Bulk Selling And Reticulation Small Water Investment

BULK SELLING AND RETICULATION: SMALL WATER INVESTMENTS

Institute of Popular Democracy: Nino Jamir Ocamco Jude Esguerra Nai Rui Chng Frances TC Lo Melai Tuba June 2007

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract The conflict between central utilities and small-scale water providers (SSWP) is a potential area for cooperation that can produce outstanding benefits for water consumers. The interface between the two is a space of risks that can be addressed if understood more analytically. Four policy interface areas had been identified by this study as critical to the formulation of rules of engagement that can create mutuallybeneficial, cooperative dynamics among all primary stakeholders (central utility operator, client community and small water provider); these are (1) exclusivity, (2) bulk selling, (3) reticulation and (4) financing and cross-subsidies. This study studies specific policies under these four interface areas across different contexts of the four case studies (Taguig, Binangonan, Tinagong Paraiso in Bacolod with examples from San Fernando Pampanga). Based on the case studies, this paper analyzes the disabling effect of these interface policies to the participation of SSWP.

EPRA Research Project on New Rules for Grassroots Water Sector Investments

Enabling Policies for Small-Scale Water Provides1 Framework Paper Introduction The conflict between small-scale water providers (SSWP) and central utility (CU) seem to be natural effect of the development of water network infrastructures in a developing country where capital investments are scarce and the infrastructure levels are still poor. The nature of network utilities to expand one node at a time creates uncertainty for small utilities and the possibility that water infrastructure that has been built up in previously unoccupied areas would be rendered redundant, illegal or declared substandard. However, the conflict between central utilities and small-scale water provider is also a potential area for cooperation that can produce outstanding benefits for water consumers. This physical and policy-level meeting up of small utilities in the periphery and of an expanding central utility may bring with it the possibility of service level improvements. The interface between large utilities and smaller peripheral utilities is a space for risks that can be addressed if understood more analytically. It is also a space for the possibility of co-existence, perhaps even of a division of labor that might seem more logical, given the preponderance of these community and private sector initiatives in areas unserved by the central utility. Four policy interface areas had been identified by this study as critical to the formulation of rules of engagement that can create mutually-beneficial, cooperative dynamics among all primary stakeholders (central utility operator, client community and small water provider); these are (1) exclusivity, (2) bulk selling, (3) reticulation and (4) financing and cross-subsidies. This study studies specific policies under these four interface areas across different contexts of the four case studies (Taguig, Binangonan, Tinagong Paraiso in Bacolod with examples from San Fernando pampanga). Based on the case studies, this paper analyzes the disabling effect of these interface policies to the participation of SSWP. The second half of the policy report ends up with policy proposals that can create an enabling and supportive environment for SSWP as reliable, alternative water provider for waterless communities.

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Nino Jamir Ocampo and Jude Esguerra, Institue for Popular Democracy, May 2007

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I. Discussion of Policy Interface Areas between Small Scale Water Provider and Central Utility 1.1 Exclusivity Exclusivity is the area which refers to policies being used by water providers, whether by the central utility (CU) or the small scale water providers (SSWP), to justify and defend their exclusive right to provide water services to a certain territory. In economic parlance, exclusivity refers to policy barriers, which are mostly legal, that are used by a monopolist water provider to prevent possible competitors from entering their captive market. In the case studies, exclusivity mostly pertains to the legal bases and authoritative codes that SSWP and CU uses to assert their jurisdiction and authority to provide water services to a certain area. Although legal codes are the common source of exclusivity policies, some cases show that technical aspects of water sector regulation are also used as basis of exclusivity. Exclusivity can be considered as the immediate and frequent policy issue every time there is a physical and policy-level meeting up of small utilities in the periphery and of an expanding central utility. Exclusivity frequently emerges as a conflict issue because it is a natural reaction for both CU and SSWP to invoke their legal mandate and authority over their service area whenever possible competitors contest their territorial jurisdiction. As observed in the cases, exclusivity which also refers to territorial jurisdiction is not only invoked by central utility whenever peripheral SSWP captures a part of its underserved market, but also by SSWP whenever their existing water businesses are threatened by an competing water provider such as the CU. Based on the case studies, exclusivity mostly refers to legal codes and institutional agreements that provide the territorial jurisdiction for a water provider to a certain service area, be that of the CU or SSWP. The present legal environment of the water sector provides both the CU and the SSWP the legal armaments in asserting their exclusivity as seen in Figure 1. Figure 1: Legal Codes Used among Case Studies to Assert Exclusivity Cases

Legal Codes Used by Central Legal Codes Used by Small Scale Utility (CU) Water Provider

1. Binangonan CU: Private Company SSWP: Community Cooperative

Republic Act 6324 Batas Pambansa Blg. 799 Concession Agreement MWSS

2. Taguig CU:Private Company SSWP: Neighborhood Association

Concession agreement with MWSS, subsequent rules established by the MWSS-RO

3. Tinagong Paraiso, Bacolod CU: Water District SSWP: Community Cooperative

No Exclusivity Conflict

4. San Fernando CU: Water District SSWP: Private Company

Presidential Decree (PD) 198 or Local Government Code of 1991 Provincial Water Utilities Act of Baranggay Resolution Nos. 052-2005 1975 and 053-2005 MWSS Memorandum Circular No. 010-92

Municipal Resolution 98-01. Local Government Code of 1991 with

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Cases

Legal Codes Used by Central Legal Codes Used by Small Scale Utility (CU) Water Provider Resolution No. 156-2000 The type of legal codes for exclusivity varies per type of central utility operator. Central water districts can always invoke their exclusivity rights through Presidential Decree (PD) 198, otherwise known as Provincial Water Utilities Act of 1975. PD 198 2 is invoked by water districts in efforts to prevent water providers such as small-scale from operating in their service area. Meanwhile, private concessionaires refer mostly to their Concession Agreement to assert “exclusive right to provide water and sewerage service in the Service Area” against entering market players. On the other hand, SSWPs have used the Local Government Code of 1991 (RA 7160) as their legal basis for justifying their water services to underserved areas. Because of the incapacity of CU to expand their supply coverage, communities and local government (barangay or the municipal government) of underserved areas take the initiative to construct and operate their own water system. Local government invoke Article 25 of RA 7160, which mandates the barangay's responsibility for delivery of basic services, including the maintenance of water supply system. Small private water providers invoke the same provision in the local government code when they act as agents of local governments. Several observations can be derived from the case studies. First, the legal environment is skewed in favor of the central utility and creates uncertainties for peripheral SSWP that intend to get a fair and predictable return from investments in water service provision. Despite court rulings to the contrary and alternative interpretations of existing rules franchises and concession agreements 3 it is repeatedly asserted that such legal instruments provide central utilities the right to exclude others, most especially in localities within its franchise that the central utility is contemplating on entering. Some legal support exists for SSWPs to operate in underserved localities within the service areas of central utilities. However, both in the case of Metro Manila concessions and in water districts this legal support is one that merely allows the SSWP to operate while the central utility is unable to serve the area. Water districts, e.g., in San Fernando Pampanga even impose assessment fees on small operators even in instances where such small operator are acting as agents of local governments in areas that could not yet be served by the water district. In the end a certain right to exclude is still upheld by the courts and regulators and also through the language of concession agreements. Absent is the presumption of free entry – the presumption that central utilities may under certain specific conditions lose prerogative of taking over areas served by small water providers that preceded them by years or even decades. Although there will probably be important instances where there is economic value to establishing a division of labor between small and large utilities – with small utilities concentrating on distribution, or instance – small utilities will tend to be temporary setups because of the existing rules and

2 Section 31(c) of PD 198 states that a water district shall have the right to prohibit any person, firm or corporation from vending, selling or otherwise disposing of water for public purposes within the service area of the district where district facilities are available to provide such service, or fix terms and condition by permit for such safe of disposition of water. 3

See quote from Attorney Crecencio Minas of the MWSS-RO accompanying case study for Binangonan and National Water resources Board Case 02-843 Adala versus Metro Cebu Water District wherein the NWRB asserts that a water district’s claim of franchise, cannot prevent the NWRB from granting certificates of public convenience to other water providers within the service area of the water district.

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regulations. If that will continue to be the broad direction of jurisprudence 4 the subsidiary reform can take the form of establishing rules and practices on the compensation of investors that will be displaced by central utilities. To ensure a fair return to the investment of the small providers in the peripheries the period of cost recovery, the allowable tariff level and the compensation for assets that will be used by the central utility are handles that can be used by policy and rules to ensure that small pproviders will continue to invest even if their operations will only be transitory in character. The other option is of course one where the long-term economic value of unbundling water delivery services is understood and rules of entry by small water providers and future interconnection with large utilities rather than procedures for excluding and then displacing them will attract policy reforms. 1.2 Reticulation issues During the initial period of partnership between a CU and the SSWP (i.e., especially in the instance where the small water provider depends on the central utility for its supplies), reticulation issues arises when the water distribution system (or the reticulation system) of certain client community is constructed at the expense of the SSWP instead of the central utility. This usually happens because of financial constraints that central utilities face 5 . Accessibility of waterless areas to CU’s water services is hampered by the financial incapacities of the central utility to construct the needed reticulation system. To solve the problem, the SSWP in cooperation with their client community takes the initiative in constructing the reticulation by shouldering all the financial cost related to the construction and operation of the reticulation system. Reticulation issues also refer to the rules and practices governing the turn-over of the operation of water distribution system from the small-scale water provider to the central utility. Reticulation policies emerge as a contentious issue among the stakeholders in the event of the turn-over from the SSWP to the CU if the SSWP demands financial compensation from the CU for the investments they made on the reticulation. CU and SSWP have to settle their reticulation policies in their partnership agreement before the construction of the reticulation system to prevent any irreversible financial complications in the future operations. The conflict arises either when the central utilities do not recognize their duty to compensate the SSWP or when there is no consensual agreement on the terms of investment recovery for the SSWP. To minimize expenses, CUs do not routinely compensate the capital expenses of the SSWP. If there is no clear binding agreement with the CU on capital recovery measures, the SSWP faces a big risk of grave investment losses. The financial losses of SSWP also trickle down to losses in the personal savings of the household members of the client community because the capital expenses on the 4

The MWSS regulatory office in 2005 established a policy (CSR 001-05) mandating subsequent conversion of bulk-sales arrangements into set-ups where customers are given individual connections: “The regulatory office herby declares as policy that for water connections in open communities and depressed areas, the ultimate aim of the concessionaire is to provide an individually metered and billed water service connection for each household”

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The West Zone concessionaire has been experiencing severe financial difficulty since privatization and even after new owners have taken over the concession contract of Maynilad. Using a comparison of the bid financial model and of the audited financial statements one would see that the more successful East zone concessionaire also experienced its own financial difficulties during the first five years of operations – a factor that without doubt ppredisposed it to enter into partnerships with community distributors.Outside of Metro Manila, more than a one hundred of the five hundred water districts are in financial distress and have no possibility of gaining access to commercial credit.

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reticulation are oftentimes co-financed by the client community. Thus, the issue on reticulation policy is related to issues of investment recovery mechanisms on the reticulation system for SSWP and for the community. The conflict in this interface area centers on the resolution of investment recovery measures that is acceptable for both central and peripheral water providers. According to Elsa Mejia of INPART Engineering, the constant possibility of uncompensated takeover of a small water provider’s customer base and of its facilities is the most important reason for the high tariffs that small water providers must charge. The small water utility, must try to achieve cost recovery before take-over happens. Needless to say this unenviable investment climate will make it difficult for long-term credit facilities for small water utilities to emerge. In cases where orderly legal arrangements exists there are five major sub-policy areas identified in this interface area, these are (i) financial compensation of the CU for the capital investments of SSWP, (ii) investment recovery period, (iii) absorption of costs related to reticulation take-over and (iv) conditions of reticulation turn-over and (v) construction standards of reticulation system. It can be observed that these policies highly affect the investment recovery of SSWP as these govern the conditions and requirements of reticulation turn-over. i. Financial compensation of the CU for the capital investments of SSWP This policy refers to provision of guaranteed payments of the CU to the existing reticulation assets of SSWP and the forgone returns to investment of SSWP at the event of asset turn-over. This payment provision is usually indicated in the memorandum of agreement (MOA) or contracts between the CU and the SSWP. The turned-over assets are mostly paid at depreciated price. In most cases compensation does not happen. in the case of middle class village systems the distribution system owned by the real estate developer or by the homeowners is donated to the central utility in exchange for the obligation of the central utility to operate and maintain the system as well as the obligation to provide individual metered connections to customers.

ii. Investment recovery period Investment recovery period is the timeframe given to the SSWP for them to fully recover their capital investments on the reticulation system before the asset take-over by the CU. Two financial items must considered in the recovery period, these are (i) capital expenditure on the reticulation system and (ii) investment returns which refers to the opportunity costs of the capital. This policy is an area of concern because this affects the recovery of investment costs of the SSWP on their reticulation investments. Shorter recovery periods relative to the proper timeframe may result to minimal capital gains and possibly investment losses for the SSWP. On the other hand, a longer recovery period than what is necessary can be detrimental to customer welfare. In most agreements, the central utility has the full discretion to take-over the reticulation assets after the recovery period, regardless of whether or not the SSWP has indeed fully realized the income streams projected in the pre-operation feasibility studies. The design of agreements between CU and SSWP does not provide any consideration for the extension of recovery period despite unanticipated events that may hamper the investment recovery process Thus, a fixed and inflexible recovery period could pose financial risks to the SSWP.

iii. Absorption of costs related to reticulation take-over, e. Construction standards of reticulation system The turn-over of reticulation entails new cost items for the central utility such as maintenance and

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rehabilitation expenses on the turned-over assets. Once the assets are turned-over to the central utility, maintenance and rehabilitation works on the reticulation system become the responsibility of the central utility. The concern in this policy is the management of these emerging costs and its financing by the CU. The problem arises when these reticulation-related costs turned out to be unexpectedly high for the CU. Compared to the CU, maintenance and monitoring costs are often more easily controlled by the SSWP because of locally-grown organizational management systems and cooperative working relationship with the community. The closed social ties built by the SSWP with the community members, and the sense of ownership and responsibility of the community members on their water distribution system often works to minimizes the maintenance costs and improves the service quality. Community members actively take-part in the prevention of water crimes such as theft and pilferage through their vigilant reporting to the monitoring staff of the SSWP. Moreover, the wider grassroots knowledge of the SSWP on the community enhances the monitoring of the condition of the reticulation system. Central utilities may refuse to take-over small water utilities where this would result in net financial losses for itself. In instances where the distribution system within a subdivision is dilapidated one would expect that there would be significant amounts of water that is merely lost. Without reticulation this is not a concern of the central utility. In fact, the bigger the losses after the main meter connecting the central utility and the localized distribution sytem, the bigger the revenue accruing to the central utility. This perverse situation is compounded where a rising block tariff scheme ensures that the rate per cubic meter is higher as the total volume of water that flows through the main meter increases – regardless of where this water ends up. vi. Conditions of reticulation take-over For reticulation system take-over to happen, the small water provider has to meet and fulfill specific construction and performance standards demanded by the central utility prior, upon and after the asset turn-over. Every specific reticulation condition has financial and operational implications for the small water provider. Failure to comply with these policy conditions can lead to failure of the reticulation turn-over and, thus, results in the denial of any financial compensation.. Prior to the asset-turn over, the central utility requires the small water provider to meet certain technical standards. The rationale behind these standards is to prevent certain inefficiency and financial risks from being passed on to the central utilities. For example in the case of asset take-over by MWSS, the pre-requisites that must be met by applying subdivision are 50% occupation of the area, NRW of at most 20% or average billing efficiency of at least 80%. The required standards might be helpful in promoting efficiency in water supply operations; however, the problem lies on whose shoulders will the burden of achieving efficiency targets be carried upon. The problem is that, in most cases, the small water provider shoulders the full burden of achieving these efficiency targets (NRW or billing efficiency) without any assistance from the central utility. Meeting these efficiency targets entails increased cost for the SSWP such as increased transaction and labor costs on the maintenance and monitoring. Small water service providers, however, are not always eager to transfer their assets over to the central utility. This would be the situation where, as in the community providers in Taguig City in Metro Manila, community service providers generate incomes for individuals or for communities; in Binangonan Rizal the 20 water service cooperatives have been the basis for the establishment of seed funds for credit and community service facilities for members. v. Construction standards of reticulation system

