Establishing Local Government-Run Water Utilities as Economic Enterprise

About Philippine Water Revolving Fund (PWRF) Support Program The PWRF Support Program (PWRF-SP) is a collaborative undertaking of Government of the Philippines partners, USAID, Japan International Cooperation Agency (JICA), LGU Guarantee Corporation (LGUGC), and private financing institutions (PFIs) through the Bankers Association of the Philippines. The Program’s GOP partners are led by the Department of Finance and the Development Bank of the Philippines. The PWRF Support Program operates around the following main objectives: • Establish the co-financing facility and develop a long-term financing strategy and mechanism with broader private sector participation; • Strengthen water project financing and enable other conditions necessary for optimizing PWRF-SP’s positive impact on the sector, including corollary regulatory reforms; • Assist water districts and local government units in developing a pipeline of bankable water projects; and • Assist water districts and local government units with reforms in utility governance. The PWRF Support Program has established a co-financing facility that combines ODA/JICA resources with PFI funds for creditworthy water service providers, using a financial structure that allows affordable loan terms without sacrificing the viability of PFIs. PFIs have access to credit risk guarantees provided by LGUGC and USAID’s Development Credit Authority. PWRF-SP has also assisted in financing policy formulation, regulatory reform, project development and capacity building of water utilities to improve management and operations. PWRF-SP has actively supported utility reform initiatives, such as the ring-fencing of LGU and cooperative-run utilities. Together the PWRF-SP, Water and Sanitation Project (WSP) of World Bank, Department of Interior and Local Government (DILG) and Cooperative Development Authority (CDA) collaborated on developing knowledge products and helping build capacity of LGUs and cooperatives in ring-fencing of water utility accounts and operations. The PWRF Support Program is implemented by Development Alternatives, Inc. in association with The Community Group International LLC, Resource Mobilization Advisors, and CEST, Inc.

Guide to Establishing LGU-Run Water Utilities as Economic Enterprises

This guide was published with assistance from the USAID Philippine Water Revolving Fund (PWRF) Support Program. The views expressed here do not necessarily reflect those of USAID or the United States Government.

Acknowledgements The PWRF Support Program thanks the Water and Sanitation Program (WSP) of the World Bank and the PublicPrivate Infrastructure Advisory Facility (PPIAF) for allowing use of the Guide to Ring-Fencing of Local Government-Run Water Utilities prepared by the Small Water Utilities Improvement and Financing (SWIF) Project in the development of this guide. In particular, Chapters 2 and 3 of this Guide are quoted directly from the Guide to Ring-Fencing, which discusses the critical first step—that of segregating the water utility accounts—in the establishment of a discrete economic enterprise for a LGU-run water utility. Thus the two guidebooks are complementary and provide a uniform approach for completing the process of establishing a utility distinct from the overall LGU operation, accountable for its performance and has disposition of its funds. This Guide benefited from a peer review by accountants and finance specialists from the municipalities of Jagna, Alburquerque and Antequera in the province of Bohol; and from local resource institutes: Ateneo de Naga University Center for Local Governance, Batangas State University, Catanduanes State Colleges, UP Los Baños College of Public Affairs, Father Saturnino Urios University, GenTwoFifteen Development Foundation Inc., Holy Name University Center for Local Governance, University of Northern Philippines, the Local Government Academy, and WSP.

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PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

contents

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

Abbreviations and Acronyms

1

1. Developing the Guide

3

1.1 Ring-fencing approach

4

1.2 Ring-fencing towards corporatization

5

1.3 Ring-fencing pilot experiences

5

1.4 Organization of the guide

7

2. Accounts Reconstruction

9

2.1 Preparatory activities

9

2.2 Steps in the Accounts Reconstruction 3. Maintenance of ring-fenced books of accounts

12 35

3.1 Parallel books

35

3.2 Bookkeeping

36

3.3 System of allocating shared expenses

37

3.4 Accounting and financial reporting system

37

3.5 Monitoring and evaluation

40

4. Evaluation of Water Utility Performance

41

4.1 Benchmarking key performance indicators

41

4.2 Conference with local officials

44

4.3 Strategic business planning

45

5. Financial Management Guidelines for the Utility

47

5.1 Formulation

47

5.2 Review

55

5.3 Institutionalization

55

5.4 Implementation

57

6. Separate Bank Account for the Utility

59

6.1 Rationale

59

6.2 Authority

59

6.3 Cashbook

59

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

vii

7. Separate Budget for the Utility

63

7.1 Budget preparation

63

7.2 Budget authorization

65

7.3 Budget review

65

7.4 Budget execution

65

7.5 Budget accountability

65

8. LGU-Run Water Utility as Economic Enterprise

71

8.1 Corporatization

71

8.2 Creation of a water utility economic enterprise

71

8.3 Restructuring the water utility’s organization

74

8.4 Zero-subsidy and/or positive surplus

76

8.5 Performance contracting

77

Appendix 1

79

Appendix 2

101

Appendix 3

117

List of Boxes Box 1. Testimonies of local chief executives of pilot LGUs

7

Box 2. Books of accounts and chart of accounts under the ring-fencing system and the NGAS

