
several LGUs that have shown strong interest in improving their present SWM and
taking on the needed new investments. An initial list of these LGUs is also found in
the annexes.
It is also proposed that the National Solid Waste Management Commission fi-
nalize the proposed work and financial plan for the initial Php20 million seed fund of
the National SWM Fund so that it can be submitted as a supplemental budget to the
Department of Budget and Management.
A Memorandum of Agreement between the Commission and the Municipal De-
velopment Fund Office should also be worked out to clearly define roles and respon-
sibilities in the management and actual operations of the national government share in
the cost-sharing framework.
An extensive information and education campaign should then be conducted
through the various LGU leagues to promote the cost-sharing scheme among the
target implementers and encourage them to seek new investments in SWM.
The hope is that this revised cost-sharing scheme will provide the needed impe-
tus to propel more ecological waste management in the country. At the end of the
day, it will help improve the overall quality of the environment and protect the health
of the people.

75
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Cardenas, L. 2005. “Developing a Sustainable Funding Mechanism for Solid Waste

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