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The observance of certain specifications and standards during the construction of reticulation system are used as pre-requisites for reticulation turn-over. Before the asset turn-over, the CU usually inspects the present status of reticulation assets and tests its reliability whether it can operate satisfactorily based on prescribed standards. The condition and reliability of the reticulation system is an important factor for CU since an unreliable reticulation can affect the efficiency and financial health of CU’s operation in the area. A badly constructed reticulation system, more likely because of the non-observance of specification and technical standards prescribed by the CU, can lead to the passing-on of inefficiencies and water service problems produced from flawed design and poor construction of the reticulation such as high NRW or poor water quality to the central utility. The problem in this policy emerges when the SSWP, based on the judgment of the CU, fails to comply with the construction standards of the CU. If the SSWP fails to comply or achieve the specifications of the CU, the CU may decide to rehabilitate the existing assets at the expense of the SSWP or establish a new reticulation system, which can render SSWP investments economically redundant. The conflict between the CU and SSWP on this policy can be seen in the case of Taguig where the central utility, Manila Water, requires the observance of their construction specification as a condition for reticulation turn-over although this condition is not stated in their initial contracts with the small water provider, Signal Water Integrated Service for Community Inc (SWISC). It is commonplace to find small water providers that improve and expand their systems on a stepwise basis. This must happen where small water providers do not have access to credit or to significant investor or member equity (in the case of cooperatives). Internal cash flow generation becomes the basis for incremental service-level and infrastructure improvement. Thus, there can be prolonged periods when the facilities in place will not be up to par with engineering standards followed by central utilities (DPWH, LWUA and MWSS standards). Many small water providers do not aspire for the best designs and facilities and rely instead on high-maintainance facilities that, on the other hand require low up-front investment. The matter of construction standards becomes an important source of take-over risk for small water providers in such instances. Even where outcome (pressure, water quality and hours of service) are satisfactory the central utility can always claim that because of low construction and facilities standards the services delivered are not as high as they ought to be – this is an argument being increasingly used by Manila Water staff in Taguig in mid2007. This argument becomes salient where the supplies come from the central utility. 1.3 Bulk Sales Bulk sales refers to policies for wholesale or “bulk-selling” of water supplies from the central utility operator to small water providers who then distribution the supply to individual customers. The individual customers do not have contractual relations to CU. Bulk sales is one out of several types of water service delivery mechanisms such as (i) direct, individual water connections, (ii) public faucets, (iii) vendors who have individual MWSS connection and (iv) group taps with shared mother meters (David, April 2002:27, Inocencio, September 2001; Mitlin, August 2002:15). The subcontractor/retailer SSWP directly distributes water to households and charge fees to helpcover operations, investment recovery and returns on investments. The small water provider is solely responsible for the maintenance and monitoring of the reticulation system. Bulk water sales has two types based on the nature of the small water provide, these are (i) community-managed water connection and (ii) privately-managed water distribution (Cuaresma 2006:16). Because bulk water cost is a major input cost for small water providers, bulk water rates determine the affordability of the water services by SSWP. Equally important, however, is the additional tariff that is imposed by the distributors on top of the bulk water purchase price.

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The specific contentious policies under this interface area are: (i) calculation of bulk water rate, (ii) pricing by distributors and (iii) transition program from bulk water to individual sales set-up. i. Classification of Bulk Water Rate The ulk water rate varies depending on whether the customer is classified as residential or commercial. Central utilities usually bill SSWP for their bulk water supply at business rates, which have a higher tariff schedule, than residential rates. SSWP are billed under business rates because they are classified by the central utility as business customer rather than a residential type. ii. Bulk Supply Pricing Under the bulk water supply set-up, the small water provider fully shoulders the capital expenditure on the reticulation system and its maintenance costs 6 . The client community also has an incentive to reduce theft and physical losses in their area because any losses from inefficiencies will translate to direct financial cost for the households. Reduced non-revenue water 7 (NRW) can in some instances be expected in the bulk water set-ups because it is in the interest of the community and SSWP to monitor and prevent water losses. This does not always happen though; in reality community collective action to achieve efficiency can also be very costly especially when social capital is low 8 . The central utility is able to sell water supplies while assigning aspects of the capital expenditure program to consumers and their agents who organize these collective consumption arrangements. The central utility is also able to sell its supplies without incurring the ordinary costs that come with maintenance, billing, collection, opportunity costs for delinquent customer accounts. Most importantly the bulk water arrangement becomes a mechanism for “reducing water losses” or NRW; in fact there would be instances where the actual losses after the main meter could be significant. Yet because all of the water that flows through the main meter is paid for no water losses are registered on the side of the CU. Without the bulk arrangements these are costs and risks that the CU would have had to take on. A policy challenge is how to redesign bulk supply pricing to compensate small water providers for the savings and efficiency gains that they make available to the operations of the CU that supplies them with the water. It is curious that communities that have to pay capital investments to make the water flow towards their direction have to pay rates that are much higher than rates paid by directly connected households who did not make any investments in terms of a local distribution system. Reducing bulk water prices based on the forgone capital expenditure, forgone operation and maintenance costs, and reduced NRW needs to be studied. It stands to reason that small water providers should share in the cost-savings and efficiency gains that accrue to the central utility in terms of increased net incomes. If bulk-selling rates are discounted significantly to reflect such contributions then, with proper regulation, end users may even end up paying rates that are cheaper than those available to directly-connected residential consumers.

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Manila Water has introduced arrangements in Antipolo city in 2006 wherein the company pays for 30 percent of the costs of establishing a distribution system in subdivisions that are said to have been “abandoned by developers” who failed to install facilities that lot owners paid for with the purchase of their subdivision property. 7 on the accounting ledger of the central utility 8 Discussion with Perry Rivera (Manila Water Manager for Regulation)

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iii. Transition from Bulk Water Set-up to Individual Sales Set-up Notwithstanding the real and potential benefits to the CU of bulk sales arrangements central utilities to aim for individual water connections. This remains somewhat of a puzzle that this study does not address. One might suppose that this behavior is motivated by the guaranteed returns that central utility shareholders get from more instead of less capital expenditures. In the case of water districts, an explanation might lie in the private returns to the management of large rather than small procurement contracts. In the context of pre-existing bulk sales arrangements the contention can arise when the CU plans to change the existing bulk water supply set-up of certain community into individual sales. This may happen when, in contrast to an earlier period, the CU already has the capital funds to construct additional infrastructures for individualized water distribution.

Figure 1. Pros and Cons of Bulk and Individual Sales Set-up Bulk Sales Set-up

Individual Sales Set-up

Advantages Advantages 1. Flexibility in payment schedules 1. Cheapest tariffs 2. Low transaction cost for household 2. Higher water consumption 3. Better convenience in this system customer during the payment process. 3. Greater savings for low-income because there is no more queuing for households – where these replace long and odd hour. truckers 4. Revenues from the bulk water set-up Disadvantages can be used for other development 1. Emerging costs of individual projects or to the business expansion of connection, originating from reticulation the small water provider turn-over 5. Better maintenance and monitoring of 2. Weaker maintenance and monitoring of the reticulation system the reticulation system. 6. Potential improvement in th efficiency of water distribution in terms of reduced NRW Disadvantages 1. High water tariffs relative to tariffs applied to directly-connected cistomers 2. High demand for mobilization and organizational capacity of the community 3. Lack of regulation in rate-setting can result to exorbitant fees 4. Favoritism by small water provider in choosing which areas are served 1.4 Financing and Cross-Subsidies

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Financing and cross-subsidies refers to the policies that determine the mode of financing for the business operations of the small water providers. These policies refer to the financing of the capital expenditures on the water distribution system such as reticulation pipes, meters and construction expenses. This policy area has two major features: (i) financing source and (ii) financing period. Sources of finance can be local or universal; universal means that the capex financing on the reticulation system 9 is fully shouldered by the central utility (or from taxes) as the capex will be financed through the tariff charges to all the customers of the central utility within its service area. Local financing, on the other hand, means that the capex will be mainly financed through funds mobilized by the client community. the source of finance impacts the water rate. Local financing leads to higher water tariffs for the client community, since their tariffs and up-front contributions absorb all the capex, aside from the operation expenditure of SSWP. Compared to the universal financing, the burden of capex on the client community diminishes because all of CU’s customers take part in the financing of SSWP’s capex, causing lower tariffs for the client community. The more the capex is financed through the local source, the higher the water tariffs for the client community, while the more the capex is financed through the universal source, the lower the water tariffs. On the other hand, financing period refers to the length of the payment period on the capital expenditure on the reticulation system. This policy can be classified into two types, which are longterm and short-term. Long-term financing means that the full costs of the asset is recovered over the life of the asset while short-term financing means that the full cost of the assets is paid upfront or in a few months. Financing period has significant effect on water affordability -- the longer the financing period, the lower the tariffs while the shorter the financing period, the higher the tariff. The permutation of these two major features of financing policy gives four typologies of financing set-up: (i) long-term local, (ii) short-term local, (iii) short-term universal and (iv) long-term universal. Figure 1 presents a matrix of these four financing typologies. Figure 2: Typologies of Financing Set-up between Small-Scale Water Provider and Central Utility

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Expenses usually include extensions from the main lines, mother meters, secondary and tertiary meters. Household meters are usually for the account of the individual households.

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Financing Period F i n a n c i n g S o u r c e

Short-term

Long-term

L o c a l

II. Short-term local financing

I. Long-term local financing

Case: Bacolod Water District (upfront), Taguig (short-term)

Case: San Fernando, Tinagong Paraiso in Bacolod (with loan)

U n i v e r s a l

III. Short-term universal financing LGU-San Jose del Monet WD support for extension of service lines to the urban poor

IV. Long-term universal financing

Case: Binangonan*

L o w e r T a r i f f f s

Lower Tariffs *The initial capital financing for the water systems of Binangonan started as long-term universal before the barangays took over the water systems in 1998. Among the four financing typologies, short-term local financing can be considered as the least desirable financing set-up as it passes the full burden of capital financing to the client community. As a result, tariffs are more likely to be higher in this set-up in order to sufficiently finance the capital expenditure on the water system compared to long-term universal. Moreover, the set-up requires an upfront payment for the capex that imposes a barrier to the entry of consumers into the water shop. Although this set-up can be useful to situations wherein the water district is in financially difficulty, it should still be the primary responsibility of the central utility to finance water expansion projects owing to its access to longer-term financing and its ability to administer infrastructure cross subsidies between poor and rich neighborhoods. Long-term universal financing can be considered as the best set-up for the client community because it causes the least burden of capital financing on the client community. The combination of longterm recovery period and dilution of capital financing to all of CU’s customers definitely lead affordable tariffs compared to other set-ups. II. Policy Proposals 2.1 Exclusivity The exclusivity of a central utility to a certain captive market must be subject to conditions of performance and competence targets. The monopoly rights of central utility must be constantly evaluated based on the performance targets and capability measures to ensure an efficient

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and secured water system expansion. The effective duration and territorial jurisdiction of central utility must be also conditional to certain performance standards. The conditional nature of a CU’s exclusivity can pave way for a more legally secured, less risky participation of SSWP as alternative water providers. Exclusivity provision should be flexible to market contestability especially at times when SSWP are more capable than CU. In the event that central utilities fails to deliver effectively water services, then exclusivity policies should be made supportive for the free entry of SSWP as more efficient water providers. Thus, water regulatory authorities and existing laws should be made to recognize the right of local government units or even community initiatives to create their own waterworks and sewerage systems. Exclusivity powers should be developed for small-scale water providers. Exclusive rights of SSWP as water providers must be established as legal codes and institutional agreements. Exclusivity legal provision for SSWP must provide secured time for the business operations of the SSWP based on a reasonable cost and investment recovery period. SSWP must be given legal protection and exclusivity terms to provide water services to those unserved or underserved areas of a CU. Regulatory authority that will examine and decide on the continuance should be autonomous and independent from the central utility. As of now, when deciding upon the capabilities of the CU to serve certain jurisdiction, which is the primary basis of exclusivity, the central utility still maintain the absolute discretion. Regulatory authorities deciding upon exclusivity issues should be autonomous from the concerned parties to prevent conflict of interests. 2.2 Reticulation Reticulation policies can be a key solution for expanding water services to waterless communities when it is designed to provide fair investment recovery mechanisms and optimum capital returns for small water providers so that local private capital can be mobilized for investments in water infrastructure. In the present context where the water expansion projects of the central utility are highly constrained by its own financial incapacities causing the prevalence of waterless communities, the CU should treat the small water provider as a complementary partner in overcoming the challenge of capital financing for reticulation. Hence, reticulation policies should be designed in a way to encourage small water providers to make reticulation infrastructures as profitable sites of their investments. However, small water providers and the client community have lesser market and legal leverage in the current regime of reticulation policies. Investment recovery is subject to risks and uncertainty among current reticulation agreements. Reticulation policies are strategically used by central utilities to impose other interface policies such as the promotion of individual water sales program and enforcement of CU’s exclusivity by treating them as requirements of reticulation turn-over. Reticulation policies must be designed in a manner that also safeguard SSWP against investment losses and other financial risks. The following are the policy proposals on reticulation that are favorable to both central and peripheral water providers. Formal agreements should guarantee a payment for the capital investments of the small water provider on the reticulation system. To reduce uncertainty and risks of financial losses for the small water providers, contracts or memorandum of agreement between the CU and SSWP should contain a guaranteed payment provision for forgone investment returns and the existing reticulation assets of the SSWP during the asset turn-over. Legally binding agreements on reticulation can obligate the CU to pay the necessary compensation for the SSWP, preventing the financial risk

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for the SSWP from being actualized. The recovery period should ensure optimum investment returns for small water providers. The calculation of the recovery period should be on based competent methodology and it should be sensitive to the financial performance of SSWP. To alleviate the risks produced by the fixed recovery period, there should be contractual provisions on the flexible adjustment of the recovery especially in the case of unanticipated circumstance that can disturb the earning flow of the SSWP Technical assistance for the construction of the reticulation system should be an initiative of the central utility. To ensure that small water providers are aware of construction standards, the central utility should provide technical supervision on demand. This is important even if the SSWP proceeds through a stepwise manner towards service-level- and infrastructure improvement. This facilitates an expedient turnover of the assets if and CU take-over is an acceptable future step. 2.3 Bulk Sales Bulk supply pricing should reflect the savings accruing to the central utility as a result of avoided capital investments, operation and maintenance expenses, and reduced NRW. The small water provider should be given the compensation and incentive they deserve for their contributions to central utility efficiency and for organizing the market in the first place. 2.4 Financing and Cross-Subsidies Setting the financing scheme should always be geared at achieving the best set-up for the waterless communities, which is the long-term universal financing set-up. Financing scheme should result to the least cost-burden to poor households. Universal financing by the central utility and local government for the capital expenditure of the small water provider should be developed. Mandated by law to ensure water accessibility to all consumers in their service area, the central utility has the responsibility to financially support the water service project of the SSWP as they are performing a complementary role in the service expansion project of the CU. It is of best interest of the CU to provide financing for the SSWP since the reticulation system constructed by the SSWP will eventually be transferred to them when they are already financially capable. Moreover, it is also of the best interest of the local government since their constituents will be the primary beneficiaries of the water projects of the SSWP. Long-term financing should be the desired financing period. Negative impacts of capex recovery to price affordability will be minimized if the capex payment will be distributed over a longer period. Stretching the financing period can be done through (i) provision of deferred payment by any lending institutions to SSWP and (ii) allowance of longer cost recovery period by the central utility to the CU. Central utilities and government agencies should establish a financing program for small water provider. Accessibility to capital funds through the active support of financial insitutions will improve the profitability of the SSWP and the affordability of their water services to their poor customers. It may be necessary to make use central utilities as conduits for such credit facilities because they are not only capable of examining the feasibility of project proposals they areoften also in the best position to address key risks that confront small water service providers. In the end, the low-income waterless households would benefit from an enabling financial environment.

