IRR of E.O. No. 279, s. 2004 (July 16, 2004)

(NAR) VOL. 15 NOS. 3-4 / JULY - SEPTEMBER 2004 [ DOF, July 16, 2004 ] IMPLEMENTING RULES AND REGULATIONS OF EXECUTIVE ORDER NO. 279, SERIES OF 2004 "PRESCRIBING GUIDELINES ON INSTITUTING REFORMS IN THE FINANCING POLICIES FOR THE WATER SUPPLY AND SEWERAGE SECTOR AND WATER SERVICE PROVIDERS AND PROVIDING FOR THE RATIONALIZATION OF LWUA'S ORGANIZATIONAL STRUCTURE AND OPERATIONS IN SUPPORT THEREOF" SECTION 1. Purpose - To prescribe the guidelines, criteria, grounds and procedures which shall govern financing policies for the water supply and sewerage sector and the rationalization of LWUA's organizational structure, operation and refocusing of its objectives. SECTION 2. Coverage - These IRR shall cover all water districts (WDs) other water service providers (WSPs) outside the coverage of MWSS /Maynilad/Manila Water, and all concerned government agencies which have a role in the implementation of EO 279, such as but not limited to the Department of Finance (DOF), National Economic and Development Authority (NEDA), Department of Budget and Management (DBM), Department of Interior and Local Government (DILG), Office of the President (OP), Local Water Utilities Administration (LWUA), Government Financial Institutions (GFIs), Municipal Finance Corporation (MFC), Department of Public Works and Highways (DPWH), Department of Environment and Natural Resources (DENR), Rural Waterworks and Sanitation Associations (RWSAs) and Barangay Waterworks and Sanitation Associations (BWSAs). SECTION 3. Reforms, Objectives and Policies - In view of the shifts in government financing policies and constraints in the availability of financing from the National Government, there is a need to review and rationalize current financing policies for the Philippine water supply and sewerage sector to allow for the efficient flow of resources to the sector. Cognizant of the need, these IRR hope to address the following reforms, objectives and policies: a. Improvement of investor confidence in the water supply and sewerage sector; b. Rationalization in the allocation of scarce financial resources in the water supply and sewerage sector through classification and graduation initiatives; c. Freedom of choice of WSPs in sourcing financing;d. Increase in the participation of LGUs, GFIs, PFIs in the financing of the water supply and sewerage sector; e. Stimulation of improved service and creation of financial self- sustainability for WSPs; f. Encouragement of initiatives aimed at self-sufficiency of water service providers, including, but not limited to, amalgamation, private sector participation, cost-recovery tariffs, and resource pooling; g. Grant of incentives for the improvement and graduation of WSPs; and h. Education of consumers towards treating water as a scarce economic good. SECTION 4. Definition of Terms - For purposes of these IRR, the following terms are defined: a. Amalgamation - consolidation, joint operation or annexation of two or more WSPs resulting into a WD. b. Classification - categorization of WSPs into non-creditworthy, pre- creditworthy, semi-creditworthy or creditworthy to determine proper allocation of financing. c. Cost Recovery Tariff - tariff that is required to cover investment in capital expenditures, operating expenditures and debt servicing, including minimal reserve for collateral or counterpart equity, and reserve for recovery of and some minimal return on LGU's investment/infusion in the WDs or WSPs. d. Creditworthy WSPs - financially self-sustaining WSPs capable of accessing financing from GFIs and/or PFIs. e. Government Financial Institutions (GFIs) - Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP) and other financing institutions owned and controlled by the Government. f. Graduation - the progression of a WSP from non-creditworthy to pre- creditworthy status or from a pre-creditworthy to semi-creditworthy status and/or from a semi-creditworthy to creditworthy status based on improvements in financial and operational indicators. g. Local Government Units (LGUs) - territorial and political subdivisions of the Philippines, consisting of provinces, cities, municipalities and barangays. h. Long Term - period covering more than five (5) years. i. Medium Term - period covering between three (3) and five (5) years.j. Non-Creditworthy WSPs - WSPs with potential to reach pre- creditworthy status in the medium-term, based on relevant financial and operational indicators set by the Oversight Committee. k. Pre-Creditworthy WSPs - WSPs which are not likely to become creditworthy in the medium-term due to performance issues but can demonstrate the potential for creditworthiness in the long-term, as may be determined based on relevant financial and operational indicators set by the Oversight Committee. l. Private Financial Institutions (PFIs) - private entities which are primarily organized for the purpose of extending credit facilities to consumers and to industrial or agricultural enterprises. Financing institutions other than government financial institutions. These include universal and commercial banks. m. Semi-Creditworthy WSPs - WSPs with the demonstrated ability to achieve creditworthiness in the short-term, based on relevant financial and operational indicators set by the Oversight Committee, but either lack the full criteria for creditworthiness or do not meet the criteria consistently. n. Short Term - period covering one year (1) to less than three (3) years. o. Technical Assistance - includes feasibility study, detailed engineering design, review of feasibility study and engineering design, preparation of work program, construction supervision, start-up operations, operations and maintenance assistance, rehabilitation of dilapidated systems, well drilling and construction of new wells, rehabilitation and repair of old wells and emergency repair of water supply system. Financing for technical assistance involving pre-feasibility or feasibility studies, project identification, sector survey, institution building activities including training, shall be charged against beneficiaries unless grants are available for the