IBON Features Vol. X Nos. 16-17 

Every Filipino has the right to clean and affordable water. And it is government’s duty to ensure that each has access to this vital need. But a recently-issued executive order threatens to commercialize delivery of water services by turning the sector over to private interests.

Executive Order 279 was signed by President Gloria Macapagal-Arroyo on February 2, 2004. The purpose of the order is to institute reforms in financing policies for local water utilities by “rationalizing operations of the Local Water Utilities Administration (LWUA).”

But water industry insiders believe that the ultimate aim of the EO is the dissolution of the LWUA and the privatization of water services delivery in areas outside Metro Manila.

The Role of the LWUA

The delivery of potable water in the country is the responsibility of government agencies. But in Metro Manila, water services are primarily provided by two private concessionaires, Maynilad and Manila Water.

Provincial rural areas are served by local government units (LGU) and cooperative water associations, with assistance from various government agencies. Provincial urban areas are principally served by water districts (WD) with the development assistance of the LWUA.

The LWUA is a specialized lending institution mandated by law to promote and oversee the development of provincial waterworks systems. It was created through the promulgation on May 1973 of Presidential Decree (PD) 198, known as the Provincial Water Utilities Act. The PD also provided for the creation of water districts.

WDs are local corporate entities established on local option basis to operate a water supply system in one or more provincial cities and municipalities. They are formed in either urban or rural communities in areas outside of Metro Manila. These WDs are government-owned and -controlled corporations (GOCC).

Although the initiative to form a WD comes from interested local government units (LGU), water districts are run by a Board of Directors composed of nominees from the private sector, through a General Manager. During the formation process, the local legislative body (Sangguniang Bayan, Sangguniang Panglungsod or Sangguniang Panlalawigan) must also submit a set of candidates for the Board and a resolution to form a WD to the appointing and approving authority (municipal or city Mayor or provincial Governor, for WDs servicing more than one town or city). The Board appointments and Sanggunian resolution are then submitted to LWUA for review.

Once the WDs are organized, the LWUA extends them various forms of support such as financial assistance (the agency acquires from loanable funds from local and foreign institutions), institutional development and technical assistance (training on policy making, WD operations, evaluating performance, operation and maintenance, etc.), and watershed management.

In essence, the LWUA is a ‘one-stop shop’ that provides both funding and expertise to local communities that want to expand the delivery of water services in their areas through the formation and development of water districts.

A troubled institution

Based on LWUA performance indicators, the agency has been a success in improving the access of provinces to potable water. From 1973 to 2002, the LWUA was able to form 584 water districts covering 691 cities and municipalities. The agency was also able to develop WDs into viable institutions, with an average of 24% non-revenue (unaccounted and unpaid for) water and a 96% collection ratio. It was also able to provide 11.4 million people with potable water through individual house connections.

LWUA’s success can also be measured through the increasing financial viability of the WDs, as reflected in the agency’s loan disbursements and collections. For 2003, LWUA disbursed P1.6 billion in loans and other assistance and generated a gross revenue of P1.2 billion, mostly from loan repayments of WDs.

But this success masks the financial problems that the agency has been undergoing due to lack of government funding.

As of late 2003, the LWUA has not been receiving congressional appropriations for its water sector projects. Thus, it has had to use internally generated funds, primarily from debt collections from WDs, for its operations. If ever it does receive money from the government, the appropriations are usually two to three years late, according to LWUA insiders.

The Medium-Term Philippine Development Plan 2001-2004 set out service coverage targets of 90.5% by 2004, an increase of 7%-8% from 2000 levels. LWUA has estimated that satisfying the requirements of the WDs alone to meet these targets will require more than P6 billion a year. However, current government allocations are not enough to meet even current needs.

Thus, when the Department of Finance (DOF) received a grant from the Miyazawa Initiative for Philippine Water Sector reform administered by the World Bank, it applied this to a study of financing policies in the water sector. DOF hired Stone & Webster Consultants in October 2002 to conduct the study together with IDP Consult, Villaraza & Angangco, Hyder Consulting and Minter Ellison.