13

14

EPRA Research Project on New Rules for Grassroots Water Sector Investments

Small-Scale Water Providers: Neighbourhood Water System in Taguig1 Introduction Laguna de Bay is Southeast Asia’s second largest freshwater lake, and the Philippines’ largest. However 30 of Metro Manila’s 212 waterless communities live on its western shore in the formerly thriving fishing community of Taguig (Government of the Philippines 2005). Now a major industrial and residential suburb of Manila, most of Taguig’s urban poor residents were relocated from other depressed areas of the city after the EDSA Revolution of 1986. Prior to privatisation, less than half of all households in Taguig had piped water supply. The other half of Taguig’s households spent more than 10 per cent of their income on water consumption. 36 per cent relied on deep wells while 18 per cent bought water from vendors (Villa n.d.). Since 2002, beginning in Barangay Signal Village, the local community has received piped, potable water. This has been widely attributed by the literature to MWCI’s programme for poor communities, the ‘Tubig Para Sa Barangay’ (TPSB) programme, developed in 1998. 2 Working closely with community organisations, MWCI has made much of its TPSB programme as evidence of the company’s commitment to the poor and its desire to be ‘socially responsible’. 3 While the case of Taguig case has become the leading example of how the urban poor may benefit from privatisation, recent developments show that the system is coming under pressure. The mayor of Taguig and its city councillors have publicly criticised community peoples’ organisations (POs) involved in TPSB for exploiting consumers through over-charging and sub-standard piping. In 2006, Taguig City Council Resolution No. 172 s. 2006 was passed advocating direct water connections, with the support of MWCI. 4 Meanwhile, high tariffs, lack of credible commitment, regulatory unaccountability, and service over-extensions have also undermined the system. The sustainability of 1

Nai Rui Chng, Institute for Popular Democracy May 2007

2 Maynilad’s own programme for the urban poor, ‘Bayan Tubig’ (BT) was introduced in 1999 for the west zone. By 2004, TPSB and BT have served at least 100,669 and 61,370 households respectively throughout Metro Manila (Sy and Cleofás 2004). 3

See MWCI., http://www.manilawater.com/sd_watercomm.cfm

4 See Freddy Tinga, ‘Water, water everywhere, but not a drop to drink’, Manila Standard Today, 17 July 2006.

TPSB small-scale water systems run by POs thus appears to be in doubt. The experience of Taguig suggests that while novel service delivery models have been developed from the concession agreement, a maturing post-privatisation landscape may require a new set of institutional rules to mitigate the hazardous regulatory environment that small-scale water providers and their partners operate in. This study explores the institutional design challenges facing the sustainability of small-scale water providers in Taguig. This report also has the aim of informing practises and contexts elsewhere. Following a brief statement in the first chapter on the theoretical perspectives and assumptions adopted in this study, the following chapter provides the context of the bulk-water system in Taguig. Chapter three explains present challenges facing the system. Proposals to address these problems through institutional design are raised in the final chapter, centering on bulk-selling policies, exclusivity rights, reticulation issues, and last but not least financing considerations. The study concludes that the suggested reforms can go a long way in addressing the sustainability of small-scale water providers in Taguig and in the rest Metro Manila.

2

1. Framework and Propositions The framework underpinning this study is driven by the desire to explore the developmental potential of regulatory design for urban poor service delivery in the water sector. It also seeks to expose the dangers for new and sustained forms of domination over waterless and marginalised communities in the context of water privatisation. The dominant framework used to study water regulation has been new institutional economics and rational-choice institutionalism. 5 This approaches regulation as a design problem, and consider implications for both regulatory governance and incentives (Levy and Spiller 1994, 1996), the later of which is the main concern in this paper. 6 The importance of regulatory incentives is for Levy and Spiller self-evident. This involves ‘rules governing utility pricing, cross- or direct subsidies, entry, interconnection etc’ (1994: 205). This study focuses on four such incentives that matter small scale water provision. These are selected based on observations of the reality of water service delivery since privatisation. It is a situation where ‘local governments, communities groups and other or third-party providers have filled-in swathes of the service area that the companies could not yet serve.’ 7 Bulk sales policies govern the price at which a central utility may sell its supplies to smaller distributors within its service area. Issues that such policies need to address include discounts that the small operators can be eligible for, given that small operators make it unnecessary for the central utility to incur expenditures in distribution facilities, personnel and in spilled and stolen water in order to realise revenues. It also includes responsibility and accountability for water quality standards after the ‘mother-metres’. Reticulation policies allow small operators to turn-over their built up assets to central utilities once the latter is capable of expanding operations. Questions that such policies should address include physical and operational standards that the small operators need to match to get compensation for the investments that they have made. Exclusivity policies pertain to the pretext and legal bases that private concessionaires may invoke to bar third parties like cooperatives, neighbourhood associations/peoples’ organisations and local governments units, from operating in their franchise area. Issues such policies need to address include the precise manner of compensating the central utility for a well-specified loss of future revenue. The possible loss of the presumption of exclusivity and reduction in size of the service area where investment plans promised in certificates of public convenience are not set into motion must also be considered. Additionally, incentives for the central utilities for contracting third-party providers even in areas where they have a capability to invest (eg., MWSS concessionaires are allowed by the Regulator to take credit for services rendered by third-party providers) can also be considered. Last but not least, cross-subsidisation and financing refers to the policies that determine the mode of financing for the business operations of the small water providers. These four policies need to be understood in their own contexts so that partial approaches can be developed for interventions in the water sector that can help create an investment climate that will encourage complementary investments by small-scale water providers. The next chapter provides one such context in the case of bulk-selling small-scale water providers in the form of POs in Taguig.

5

See for example Capistrano and Gutierrez (2003).

6

For Levy and Spiller, ‘the governance structure of a regulatory system [is defined] as the mechanisms that societies use to constrain regulatory discretion and to resolve conflicts that arise in relation to these constraints. The regulatory incentive structure comprises the rules governing utility pricing, cross- or direct subsidies, entry, interconnection, etc.’ (1994: 205).

7

See Institute of Popular Democracy, Local Governance Team (1997), project proposal to EPRA ‘Support for the Multi-stakeholder Conference on New Rules to Encourage Water Sector Investments at the Grassroots’.

3

2. Context In the context of Taguig, small-scale water provision has been provided by deep-well operations managed by private entrepreneurs, as well as bulk-selling systems managed by POs. It is the later that MWCI has worked closely with in its TPSB programme. MWCI’s bulk-water selling in Taguig had started only in 2002 due to a number of factors. The delay by MWCI to begin servicing most of the urban poor communities (usually also the waterless communities) was due to their location in most of the ‘expansion areas’. In the first five years of its operations, MWCI (like MWSI) was beset with financial difficulties and channelled their resources towards trunk (ie., upstream) facilities. 8 It was only after the first five years that MWCI was able to invest in the expansion areas. 9 While making no specific mention of servicing the urban poor in areas like Taguig, the concession agreement nonetheless had set the parameters by which schemes like TPSB’s bulk-selling programme in Taguig will later evolve. For Rosenthal, the flexibility in type of service, expansion targets (that is disaggregated to the municipal level), and exclusivity clauses that permit third-party provision in the concession agreement put in place the regulatory incentives for serving the urban poor (Rosenthal 2001, 2002). 10 In the case of MWCI, the introduction of reward and promotion systems for staff and managers encourage greater innovation in each individual business area. As Rosenthal (n.d.) elaborates, the discretion practiced by MWCI Business Areas is more on improving collection and relationships with the community rather than proposing specific capital expenditure programs. This explains the willingness of MWCI to engage in business relations with POs in urban poor communities even if they have different agendas. Paving the way for MWCI managers to innovate at the ground is the Tubig Para Sa Barangay (TPSB) programme. According to Rosenthal (n.d.), TPSB is implemented in areas affected by land subsidence (risky to put up investments on pipelines) as well as future commercial areas (upon subsequent land conversion individual pipelines would have to be removed). In addition, areas where there are large numbers of clustered low income families, high rates of informal settlement (and land disputes), very poor water quality and where the roadway is wide enough to lay tertiary mainline are also considered (Rivera 2002). Much has been made about the TPSB programme that has allowed MWCI to ‘do business with a social conscience’ (Rivera 2002) but as pointed out by Rosenthal (n.d.) and Matous (2004: 20) in separate studies, underpinning MWCI’s commitment to TPSB is also the guarantee of billed volume. 11 As Ferrer also pointed out, MWCI’s business incentive is met by the fact that 40 per cent of new customers are urban poor. TPSB made investments in informal settlements more attractive to the company by reducing capital expenditures coupled with a regular income stream from its customer base. This avoids typical legal costs associated with investing in informal settlements (Ferrer 2006). 12 8

Personal Communication, Jude Esguerra, 10 December 2006.

9

Interview with N. Jeric T. Sevilla, 9 January 2007.

10 Differential pricing based on an increasing block tariff structure is designed to benefit the poor but Rosenthal (2002) argues that it fails to do so as low-priced blocks only benefit households that have individual Connections – a luxury that is denied to most urban poor households. 11 Matous (2004: 20) claims that performance of each MWCI employee is evaluated every six months, which determines the employees’ career paths. Their most important evaluation criterion is billed volume. 12 The company’s pipes and meters do not extend beyond the boundary of the settlement. Moreover, the procurement of digging permits for the service lines are assigned to the officials of the neighbourhood association. Beneficiaries that are not yet in the process of acquiring titles to their lands are also required

4

For the bulk-sales component of MWCI’s TPSB to go ahead in Taguig however still required the existence of business partners in the community. This happened when it was able to locate and engage with local civil society organisations that could not only mobilise urban poor communities but also provide service delivery and even ‘regulate’ the urban poor on behalf of MWCI. The problems facing MWCI in extending services to the urban poor when it was awarded the concession were the same problems facing MWSS prior to privatisation. Water consumption by the poor and their ability to pay are usually low. 13 They also often live in areas that are either unsuitable for the laying down of infrastructure or are illegally occupied (Budds cited in Matouš 2004: 1), thus raising right-of-way and tenancy issues. These difficulties pose a significant risk for sinking in investments needed for servicing the urban poor. To cater to the problem of land tenure among the urban poor, both TPSB and BT schemes waive the usual land title requirement (Cuaresma 2004). 14 To offset the risks of extending service delivery to the urban poor, business partners were needed. It is here that POs entered the water service-delivery scene in Taguig. It was due to the desire to support and fund the struggle for legal tenancy in Taguig that led Noli Villanueva to first inquire about MWCI’s bulk-selling programme as a business opportunity. 15 This was yet another dimension of the ‘entrepreneurship’ displayed by community organisers such as Villanueva as documented elsewhere. 16 Prior to privatisation, land disputes, by definition also implicated other issues concerning basic services like water. Privatisation had effectively unbundled water as a discrete agenda for mobilisation, apart from land disputes. 17 For Villanueva, the comparative advantages of POs over big water utilities in servicing the urban poor are very clear (see below). There are 50 associations currently serving 10,000 households (Ferrer n.d.), including POs like Villanueva’s Dream Village Water Community (DVWC). 18 Whereas MWCI works with POs in Taguig, in Antipolo, Homeowner Associations from middle-class subdivisions like the Virginia Summervile Homeowners’ Association engage with the Concessionaire. 19 In Binangongan, water service is an issue for its water coops like the Federation of Binangonan Cooperatives (FEBICO). Small-scale water providers therefore serve a high number of poor customers in the concession areas. It is with local civil society – local entrepreneurs, homeowners associations, cooperatives, water truckers and real estate developers (Water and Sanitation Program 2004), along with local government units (LGUs), 20 that the concessionaires

to secure legal waivers which comprise an agreement between the local government and the community stating that they are willing to relinquish the area once the rightful owner decides to make use of the property (Esguerra 2006). 13

For a more detailed study on the technical aspects of TPSB,and especially factors internal to MWCI contributing to the success of TPSB, see Matouš (2004).

14 The relative successes of TPSB and Bayan Tubig have been well-documented. See Cuaresma, Rosenthal, Rivera etc. 15

Interview with Noli Villanueva, 25 January 2007.

16

See Karaos (2006).

17

I am grateful to Gladstone Cuarteros for highlighting this point.

18

Interview with Noli Villanueva, 25 January 2007.

19

Interview with Lett Tabora, 11 January 2007.

20

All administrative divisions in the Philippines from provinces, to cities, municipalities and barangays (the smallest unit) are considered Local Government Units (LGUs). With the passing of Republic Act 7160, also known as the Local Government Code of 1991 in support of decentralisation, the formerly highly

5

work closely with in providing water services to the urban poor. As MWCI concedes however, since such programmes are not part of the concession agreements (Perry Rivera cited in Cuaresma 2004: 6), there is considerable discretion, and variety, to the particular kind of small-scale water provision setup to the urban poor in Manila with little direct governance from the regulator. Given a weak regulatory framework, much therefore depends on particular relationships between local Business Area managers, LGUs, and local community organisations at any one time. The case of Taguig again proves instructive. Taguig has been lauded as one of the most successful examples of MWCI’s TPSB, so much so that the MWCI Taguig BA Manager responsible for bringing the scheme to the area, Loida S. Dino, has earned the unofficial title of ‘champion of bulk water selling’ among the local community and within the company. 21 Recently however, these bulk water systems have come under criticism by the current Mayor of Taguig Freddy Tinga. He has accused ‘oppressive syndicates’ of overcharging people through bulk-selling (Tinga 2006). A resolution was also passed by the Taguig City Council supporting ‘direct individual water connections’ with the support of Manila Water. According to Villanueva, this change in attitude by local politicians, and MWCI is ‘political’. Villanueva has found it difficult to understand why MWCI continues to pursue bulk-water selling in other areas of its concession area while undermining the bulk-water schemes in Taguig ‘deceptively’ by providing direct connections to customers who also purchase bulk water from peoples’ organisations. 22 Presently, thirteen POs under Villanueva have brought their case to the Regulator for arbitration, and are also prepared to resort to the courts to seek redress for their allegations that MWCI is undermining of their bulk-selling business, something that MWCI denies. 23 Right before a scheduled MWSS-RO hearing on this case however, water to some of the communities was cut off on 29 March 2007. Before going into the challenges faced by the small-scale water provider POs in Taguig, the next chapter will describe the bulk-water system operated by small-scale water providers in conjunction with MWCI in Taguig. For now it is sufficient to note that implicit and explicit regulatory incentives built into the concession agreement have both encouraged but also endangered the development and sustainability of small-scale water providers in Taguig. 3. Set-up In this set-up, MWCI sells bulk water to smaller scale water providers in Taguig who effectively act as sub-contractors. The small scale water providers are also solely responsible for the maintenance and monitoring of the reticulation system, in effect performing service delivery, and to a smaller but significant extent, regulatory roles (see below). The type of sub-concession depends on the nature of the small scale water provider. Privately-managed systems are managed by private companies with minimal community involvement. The source of the water may either be the concessionaire itself or deep-wells. Community-managed systems dominate bulk-water selling in Taguig and the source of the water is MWCI. There are of course variations to the degree of involvement by the community. Some POs, like Water Supply in Sitio Katipunan in Western Bicutan, were formed by a lead investor who subsequently ‘invited’ members of the community to share profits and costs of maintaining and expanding the distribution. 24 Others like Waterlink in Sitio Imelda in Upper Bicutan were initiated by several members of the same extended family. 25 centralised Filipino state was devolved. LGUs were given additional functions, powers, authorities and responsibilities. 21

Ibid.

