NOTE: THIS PAPER WAS PUBLISHED IN EARLY 2004. POSTED FOR REFERENCE.

Speech delivered at the 2004 LWUA-Water District Forum

A Reexamination of the LWUA-Water District Concept
By Carlos C. Leaño Jr.

Col. Carlos C. Leaño, Jr. (Ret.) is regarded as the father of water districts in the Philippines for his pioneering efforts at establishing and institutionalizing the water district concept. His stint as general manager of the Local Water Utilities Administration, from its inception in 1973 until his departure in 1986, has left a lasting legacy to his peers and colleagues in the water supply industry. Col. Leaño, a civil engineer by academic pursuit has undergone numerous postgraduate courses in engineering and in other fields both here and abroad. His long and colorful service in government included his terms as Chief Operations Officer and Executive Director of the Infrastructure Operation Center and Coordinating Officer for Program Evaluation in the Office of the President, and Director of Infrastructure Program Office of the Presidential Economic Staff.

My friends, good afternoon.

It is my pleasure, privilege and honor to be with you today - my old friends as well as new ones. You can be certain that I cherish your friendship despite the long years of our separation since I left LWUA many, many years ago.

I am asked to speak on a subject very close to our hearts.... the LWUA-WD concept. In effect, I am asked to reexamine that concept. To state it in another way, the question that I must answer, as I perceive it, is … "Is the LWUA-WD concept still valid today?"

But first, let us define what the LWUA-WD concept is and how it came about.

Thirty years ago, most of the municipal water supply systems all over the country were under the control of and were being operated, maintained and administered by local government units (LGUs). At that time, water supply systems were deteriorating faster than they could be replaced, while the ever growing population and industry needs were imposing additional demands on these existing facilities. The major problems then in the water supply sector were shortages in water supply, inadequate funding for facilities improvement and expansion, inadequate skills in developing and maintaining water resources, inadequate physical infrastructure, institutional weaknesses as well as managerial and human resource inadequacies.

Due to the failure of these existing water utilities to meet the needs of the communities they were serving, the LWUA-WD concept was conceived and operationalized in 1973 with the enactment of Presidential Decree (PD) #198. The concept is a partnership arrangement - a partnership between LWUA as the government resource provider and the water districts (WDs) as the local water service providers. The establishment of LWUA and the development of WDs provided a mechanism primarily for funding and managing the expansion and delivery of water supply services in the countryside.

LWUA, as a specialized lending institution, is to be the principal source of funding and will also provide technical and training assistance to the WDs. On the other hand, the WDs, operating as quasi-public, locally-controlled and locally-managed entities are expected to become self-sufficient, to develop the necessary expertise and to be capable of maintaining financial viability.

In 1993, 20 years after the inception of the concept, the World Bank water supply sector reform study was conducted. The study highlighted the fact that the water supply sector continues to suffer scarcities in three areas: first, in the area of water supply or how to provide quality water to all users; second, the area of maintaining environmental quality or how to prevent destruction of our surface and ground water resources; finally, the area of capital sourcing or how to find the huge investments required for the continuing development of the water supply sector. So, it seems that while a significant breakthrough has been made towards the alleviation of our water supply problem in the urban countryside, considering that some 600 WDs have already been formed and organized to date, the same problems still persist in the poorer urban and rural areas in the countryside.

And as long as these problems continue to adversely affect us, we need to Implement proven measures - such as the LWUA-WD concept - in order to keep pace with the ever increasing demands of our people for potable water. Of course, we should constantly be aware of the need and be on the lookout for better and more effective measures of expanding our means and capabilities to improve the situation.

Given the current situation and information from past experiences and records, I now ask the question: Is the LWUA-WD concept still valid today?

To help us answer this basic question, it may be pertinent and relevant to ask ourselves certain questions that bear on the structural and organizational issues as basis for assessing the situations - then and now. Actually I have four questions.

1. Has the situation - the findings of the USAID Water Supply Sector Study of 1971-73 - for which PD 198 was enacted to correct, been substantially eased up? In other words, has the serious water shortage problem then obtaining in the urban and rural countryside, been improved significantly as regards to structural and institutional capabilities? Or simply stated, are there more people outside of Metro Manila now benefiting from improved water supplies?

