Keynote Address
of LWUA Chairman Francisco D Dumpit

Souther Tagalog Association of Water Districts (STAWD) General Membership Meeting
22 June 2005

Chairman Francisco D Dumpit has been a member of the LWUA Board of Trustees since 1988, serving in various capacities as a member, vice chairman and chairman. With such length of service, he is very familiar with the agency. Chairman Dumpit graduated from the Philippine Military Academy, Class of 1957, with a Bachelor of Science degree. He is a registered civil engineer, obtaining his Bachelor of Science degree in Civil Engineering in 1969 from the St. Louis University in Baguio City.He also holds a degree in Master National Security Administration from the National Defense College of the Philippines, where he graduated in 1982 with honors. He retired from military service in April 1988 as Commander, 51st Engineer Brigade, Philippine Army.

Ako ay lubos na nasisiyahan na maging bahagi nitong mahalaga at di karaniwang pagkakataon. Mangyaring tanggapin ninyo ang aking masiglang pagbati sa inyong General Membership Meeting ngayon.

You mentioned in your invitation that the association is earnestly longing to hear an insight on the latest status of the Local Water Utilities Administration (L WUA) and the Water Districts (WDs). Allow me, therefore, to expound on the subject.

This matter was triggered by Executive Order (EO) No. 279 dated 02 Feb 2004 entitled "Instituting Reforms in the Financing Policies for the Water Supply and Sewerage Sector and Water Service Providers and Providing for the Rationalization of LWUA's Organizational Structure and Operations in Support Thereof."

Sec. 9 of this EO entitled "Rationalization of LWUA's Organizational Structure and Operations" provides that L WUA shall constitute and designate from its current organizational set-up, a Water Development Group (WDG), a Water Development Financier (WDF) and a Technical Assistance Group (TAG), or similar structures. Further, it provides that the WDG shall classify the Water Supply Providers (WSPs), among them the WDs, into either creditworthy, semi-creditworthy, pre-creditworthy or non-creditworthy and shall develop a graduation plan for non-creditworthy, pre-creditworthy and semi-creditworthy WSPs.

Amidst EO No. 279, you may ask where are we now?

The President issued EO No. 387 dated 18 Nov 2004 transfering LWUA from the Office of the President to the Department of Public Works and Highways (DPWH) and authorizing the Department Secretary to exercise administrative supervision over LWUA.

And lately, we have EO No.421 dated 13 Apr 2005 entitled "Implementing the Refocusing of the Functions and Organizational Structure of the Local Water Utilities Administration under EO 279 and Providing Options and Benefits for the Employees Who May Be Affected Thereon."

Sec. 4 of this EO entitled "Staffing Pattern" requires the submission of LWUA staffmg pattern to the Department of Budget and Management (DBM) for review and approval. LWUA has just completed the proposed rationalized organizational structure and the proposed staffing pattern with 465 number of positions.

Sec. 7 of the same EO entitled "Benefits of Personnel Who Would Opt to Retire or Be Separated from the Service" gives the option to avail themselves of retirement gratuity provided under Republic Act (RA ) 1616 or retirement benefit under RA 660 or applicable retirement, separation or unemployment benefit provided under RA 8291.

In a letter to the President dated 09 May 2005, LWUA expressed deep concern for its employees who may need to be retired or separated by said rationalization and streamlining. LWUA is prepared to give them reasonable early retirement and separation package (ERSP) that will encourage at least 248 employees to opt for early retirement. LWUA shall shoulder the cost of the proposed ERSP out of its corporate funds. The savings that will be generated by a more streamlined and efficient organization will more than offset the cost of the ERSP. LWUA has submitted for approval of the President its own proposed ERSP similar to or better than like the National Development Company (NDC), Garments and Textile Export Board (GTEB), the Government Service Insurance System (GSIS) and National Power Corporation (NPC).

For the WDs, LWUA issued Board Resolution No.93, series of 2005 dated 17 May 2005 classifying all Water Districts nationwide into Creditworthy (CW), Semi-creditworthy (SCW), Pre-creditworthy (PCW) and Non-creditworthy (NCW) on a 3-year basis from 2001 to 2003.

Going back to EO 279, what then are the expected reforms in the water supply sector (WSS) and what financing framework could be developed for WDs water supply (WS) projects?

Some of the reform objectives espoused under EO 279

Rationalization of allocation of financial resources in the WSS through classification of WDs. LWUA funds have been considered low-cost and long-term credit. It is a mix of concessionary foreign loans and government equities/subsidies or grants and local borrowings. However, LWUA's financial assistance has been accessed only by financially viable WDs while fledgling WDs hardly has access to it. Further, due these concessionary loans, WDs seldom tried other sources of development funds coming from Government Financial Institutions (GFls)/Private Financial Institutions (PFls ).

Increased participation of GFls/PFls in financing WS projects. Traditionally, L WU A has been the only source of long-term credit for WS projects. Because of the impaired lending capacity of L WUA to meet demand for capital funds for WS projects, there is a need to tap private capital markets and credit facilities of GFls/PFls.

Grant of incentives for improvement and graduation of WDs. Rationalization of the allocation of scarce resources should consider giving priority in accessing development funds to WDs showing greater potential of improvement and avoid giving premium to WDs unwilling to change for the better.