22

Interview with Noli Villanueva, 21 March 2007.

23

Ibid. Interview with ‘Bird’ Roberto A. Laguador, 14 April 2007. Interview with Elmer Gordon, Diocel and Eigel, 3 April 2007.

24 25

6

Service boundary of a PO (not usually well-defined)

Member of POs are directly connected with sub-metres

Number of secondary lines varies

Main pipe buried beneath a road Protected meters, usually encased in concrete

Figure 1: Indicative diagram representing small scale water providers in Taguig (actual physical layout may vary among communities) Adapted with minor modifications from (Matouš 2004): 26 In a PO managed bulk-water scheme, the community enters into a contractual relationship with MWCI, and is charged according to the reading on the mother metre. The PO, and not MWCI, collects payment from member households which is used for payment to MWCI, operating and maintenance costs (eg., losses from installing new connections, NRW etc.), the community, allowances for PO officers and ‘runners’ (members of the community hired to collect payment). POs also pay the installation of the mother metres, usually located at the community’s entrance, and all pipe extensions from the company’s main line to individual households. Apart from these expenses related to the operation and maintenance of the water system, an association also utilizes its net earnings for community projects such as street lighting, paving of foot paths, and undertaking the legal requirements needed to secure formal ownership of the land on which the community is located. Pioneer investors from the community are also given refunds of their capital expenditures and, depending on the amount that they put in at the start, are also entitled to dividends (Ferrer 2006). In Sitio Imelda, Waterlink has made donations to the church, as well as disburse ‘grocery allowances’ (P300) during the Christmas period to all members. Billing within the community is based on sub-meters, which is often shared by several households or boarders under a single connection account. As Matous notes, this requires a high degree of cooperation and trust within the community. Since MWCI does not involve itself in community organizer, there is not hard-and-fast rule to how communities are selected. MWCI charges a bulk rate of PhP19/m3 to community PO sub-contractors in Taguig who in turn, directly distribute water via individual connections to household under their own tariff calculation. Rates once again vary from PhP25/m3 to PhP35/m3. For example, Waterlink charges its customers PhP25/m3 while Water Supply charges PhP32/m3. Collection is done twice a month and POs’ flexibility in payment have helped revenue collections. Ferrer observes that since the runners who collect payment also live in the same community as their customers, they are able to collect more frequently, as well as schedule their visits to ensure that costumers have money on hand for payment. Since relationships between

7

the service provider PO, and its customers are not only business ones, POs exercise much latitude in allowing members a range of payment means that sustains the connection without automatic resort to cut-offs. Additionally, payment balances are treated as interest-free loans so social pressure helps prevent defaults to a certain extent. The PO may also make the threat of cut-off by MWCI for belligerent customers and residents who failed to pay their arrears will be held responsible by the community in such instances (Ferrer 2006). This community-centred approach in service delivery has also helped address the problem of nonrevenue water (Camacho 2006). PO officers regularly monitor pipes or hoses located aboveground and are able to immediately respond to problems of water wastage caused by damaged pipes. Speedy response time has also motivated community residents to voluntarily call the attention of the officers whenever they see instances of water wastage. They also closely monitor household water consumption to spot above-normal consumption (a possible sign of water pilferage) (Ferrer 2006). The most important feature of the bulk-water small-scale water provision set-up is however nontechnical. It is the initiation and regulation of a culture in the community by POs, whereby the idea and practise of paying for water is produced and re-produced. Not only is the outlet for more militant collective action stymied as witnessed elsewhere in Metro Manila (eg., Caloocan), the valorisation of water and its decoupling from state provision prepared local communities for the smooth expansion of MWCI in expansion areas like Taguig. Hence, when the time came for the expansion of direct connection by MWCI (ie., conversion), POs were no opposed to this. What they had problems with were the political context out of which conversion was taking place as the next chapter will describe. 4. Challenges On 18 October, 2006, the Taguig City Council passed resolution number 172, Series of 2006. The resolution accused POs of charging “exorbitant rates”, laying “sub-standard pipes submerged in dirty, clogged and muddy drainage canals” (Jordan 2006). The impression created by the resolution, seemingly with the tacit support of MWCI, is that POs acting as small scale water providers have been unregulated, and have taken advantage of peoples’ lack of access to cheap potable water. The preceding evidence however suggests a more complex picture. There is considerable variation to the behaviour and performance of water POs in Taguig contrary to the sweeping charges laid out in Resolution 172. They have also fulfilled an essential service function, acted according to new market rules in the water sector as business partners of a concessionaire who was only to willing to improve service coverage in its concession area. Small scale water providers working with the concessionaires have provided a service to urban poor communities, LGUs and the water sector in Metro Manila at large. Nonetheless, repeated criticism of POs and small scale water providers in Taguig by various parties suggest that their sustainability and relationship with MWCI is under threat. For MWCI, the souring of their operations in Taguig has implications not just for households in the area but for all similar bulk-water/small scale water providers in Metro Manila and the Philippines. This chapter explores the constraints on small scale water provision in Taguig, paying particular attention to the regulatory challenges. Firstly, the provision of bulk-water selling to small scale water providers is a contentious policy because it affects the derivation of water tariffs that individual household pays. Since bulk-water rates represent significant costs for small water providers, bulk-water rates highly determine the affordability of the water services by POs and, in turn, their revenue earnings. An increase in bulk water tariffs translate to higher production costs for the small water provider and, as an effect of cost-recovery by the POs, higher water prices for household customers. This makes bulk sales policy closely linked with the issue of consumer welfare. As Ferrer (2006) explains, PO bulk-water rates used to be charged as high-volume users at the commercial-industrial user rate. This was set at PhP 8

20 per cubic meters of bulk water. These rates have been subsequently adjusted downwards. This does not take into account that most customers of POs come from low-income groups in communities where unemployment is high. The dependence of urban poor on third-party water providers is due to the inability or unwillingness of MWCI to fulfil its concession obligations has translated into higher tariffs for a large section of the urban poor community. Bulk-water pricing thus suffer from equity issues even as it has allowed more urban poor access to water (Cuaresma 2004). This has led to the executive director of the National Water Resources Board remarking that he does not know another industry where the wholesale (ie., bulk-water) price is higher than its retail price (ie., individual connection). 26 Furthermore, Ferrer argues that bulk-water tariffs are also based on the average water consumption per metered connection. This disregards the fact that some urban poor households share a single metered connection. The bulk-rates currently imposed on POs in Taguig also do not take into consideration the fact that these organizations have essentially undertaken the risks, and hence costs, of supplying water to the urban poor. These are risks that MWCI was unable to undertake in the first five years of its operations as it focused on the ‘Core Service’ Area rather than areas like Taguig which was considered an ‘Expansion’ area. 27 In effect, households are billed twice because MWCI does not convey the part of the revenue to its business partners who took on MWCI’s obligations. The tariff issue is particularly important to Taguig associations, given that MWCI wants to limit the amount that they can charge on top of the basic water tariff that the utility is collecting from them. POs claim that the PhP 2 cap that MWCI wants to impose is arbitrary and is not sufficient to meet the costs of running their systems. Aside from maintenance and operating expenses and allocations for investments, part of the extra charge imposed by POs pays for community welfare projects (Ibid). It is therefore unclear how far tariffs charged by POs to their members reflect actual costs of running the service. Many of the community projects like donations to families in bereavement and improving pathways also have little to do with water service delivery. 28 This only reveals the complicated roles that POs play in urban poor communities. This leads to another problem facing small scale water providers in Taguig. Water POs in Taguig, as elsewhere in Metro Manila are not directly regulated by any specific body or sets of laws. Unless they are cooperatives, POs function in the grey space of the water regulatory framework that does not prohibit nor encourage their business operations. Accountability is therefore a serious problem as there is the danger of individual interests prevailing over the interests of the community (Ferrer 2006). PO tariffs for bulk-water in Taguig are therefore not standardised. Thus for example, Waterlink, Sitio Imelda Water Supply, Blocks Water Ways, Vitalize Equalizer, and Neighbourhood in Upper Bicutan charge PhP25 per cubic metre, while Water Supply in Lower Bicutan charges PhP32 cubic per metre. 29 Many of the POs are run by members of urban poor communities who are often lacking in significant formal education. The POs are therefore far from being run professionally. Records are poorly kept, and little, if any auditing of accounts is done. The problem of weak, if not absent regulation, also extends to the contracts POs enter into with business partners. For more than two years, the business relationship between water POs in Taguig and MWCI was smooth and mutually beneficial, managed mainly by contract. For MWCI, every new connection via the POs allowed the concessionaire to claim credit for meeting service targets, make profits, and avoid penalties. For the POs, the delivery of a basic service such as water not only met developmental needs, it was a great source of pride to the communities to be undertaking governance functions. This relationship has however come under tremendous strain due to regulatory 26 27 28 29

Interview Interview Interview Interview

with with with with

Ramon B. Alikpala, 27 November 2006. N. Jeric T. Sevilla, 9 January 2007. officers of Waterlink PO, 3 April 2007. officers of various POs in Upper Bicutan, 9 April 2007.

9

inconsistencies built into the business relationship from the beginning. As Esguerra argues, POs in Taguig face tremendous difficulties in enforcing the contract with MWCI. 30 MWCI has reneged on its contracts with Pos. This pertains to the five-year bulk-water supply contract it was supposed to have entered into agreement with some POs. Another development showing the problem of regulation concerns the concurrent expansion by both POs and MWCI within what is essential the same service area, the former having been sanctioned by MWCI themselves for providing water services. This firstly affects the service quality of water. For example, Ferrer reported a local leader claiming at least 2,000 households were affected by reduced access due to MWC’s expansion to other areas without first securing improved capacity of the main pipes or additional local reservoir capacity. Secondly, MWCI’s ongoing provision of individual connections in Taguig with lower tariffs compared to the fees charged by the POs is also cause for concern (Ferrer 2006). 31 Many POs in Upper Bicutan and Signal Village for example report that many of their customers have stopped paying in the expectation that individual connection from MWCI was imminent. Delinquency in payment has now become a huge problem for the POs as they are unable to pay MWCI’s bulk rates, and have run up substantial debts. Given that POs are in different stages of recovering their investments, not all are ready to convert their system to MWCI, and ‘throw in the towel’, so to speak. On 30 March 2007, MWCI cut off water supply to seven areas in Taguig served by many of its business partner POs. On 31 March, a further three areas had their water supply cut off. Although most areas had their water restored within 24 hours, it required the intervention of MWSS, following complains from Ornai, the legal counsel advising the POs. According to Esguerra, MWCI’s action was in response to the restructured but long overdue payments (two month delinquencies in some instances) that should have been paid on 16 and 23 March. The delinquencies total more than onemillion pesos. The missed payment schedules are supposedly consistent with promissory notes that MWCI asked the delinquent neighbourhood associations to sign following an agreement on 8 March that these delinquencies would be settled gradually over a period of two months. 32 These promissory notes were later established to have been signed by members of the POs under some duress. Having described the basic set-up of small-scale water provision in Taguig, the background to its development and current challenges, the next chapter now forwards four proposals that may go a long way in partially solving the problems faced by POs (and MWCI and the LGU) in Taguig by focusing on the regulatory design. 5. Regulatory Design The preceding chapters described an unspecified, perhaps even unintentional, regulatory outcome resulting in increased water service delivery to the urban poor residents in Taguig and much of Metro Manila. The system of bulk-water has by default, become one of the most common ways by which the concessionaires supply water to the urban poor. None of the current set up however can be found in the concession agreement. Thus, bulk-water small scale water provision can be said to be an innovative response to a market demand. However, the last chapter also described the challenging state facing POs in Taguig. This chapter raises four policy reform proposals targeting regulatory amendments to the incentive structure of the water sector framework in Metro Manila. The motivation is to establish rules that are endorsed and legitimized at many levels of the sector, and 30

Personal communication, Jude Esguerra, 14 December 2006.

31

Around PhP 10-12 per cu.m., compared to PhP25 per cu.m., the lowest fee that an association charges. However, MWC’s connection costs are higher compared to what the association charges (Camacho 2006). 32 Personal communication, Jude Esguerra, 1 April 2007.

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formulated during periods of difficulty of a utility. 33 This is so that communities, via small-scale water providers in the case of Taguig for example, are both protected and encouraged to engage in sustainable service delivery in varying ways. Proposition 1: Bulk-selling Policy Discounted bulk water rates will significantly improve water affordability for the poor since the market of the SSWP are mostly low-income consumers. Bulk supply pricing should reflect the savings accrued to the central utility by forgone capital investments, forgone operation and maintenance expenses, and reduced NRW. The small water provider should be given the compensation and incentive they rightfully deserve for it is the effort and financial burden of the SSWP that created these cost-savings and efficiency. The design of water sales set-up, whether bulk or individual sales, should be based upon the needs and preferences of the client community. Individual sales set-up cannot be imposed as the universal water supply set-up as what central utility practices for this may be more disadvantages in certain context compared to bulk sales. Consultative mechanisms with the SSWP and CU must be performed when deciding upon the water supply set-up. A more equitable treatment of pricing under bulk-selling, according to Ferrer (2006), would be basing the price of bulk water on actual use by percentage of commercial, residential and low-income groups- for example, if residents of an area covered by the water associations are 90% poor, then the socialized rate should be applied for 90% of the consumption and the commercial-industrial rate on the 10% (or regular residential rate, whatever the case may be). Apart from making the water tariff more equitable, micro-financing schemes for bulk-selling that would enable long repayment periods for connections and meters and a stage-wise development of distribution systems (i.e., incremental investments based on cash availability that start from temporary and low-cost engineering solutions) would help serve to increase the equitability and viability of this approach (Esguerra 2006b). Apart from sponsoring capacity-building activities, another role of LGUs would be in providing financing for investments (this could be given as an incentive to well-performing systems, similar to Argentina’s Menprosif project). Nonetheless, these would also lessen the benefits to commercially-motivated utilities, i.e. large-scale private operators and water districts, and thereby, make such investments unattractive (Ferrer 2006). One way of addressing the accountability issue in bulk-selling by POs could be in terms of letting the systems be run by cooperatives in order to help ensure collective decision-making in the running of the systems (including tariff-setting and formulation of investment plans) as well as putting them under the oversight of the Cooperative Development Authority (a national government agency). LGUs may also need to have regulatory functions to fulfill in this regard (Ferrer 2006). Proposition 2: Reticulation Policy In Taguig, this must refer to the ease or difficulty of securing bulk connections at the start. This refers to rules as well as incentives of the staff and of the company itself to provide favourable deals for those who must support and create distribution systems downstream. Reticulation policy in Taguig must also refer to allowance that was supposed to have been given by Manila Water to communities to allow them to recover investments over time. There may be two competing rules here. MWCI sometimes claim that the communities have already fully recovered their investments, given the high tariffs that were imposed. On the other hand, the contracts also specified that the 33

Personal communication, Jude Esguerra, 10 December 2006.

