Development and Regulation of water utilities:
The Philippine LWUA experience

by Administrator Lorenzo H. Jamora
Local Water Utilities Administration
Quezon City, Philippines

Abstract. The Local Water Utilities Administration (LWUA) was established in 1973 by Presidential Decree No. 198, as amended otherwise known as the Provincial Water Utilities Act of 1973 to promote the development of provincial water supply in the Philippines. LWUA's establishment was the national government's response to the problems then besetting the provincial water supply, among them funding problems, institutional weaknesses and technological inadequacies which led to the generally poor water service in the countryside during the period.

The same decree created the water districts, paving the way to the adoption of the water district concept which revolutionized the then water supply development and management, which was characterized by heavy government subsidies of water utilities consequently developing dole-out mentality among consumers. Under the water district concept, water consumed has to be accounted and paid for by every consumer, whether government, private industries or plain citizens. This new concept also promotes the principles of self-reliance and financial viability for the water utilities.

LWUA as a specialized lending institution is a one-stop-shop where the water districts may gain access at once to its varied development services, such as:

1) financial assistance in the form of loans at concessionary rates;
2) engineering/technical services and assistance on project identification, planning, detailed engineering design, construction supervision of water projects, operation and maintenance of systems; and
3) institutional development and regulatory services in the forms of skills and management training, management advisory, water rates review/regulation, and water quality regulation, among others.

Regulating the operations of water districts including the setting of proper water rates is inherent and indispensable to the performance of the developmental mission of LWUA. The regulatory standards/guidelines LWUA has developed and institutionalized are those pertaining to water tariffs setting, commercial practices systems, water quality, engineering design and construction and organizational as well as institutional setup for water districts, which have stood the tests of times. Public hearings on water rates adjustments are closely monitored and cash-flow requirements for capital expenses and systems expansion of water districts are judiciously studied. LWUA's effectiveness as water tariff regulator is evidenced by an almost complete absence of court decisions reversing water rates adjustments reviewed and approved by the agency.

For the period 1973-2002, the institutional arrangement between LWUA and the water districts has resulted in the following:

a) formation of 584 water districts covering 691 cities and municipalities in provincial urban areas
nationwide;
b) served 11.4 M people with potable water thru individual house connections;
c) developed water districts into viable institutions, with an average of 29% non-revenue water, and an average of 96% WD collection ratio from customers; and
d) the success and wide public acceptance of the LWUA-Water District development relationship.

Overview of the Philippine Water Supply Sector

In the Philippines, the development, operation and delivery of potable water in the country's three major areas, is the responsibility of various government agencies and water utilities. Metro Manila is being served primarily by the Metropolitan Waterworks and Sewerage System (MWSS) through its two private concessionaires, the Maynilad Water Services Inc. and the Manila Water Company, and by some private companies serving subdivisions. The provincial urban areas are served by the a) water districts with the development assistance of the Local Water Utilities Administration (LWUA), b) local government units (LGUs), and c) some private companies. And the provincial rural areas are being served primarily by the local government units and cooperative water associations, with government assistance from the Department of Interior and Local Government (DILG), Department of Public Works and Highways (DPWH), and LWUA.

Based on the Medium-Term Philippine Development Plan (2001-2004), as of 2000, 79% of the 76.3 million Philippine population was served with safe and reliable water, with the following distribution: 47% (6.2 M) in Metro Manila, 88% (18.3 M) in the provincial urban areas, and 85% (35.8 M) in the provincial rural areas.

The same Plan sets a 90.5% target of total Philippine population to be served with potable water by year 2004. The specific targets by 2004 on the three major areas are: 90% in Metro Manila, 89.6% in provincial urban areas, and 90.4% in provincial rural areas.

Creation of the LWUA and the Water Districts

The creation of the LWUA was an offshoot of a comprehensive study on the provincial water supply sector conducted in 1968-72 by the James M. Montgomery consultancy group with funding assistance from the United States Agency for International Development (USAID).

The study revealed that practically all the then existing provincial water supply systems were antiquated, dilapidated and poorly managed. It pointed to the lack of adequate financing, technical know-how and proper institutional setup as the main causes of the widespread problems in the sector.

Soon after the national government declared the establishment of reliable and viable water supply systems in the country as a high national priority. And in 1973, Presidential Decree No. 198 otherwise known as the Provincial Water Utilities Act of 1973, was promulgated authorizing the establishment on local option basis of locally-controlled independent water districts to own, manage and operate provincial water supply systems. The decree likewise provided for the creation of a national government agency, LWUA, to minister to the financial, technical and institutional development needs of these water districts and to regulate their operations.