2. Are the LGUs, which have opted to form WDs benefiting from such devolution and are now able to adequately and better provide for the other basic governmental services, like community health, public order and safety, and public administration? In other words, has relief from the task of providing water supply service to their communities, which they used to do before, been a blessing to them in terms of more money to spend on the other basic community services for which they are responsible?

3. Are the WDs slowly but surely attaining the objectives of self-reliance, self-governance and financial viability and are delivering acceptable water service to their areas of responsibility?

4. Has the LWUA been able to provide the needed financial and technical assistance to WDs at the level that would promote their capability for self-reliance and self-governance and for sustaining financial viability? In other words, has the LWUA been able to develop adequate infrastructure and institutional and managerial skills required of WDs in delivering adequate, economic, acceptable levels of service within the water users' ability to pay - and thus promote financial viability?

The answers to these four sets of questions will tell us whether the LWUA-WD concept has been a success and if still valid today or not. My own answer to the basic question is yes, the LWUA-WD concept is still relevant. Undoubtedly, we must have learned some fruitful lessons over the past years. For though how good a system is, there is always room for improvement. We simply cannot remain complacent, we cannot stagnate, rather we need to grow and must grow. And that is what the business of water service is all about ­growth - we need to keep pace with the growing and continuing demand for this very basic service and we need to keep on improving our delivery methods and systems and make them cost-effective. This means continuous reexamination of our means and systems that should possibly result in adjustments or shifts in priorities and direction. This means changing for the better.

At this point, let us take note of some of the current issues that have cropped up in response to this call for continuing improvement. First, the issues relating to the Local Water Utilities Administration (LWUA):

1. Commercialization. The World Bank water supply sector reform study of 1993 and the USAID water supply sector privatization study of 1996 both recommended the reorientation of LWUA to its original corporate mission as a "specialized lending institution", financing only viable water supply projects with tariff levels formulated towards full cost recovery. This, in effect, will commercialize LWUA. LWUA, under its enabling
legislation, always had the authority to raise funds from private sector and must now exercise this power with greater urgency in order to generate more funds for relending to WDs - now possibly to other water service providers (WSPs) - for water supply and sewerage development. The current program of LWUA to increase its capitalization and improve its relending capacity are moves in the right direction. Very recently, Presidential Executive Order No. 279 was signed on Feb. 2, 2004, instituting reforms in the financing policies for the water supply sector. This, in effect, would now actualize LWUA's commercialization. Under this Executive Order, LWUA, presently attached to the DPWH, will now be attached temporarily to the Office of the President during the transition phase of its reorganization, finally transferring to the DOF - ­that is, move from the infrastructure sector to the financial sector. This reorientation of LWUA's operations towards development banking principles implies the need to change its organizational culture to allow it to perform its reconstituted role with greater banking expertise. Noteworthy is the fact that the Executive Order prescribes an organizational structure that closely follows LWUA's current principal functions, to wit: institutional development services to be assumed by the Water Development Group, relending services by the Water Development Financier, and technical assistance services by the Technical Assistance Group. Also noteworthy is the fact that LWUA's service coverage will no longer be limited to organized WDs but would also include other water service providers (WSPs) in accordance with their creditworthiness classification and eligibility.

2. Subsidies. NEDA Board Resolution No.4 of 1994 provides that LWUA support only financially viable projects; therefore, it cannot now subsidize water supply development. Where government grant funds are made available, they should be used, at best, for project feasibility and scoping studies or provided as direct subsidies to small nonviable systems.

3. Regulatory Functions. LWUA should continue exercising regulatory functions relating to the formation of WDs to ensure that such WDs are properly established and operated and that operating and quality standards are met. However, it has been noted that since LWUA would now be exercising its development banking role to a more expansive extent, its regulatory control over tariffs or water rate setting by borrower-utilities could present a conflict of interest. It is suggested that such regulatory function for WSPs not included in LWUA's current loan portfolio which covers only the loans granted prior to its reorganization under EO #279, be vested in the NWRB. In short, the regulation of water pricing by new borrowers should no longer devolve on LWUA but be taken over by the NWRB.