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agreements were binding as long as the parties complied with the provisions. These two ‘logics’ do not always correspond to each other. In cases where individual connections must be introduced before bulk systems owners have recovered the investments, there are not rules for compensation for the small investors. Neither are there standards that the parties to the arrangement can agree on so as to specify which assets need to be paid for by MWCI. The investments in Taguig by the POs are substantial. They started with the purchase of a mother meter that would convey water up to the gate of the community. Then rudimentary hoses were used and then improved in a step-wise manner as households paid connection costs and as internal cash generation made it possible to implement more permanent and sturdy distribution systems within the communities. Manila Water does not have manuals that instruct their business partners in Taguig about the proper standards needed for delivering water services to households. It did not matter, in fact, to MWCI whether there was a distribution system at all at the start of the business partnership with communities. Yet, in the end MWC claims that it cannot compensate its business partners owing to the inadequate construction standards being used. MWCI’s Linda Quines cites for instance the small diameter of the distribution pipes used that makes it difficult for these community systems to deliver twenty-four hour water supply to all of the areas even when supplies and pressures at the mother meter are adequate. Clarity on the rules of compensation is needed or this can discourage investment altogether. Proposition 3: Exclusivity Policy Although the concession agreement recognises the role that third-party providers can play, the threat of unexpected revocation of license to operate is a constant one. The premise of revocation need not rest on anything more than the exclusivity clause (Section 5.3 of the concession agreement) which provides: that ‘the Concessionaire shall have the exclusive right to provide water and sewerage services in the Service Area’. 34 Absolute discretion thus rests on the concessionaire with its accompanying problems as the case of Taguig has shown. Nonetheless, it is not clear if the concessionaires have the right to prevent third-parties from entering an area that they themselves cannot service as promised. A further dimension in the issue is when concessionaires enter into contract with a third-party. Is the exclusivity clause still in effect? How is it observed and implemented in reality? The case of Taguig shows very clearly that there is neither consistency nor clarity on this matter. Is there a way (e.g., through rate rebasing agreements) for specifying areas where the concessionaire declares that it would temporarily not serve for stipulated time period owing to its resource limitations? Under what conditions can so-called sub-concessions (Taguig water POs) retain exclusivity in their own designated areas of service when service obligations are delegated to them by MWCI itself? What other sources of regulatory authority can the POs refer to? Are the NWRB rules the best rules for securing economic spaces for the POs in Taguig? What if the local government is so politicised so as to make even NWRB rules unreliable in such affairs? Proposition 4: Financing Policy As Esguerra and Ocampo illustrate elsewhere in this report, the case of Taguig demonstrates shortterm local financing as the residents of Taguig relied on their internal cash flow managed by their small water provider to finance the construction of their reticulation system and its eventual network expansion. Accessibility to finance is thus a major problem of small water providers when it comes to capital financing. While financing institutions in the form of government agencies, lending firms or international financial institutions perform a significant role in alleviating the adverse impact of capital financing to low-income customers, the political realities may influence the accessibility of small-scale water providers like the POs in Taguig to capital. For example, they can hardly expect to 34

The exclusivity clause is also featured in individual contracts MWCI sign with POs on bulk-water supply

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receive help from the LGU. In the case of MWCI, it is once again an issue of regulatory discretion when MWCI has been known to offer financing to other third-party water providers in other parts of its concession area. The reason for not extending the same service to POs in Taguig to allow them to comply, for instance, with recently-specified MWCI standards is not clear. Hence financing policies mandated by law should be in place that is made available by the concessionaire and local governments for the capital expenditure of the small water providers. Longterm financing should be the desired financing period. Accessibility to capital funds through the active support of financial institutions will improve the profitability of the small-scale water providers like the POs in Taguig. These proposals are not suggested without a caveat. From a legal perspective, the issue is if the State having bound itself to the stipulations agreed upon in the concession agreement can interfere and have the provision amended so as not to place third party operators and end-consumers at highly disadvantageous positions. Given post-privatisation amendments, usually in favour of the concessionaires in some way or another, to the regulatory framework has been a constant feature of the experience of privatisation in Metro Manila, this paper asserts that it is perfectly reasonable to implement reforms in favour of small-scale water providers so long as the overall principle of privatisation is maintained. Conclusion The example of small-scale water providers in Taguig has shown how the concession agreement has been interpreted and implemented by various parties to provide urban poor communities with water. The sustainability of POs in Taguig however is not assured. This report has forwarded four proposals that may go a long way in ensuring examples like Taguig may be continued, if not replicated.

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Reference Capistrano, Lyn N., and Eric Gutierrez. 2003. For-Profit versus Not-for-Profit: Cases from the Philippines. In New Rules, New Roles: Does PSP Benefit the Poor?: WaterAid and Tearfund. Cuaresma, Jocelyn C. 2004. Paper No. 81 Pro-Poor Water Services in Metro Manila: In Search for Greater Equity. In Working Paper Series: Centre on Regulation and Competition, Institute for Development Policy and Management, University of Manchester. Ferrer, Carmille Grace S. 2006. Alternative Approaches to Water Service Delivery in Hard-to-reach Areas: Two Cases from the Philippines. Paper read at Public Models of Drinking Water Supply and Sanitation in Rural Areas, 19-21 November, at Barcelona. ———. n.d. Alternative Approaches to Water Service Delivery in Hard-to-reach Areas: two cases from the Philippines: Institute of Popular Democracy. Government of the Philippines, National Economic and Development Authority. 2005. Providing Clean and Safe Water for All. Jordan, Councilor Ricardo J. 2006. A resolution strongly endorsing and vigorously supporting the sentiments and demands of the people of the city of Taguig for a clean, affordable and direct individual water connectins with Manila Water Company, Incorporated: Office of the Sangguniang Panlungsod. Karaos, Anna Marie A. 2006. Populist Mobilization and Manila's Urban Poor. In Social Movements in the Philippines, edited by A. Fabros, J. Rocamora and D. Velasco. Quezon City, Manila: Institute of Popular Democracy. Levy, B., and P. T. Spiller. 1994. The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation. Journal of Law, Economics, & Organization 10 (2):201-246. ———. 1996. Regulations, Institutions, and Commitment: Comparative Studies of Telecommunications: Cambridge University Press. Matouš, Petr. 2004. The Mechanism of Sustainability in a Large-scale, Community-based Water Supply to the Urban Poor: The Case of Tubig para sa Barangay Program in Metro Manila, Philippines, Provided by Manila Water Corporation Inc. , Department of Civil Engineering, The University of Tokyo, Tokyo. Rivera, Virgilio C. 2002. Manila Water Company Inc. Presentation. Paper read at 3rd World Water Forum: Water and Poverty Initiative Multi-stakeholders Dialogue on Water Services for the Poor, 29-31 May, at Manila. Rosenthal, Shane. 2001. The Manila Water Concessions and their Impact on the Poor: Yale School of Forestry and Environmental Studies. ———. 2002. The Design of the Manila Concessions and Implications for the Poor. In Conference on Infrastructure Development - Private Solutions For The Poor: The Asian Perspective. Manila. Sy, Jema, and Leonor C. Cleofás. 2004. Face Off: Utility Sub-concessions and Local Private Providers in Metro Manila. Paper read at World Bank Water Week 2004: Diving into Implementation, 24-26 February, at Washington DC. Tinga, Freddie. 2006. Water, water everywhere, but not a drop to drink. Manila Standard Today, 17 July. Villa, Victoria A. de. n.d. Water for the poor communities of Taguig. Water and Sanitation Program, World Bank. 2004. The Experience of Small-Scale Water Providers in Serving the Poor in Metro Manila: Increasing Access. In Field Note.

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EPRA Research Project on New Rules for Grassroots Water Sector Investments

To bulk or not to bulk: The Case of Binangonan Water Cooperatives 1 I.

Introduction

The case of small-scale water providers versus big central water utility firms has become almost commonplace in many parts of the Philippines. It is seen in places where households mostly in rural and peri-urban areas which the central utility is unable or unwilling to serve have relied on either barangay, cooperatives or private companies for their water. These water providers are now faced with the threat (or reality) of the entry of water districts, private concessionaires or government-run water utility firms. As evidenced by many cases in different parts of the developing world, peri-urban and rural communities are the least priority to receive piped water services. In areas where piped water exists, high connection fees are the next stumbling block for many of these households leaving them to either buy from their neighbors or from mobile truckers which are in fact, more expensive than the cost of water coming directly from their faucets if they are connected. Thus, the existence of smallscale water providers in these areas is not only needed but welcomed by the residents, grateful that there are groups willing to service their area. Small-scale water providers could be categorized under the following major groups 2 or its variations: a) Providers in permanent partnership with water utilities, whose water they distribute at kiosks or standpipes 3 ; b) Pioneers who bring piped water from their own sources to communities where water utilities have not yet expanded their networks; c) Pioneers who build their own tertiary and secondary sewerage systems and get them connected to the sewer company’s mains; d) Mobile water truckers, carters and water carriers who provide water (mostly drawn from water company taps) at times and places that water utilities are unable to serve; e) Owner/operator/franchisers of public toilet and bathing facilities; and f) Community-managed latrines and community-managed water system.

1

By Frances TC Lo for Institute for Popular Democracy Suzanne Snell, Water and Sanitation Services for the Urban Poor: Small-scale Providers-Typology and Profiles, December 1998, UNDP/World Bank Water and Sanitation Program Working Paper Series. 3 Or, as in many cases in Metro Manila, buying bulk water for distribution in the water system network built by the community or homeowner’s association. 2

1

These small-scale water providers face varying degrees of difficulty and constraints in the course of their operations. This study aims to look at these issues that confront small-scale water providers specifically the Binangonan water cooperatives whose area of operation is under the concession area of Manila Water Company Inc. (MWCI) per the 1997 privatization of MWSS. These issues revolve around policies on a) bulk water selling in which Manila Water sells water to a cluster of households or communities or villages at a specified rate enabling the company to save on operation costs; b) exclusivity which dictates who covers what area and for how long; c) financing which covers sources and availability of funds that encourages network expansion and service improvements; and d) reticulation where assets built by small-scale water providers are allowed to be turned over to Manila Water/ MWSS after recouping investments, if not, outright compensation for them. This study will look into current policies and practices on these themes, how these either impinge, hinder or contribute to the “failure” of small-scale water providers and recommend new elements and rules that would better protect them. II.

Brief Background

The residents of the province of Rizal are no stranger to pila balde (queuing for water) back in the days when no water district or other such water utility firm was able to service the area. This is due to several factors, chief among them is the hilly topography of the province which would require a great deal of infrastructure investment in order for water to reach household faucets. And for a company to recoup such an investment requires a large number of customers which Rizal province did not have back then. It is no surprise then, that even when Batas Pambansa Blg. 799 4 transferred jurisdiction, supervision and control of the entire waterworks and sewerage of the entire province of Rizal to the Metropolitan Waterworks and Sewerage System (MWSS) in April 1984, it was still not connected to the central utility even up to the time of MWSS privatization in 1997. By then, Rizal’s population was growing as the province became the destination of many construction firms specializing in residential villages. Water as a service was one value-added feature in any contractor’s advertising pitch, evidence of the reality that piped water is not a given in Rizal. Municipality of Binangonan 5 Binangonan is one of the fourteen municipalities of Rizal. It lies between the foothills of Sierra Madre Mountain and the northeastern 4

BATAS PAMBANSA BLG. 799 : AN ACT PLACING ALL WATERWORKS AND SEWERAGE SYSTEMS IN THE ENTIRE PROVINCE OF RIZAL UNDER THE JURISDICTION, SUPERVISION AND CONTROL OF THE METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM AMENDING FOR THE PURPOSE REPUBLIC ACT NUMBERED SIXTY-TWO HUNDRED AND THIRTY-FOUR, AS AMENDED 5 Data is from the Municipality of Binangonan Local Government Unit

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part of Laguna de Bay. The municipality is bounded on the north by Angono, on the east by Cardona, on the northeast by Morong and Teresa and on the southeast by Laguna de Bay. Binangonan has a total land area of 7,270 hectares; the area of the mainland is 5,820.55 hectares while Talim Island is 1,449.45 hectares. Binangonan ranks as the fifth biggest in the province of Rizal in terms of land area. The Poblacion is located in the center of 39 barangays. On the Northernmost part lie Pagas, Tayuman, Tagpos, Bilibiran, Palangoy, Pantok, Darangan, Calumpang. On the northeast towards Morong are Batingan, Tatala, Mambog, Macamot and Mahabang Parang. On the southeast are Lunsad, Libis, Layunan, Libid, Pilapila, Limbon-Limbon, ithan, Kalinawan, Pipindan and the Barangays in Talim Island namely: Kasile, Bombong, Kinagatan, Kinaboogan, Bangad, Buhangin, Janosa, Kaytome, Gulod, Sapang, Malakaban, Pinagdilawan, Ginoong Sanay, Binitagan, Tabon, Habagatan-Talim and Rayap-Talim. Barangay water system and water cooperatives Since water is not available from any central utility, barangay water system associations (BWSAs) were set up to cater to the needs of its constituents. These BWSAs were run by barangay officials and were mainly financed by the central fund of the municipality. As the municipality continued to bleed due to inability of BWSAs to finance itself, the local government officials by virtue of a Sanggunian Bayan resolution 6 decided to transfer management and operation of these BWSAs to cooperatives organized for such a purpose. The basis for this resolution was the success of existing water cooperatives that already run water distribution system in several barangays. This move not only solved the issue of continued subsidization of BWSAs but also limited, if not, stopped the influence of elected officials in the operations of these systems while encouraging barangay constituents to be members of cooperatives. By depoliticizing the operations and management of the system, payment delinquency and system losses decreased. Water cooperatives were set up in 21 of the 39 barangays; poblacion barangays were not converted as there was no initiative from the constituents to organize themselves into cooperatives. As a result, the municipality continues to operate the Binangonan Waterworks (BWW) servicing 6 poblacion barangays with cumulative total losses amounting to PhP5 Million. 7 As soon as the 21 BWSAs were taken over by the cooperatives, new sets of rules and procedures were implemented as they are now governed by the Cooperative Code of the Philippines and under the supervision of the Cooperative Development Authority (CDA). For its part, the municipal government of Binangonan supported the initial set up of these cooperatives by writing off debts incurred previously by the BWSAs, paid off electricity bills during the early part of its operations and facilitated the solicitation of new infrastructure from other government offices and officials namely, the office of the Governor and the district representative of Binangonan. Sink or swim 6

Resolution 98-001 “A Resolution Promoting the Organizing and Putting Up of Water Service Cooperatives in all of the Thirty-Nine Barangays of the Municipality of Binangonan, Rizal.” 7 Gathered from an interview with the Municipal Planning and Development Coordinator (MPDC) Engr. Tolentino

3

The municipal government left the cooperatives on their own, letting them manage a relatively new venture without benefit of technical assistance from the municipal or national government agencies. Some cooperatives managed to hire professionals that have the technical know-how to run the system, others were not as fortunate. These are mostly cooperatives that have a small constituency and do not have the wherewithal to either hire engineers or pay for consultants. It was a slow process for many of these small cooperatives but eventually they managed to convince their constituents to connect to the water distribution network. Still, others decided to just buy from their neighbors instead of directly connecting to the network because they could not afford the connection and membership fees. 8 Owing to the proliferation of cooperatives in Binangonan, the Federation of Binangonan Cooperatives (FEBICO) was organized to provide support and assistance to fledgling member cooperatives, especially in the water sector. FEBICO formed a committee that caters only to water issues, and where Darangan Water Service Development Cooperative (hereinafter referred to as Darangan), set up in 1968 and being the oldest water cooperative in Binangonan stood as the repository of technical knowledge when it comes to running a water system. Darangan provided training and information to water cooperatives ranging from financial accounting to pipe-laying to cost estimates of materials to be used. This support system enabled new water cooperatives access to technical and practical information that ensured the continuous operation of their water system. On the average, water cooperatives currently serve 60 – 70% of their consumers with 8 - 10 hours a day of water supply at PhP8 – 10/ cubic meter. This current service level could be further improved through a combination of several factors: if electricity cost could be lowered, if some cooperatives are allowed to expand their service area coverage, and if access to funds is readily available for infrastructure expansion and development and network rehabilitation. III.

Issues

There are constraints being faced by these cooperatives, though. And these constraints and difficulties are quite common in many cases all over the developing world. Studies show that smallscale water providers whether they are organized as cooperatives, NGOs or SMEs face issues related to exclusivity, financing, pricing of bulk water and reticulation in relation to a central utility, whether public or private. A. Exclusivity Binangonan water cooperatives face a formidable foe in Manila Water where the latter may at any time invoke its exclusivity rights over the area of operations of the former. Citing the 1997 Concession Agreement which provides that “In the event of any application to the NWRB for which MWSS consent is sought by a third party for a license to provide water and sewerage services to a new development after the Commencement Date (a “New Third Party License”), MWSS shall consent to the grant by the NWRB to the Concessionaire of the right to provide such services to such new development if the Concessionaire agrees to provide such services on (a) substantially similar terms as set forth in the proposed New Third Party License and (b) at the Standard Rates then in effect for such services. If the conditions set out in the previous sentence are not met, or if the Concessionaire voluntarily declines to provide the services to such new development, MWSS may 8

Cooperative officials say that both connection and membership fees are not collected upfront; payment is staggered and will be included in the monthly water bill.