Encouragement of initiatives to improve efficiency of WDs through amalgamation, resource pooling and cost-recovery tariffs. The need for effective communication and closer coordination with the Local Government Units (LGUs), private/public sectors and local stakeholders cannot be overemphasized to make a project successful. To achieve economies of scale, pooling of resources of the different stakeholders in the community can be initiated through participatory project conception and implementation. The different stakeholders can then have a shared vision and agree on their specific roles and responsibilities. This arrangement will avoid information deficit on the side of the community and promote project advocacy.

Improvement of investor confidence in the WSS. Due the lack of critical information provided to other sources of funds and lack of experience in water projects, many potential investors were reluctant to invest in long-term lending programs for WS projects. The lack of WD rating system made the investors to do their own evaluation and very often the loan is heavily hedged and the perceived risk is passed on to the borrowers.

To achieve the reform objectives, LWUA has to:

Review its policies, programs and operations. L WUA in the past was directed by the National Government (NG) to lend only to viable WDs. This had the unintended effect of restricting access by less creditworthy WDs to LWUA financing. Since the exhaustion of its capitalization and its domestic borrowing, but without matching local funds, LWUA could not access Overseas Development Assistance (ODA) funds. Further, severe fluctuation in foreign exchange rate has heavily weakened LWUA's capacity to generate earnings for its operation and debt service and to maintain a revolving fund for other WS projects. There is a need to tap domestic capital markets which has been used sparingly with the hope of closing the huge backlog in WS investments in the country.

Refocus its objectives. As a result of the directive to LWUA to lend only to viable WDs, the more creditworthy WDs have been accessing concessionary loans which would have been made available to the less creditworthy WDs. There is, therefore, the need to classify WDs according to creditworthiness to rationalize the allocation of funds where the less creditworthy ones will be accessing the concessional funds while the more creditworthy will utilize commercial sources of funds,e.g., GFIs/PFIs. A graduation program will be implemented to provide capacity-building support to less creditworthy and graduate from concessional financing as soon as possible. Access to these funds will be based on an output-based assistance which means that less creditworthy WDs showing greater potential of development will be given priority to access concessional funds.

Rationalize its organizational structure to include three main units, as follows:

Water Development Group (WDG) to classify WDs according to creditworthiness and develop less creditworthy ones to graduate them to creditworthiness.

Water Development Financier (WDF) to enhance provision of financing for SCW, PCW and NCW WDs.

Technical Assistance Group (TAG) to offer project related technical assistance to GFIs and CW WDs on a competitive basis.

Financing policies to be adopted according to WD creditworthiness

CW WDs will be eligible to source fmancing from GFIs/PFls. In case fmancing is not available from these sources, LWUA may finance their WS projects subject to prioritization criteria giving preference to less creditworthy WDs.

SCW WDs will be eligible to source concessional financing from L WUA or from GFIs/PFIs whenever possible.

PCW WDs will be eligible to source grants from donors and deep concesionmal financing from L WU A.

NCW WDs will be eligible to fmancing under LWUA but LGUs will be encouraged to provide fmancial and operational support for them.

Financing framework to be developed for WS projects

Recognizing the huge backlog in WS investments in the country, and that LWUA has already exhausted NG capitalization and domestic borrowing capacity, and realizing that no government subsidy is forthcoming, there is a need to develop mechanism to tap domestic capital market. The evolving WSS financing framework will be by way of, as follows:

Lending by GFIs/PFIs to CW WDs (interim measure). Foreign Lending Institutions (FLI) will co-finance WS projects with GFls/PFls. ODA funds channeled through GFls will be matched with GFI/PFI funds.

Lending by LWUA using its Internal Cash Generation (ICG) blended with ODA funds/grants and government grants where possible (interim measure). GFls will refinance some existing WD loans from LWUA which would then reduce foreign risk exposure of LWUA by prepaying the foreign loan and at the same time fund some of its less creditworthy WDs WS projects.

Lending to SCW, PCW and NCW WDs would require concessional funds window (interim measure). Due to the severely constrained government budget, government grants would be very difficult to come by. This window will have to rely on ODA. Co-financing by several donors will be needed. ODA funds mixed with grants will be necessary for feasibility studies and project preparation to develop a pipeline of WS projects.

Lending through the Water Development Financier (long term measure). Capital for this operation will be raised by periodically issuing bonds. The WDF will have two windows, as follows:

Water Revolving Fund Window. This will tap the domestic bond market and the capital raised by periodically issuing bonds will be lent as cornmercialloans to CW WDs.

Concessional Funds Window. WDs which cannot qualify for cornmercialloans can access this window. ODA and government grants will be the main source of funds to the less creditworthy WDs. However, access to these funds will require the WDs to prepare and implement a graduation plan and loan access .and availment will be output-based which means that the WD availing of such assistance will have to meet a certain level of progress in its graduation plan.

The challenge

The thirst for capital funds in the WSS is large and critical. The traditional source of government equities/subsidies continues to diminish and cannot meet the increasing demand for capital. Non-traditional sources and even the more expensive capital markets will have to be tapped. The huge challenge to the NG, LWUA, the WDs and the various financing institutions is how to come up with innovative ways of stimulating additional financing for the country's water supply program.c