4. Engineering Functions. Historically, LWUA has been involved in engineering and construction primarily to ensure that the WDs are provided the right and appropriate water supply facilities that would be responsive to the demands and capacity to pay of recipient communities. At the initial stages of LWUA's operation and WD development, it was deemed necessary and justified to develop and provide this expertise since at that time the private sector could not adequately cope with. Although many WDs have matured over the last thirty years, quite a number still need technical support. Fortunately, many of these technical support functions can now be satisfactorily handled by the private sector. It would be to the benefit of the entire water supply sector that such services be provided to WDs and other WSPs on a fee-for-service basis to allow competition in providing such services and ensuring that the WDs make effective use of these services. Moreover, LWUA could privatize some of its activities that can well be performed by the private sector, like financing of WD investments, preparation of feasibility studies, design of system facilities, construction supervision, and training of WD staff in the operation and maintenance of water supply systems.

5. Marginal or Nonviable WDs. In 1986, the First People Power Revolution ushered in a complete top-to-bottom change of "leadership in government from the presidency down to the departmental and agency level. This, consequently, brought about drastic changes in many governmental operating policies. LWUA, for its part, pursued an aggressive program to increase the number of WDs with a sudden shift in its policy - from that of "viability and self­-reliance" to that of "service with equity". This resulted in the formation of smaller WDs, not a few of which are now finding difficulty developing into viable systems. For the marginal, nonviable WDs, it is possible to improve their viability ratings through amalgamations, management mergers, responsive service standards, institutional and technical assistance, and financial restructuring. This issue can be better attended to under the "classification and graduation" scheme provided for in EO # 279.

Now, let's go to the problems and issues relating to Water Districts (WDs):

While many WDs are now well managed and performing to high standards, there are still a number of implements to WD self-sufficiency and viable growth:

1. Inadequate financing for system expansion. In some cases, even if funds are available for projects, the rate of disbursement and subsequent project completion seems to be a bit slow.

2. Adverse political interference. This could be traced partly' to the fact that the LGU chief executive continues to exercise appointive powers over the members of the WD Board of Directors.

3. Inadequate skills and technical expertise necessary for the efficient management of water supply systems. This is a continuing concern of management in its quest for excellence and a matter of investing more attention to human resource selection, development and motivation.

4. Water source problems and competition from private wells, with serious environmental consequences. Our water resources continue to be polluted, salt water
are intruding into our coastal water supplies and groundwater aquifers are being destroyed or unduly depleted. Previous and current studies have underscored the need for a centralized effective control and regulation in the proper marshaling and management of our water resource. Until now, efforts in this direction seem to be wanting if the results are any indication.

5. Technical and operating problems, such as, over­ designed systems, that is the cost of the installed systems does not match the modest requirements of the community, constraints on pricing or underestimated water tarrifs which do not account for the true costs of the service.

6. Marketing problems, e.g., limited service area, slow growth of service connections, or situations where households have easy access to ground water sources which reduces demands for the WDs services.

Given the above situations and problems, some of the major issues affecting the WDs that need to be looked into and resolved are:

1. Private Character. The WDs have a need for a legally defined and clear ownership and control structure. They also require incentives to promote efficient performance by management and staff. Section 6 of PD 198 provides that a WD "shall be considered as a quasi-public corporation performing public service and supplying the public wants". However the Supreme Court's decision of 13 September 1991, in the case of Davao City WD, et al versus the Civil Service Commission and the Commission on Audit ruled that WDs are government-owned or controlled corporation. This implies that the hiring and firing of a WD personnel will be in accordance with the Civil Service rules; their salaries and wages will be in accordance with the civil service rules; their salaries and wages will be in accordance with the corresponding regulations for regular government employees; its financial operations will be subject to COA audit contrary to a specific provision of the enabling act (Sec. 20, PD 198); and for social insurance and pension purposes, they will be covered by GSIS instead of the SSS. This has serious implications on the WDs considering that water services are generally to be provided on an efficient commercial basis.