The water district concept was a totally new concept in water supply development and management then. At the time it was introduced, it was considered revolutionary since the practice of having water consumed, accounted and accordingly paid for was radically new to the consumers, especially those who had already developed a dole-out mentality on account of years of government subsidies and political favors.

Under the old NAWASA (National Waterworks and Sewerage System) system, water users were charged flat rate regardless of water consumption thereby encouraging wasteful water use while

contributing very little to the utility coffers. It was also not uncommon then for politicians to use free water as main platform for their electoral campaigns. However, it was rare to find a water connector paying for water consumption justly and promptly.

The new concept demanded change not only in physical terms but also in the mental outlook and the behavior especially of the consumers. Under the concept, every drop of water consumed has to be accounted and paid for. Every consumer, whether government, private industries or plain citizens must pay for water consumed. Among the reasons behind this are to instill responsibility and discipline among the consumers and make them realize and recognize the value of water as an economic commodity.

The water district concept is based on the principles of self-reliance and financial viability. This means that when a water district is formed, it has to operate on its own, independent from local political control and no longer reliant on government subsidy support. Therefore, a water district has to be financially viable, able to generate enough revenues through water sales to its concessionaires to meet all its financial needs and obligations to include payment of capital improvement loans to LWUA. To realize this, a water district is allowed to charge certain water rates but subject to the review and approval of LWUA, collect service fees and to impose penalties on erring or delinquent concessionaires.

Development and Regulation of Water Districts

A. Development Assistance to Water Districts

LWUA was established primarily as a specialized lending institution for the development and promotion of provincial water supply and wastewater disposal systems. It lends out capital improvement loans only to duly-organized water districts. In addition, LWUA was further mandated to prescribe minimum standards and regulations, furnish technical assistance and personnel training, monitor, and evaluate local water standards, among others.

Essentially, LWUA's relationship with the water districts is that of a lender and a borrower based on a supervised credit scheme.

In pursuit of this, LWUA provides regular management advisory assistance to the water districts. LWUA advisors regularly visit water districts to advise their officers and staff on the rudiments of effective water utility management and operation as well as to monitor and continually evaluate their performance. The advisors also see to it that the water districts follow the utility rules and regulations formulated by LWUA and the guidelines issued periodically.

LWUA likewise introduces and installs a uniform Commercial Practices System for all water districts. Moreover, LWUA extends training assistance to water district board and management officials and employees on such aspects as policy-making, utility management and system operation and maintenance.

Correlated to this supervised credit scheme, LWUA also extends technical assistance to the water districts in the preparation of project feasibility studies and detailed designs and supervision of their water system construction projects.

B. Regulation and Performance Monitoring of Water Districts

Foremost in LWUA's regulatory function is the review of water rates of water districts. This function ensures that the rates charged by the water districts are in accordance with the provisions of applicable laws and regulations. It also guarantees recovery of government investment in the water sector coursed through LWUA. More specifically, such review function ensures that such rates adequately provide for reimbursement of costs of installing new services and meters, district revenue, annual operating expenses, works maintenance and repairs, payment of interest on debts, and a reasonable surplus for improvements. LWUA's rate reviews are appealable to the National Water Resources Board (NWRB).

LWUA is also mandated to establish standards for local water utilities and to formulate rules and regulations for their enforcement. These standards and regulations include the following:

1) water quality
2) design and construction
3) equipment, materials and supplies
4) operation and maintenance
5) personnel
6) organization
7) accounting

LWUA conducts management and financial audits of water districts annually, for regulatory and performance monitoring purposes.

LWUA is responsible for the performance assessment of water districts. In this connection, LWUA requires all water districts to submit monthly reports covering technical, financial, administrative and other aspects of operations. These reports are also summarized by the water districts annually. LWUA in turn publishes water district industry averages annually, and compares these with the water district performance.