35

Box 3. Subsidiary ledgers for major controlling accounts in the general ledger

38

Box 4. Key performance indicators and formulas

43

Box 5. Pro-forma for water utility operation budget proposal

63

Box 6. Important dates in the local planning budget calendar

64

List of Exhibits Exhibit 1. Benchmarking results for water utilities in small towns

3

Exhibit 2. Comparative analysis of performance of ring-fenced water utilities for 2008–2009

6

Exhibit 3. Executive order creating a ring-fencing team

10

Exhibit 4. Inventory count sheet

13

Exhibit 5.1 Useful lives of tangible assets that may be considered part of inventory

21

Exhibit 5.2. Estimated useful lives of property, plant and equipment

23

Exhibit 6. Schedule of aging of receivables

26

Exhibit 7. Sample ring-fencing financial management guidelines

50

Exhibit 8. SB resolution adopting the financial management guidelines

56

Exhibit 9. Cashbook - Cash in Bank

60

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PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Exhibit 10. Cashbook - Cash in Treasury

61

Exhibit 11. Quarterly report of income

67

Exhibit 12. Quarterly financial report of operations

68

Exhibit 13. Quarterly physical report of operations

69

Exhibit 14. Statement of receipts and expenditures

70

List of Figures Figure 1. Water utility economic enterprise program

5

Figure 2. Discussion points in conference with local officials

44

Figure 3. FMG review and adoption process

57

Figure 4. Organization chart of a typical LGU-run water utility

76

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

ix

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PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Abbreviations and Acronyms ADCOM AIP Ave BOM CO Coops DILG ECC FF FMG GFI IEC IRA JEV KPI LCE LDC LDIP LFC LGC LGOO LGU LPDC LWUA MandE

Additional compensation Annual Investment Plan Average Budget Operations Manual Capital outlay Cooperatives Department of the Interior and Local Government Employees compensation contribution Furniture and fixtures Financial management guidelines Government financing institutions Information, education and communication Internal Revenue Allotment Journal entry voucher Key performance indicators Local Chief Executive Local Development Council Local Development Investment Plan Local Finance Committee Local Government Code Local Government Operations Officer Local government unit Local Planning and Development Officer Local Water Utilities Administration Monitoring and evaluation

MDFO MOOE MPC NGAS NRW NWRB OandM OME OR PERA PFI PGB PI PS PWRF-SP RA RWSAs SB TA USAID WATSAN WD WSP WSPs

Municipal Development Fund Office Maintenance and other operating expenses Multipurpose cooperative New Government Accounting System Non-revenue water National Water Resources Board Operations and maintenance Other machineries and equipment Official receipts Personal Expenses Relief Allowance Private financing institutions Policy Governing Body Public infrastructures Personal services Philippine Water Revolving Fund Support Program Representation allowance Rural Waterworks Systems Associations Sangguniang Bayan Transportation allowance United States Agency for International Development Water and sanitation Water districts Water and Sanitation Program Water service providers

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

1

2

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

SECTI O N ONE

M

any local government units provide water supply services as part of their regular operations. This means the budget for operating the water utility is included in the LGU’s overall budget, and all revenue from providing water services go to the general fund. Tasks involving water supply services are often added on to the regular workload of the local engineer, accountant, or treasurer. Since accounts are not ring-fenced and the water supply function is not governed as a sustainable entity, the performance of the water utility is generally poor and service coverage is inadequate.

One way to address this concern is to improve the governance system of LGU-run utilities to compel as well as empower them to become accountable for their performance, budget disposition, and revenues generated. The Local Government Code (LGC) already provides the enabling mechanism; short of creating an autonomous corporation, LGUs can establish economic enterprises that operate on commercial principles to generate revenues adequate to sustain their operations and, ultimately, investment needs. Economic enterprises are allowed to maintain separate accounts and dedicated personnel.

Exhibit 1. Benchmarking results for water utilities in small towns

KPI/utility model

Benchmarking results

Ideal/ industry standard

LGU

Sample size

RWSAs/ Coops

WD

Private

Ave

10

9

18

8

45

100

57

66

69

66

65

24

18

20

23

22

21

>100

96

127

120

144

120

NRW (%)

20

36

16

26

26

29

Operating ratio