4

consent to the grant of a license to the third-party service provider for a term not longer than 10 years, subject to revocation upon not less than 60 days’ notice to such third party provider if the Concessionaire notifies MWSS and the NWRB in writing that the Concessionaire is in a position to provide such services in accordance with the conditions of this clause (ii). 9 However, there are opposing views on this, chief among them is the provision in the Local Government Code of 1991 (Republic Act 7160) which authorizes Municipalities to establish waterworks system 10 as part of its role to provide for the general welfare of the constituents. As a result, the Municipality of Binangonan took upon itself to establish a waterworks system through the BWSAs and eventually, turning over the task to the Binangonan water cooperatives. Such action is allowed in Section 447 of Republic Act 7160 11 and rendered the water cooperatives as primary distributors and agent of the municipality of Binangonan 12 . To reiterate its intent to manage and operate its own waterworks, the Municipality of Binangonan even came out with a Sangguniang Bayan Resolution 13 where the municipal government explicitly stated that it is only going to “avail of the technical assistance/ expertise of the MWSS/ Manila Water,” and once the Laiban Dam or other sources are available, “…requesting Manila Water to provide bulk water, sanitation and sewerage services to the municipality.” It is evident in the resolution that the municipal government knows the parameters of its authority and powers, and, in no way are they abdicating or reneging on its duties stipulated in the Local Government Code. High risk investment Exclusivity provisions stem from a policy logic that since water and sanitation services, or for that matter, other utilities such as electricity, require a large amount of investments, it therefore 9

Article 5 Section 5.3 of the Concession Agreement Section 17 of Republic Act 7160: Basic Services and Facilities. - (a) Local government units shall endeavor to be self-reliant and shall continue exercising the powers and discharging the duties and functions currently vested upon them. They shall also discharge the functions and responsibilities of national agencies and offices devolved to them pursuant to this Code. Local government units shall likewise exercise such other powers and discharge such other functions and responsibilities as are necessary, appropriate, or incidental to efficient and effective provision of the basic services and facilities enumerated herein. (b) Such basic services and facilities include, but are not limited to, the following: (v) Maintenance of barangay roads and bridges and water supply systems; (viii) Infrastructure facilities intended primarily to service the needs of the residents of the municipality and which are funded out of municipal funds including, but not limited to, municipal roads and bridges; school buildings and other facilities for public elementary and secondary schools; clinics, health centers and other health facilities necessary to carry out health services; communal irrigation, small water impounding projects and other similar projects; fish ports; artesian wells, spring development, rainwater collectors and water supply systems; seawalls, dikes, drainage and sewerage, and flood control; traffic signals and road signs; and similar facilities; 11 Section 447 (a) (5) (vii): Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient waterworks system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and, for this purpose, extend the coverage of appropriate ordinances over all territory within the drainage area of said water supply and within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in connection with the water service; and regulate the consumption, use or wastage of water; 12 Legal study prepared by the Institute of Human Rights, University of the Philippines Law Center, unpublished 13 SB Resolution 156-2000 - “Resolution of the Local Government Unit of Binangonan to Continue Operating its Local Waterworks and Sewerage System” 10

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requires a certain degree of monopoly over a certain of jurisdiction in order for investors, private concessionaires or the state utility to recoup its capital expenditures. This entails “formal restrictions on competitive entry into the sector which means that entrepreneurs working outside the official system are generally considered illegal, or irregular at best, despite the vital service they provide 14 .” Such logic implies that communities are not allowed to organize themselves into groups that would take on the delivery of these services because such an act would be in violation of the exclusivity provision. It is blind to the fact that marginalized and poor communities continue to have no access to water as these are considered high-risk, low-revenue areas by the central utility. As evidenced by many field studies, it is the community residents themselves in rural and peri-urban areas who took the cudgels of delivering water to their respective areas such as those in Dinoronan in Albay, Roxas in Palawan and General Santos City in South Cotabato. Binangonan is no different to these communities given the absence of NAWASA and later, MWSS in the area. In reality, it is the small-scale water providers “…that overcame the local knowledge problem by indicating households’ willingness-to-pay and provided service to customers that for various reasons presented higher risks to the larger companies.” 15 It has also been documented that “small-scale entrepreneurs, both by virtue of their size and their consequent ability to get closer to clients, have developed simpler and appropriate charging mechanisms, from offering their clients credit to charging on a daily basis like the “water women” in Dakar. In Guatemala City, the first system of “paying-as-you-go into your bank” was introduced by a community owned and operated water company -ACOVA - serving some 7,500 families.” 16 Given this scenario, the exclusivity provision in contracts, concession agreements or some other similar legal instruments needs to be reviewed thoroughly and should be able to adapt to the realities on the ground, if universal coverage which is the purported claim of the actors in the water industry is to be achieved. B. Bulk Selling Manila Water claims that it is not the bad guy in this situation. In fact, it is willing to peacefully co-exist with the water cooperatives through the bulk water selling scheme where the cooperatives buy water from them at bulk rates and distribute it to its network. In effect, the water cooperatives become, twice over, the primary distributor of water only this time, they are now the agents of Manila Water. In such a scheme, Pag-asa Water Cooperative, for instance, being the cooperative that services the first barangay in Binangonan coming from Angono (where Manila Water has already established its presence) has been offered a bulk rate of PhP11 – 12/ cubic meter under the category of mixed usage. Currently, Pag-asa sells its water at PhP12/ cubic meter, PhP4 of which is the cost of water while PhP8 goes to operations and maintenance plus other expenditures. If Pag-asa cooperative enters into a Memorandum of Agreement with Manila Water, the cost per cubic meter of water would come out at PhP19 – 20, higher than what it charges its members and customers now. When told about this, Manila Water officials say that Pag-asa does not have to profit 14

Tova Maria Solo, “Small-scale entrepreneurs in the urban water and sanitation market,” Environment and Urbanization, Vol. 11, No. 1, April 1999. 15 Nicola Tynan, “Private Participation in Infrastructure and the Poor: Water and Sanitation,” George Mason University, Conference Paper for Infrastructure for Development: Private Solutions and the Poor, 31 May - 2 June 2000, London, UK 16 Solo, April 1999.

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PhP8/ cubic meter as it is a cooperative anyway. Pag-asa cooperative explains that the add-on is not profit but is used to finance the day-to-day operations of the cooperative including paying for services that they provide their members e.g. damayan fund 17 , patronage refund and for training and education. In a dialogue with the Business Territory officials in charge of the Binangonan area, they said that they are not forcing the cooperatives to connect with the Manila Water network if they do not want to but quickly added that “they are forced to serve the customers who write to us or call our office asking for connection.” 18 In several occasions, Manila Water has been asked about its bulk water pricing and its answer has always been that it represents the cost of delivering water to their “partners” and that the price, anyway, roughly rises in proportion to the number of customers being served. Manila Water, however, has yet to give a clear explanation as to why it charges a higher rate for bulk water compared to those in the so-called “lifeline” category when the former does not have any operation cost to the company. Path of least resistance Manila Water is particularly satisfied with its performance of almost 100% connection in its concession area; a significant number of the new connections has been through their Tubig sa Barangay program that caters mainly to informal settlers and urban poor communities where 5 or so households share one connection and cost. In effect, there is a mathematical increase in the number of connections and customers since one household, in many cases, is shared by two families. These are the areas that badly need direct connection as these are the consumers that buy expensive water from mobile truckers. In some areas where there is a strong presence of organized groups, Manila Water negotiates with these organizations to ensure cooperation in the community. Manila Water, in effect, takes the path of least resistance by selling bulk water to communities. Because water is such a crucial service, many community organizations take initiative to negotiate an agreement with the company, as what happened in Taguig and Angono. In other cases, Manila Water offers this as a gesture of partnership and cooperation to small-scale water providers already existing in communities to assuage their fears of a take-over. In reality, however, Manila Water is only biding its time before they come and assume the operations in the area, citing either local government pressure to take over the facilities or some consumer complaint they received. Again, it will go back to invoking the claim of exclusivity in justifying the take-over. Or it will invoke “orders from the top” as bulk water selling is considered a transition mechanism for the concessionaires before it converts its bulk connections with its customers to individual connections. This has been explicitly laid down in an MWSS Board and Regulatory Office Resolution in 2005. 19 In the meantime, however, Manila Water continues to peddle bulk water in Binangonan without any proper explanation of possible outcomes and repercussions. This has worked in the past in containing risks and in achieving high sales turnovers; yet, it is also a mode of provision that preserves the company’s right to take-over reatail operations altogether in the future. It is understandable, given the fact that area business officials meet their key performance indicators and targets with little cost to the company. Manila Water is able to save up on operation and 17

Small contribution to a cooperative member whose next of kin died. Meeting with Manila Water on 24 April 2007, Manila Water Main Office in Balara, Quezon City 19 MWSS-RO Resolution 05-006-CA – “Policy Guideline on Providing Water Services to Customers in Open Communities and Depressed Areas” 18

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maintenance cost, headaches caused by non-revenue water and pilferage since it is the obligation of its “partners” to handle all cost incurred after the mother meter. Stories abound of consumers living in villages paying an exorbitant amount because residents have to equally divide among themselves the cost of whatever is unaccounted for on top of paying for their actual water consumption. And this is true whether one lives in a posh village or middle-class subdivision or an urban poor community such as in Taguig. In a way, what happened to Taguig where the people’s organization was suddenly told to fold up its operations because Manila Water is now ready to service the area is a possible portent of things to come in Binangonan. C. Reticulation By virtue of the Sanggunian Resolution, Binangonan cooperatives became heirs of an existing barangay water system network built by municipal funds and other grants. In subsequent improvements of the system, these cooperatives through the aid of the local and provincial government and district representatives were able to expand the network in each of the barangay where they were assigned to operate. Most, if not, all of the big expenditure assets were solicited from government officials and offices, and ownership has already been deemed transferred to the cooperatives. Recently, though, there are several cooperatives that are able to finance its service improvements using their own funds. Big-ticket expenditures include construction of new pumping stations to service expansion area and rehabilitation of pipes to address leakages and pilferage. The design and lay-out of these water networks usually follow the requirements of any public infrastructure project since, in many instances, funds for their construction are coursed through the Department of Public Works or the city/ municipal engineer’s office. It appears, however, that questions are raised on the standard and quality of this infrastructure set-up in the light of questions raised with regard to the reticulation policy. This matter of compliance with construction standards is important for at least two reasons: first, construction standards can be a major factor, sometimes the only factor used, in determining whether the central utility will be allowed by its owner and its regulator to compensate the community’s water service provider in case of a take-over of the service area. Second, non-compliance with construction standards may also be used as a legitimate pre-text for taking over the service area of small water service providers, especially if water pressure, quality or hours of service is affected. However, these need not be the only policy frameworks of course. In the first instance, the commercial value of a localized water system is not only in its pipes, pumps and tanks; it inheres, perhaps more importantly, in the operational practices that have been set up to control risk and realize revenue from these assets. In build-operate-transfer schemes one usually has a contract pretermination clause that compensates a private company for the net present value of the expected future income stream associated with the contract and not with the book value of its physical assets. In the second instance, the fitness of an operator can also be gauged in terms of it s ability to deliver specified outcomes rather than via the means that it uses to deliver such outcomes. Water industry standards on reticulation as practiced by central utilities like water districts allow for take-over and transfer of water system to their network when the other party meets the requirements; in the case of villages and subdivisions, for instance, its system must meet the technical specifications set by LWUA and the water district with regard to pipes, valves, sewage, etc., must sign

8

a Memorandum of Agreement donating the entire system to the water district, and a low nonrevenue water. 20 In this particular example, villages and subdivisions are the less contentious section of the service area as developers and contractors are required by law to set up a package of services to its prospective buyers which include electricity, roads, and water; this package is part of the cost of the property being sold. Experiences of water districts in the provinces show that village homeowners would usually want an immediate turnover of its system to the water district which means that these are relatively new water networks that do not have the attendant problems of NRW or any unaccounted water. For older networks, though, construction and performance requirements usually have to be met before proper turnover takes place, and the MOA specifically lays down that such a turnover is considered a donation and that no compensation will ensue. 21 Unlike homeowners’ associations within subdivisions, though, people’s organizations and cooperatives operating in so-called open areas are a different case altogether. In the case of nonprofit organizations and community associations whose areas have not been reached by the central utility and do not have the facilities for a water network set-up, the residents bear the cost of the network installation and its operations and maintenance. Applying the same rule of no compensation to them is tantamount to taking and is contrary to the Constitution. The law requires that for any expropriation of property, due process must be followed and just compensation should be given to the affected party as determined by the court of law. It appears that Manila Water thinks otherwise, and invokes the provision in the Concession Agreement that allows them to take-over assets without compensation as assets acquired after 1997 are deemed assets of MWSS; by extension, assets that could be used freely by Manila Water. Unjust enrichment? In the case of Binangonan, while some of the assets are evidently paid for by government funds (municipal, provincial and congressional allocation) any take-over of the system still constitutes expropriation and by law, an expropriation proceeding must take place to determine proper compensation. By taking over the assets without any just compensation or any other similar agreement, could this be considered unjust enrichment on the part of the central utility? Or could there already be an agreement reached by Manila Water and the LGU of Binangonan contrary to public interest and the cooperatives? D. Financing Except for subscriber connection costs, which also become part of a cooperative member’s capital, relying on solicitation and grants from local politicians and government agencies appear to be the route taken by Binangonan cooperatives. This has been the case as these cooperatives have an aversion to credit and loans mainly due to the steep interest rates demanded by credit and financial institutions plus the usual requirements of asking for collateral and co-maker/guarantor. The aversion also stems from their knowledge of experiences of fellow cooperatives in other provinces where their operations have been greatly hampered due to loan payments.

20

In some cases, the NRW required is 10% before transfer happens although this rate appears to be arbitrary. In the case of Bacolod City Water District (BACIWA), they require that NRW must not be higher than theirs – 38.9% currently (Phone interview with BACIWA General Manager Atty. Julie Ann Carbon). 21 Phone interview with BACIWA General Manager Atty. Julie Ann Carbon

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Financial and credit institutions traditionally do not see people’s organizations or cooperatives as a distinct category from their other clients, and therefore, subject them to the same requirements as they do big corporations. Short and long term loan windows are often offered to established companies that do not lack sources of financing. Binangonan cooperatives realize that if they want to continue to offer quality water service to their members, a business plan has to be crafted and financed in a predictable manner over the long-term. At the federation level, officers and board members of FEBICO are already talking about pooling funds that may be used to support member cooperatives that are in need of financing; a cooperative bank run by FEBICO is also another proposition that members are seriously considering. These proposals show that the attitude of FEBICO and its member cooperatives towards traditional financing from banks and other financial institutions is one of distrust and aversion; perceiving these institutions as insensitive to small organizations and are only meant to wring every centavo out from them. Such a perception may not be entirely without basis as financial institutions usually subject small organizations to a higher standard and scrutiny. “Because they are small and privately owned, the “alternative” providers don’t qualify for loans from donor agencies or banks which traditionally have focused on municipal water companies with monopoly rights. While some community based providers and NGOs have co-existed with the utilities, surviving largely on grant support, it hasn’t been convenient for either the utilities, the NGOs or their financiers to learn about any other alternative providers, except for their negative connotations.” 22 As in the case of international financing where it is often seen as a source of big funds, financial institutions require utilities to have “exclusivity…and is defended as a way to facilitate access to finance markets. Again, evidence from pre-20th century London and from Paraguay suggests that securing capital need not depend on exclusivity. All the aguateriss and London's private water companies obtained financing without a guaranteed monopoly.” 23 Financial institutions have yet to be convinced of the uniqueness of cooperatives and small organizations as their potential clients that require a different handling. The cost of capital alone is quite big for cooperatives, and they do not normally have the necessary collateral to back up loans. And since water is a long-term investment, it requires a longer loan maturity that banks and other credit institutions are not willing to extend to cooperatives. Such a scenario leaves cooperatives, rural water associations and even people’s organizations to just rely on grants and local government contributions. IV.