The Miyazawa Study

The resulting study was entitled, “Study of Reforms in the Financing Studies in the Water Sector, Graduation Policies in the Water District and Approaches to Various Regulatory Issues.” Its major recommendations included:

• The classification of water districts into four categories: creditworthy, non-creditworthy, semi-creditworthy and less-creditworthy.
• The “graduation” of creditworthy WDs from LWUA’s assistance program. These water service providers would now get their capital development funding requirements from government and private financial institutions. Water tariffs charged to consumers of these utilities would then be adjusted to ‘cost-recovery’ levels.
• The establishment of a separate Special Purpose Entity to handle the collection of outstanding LWUA accounts from WDs.
• The creation of a separate Water Development Finance Group to finance the projects of the pre-creditworthy and semi-creditworthy water districts.
• The reduction of LWUA into a Water Development Group or a mere “graduation school” with the main functions of nurturing the less-creditworthy and semi-creditworthy WDs to creditworthy status by seeing to their institutional and technical development.
  
  Not surprisingly, LWUA officers and staff opposed the recommendations of the report since it would effectively make the agency powerless, and eventually dissolve it.
  
  Agency insiders also believe that dissolving the agency is one of the major objectives of the study. According to them, after the 1986 EDSA revolution, LWUA undertook a review of foreign loans and asked donor agencies to be less stringent with their loan conditions. These conditions included the hiring of foreign consultants, whose salaries, they said, eat up as much as half the project funds. The World Bank (WB) was allegedly one of the donor agencies that refused to give in on the issue of conditionalities.
  
  Because of this review, the WB has been shunning LWUA projects for the past ten years. The Bank has instead been disbursing its funds for water projects through other government agencies such as the Department of Interior and Local Governments (DILG) and the Development Bank of the Philippines.
  
  EO 279

The recommendations of the Miyazawa study formed the basis of EO 279. The EO covers local water utilities other than WDs such as LGU-run water utilities, barangay waterworks and sanitation associations and rural waterworks and sanitation associations. These are referred to under the generic term water service providers (WSP).

The EO adopts the study’s recommendation that WSPs be classified according to “creditworthiness”, and that creditworthy WSPs be “eligible to source financing at commercial lending rates from GFIs and PFIs.” But instead of creating separate entities to take over LWUA’s financing and debt collection functions, it calls instead for a reorganization of the agency.

The LWUA, which was attached to the Department of Public Works and Highways, is now temporarily transferred to the Office of the President and will eventually be moved to the Department of Finance.

Three new divisions will be created from its current organizational set-up: the Water Development Group (WDG), which will classify the WSPs according to creditworthiness and develop a “graduation plan” for WSPs below creditworthy status; the Water Development Financier (WDF), which is tasked with “enhancing and strengthening” LWUA’s lending functions to WSPs below creditworthy status by adopting “development banking principles”; and the Technical Assistance Group (TAG) which will continue the LWUA mandate of extending technical assistance to WSPs.

Prelude to privatization?

A critical look at the EO indicates that it paves the way for eventual privatization of local water utilities through their “corporatization.” Corporatization means that government would no longer subsidize state-run utilities, essentially turning them into for-profit service providers whose tariffs are determined by market considerations. The first step towards this would be reducing government participation in funding provincial water systems.

The EO’s rationale already makes it clear that the focal role of the national government in financing development of local water systems is to be diminished by stating that there is “a need to tap financing resources available to the water sector.” These include “international grants, and funding from government financial institutions (GFI), private financing institutions (PFI) and LGUs.”

The introduction of “cost recovery tariff initiatives” also paves the way for the entry of private investors. Water tariffs of WSPs are usually set to ensure the financial viability of the provider with due consideration given to social concerns. But this new initiative seeks to ensure that tariffs are set at a level that will make WSPs profitable, and thus attractive to investors. This inevitably means higher water rates for consumers.

Allowing creditworthy WSPs to borrow from government and private financial institutions “at commercial rates” also means higher tariffs since interest on the loans would be higher compared to LWUA loans, which it gives on concessionary terms. Many of the loans from foreign financial institutions are also denominated in dollars, meaning that the cost of debt servicing increases when the exchange rate fluctuates.