2. Privatization. At the core of the proposed water supply sector reforms in the privatization of WDs. In this context, privatization can take various forms, from the privatization of parts of the WD operations, like billing and collection activities, or the operation and maintenance of the system, to the conversion of the WD into a private corporate structure. As a bottom line condition, WDs should be able to operate on a private, commercial basis. The Water Supply Sector Reform Study of 1993 provides three options on the possible ownership and corporate structure of WDs: (a) First option is a private corporation under the Corporation Code of the Philippines under BP #68. This option is suitable to WDs that have the necessary market of at least 50,000 service connections, the capital strength and the capacity to operate as a private corporation and be managed as such; and (b) Second option is a private corporation under a further amended PD 198 which clearly defines WDs as private institutions, under a foundation ownership system with their charter specifying management and financial guidelines and constraints, the legal accountability of its board directors and permanency of its management officers who may not be removed except for cause and after due process.
And a third option is a cooperative of water consumers under the Cooperatives Code of the Philippines
under RA 6938, with the consumers converted into shareholders, with voting rights after contributing equity to the enterprise. This option is suitable to the smallest of WDs where meaningful interaction and communication with members are feasible. These cooperatives should have the further option to incorporate under the to-be-amended 198 or under the Corporation Act at a suitable future time in their development.

3. Operational Issues. Some of these operational issues are: (a) WDs should provide the type and level of service their customers demand or require and are willing to pay, and accordingly should charge financially sustainable water tariffs that cover the full cost of the service; (b) WDs should be allowed to avail of engineering, financial, institutional development, business management and material procurement services from LWUA or the private sector on a competitive basis. This means that LWUA will have to compete with the private sector for providing these support services on the fee-for­-service basis; (c) The minimum level of government regulations should be imposed on WDs' operations, except those relating to health and environment standards, maximum water tariffs, and minimum levels of service which are all essential for the protection of water consumers; (d) WDs should be allowed to avail of private bank loan funds, BOT and franchise operations to encourage the inflow of private capital and expertise into the water supply sector; and (e) WDs should give particular and serious attention to the reduction of non-revenue water (NRW) and the protection of their water sources as major efficiency and cost reduction for 2004 an average NRW rate for all the WDs of not more than 27%. This is very encouraging. As basis for comparison and possibly a goal to aim at, Singapore's NRW rate, as I have last heard of, is only 5%. That... is really something.

So there you are. The basic organizational structure and concept exist - a structure and concept that had worked reliably since its inception thirty years ago. What is needed is to make that structure and concept continue to work. If present results are still wanting, then let us make it work within or inspite of the given constraints. Moreover, it is necessary to resolve the emerging issues which seem to imply deficiencies in the concept and to remedy and update them as needed.

The LWUA and the Water Districts have come a long way. Last year, in 2003, LWUA, as if to prove its worthiness after 30 years of existence, completed 47 projects, both comprehensive and interim, valued at some P519 million, which will provide potable piped water service for an additional 300,000 people living in the countryside. LWUA has tremendously improved its financial operations which also reflect the improving viability of WDs. For the past two consecutive years, it disbursed loans as well as generated revenues each year in excess of P1 billion. For 2003, it disbursed P1.6 billion in loans and other assistance and generated a gross revenue of P1.2 billion, mostly out of loan repayments from borrower water districts - and in the process was cited by no less than the NEDA and the Department of Finance as "among the few agencies that have been efficient in the utilization of Official Development Assistance (ODA) funds for their projects" and "among the few truly earning government-owned and controlled corporations." These are achievements that can speak well for the efficacy of the LWUA-WD Concept.

Resource availability and its optimal distribution and use, institutional responsiveness and the clientele's well-being and satisfaction would certainly be the ultimate yardsticks for measuring the success of your efforts. Some internal reorganization would be required and the updating of systems and procedures is called for. All these mean people - the policy makers, the executives, the managers and senior staff and the rank and file - people who are highly motivated, knowledgeable, reasonably determined, who work hand in hand with each other, and are not sidetracked or do not lose sight: the organization's aims and objectives.

I do hope I have made clear my stand on the topic assigned to me and sincerely wish I had struck some responsive chords in your minds and hearts to make you realize how heavy and serious your responsibilities are to our people as resource and service providers. I personally consider the LWUA-WD concept as an institutional development strategy worth developing, improving and pursuing to the fullest possible extent for the benefit of our people.

As I end my talk, I am reminded of a prayer by Reinhold Niebuhr. It is said that for one to be successful
in anything he does, his physical drive should be pushed by his intellectual fortitude and sustained by his spiritual integrity. The three-physical drive, intellectual fortitude and spiritual integrity - together all spell success. So let me now quote that prayer as a guide for us as we pursue our goals for the benefit of our people: "God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. Amen."

My friends, thank you and good day