Recommendations

Encouraging community participation and collective action in water delivery services requires a package of support mechanisms that would ensure that initiative and creativity are rewarded. One of the possible support mechanisms is through developing new rules and amending existing ones that adapt to and suit the needs on the ground. Small scale water providers, in a way, are the “other” private party, and in the continued absence of publicly delivered services, they are the ones who take on this task. Water Districts on average are able to serve less than half of the service area assigned to them – it is usually small water service providers that take up the slack While the big commercial operations such as the private concessionaires and even water districts get innumerable

22 23

Solo, 1999. Tynan, 2000.

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encouragement, incentives and regulatory forebearance, cooperatives are practically left to fend for themselves. The hands-off, we’ll-let-you-sink-or-swim attitude of the local government unit of Binangonan is definitely not the way to handle water cooperatives. Such an endeavor requires a whole range of support activities, from technical assistance and professional training to accessibility of long-term funds that would ensure sustainability of operations. Risks and threats to the existence of these water cooperatives could easily be mitigated if these support mechanisms are well in place and institutionalize. Given the current situation of the Binangonan cooperatives and the threats they face with the impending entry of Manila Water in their area, the following recommendations are contributions to a possible package of rules and mechanisms that would protect working and viable small scale providers from central utility take-over: 1. On exclusivity The policy of monopoly over a certain area has not been beneficial to consumers in general, and has already discouraged community initiative. For areas that have not been reached by the central utility, it is the entrepreneurs in the form of mobile truckers, standpipe operators and well drillers who have “exploited” the situation. In areas, however, where community organizations took the initiative to organize the residents into a collective network of customers and operators at the same time, they are faced with possible displacement and high connection fees to the central utility network without them getting any compensation for the infrastructure that they have set up. In the case of Binangonan cooperatives whose legal standing as water distributors is based on the Local Government Code and further reiterated by Sangguniang Bayan resolutions, exclusivity could be viewed as a two-way street. There are several options that could are open for this case: a) MWSS Regulatory Office with concurrence by the MWSS Board comes out with a resolution addressing the issue of exclusivity, and calls on the concessionaires to respect local government unit’s authority and mandate to create its own waterworks and sewerage system; 24 Such a resolution must consider the relevant laws and must take necessary action to either amend the Concession Agreement or create a supplemental provision to it; b) In relation to the above, MWSS must not oppose the application of existing water providers for water permits and Certificate of Public Convenience (CPC) in order that their “legitimization” is no longer considered an issue; it should also be seen that the grant of these permits is an important requisite for access to long-term finance c) Carve out from the concession area those municipalities and cities that already have viable and efficient water services (especially those run by people’s organizations and cooperatives) subject to a set of criteria that protects and promote public interest and safety; these areas could be regulated by a regulatory body composed of the NWRB, local government, DOH, etc.

24

Atty. Minas of the MWSS Regulatory Office Legal Department announced during the public consultation in Binangonan for the rate rebasing process that “nobody can compel or force the cooperatives to connect to Manila Water or to close its operations to give way to them.”

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d)

Instead of a hostile take-over, central utility could look into other partnership and cooperation agreements with existing small-scale providers e.g. contract on sewerage and wastewater treatment or consulting services.

2. On bulk water scheme As this type of water delivery is the least transparent, it will serve everyone well if the central utility would “unbundle” the rate and show the real cost of water. As this seems to be the preferred mode of Manila Water to address connection and coverage issues, a clear policy from the Regulatory Office must be had covering the following issues: a) Following a review of the current bulk water rate structure, concessionaires must adhere to a different categorization of customers that address issues of location, type of community and income level. One cannot charge the same bulk residential rate to those living in Ayala Alabang and Barangay Pag-Asa in Quezon City; b) With the unbundling of rates, there will be basis to set a parameter as to how much can “partners” of central utility charge on top of the bulk rate; and c) Contractual obligations of both parties must be well laid out and contracts must be developed in consultation with stakeholders to avoid onerous and one-sided agreements. d) In general, households in open communities that decided to invest in water services infrastructure and to operate these ought not to pay for water that is more expensive than the water supplied to those with direct connections. To achieve this bulk sales rates should be significantly lower so that a typical community provider can still recover prudent and efficient costs for services that the central provider no longer needs to provide and for risks such as water theft that the central provider no longer needs to worry about. 3. On reticulation Future connection to the central utility network should only be one of the options open to small scale water providers, and must not be forced on them when their current set up is considered more efficient and apt. Central utility, however, must adhere to provisions of law with regard to reticulation policy. As such, the following should be addressed: a) Due process must at all times be respected with regard to expropriation and the attendant compensation; any provisions in the Concession Agreement or any contract that is contrary to this and other laws must be repealed and/ or amended; b) To avoid future dispute as regards network connection, clear and above-board agreements and standards must be discussed and contracts drawn up to prevent arbitrary decisions; and c) In cases where entire systems have to be replaced, central utility must allow for a reasonable period of recovery of investment of small-scale providers before taking over the network. d) It should be clarified that the regulator for small water providers, whether in water districts or inside the MWSS service area, is the National Water Resources Board. While the engineering standards of infrastructure at the time of turn-over to the central utility should be a consideration for the small service provider, compliance or non-compliance with construction standards specified by the water district or the MWSS concessionaire need not be requirements for the commencement of operation by small water providers.

12

Standards set by these central utilities should also not be relevant as long as the National Water Resources Board is confident that the minimum outcomes can be delivered using the technology specified in the small service provider’s CPC application. 4. On financing Water is a big-ticket investment, and sustaining such a system requires efficient personnel and cooperation from the consumers. In such a venture, banks and other financial institutions show their bias for big companies, and in some cases, multinational firms. Convincing these institutions to take a second look at small-scale water providers as potential clients could sometimes require an innovative and pioneering attitude on the part of its decision-makers. Some innovations in this area are the following: a) Address the rules on reticulation, bulk-selling and exclusivity that increase the risks and difficulties of investing in and lending to small scale providers that operate within large franchises. b) Come up with a set of tools that could be employed in evaluating proposals from smallscale water providers, leading to a clear manual of operations that could serve as a template for would be clients; c) Pool resources available in a municipality or city in the form of a water revolving fund where consumers will provide their own counterpart fund collected from tariffs, LGU will set aside a portion of budget for infrastructure, and cooperatives or other water providers will also contribute; ODA funds could easily flow to these areas when such a mechanism is set up; and d) Local governments must come up with legal responses and water providers can do their part by institutionalizing organizational discipline and certainty to serve as risk-mitigating mechanisms for creditors. It has been documented that “small providers offer huge savings in extending service coverage. Community-built sewerage systems cost only one-half to one-third as much as systems built by governments, and there may be similar savings to be had by formally involving small providers in the construction and maintenance phases of secondary and tertiary networks.” 25 This is certainly true in Binangonan where one hears of anecdotes that funds that course through government agencies only build so little when for the same amount, cooperatives could already finish the entire project. Such bloated budget cost is everyone’s suspicion why the municipal government through the municipal engineer’s office is taking a long time to release their request of network lay-out and cost, which in turn, delays the cooperatives’ submission of requirements for the application of water permit at the NWRB. Given the same opportunities, incentives, and proper government support, then, water cooperatives stand a chance to compete in a rough world of competition. When this happens, central utility does not have to pull a David vs. Goliath act on them to win.

25

Snell, 1998

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EPRA Research Project on New Rules for Grassroots Water Sector Investments

Water for the Urban poor Tinagong Paraiso, Bacolod City1 I. Introduction A community along the sea but without water, safe potable water that is, in Bacolod City. The reason is simple, the national and local government, and the LWUA- sponsored water district are in a halt to investing, and extending water service to all residents. Long since, communities outside the poblacion (town center), and or the immediate business district, among them Tinagong Paraiso, remain unreached and so unserved, and been relying on deep wells, or buying their water from aguadors (water entrepreneurs) who fill in the gap in service delivery, at a higher price. And not to complicate matters, but Tinagong Paraiso is an urban poor settlement, and as such, burdened with land and security of tenure issues, access to basic services, access to affordable services, low and inadequate income, employment, etc to name a few. On the other hand, the Bacolod City Water Authority (henceforth, BACIWA) is in existence for 34 years now, among the first with the enactment of the Provincial Water Utilities Act of 1973 (Presidential Decree 198). It has been given the task of providing water to all but like many water districts across the archipelago, a multitude of constraints played effectively to decisions regarding growing a branch or two, and expanding the network, thus rendering it unsuccessful in its objective. The case of Tinagong Paraiso is a source of inspiration, and lesson to similarly-situated waterless areas in the Philippines, and there are many. 1 From deep wells and water pumps, this community has taken the initiative to invest in water connection, and with the help of BACIWA and several others, succeeded. After many years of waiting, the residents have afforded communal faucets to serve all 153 families in 2001. And two years after, 20 families with individual connections has been enjoying but also helping in supplying water to the community. If asked how far will this go, one can almost infer positively without being an optimist, but not yet. Only when the same facilitating factors are in play, and then which can be reinforced will this be a good ending, certainly. This is about Tinagong Paraiso and how they made things happen the way it did. Their story is relevant, and it shall be told. Important as well is the environment that allowed events to positively unfold. In this paper, we explore the possibility of replication by highlighting facts in a stylized fashion. 1

Melai Tuba, institute for Popular Democracy May 2007

1

II. Tinagong Paraiso, their-story Before it all happened, Tinagong Paraiso was just a private piece of land where people built their homes, albeit illegally. The property belonged to one Jovita Garcia- Yogore, who happen to want it back and vacated. It was in 1994 when the members of Tinagong Paraiso were asked to relocate. The community’s leaders talked with the landowner in the hope of forging an agreement regarding resettlement and reimbursement should there be relocation. Amicably the landowner offered the community lands in Handumanan, an area already famous for squatter relocation. But it was the community’s position to bargain for an on-site relocation, or that they be provided a parcel of land not far from their original lots, within the Banago area as most of the community members made a living as fishers, or workers in the pantalan (port) as kargadors (dock workers). Relocating to a different place would mean that residents will be at a disadvantage, and could lose the means to support their families. The talks, though not without its share of controversy and difficulties, proved fruitful for the community. They were given a hectare of land (10,000 square meters) to divide amongst themselves. The leaders and most of the community members agreed to a 50 square meter per family allocation. There were those in the community who saw this as unfair – those dissenting argued that since their houses were larger and occupied more than the 50 square meter allocation, they should be allowed a bigger lot size and if not, they should at least be reimbursed for the land they had previously “owned”. According to the Mrs. Batarilan, getting the members to agree on the 50 square meter allocation was even more difficult than obtaining the piece of land. These intra-community grievances nearly jeopardized their position with the land-owner. Eventually, those who found the 50 square meter allocation fair stayed in Tinagong Paraiso while those who did not were relocated to Handumanan and compensated accordingly. This experience ended when the community registering themselves with the Securities and Exchange Commission (SEC), as the Jovita Garcia-Yogore Resident Association (JGYRA), in honor of the landowner. The hectare wide property was registered in the name of the association and as such, cannot be sold by its members. III. Inventing Options: JGYRA Community Water Plan The people of Tinagong Paraiso have always relied on their wells (two open dug well and a hand pump), but these have come to a point where the water is undrinkable. Substituting for these sources are aguadors, local water entrepreneurs that sold BACIWA’s treated water to the community for P2.50 per 5-gallon container, a hefty sum for a fish vendor or kargador. 2 In 2001, Chairperson Dionisio dela Cruz who worked with the non- government organization Builders approached another non- government organization Kaisampalad and discussed with the latter the community’s prospects for funding. At the time Kaisampalad is running a program on Food Security and Sustainability and was looking for an area to develop in the province. In the past, Kaisampalad had funded projects benefiting the rural poor. Tinagong Paraiso’s history caught their interest and asked JGYRA to conduct a survey on what is the biggest concern for the community. Water was the quick reply.

2

JGYRA and Kaisampalad proceeded in discussing the community’s water supply proposal, thus born the Potable Water Project. Kaisampalad approved and agreed to loan JGYRA P74, 000.00 for the implementation of the community’s water system. Next, JGYRA approached the Bacolod City Water Authority (BACIWA) to apply for a connection. BACIWA advised them to gather enough signatures and make a petition for connection which upon filing would then prompt the water district to send a team of engineers to survey the area. In this survey, technical and financial implications were drawn. Tinagong Paraiso lies outside the BACIWA’s main water line 3 , and makes it necessary to invest in pipes. Normally, BACIWA covers the cost of installation, and later recovers this through the tariff. In this case, JGYRA volunteered to spend on the pipes using the money from Kaisampalad, and solicited the technical help of BACIWA in the installation of materials. IV. Setting Up the Payment System JGYRA’s offer to shoulder the cost of connection went a long way in BACIWA’s books, whose experience with bulk water selling specifically on neighborhood associations and community organizations were not good. Previous communities operating as bulk water contractors had trouble collecting from their members, and keeping their financial system intact, unable to pay fully to the central utility as a result. Along this line, a simple payment / tariff collection system by JGYRA, part of their plan discussed and submitted to Kaisampalad, was what BACIWA needed to give Tinagong Paraiso the help they need. Two individual water connections were installed to serve the needs of the community. Residents who wish to avail of water need only to purchase tokens costing P1.50 for a 5-gallon container, and P1.00 for a regular size pail. Residents can buy their tokens from a nearby sari-sari store, and dropped them in JGYRA’s collection box, placed on top of the main water faucet. Daily collections are then accounted, and the total bill from BACIWA paid by JGYRA at the end of each month. This was the system for two years, coinciding with the period for paying off the loan from Kaisampalad, and enough time to move on to the next phase. Connected to the city’s water line, and with two years headstart, several residents have grown to afford their own connection through the TP- BACIWA line (since the connecting pipe remains that of JGYRA). Those who sought to be connected only need to agree with JGYRA’s “access” conditions: (1) supplying (“selling”) water to the community at the same rate (P1.50 / 5-gallons and P1.00 / regular pail), and (2) paying JGYRA P100 monthly for operations and maintenance of the network. With this arrangement, the association ceased in its operation of communal faucets, and the demand for water in Tinagong Paraiso matched and satisfied by their individually connected neighbors ever since. V. Discussion What the residents of Tinagong Paraiso did was a departure from the routine of mainstream service delivery. Given the circumstances, i.e. the repute of an urban poor community, TP outside the grid or main pipe network, BACIWA’s capacity to shoulder the costs, and their consideration of TP residents’ capacity and willingness to pay for the system, the odds of the petition-application being

