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Efficiency Improvement Program (EIP)

 

Project background

LWUA has recently developed a new lending product with the support of the United States Agency for International Development (USAID) through its Environmental Cooperation - Asia (ECO-Asia) regional program. Dubbed as the Efficiency Improvement Program (EIP) Loan, this lending scheme is specifically designed to support LWUA's new mandate under EO 279.

One of the key issues facing both LWUA and local utilities has been the inadequate supply and accessibility of funding. With limited funding available to LWUA, and the need to safeguard its own financial position by limiting its lending to viable water districts (WDs), access to funding by smaller less creditworthy utilities had been limited. This limited supply and skewed allocation of funding had been a critical factor in constraining development of the sector, particularly in the lower income areas of the country outside the major urban centers.

To address the need to significantly improve funding within the sector, the GOP enacted Executive Order No. 279 (EO 279) in February 2004 which provides for a comprehensive reform of sector financing policies.

EO 279 was aimed at increasing the overall supply of financing into the sector by bringing the government financing institutions (GFIs) and private financing institutions (PFIs) into the more creditworthy segment of the market. LWUA could then focus its lending operations amongst the less creditworthy water utilities.

The refocusing of LWUA's lending to the less creditworthy WDs required changes to its existing loan products and the establishment of new products. LWUA's existing lending products were targeted primarily at funding larger scale capital investment programs, which were inappropriate for many of the less creditworthy WDs and could expose LWUA to significant credit risk.

The EIP Approach

The Efficiency Improvement Program (EIP) approach is focused on achieving high impacts and quick returns with small investments and carefully targeted technical assistance. Consistent with the objective of achieving quick returns with small investments, processing times will be kept to the absolute minimum possible.

The EIP approach is specifically aimed at meeting the needs of the less creditworthy water districts while at the same time maintaining LWUA's exposure to these water districts at prudent levels. To achieve these aims, the EIP approach is to lower the risks inherent in the less creditworthy water districts. The approach is innovative because it uses methods and ratios that help determine the type of interventions necessary to address the specific inefficiencies in each water district. It also includes a detailed list of EIP interventions that a water district can implement over a programmed timeframe. The EIPs are designed to achieve high impact results with targeted lending and focused technical assistance.

The EIP lending product and policies explicitly integrate the borrowers' and LWUA's preferences for price and features. The product introduces the concept of risk rating and level of impact as a basis for selecting one project over another. It provides an incentive to the water districts to continuously improve their performance because no additional large borrowings from the other LWUA lending windows may be undertaken until performance ratings are improved to specified levels.

Key Features of EIP Loan Facility

The EIP model has been developed on the basis of the need to be able to treat each WD individually. While all WDs have common sets of inefficiencies, their relative impacts will differ between the WDs. As a result, the best approaches for addressing these inefficiencies need to be tailored to the specific needs and characteristics of each WD. To cover the range of possible efficiency improvement interventions, three main EIP program areas have been identified; NRW reduction, revenue enhancement, and cost reduction. While solutions to the inefficiencies have been grouped by these three program areas, it is recognized that many WDs will require interrelated projects that span more than one of these program areas.

A summary of the main features of the proposed EIP lending facility is presented below:

Feature
Description
Clientele
(Based on current LWUA Classification Rating)
  • Pre-Creditworthy WDs
  • Semi-Creditworthy WDs
Eligible Programs & Projects
  • Non-Revenue Water Reduction Program
  • Revenue Enhancement Program
  • Cost Reduction Program
Loan Amounts (Aggregate Total of Projects)
  • Non-Revenue Water Reduction Program: up to P20 million
  • Other Eligible Programs: up to P10 million
Cost Sharing
  • Loan: up to 90%
  • Water District Equity: at least 10% (may include in-kind contributions, such as preparation of a feasibility study by the water district, land cost, equipment, etc.)
Interest Rates and Other Fees
  • Cost base plus spread
  • Spread of at least 2%, but below commercial rates
  • Interest will not be capitalized
  • Penalty fee of 0.5% per annum will be applied on any undisbursed balance based on the approved loan disbursement schedule
Loan Tenor
  • Final maturity of five years for loans up to P10 million and up to 10 years for loans of more than P10 million after the last loan drawdown, or the average useful life of the asset financed under the EIP, whichever is shorter.
Selection Criteria
  • Impact on WD
  • Urgency of need
  • Financial viability
  • Social acceptance
  • Autonomy of WD
  • WD historical performance
Loan Processing Period
  • Maximum of 2 months