Thus, the end result of the EO would be a diminished role for the LWUA in funding WSPs in favor of private and government lenders, while emphasizing its role in providing technical services to make WSPs commercially viable enough that private investors would be interested in them.

LWUA insiders also point out that while the agency is tasked to continue providing technical assistance, including grants, to WSPs classified below ‘creditworthy’ status, it must do so “under competitive basis.” This means that it must compete with private-sector providers of the same services for WD projects.

Thus, they ask if competition would truly benefit WSPs or if they would suffer the fate of many government projects victimized by unscrupulous private contractors who may not even have the needed expertise.

WB and Philippine water privatization

That the World Bank should be behind plans to privatize the provincial water sector is no surprise, since it has been promoting private sector participation in local water services since the late 1990s.

In 1996-1997, the International Finance Corporation, the WB’s private investment arm, provided fees-based advisory services to the Metropolitan Waterworks and Sewerage System (MWSS), which involved the MWSS Privatization Strategy, design of an operating and investment agreement, and supervision of the competitive bidding procedures to bring international operators and investors into the local water sector.

The Bank has also funded, through adaptable project loans, the Local Government Unit Urban Water Supply and Sanitation Project (LGUUWSSP). The Project is a 12-year (1998-2010), $283 million water privatization program that intends to attract private capital to around 1,000 LGUs that manage water systems outside Metro Manila.

But these projects have failed to improve the delivery of water services and burdened consumers with onerous tariffs.

The two concessionaires tasked to serve Metro Manila, for example, have failed to meet their targets for reducing non-revenue water (NRW). As of 2002, Manila Water’s NRW stands at 53% and Maynilad’s at 69%, on targets of 16% and 31% respectively. Basic tariffs since 1997 have also risen by more than 200% for Manila Water and 350% for Maynilad due to rate adjustment mechanisms implemented by the concessionaires.

Maynilad’s proposed compromise settlement with the government over the termination of its concession agreement also leaves MWSS to shoulder P10.8 billion worth of its liabilities, which may eventually be passed on to consumers.

One of the flagship projects funded under the LGUUWSSP in the municipality of Magdalena, Laguna, also ended in failure. The project, which involved the digging of three deep wells and the construction of pumping stations, produced only unpotable water. But in order to service the debt, Magdalena residents still had to pay for the water from the new system even though they could not drink it and had to resort to buying bottled water.

Compounding the failure of the project was the backing out of the private concessionaire who had contracted to run the system. Bayan Water Services, which was a joint venture between the Lopez family’s Benpres Holdings and New Zealand-based Montgomery Watson, had entered into a 15-year, P70-million lease agreement with the municipal government to handle the system’s operation and maintenance. But it terminated the lease agreement after the local government failed to complete the construction of the facilities and turn them over to Bayan Water before the targeted System Start-Up Date of not later than August 2001.

Water for the people

The rationale behind PD 198, which created LWUA and the water district concept, is that local water utilities should be locally-controlled and -managed, and be given support on the national level in the area of technical advisory services and financing. This means that the national government has the responsibility to support the development of local water systems.

Unfortunately, the government seems more concerned with following the dictates of its international creditors than fulfilling its responsibilities to help deliver potable water to all its citizens. By turning provision of water services to privatized utilities, it is essentially washing its hands of this responsibility.

Requiring ‘creditworthy’ WSPs to borrow from private and government banks means ultimately forcing them to prioritize profitability over service. And the losers are the consumers, who have to suffer higher water tariffs. Even if water rates still seem relatively affordable, any increase in these would represent an extra burden to consumers already reeling from high prices and difficult economic times.

Thus, LWUA must retain its function to extend financial development assistance to WSPs. Local communities should also be given a greater stake in local utilities. LWUA insiders have suggested that perhaps local funds could be mobilized to invest in WSPs, allowing residents to have a greater say in the utilities’ operations.

Privatization and commercialization are not the solution to poor water service in the country. Ultimately it could be – as LWUA employees called the proposed reforms in the Miyazawa report – a cure worse than the disease. IBON Features