3

granted was remote. In retrospect, paying for water pipes that meet the central utility’s decision constraints strategically (bought and) brought the results. More importantly, the community’s action was voluntary and constitutes a self- help strategy that normally households will not think about much but often employ in the absence of, or inadequacy in investments by both government and private service providers. Indigenous, voluntary, self- help initiative by community-based organizations is shown here as an alternative in mobilizing available resources and this does not need to be the community’s resources, thus meeting any immediate demand for services. The TP experience demonstrated that with self- help, the related action of all sectors, that is, community- based association (JGYRA), non- government organizations (e.g. Kaisampalad), water service utility (BACIWA), barangay and city government units, multilateral banks (e.g. Asian Development Bank), and the household or user themselves, can be harnessed. It was through selfhelp that finance was found and that access to improved water services was achieved. Waterless areas especially urban poor communities therefore must take cue on the capacity of actors in this case, and facilitating or mitigating circumstances that contributed to having cooperatively realized access to water (Stakeholders’ profile and their contributions below). Two factors are key to replicating this feat: Organizing and mobilization. Like Tinagong Paraiso, residents in urban poor areas need to pool their resources, and contribute whatever they can. Locals in the form of peoples organization and or community- based entity stand a better chance generating and mobilizing indigenous resource that is otherwise insignificant when done individually. Organization also comes into play for various process implementations when undertaken, in negotiating with government for example, and in the case of administering the water supply system, with the collection of tariffs, and carrying of operations and maintenance. Self- help, community-based, indigenous resource / financing model. Pooling community resources is the most obvious way to raise financing but in a deprived area, which is the case in urban poor communities, a self- liquidating investment plan can substitute and be submitted (‘sold’) to interested institutions. As it was shown, Kaisampalad and many other development- oriented, non- government organizations are in the business of helping communities. When considering resources, the financial part is usually referred to, but there are many other forms. Before Tinagong Paraiso received their P74,000 loan, all they have was an idea for a water supply system. This became a proposal for funding, later refined with the help of the financing organization and becoming a project. In installing the pipes, they received technical assistance from the water district. And in the implementation of their project, money in use and technical advice at hand, the community had put up labor, side by side with BACIWA, as equity. This system carried them far, enough to have paid their loan today, and deliver 20 individual connections that service the community in return. 4 Resources can extend to government units, including the central utility. Local governments (e.g. the City Engineer’s Office) and utilities have the technical and financial capacity to spare with organized communities. This should sit well with worries over “community defaults” (i.e. the community as a whole cannot pay in time, or in a sustained manner because of an internal problem, for example, non- payment by some members) given that a system of insuring against risk can be placed onset. 5

4

Other than these elements, actions external to the organization helped in JGYRA’s success, specifically, BACIWA. First, the considerate attitude given by the central water utility BACIWA. Its acceptance of TP’s petition and granting of the proposed water project can be construed as willingness to make partnerships in areas or locations that are beyond their technical and financial reach. This may not be the case in other central utilities. Moreover, BACIWA’s waiver of the right to charge commercial rates (bulk water sales) can be interpreted as an accommodation responsive to the community’s plight. Again, a special circumstance that we rarely observe. VI. Extension / Policy implications Water supply and sanitation provision has always been perceived as a public sector supply problem, and at the core is the finance of central water utilities. The thinking continued with private sector participation (PSP) models as an improved arrangement in the supply of the service. In both perspective, greater coverage in water access always had its focus on making water supply providers and their operations efficient and bankable. Unfortunately, this wisdom is not sufficient. To demand is, by implication, to find a way. And so with access to water, and as experience in periurban and rural settings have shown, demand for water services manifested through self help and out-of-pocket finance. Citizens have spent on dug-wells and hand- pumps before government, central utilities, and private water concessionaires even installed pipe connections. Citizenconsumers always had the capacity to provide for themselves. Yet, the same problem with the supply- side analysis, the consumer- based self- help model falter at some point and is never enough in itself. The self-help, consumer finance mechanism referred to here is offered as an alternative 6 in the sense that it is demand that is being lent a hand, extended in a way that gives the consumer (citizen and client) the chance to provide for himself through producing the service or good in issue (producing in part or full). By way of extension, this initiative will be making the consumer part- producer or more appropriately, “coproducer”. Given a certain demand and the means to financing, pipes are launched from the unserved / unconnected area, reaching out to connect with the main utility’s network system. The central utility supply model therefore, with its techno- capital constraint (scale economies, efficiency and bankability considerations) is met by the unserved community given with the means to finance the installation. The only issue now, and we again look at Tinagong Paraiso, pertains to the allocation of responsibilities, and associated rewards and risks. The community association rightly assumed over BACIWA the operation and maintenance of the network that is within their jurisdiction. Residents are expected to pay promptly for water they availed, help each other in protecting the pipes; JGYRA officers take care of collections, manage a tariff rate that is affordable, but acceptable with individual household sellers. BACIWA supplies water to the area, and extends technical assistance to the association when needed. The rewards accruing from the investment should be apparent: access to improved, safe water, along with socio-economic returns from having secured water. Financial rewards include a premium on top of the rate, and the monthly “access” price from households that are individually connected. On BACIWA’s part, the utility gained 153 households as customers.

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As for the risks, JGYRA assumed all from finance to operation for the first two years. Now, with the 20 individual connections in place, all 20 household assumed of providing (selling) water to the community, collecting and paying to BACIWA as well. What is left with JGYRA is the maintenance of the TP network, and the setting of rates. To conclude, we examined the case of Tinagong Paraiso in order to learn from their successful experience in availing water service. We looked at actors and processes, and saw the stakes, and tried to have an understanding on how the game was played. We will not be replicating Tinagong Paraiso’s experience. What we aimed for are the elements that contributed to their success, crucial ingredients of achieving access to water. The following lessons are drawn: 1. Urban poor areas will benefit from being transformed into an organized community. This level of representation affords them of organizational strength, one that is useful in making demands, enhancing their position during bargaining and negotiation. 2. Self- help can be employed strategically in availing water services, and in the case of urban poor groups, it will mean offering to meet some of the central utility’s constraints, e.g. offering to pay for some of the investments, or sharing on the responsibilities of operating or maintaining the system, and the risks involved. This also implies working with other stakeholders in order to meet ends. 3. Apart from indigenous resources, financing of self-help initiatives may be solicited from development NGOs, local government units, and central utilities. 4. Central utilities must be open to this type of arrangements, and they will benefit immensely from self- help, community- based arrangements as these extend the utility’s reach without effort. 5. The financing of self-help, community based water connections must be seen in the same light as BOT schemes (Build-Operate- Transfer), although small ones. The community is given the chance to build and operate a small facility, and pay the loan with revenues / collection. The net gain for the community and government is expanded access to water. 6. A policy infrastructure must be built into supporting community- based, self help water initiatives, one that will improve on the existing capacities of stakeholders. 7. The initiative has the potential to respond to immediate needs and fill the gap in water service; similarly, self- help water initiatives extend coverage over the constraints of central utilities and big water companies.

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Profile of Beneficiaries / other Stakeholders Players Roles Individual Households, with - Those with individual connections connections are required to pay P100/month as maintenance for operations. Community Members - The community is divided into smaller committees; the men (“mga tatay”) see to it that things are running smoothly – i.e., pipes are in order, and if a pipe or a connection is damaged, they repair it.; the women (“mga nanay’) headed by the treasurer, see to it that fees are gathered. The treasurer collects the fees dropped in the drop box and tallies them every afternoon. Dionisio dela Cruz (Chairperson) - The community leader and organizer of the “Potable Water Project”; spearheaded community’s efforts of obtaining BACIWA water into their community by creatively working NGO connections. Council of Elders (JGYRA - They were called upon by then legal Officers) administrator to land now occupied as Tinagong Paraiso to discuss settlement and relocation details.

Jovita G. Yogore Association (JGYRA)

Residents’ - Administers the collection / water payment system (chip-drop box) - Community leaders made sure that fees were paid accordingly to the point that Dionisio would do a house to house visit and compel the

Prerogatives - They can sell water, with approved rates, to those who do not have connections. - They can apply for individual connections when and if they can afford it (connection fee is equivalent to cost, which is ‘access’ price of 100 pesos paid to the association, and price of water meter plus pipe installation paid to BACIWA.

- Maintained that they will not leave the land, and if possible they be given a small portion to be divided amongst themselves and used as they see fit. - During the first level of operations, JGYRA facilitated the collection of chips and payment to BACIWA. - If an individual household wishes to apply for an individual

Resources - Relatively better off than the rest, but remain in support of JGYRA and the community. - Can participate in decision making; give suggestions or air grievances in community meetings organized by the leaders.

- worked with an NGO, Builders that led to his involvement with the funding agency Kaisampalad, which eventually led to the loan which started off the “Potable Water Project”. - they believed, though they had no legal right to claim the land, that they were somehow entitled to a share of it if only for the fact that their families had lived there for as long as they could remember. - Owns the title to the hectarewide land where community stands on. - It is a SEC registered corporation, thus has legal personality.

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members to pay their dues.

Kaisampalad

connection, they process the application through the RA. - The funding agency contacted by - Originally interested in funding Dionisio dela Cruz . projects for rural communities but found Tagong Paraiso’s situation unique.

BACIWA

- The WD of Bacolod City provided Tinagong Paraiso the technical expertise needed for the setting-up of the project. - Laid down the pipes (labor) for the community.

Barangay Government

- Facilitated the land issue with the former owners and the residents. - Is viewed warily by the community; they comment that they’d rather approach NGO’s for support than their local brgy. units because with NGO’s there are no strings attached; As much as possible, residents do not want to be manipulated by politicians or be asked to return the favor during elections. 1. Former City Councilor Archie Baribar, through funding from PAGCOR, attempted to bring water to Purok Riverside. - Filmed their documentary “Water - Spoke with BACIWA’s manager, Works” which featured the lobbied for Tinagong Paraiso by community. insisting that their water rates should be lowered. - Increased awareness that success can be made possible because of

Municipal Government

ADB

- Has the right to earn from the service they provide; - They do have an exclusive franchise for water systems and distribution in Bacolod, which is why they call the “aguadors” the biggest threat to their service.

- Runs public campaign such as the Food Security and Sustainability Project, and access t o potable water fell well within the program’s principles. - Their biggest foreign loan beneficiary of date is the Japan Bank International Cooperation (JBIC), and among the principles drawn in the MOA is to provide better service to the poor. - Engr. Abadiano says that (as far as BACIWA goes, anyway) urban poor communities, like Tinagong Paraiso, are usually included under the barangay water policies. But sometimes the community comes into conflict with the barangay officials or management and choose instead to route their water causes directly to the Water District and not the barangay.

- ADB, though not involved financially with the project, helped in a big way by decreasing the water rates from commercial to residential.

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community empowerment.

There are 432 waterless communities nationwide, not counting the 212 areas in Metro Manila. These in total are 664 areas (2004 NAPC data). Much has happened since, Metro Manila alone under MWSS, Maynilad Water Services and Manila Water Company was able to reduce the number to 100 plus communities. The NAPC has yet to release their report. 2 According to Dionisio de la Cruz, the common TP resident consumes an estimated 4-5 containers (20-25 gallons) each day, and translates to P50-62 off their budget. 3 BACIWA’s existing network has reached Central Bacolod, Mandalagan, Mansilingan and Airport Area. 4 BACIWA is supplier of water and technical advisor while JGYRA operates and maintain the access pipe and collects a fee thereof. 5 The open collection and accounting system, i.e. collecting at cost and payment upon availment of the service, as what Tinagong Paraiso did, is an ideal in this sense. The point is, it was shared with both Kaisampalad and BACIWA and had the chance of being validated. Then again, having the service collector (technically in TP’s case, a “seller” since the sari-sari store sells the water tokens) double as a “water police” and just a few feet away from the faucet makes the whole setup foolproof. 6 Alternative takes into context the so-called conventional or traditional or formal systems. These refer specifically to the government and the private banking system and the way water supply has been dealt with in the past. 1

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Small Water Providers Big Risks Propositions from Research Findings of the Institute for Popular Democracy (25 May 2007)

Supported by EPRA

1

Small Water Providers Within Large Franchises . . . ►

► ► ► ►

Respond to demands for improved water services that the central utility is unable to or chooses not to immediately supply; Face risks that arise from the policies and practices of the central utilities; Face risks and difficulties that central utilities and their regulators can help address; Have advantages over large providers; Can co-exist with central utilities in the long-term.

2

The Risks and Disadvantages ► ► ► ► ► ►

The central utility’s claim to exclusivity; Bulk sales policies that raise business risks; Reticulation standards that preclude step-wise service level improvement; Reticulation standards as pretexts for forced central utility take-over; Collective action failures that deter investments; Financing approaches that raise collective action requirements.

3

Claims of exclusivity rise when . . Central utility has Central utility has water and funds for water but no funds expansion for expansion

SWP is within viable area

Taguig after 06 Binangonan urban coops Mexico in Pampanga General Santos City WD

Taguig before 06

SWP not within viable area

Telabastagan in San Fernando

Tinagong Paraiso

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Exclusivity Mixed Source

Source Dependent

Own source only

Pag-Asa Coop (potentially)

Taguig Telabastagan (Angeles-San Fernando WD collaboration)

Panipuan and Mexico (Pampanga) Telabastagan (L&S) Tinagong Paraiso (before partnership)

Tinagong Paraiso

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Finance: Upfront, Short-term, long-term

Local (from beneficiaries)

Upfront

Short-term

Long-term

Bacolod City (WD

Taguig

Tinagong Paraiso

requirement)

(reticulation)

(with loan)

Binangonan

Binangonan (mwci

Binangonan, Taguig

(mother meter down payment)

Universal

Binangonan (coop-

politician grants) (from tax payers, or entire customer San Fernando WD base)

subsidies for rural systems within franchise

(mwci secondary and mother meter installments)

mains)

Angeles-San Fernando (WDs) Maynilad (mains

and service lines)

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Risks and Reticulation Standards Taguig – high risk for SWP No standards set at the start for mother meter operators; no reticulation system at all at start of business partnership. Low service levels (hours and pressure) blamed for “substandard reticulation system” Poor reticulation and associated deteriorating service level used as a pre-text for involuntary take-over by MWCI No compensation policy because of “poor reticulaiton standard” 7

Risks and Reticulation Standards ► Binangonan

– high risk for SWP

In the context of bulk-sales arrangements reticulation standards argument may be used, together with MWSS-RO conversion policy, as means over and above exclusivity for MWCI take over of coop service areas; Concession agreement provides no language for compensation of assets rendered redundant -- perhaps even in instances where reticulation standards are high; Service level outcomes and NPV of future income streams of SWP – not reticulation – may be used for computing compensation; 8

Risks and Reticulation Standards ►

San Fernando- Angeles WD collaboraiton in Telabastagan – low risk

► Contract

ƒ ƒ ƒ ƒ ƒ ƒ

specifies:

i) WD standards to be used ii) period of cost recovery iii) recovery of book value of remaining assets iv) cost of water to be sold v) bounds of the service area vi) performance standards to be followed and monitoring protocols 9

Bulk sales ► “Socialized”

– Taguig,Bacolod ► Semi-business – Pag-Asa in Binangonan ► Discounted – Davao City (new subdivision systems) ► 50 percent discount – Kisumu in Kenya

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Some Recommendations – bulk sales ►

Deep discounts on bulk sales a la Kisumu where high delinquency and losses can be addressed locally, recovery of “required revenue” from rest of the customer base;

►

Promotion of reformed bulk sales agreements where efficiencies can be realized – e.g., in open areas; publicly funded community leadership capacity building;

►

Conversion of direct connections to bulk arrangements in difficult areas e.g., urban poor areas in Maynilad service area and water districts; 11

Some Recommendations - financing ►

►

►

►

Long-term universal financing from customer base for secondary lines and mother meters, especially for poor areas; Community contributions matched by LGU contributions in non-poor areas that are commercially unviable (e.g., due to distance); Recognition of step-wise service level improvement approaches, where creditors will not finance community distribution and storage systems; WD ang concessionaire to take on credit retailing roles for SWPs in the mean time that creditors have no information about the viability SWP project proposals. 12

Some Recommendations - exclusivity ► ►

►

►

MWSS Concession agreements as mere licences to serve; Presumption of free entry – franchise holder has the right to outbid offers of SWPs in a Duthch challenge, but not the right to exclude small providers; In the absence of matching offer for SWP proposal from the central utility – self-regulating coop form is recommended, given that NWRB has limited national presence; strong representation of unconnected people in coop service area is a needed innovation to ensure rapid progress towards universal coverage. Use of surface water to be encouraged via tax on ground water extraction especially in critical areas – bias for bulk supply sources from ventral utility if these come from surface sources.

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