The following are some of the details of WD monthly reports required by LWUA:

1) customer data- number of service connections, new connections, disconnections
2) present water rates
3) billing and collection data - collection efficiency, billed volume of water
4) financial data - revenues, expenses
5) water production data - production measurement and; production cost (power costs, treatment cost, pumping efficiency); unaccounted-for-water
6) status of various developments
7) miscellaneous data - number of staff per 1,000 customers; bacteriological tests (physical/chemical tests required annually); chlorination; board meetings

Other important performance indicators, which mostly relate to customer satisfaction, include the following:

1) coverage targets (so that operators will not concentrate only on profitable areas)
2) adequacy of pressure
3) round the clock supply (depending on customer/LGU desires; some may agree to switch off water supply during hours of minimum demand)

LWUA adopts interventions when water districts are not able to fulfill their obligations, usually regarding loan repayments. These are take-over management of water districts and the assignment of 6th member in the water district board.

To summarize, LWUA's strategies to monitor the operational efficiency of water districts are:

1) Water District Industry Averages - showing financial and operating parameters of Water Districts

2) Developing written Standard Operating Procedures for efficiency and effectiveness

3) Monitoring of:

a) annual rate review
b) implementation of audit recommendations
c) implementation of written programs
d) implementation of loan agreement
e) implementation of Commercial Practices System
f) conduct of training programs for officers and employees of WDs
g) WD Board's participation in policy making and implementation of policies it approved

4) LWUA's interventions in WDs (where necessary)

a) Interim Board of Directors
b) Sixth membership in the Board of Directors
c) Installation of Interim General Manager for defaulting WDs
d) Full time advisory services
e) Operations and maintenance assistance
f) Installation of commercial practices system
g) Water rates review
h) Audit

LWUA Accomplishments (1973-2002)

With the three-pronged services on financial, technical, and institutional and regulatory aspects, the LWUA has several accomplishments in its 30 year-experience in public service towards the development of the water supply sector.

As of 2002, LWUA has formed 584 water districts covering 691 towns/cities nationwide. It has approved P 17 billion loans of which P 11 billion have been availed by 467 water districts. The loans were used for the development of 1,431 water supply projects benefiting 11.4 million people in water district areas. On the loans availed, LWUA generated an annual average of 86% collection efficiency for the last five years.

LWUA was able to develop water districts into viable institutions, which had an average of 29% non-revenue water, and an average of 96% WD collection ratio on customers' billings. It has also shown its effectiveness as water tariff regulator as evidenced by an almost complete absence of court decisions reverting water rates adjustments it reviewed and approved.

With these, it can be said that the LWUA-Water District development model has been successful and has wide public acceptance.

Current Developments in the Water Sector

In 2002, Executive Order No. 123 was issued, limiting LWUA's economic regulation to only reviewing tariffs of WDs which it has financial exposure to. Section 6 of EO 123 specifically provides that
the "LWUA shall cease and desist with its practice of regulating the water tariffs of Water Districts which shall hereinafter be undertaken by NWRB. However, LWUA, consistent with its mandate under PD 198, may continue reviewing the rates of water districts which it has financial exposure, with the end view of ensuring their financial viabilities". Since its issuance up to 2002, the NWRB has not acted upon any single request for rate approval, which if continued will adversely affect the implementation of LWUA-funded projects. With this consideration and cognizant of the spirit of the EO, LWUA made a stand to continue reviewing and approving the water rates adjustments of water districts where it has financial exposure to, to promote the financial viability of these water districts. The NWRB welcomed this position.

During the latter part of 2002, the national government through the Department of Finance (DOF) commissioned a study of reforms in the water sector to be funded by a grant from the Miyazawa Initiative to be administered by the World Bank. The specific title of the study is "Study of Reforms in the Financing Polices in the Water Sector, Graduation Policies in the Water District and Approaches to Various Regulatory Issues". The objectives of the study are to rationalize the financing of the water sector, ensure that resources are funneled in the most appropriate way, used in the most effective manner, and that the respective institutions are empowered to fulfill their responsibilities. To date, a final report of the Stone & Webster Consultants has yet to be issued by the DOF.

The single most critical constraint in the development of the water sector is the lack of local counterpart funds. For instance, LWUA has not been released its congressional appropriations for the last three years for its water supply projects, because of the national government's own financial constraints. This situation calls for innovative financing schemes which both the government and the private sectors may forge to identify and develop.

Challenge for the Government and LWUA

As of 2002, the remaining unserved population in the provincial urban areas without access to safe and potable water, is estimated to be 15 million, and about 1,000 provincial towns/municipalities which have yet to be served with Water District water. This is a gigantic task in the years ahead, which hopefully will be addressed by the planned reforms in the water sector. LWUA, for its part, is committed to be a key player in this challenge, as it has proven for the last 30 years of serving the public.q