Eligible Programs and Projects

Non-Revenue Water Reduction Program

The program aims to assist the water districts in reducing their technical and commercial losses of water, which are key contributing factors to the financial weaknesses of the water districts. The program will also build the capacities of the water districts in monitoring and accounting for real and apparent water losses. The program promotes good metering practices, leak detection and control, detection and regularization of illegal connections, accuracy in meter reading, and best practices in the installation and rehabilitation of the supply networks. This program may support setting up district metering zones (DMZs), setting up leak detection and control systems, rehabilitation of pipes and pipe fittings, awareness campaigns on illegal connections, and training of meter readers and monitoring of readings.

Revenue Enhancement Program


The program will assist the water districts in increasing their service connections through affordable connection fees, appropriate tariff structures and levels, and reliable customer service. It also seeks to improve collection performance through more effective billing, payment and enforcement systems, image building and good marketing strategies. Activities like the establishment of a computerized billing, accounting and payment system, connection fee installment schemes, and development and implementation of marketing strategies, may be undertaken under the Revenue Enhancement Program.

Cost Reduction Program

This program intends to implement projects and activities aimed at achieving reductions in the operating cost structures of the water districts. For most of the water districts, personnel and electricity are the largest operating expense components. The most significant opportunity for cost reduction is likely in the consumption of electricity for pumping. This program will support activities to improve the energy efficiency of pumps and motors by conducting energy audits and proper production and demand matching of pumps.

Interest Rate Offering on Water District Reserve Deposits

Type of Deposit
Period
Amount
Interest Rate
Features
DEMAND No holding period P500,000 up to P1 M 1.50%
  • Computation of interest depends on Average Daily Balance (ADB)
  • Minimum Balance = P500,000
TIME








1 YEAR P500,000 up to P5 M
>P5 M up to P10 M
> P10 M up to P30 M
> P30 M up to P50 M
Over P50 M
6.00%
6.25%
6.50%
6.75%
7.00%
  • Minimum investment of P500,000
  • Minimum holding period of 1 year;
    if less than 1 year, deposit will earn
    0.25% less/quarter
  • Pretermination penalty - if less than
    50% of the term, deposit will earn
    only 25% of the specified rate; if
    after the first half, deposit will earn
    only 50% of the specified rate
TERM 2 YEARS P500,000 up to P5 M
>P5 M up to P10 M
> P10 M up to P30 M
> P30 M up to P50 M
Over P50 M


7.00%
7.25%
7.50%
7.75%
8.00%
  • Minimum investment of P500,000
  • Minimum holding period of 2 years;
    if less than 2 years, deposit will earn
    0.25% less/quarter
  • Pretermination penalty - if less than
    50% of the term, deposit will earn
    only 25% of the specified rate; if
    after the first half, deposit will earnonly 50% of the specified rate
SPECIAL





3 YEARS

P500,000 up to P5 M
>P5 M up to P10 M
> P10 M up to P30 M
> P30 M up to P50 M
Over P50 M
7.50%
7.75%
8.00%
8.25%
8.50%
  • Minimum investment of P500,000
  • Minimum holding period of 3 years;
    if less than 3 years, deposit will earn
    0.25% less/quarter
  • Pretermination penalty - if less than
    50% of the term, deposit will earn
    only 25% of the specified rate; if
    after the first half, deposit will earnonly 50% of the specified rate

Note: All interest rates are subject to change depending upon the prevailing market conditions
 
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