purpose. On the other hand consultancy/advisory services related to construction activities, including detailed engineering shall be considered as part of the project capital cost and may be financed by the project loan. p. Value Threshold - the level at which LWUA may grant project-related technical assistance for free to the PCW and NCW WSPs without affecting LWUA's viability. This will be determined by the LWUA on a yearly basis depending on LWUA's capability to absorb such additional cost. q. Water Service Providers (WSPs) - local water utilities such as WDs, LGU-run water utilities, rural waterworks and sanitation associations (RWSAs), and barangay waterworks and sanitation associations (BWSAs), regardless of location. SECTION 5. Responsibilities - The implementation of the recommended reformsrequires that LWUA as the focal government agency for financing and institutional development of local WDs, focuses its objectives and rationalizes its operations. Accordingly, the rationalization of LWUAs organizational structure, operation and refocusing of its objectives, and the implementation of the reforms in the financing policies for the water supply and sewerage sector, as defined in Section 2 of these IRR, require close policy coordination among the concerned government agencies. 5.1 Local Water Utilities Administration LWUA, subject to applicable laws and regulations, shall review its organizational structure and internal polices and programs, rationalize its operations and refocus its objectives to include other WSPs, whenever feasible or applicable, to facilitate implementation of and conform with the policies enunciated in EO 279. Further, LWUA shall conduct its operations in a transparent, efficient and effective manner. LWUA shall constitute and designate from its current organization set- up, a Water Development Group (WDG), a Water Development Financier (WDF) and a Technical Assistance Group (TAG), or similar structures, with functions and responsibilities as follows: 5.1.A Water Development Group (WDG) WDG shall have the following responsibilities: a) It shall be primarily charged with the continuation of LWUA's current institutional development services aimed at graduating WSPs, as well as the classification of WSPs. b) It shall classify the WSPs into either creditworthy, semi-creditworthy, pre-creditworthy or non-creditworthy for the purpose of determining the appropriate sources of financing. WSPs initially classified by WDG as creditworthy and/or non-creditworthy shall be subject to further review by the Oversight Committee pursuant to Section 5.2(b) of these IRR. LWUA shall initially cover the classification and graduation plan and initiatives of WDs. It may also cover other WSPs as deemed applicable or feasible. To facilitate the classification of the WDs, LWUA shall prepare the criteria for classification and submit the same to the Oversight Committee for review within 30 days upon effectivity of EO 279. The criteria shall consider: i) financial indicators such as current ratio, debt service ratio, debt/equity ratio, profit margin ratio and cash flow ratio; andii) operational indicators such as collection efficiency, non-revenue water and service connections/staff. LWUA shall closely coordinate with the GFIs in determining the criteria for classification. The classification of WDs shall be duly approved by the LWUA Administrator for submission to the Oversight Committee for review within 90 days upon completion of review of classification criteria by the OC. For the initial classification, WDs have to meet the criteria for three (3) consecutive years to be considered creditworthy. WDs classified as semi-creditworthy, pre- creditworthy and non-creditworthy shall be subject to periodic review by WDG at least once every three (3) years for purposes of reclassification. In like manner, subsequent classification shall require three (3) years consistent favorable evaluation. At their own instance, WDs may request the WDG for an annual reclassification review. Any changes in the classification should be submitted to the Oversight Committee. Lending to WDs initially classified as creditworthy shall be governed by Section 9 (b) of these IRR. c) It shall develop a graduation plan for non-creditworthy, pre-creditworthy and semi-creditworthy WSPs based on the following graduation initiatives: i) Cost Recovery Tariff Initiatives - these are initiatives aimed at achieving widespread full cost recovery tariffs in the long-term. The initiatives shall include the inventory of non-creditworthy, semi-creditworthy and pre-creditworthy WSPs to determine the degree to which tariffs are sufficient to accumulate at least a minimal reserve for collateral or counterpart equity. In addition, should the LGUs invest in WSPs, they should be allowed recovery of and some minimal return on their investment. ii) Amalgamation and Private Sector Participation Initiatives - these are initiatives aimed at achieving economies of scale and efficiency of service through the use of identified amalgamation and private sector participation techniques based on technical, geographical, economic and other indicators. LWUA shall formulate within 180 days upon effectivity of these IRR, the necessary guidelines to be observed by the amalgamated WSPs during the transition period. Among other things, the guidelines shall address the a) incentives for amalgamation, b) mechanics of amalgamation, c) restructuring of the Board of Directors and officers of the amalgamated WSPs with respect but not limited to, tenure of office and surviving positions, and d) controlling WSPs taking into account considerations such as the size, financial condition and the location of the participating WSPs. iii) Management Structure and Governance - These initiatives pertain to institutional improvements within the WSPs' structure leading to greater accountability and improved service.iv) LGU/WSP Resource Coordination for Credit Enhancement - this refers to the pooling of resources between semi-creditworthy and/or pre-creditworthy and/or non- creditworthy WSPs and the relevant LGUs in their service areas to finance water supply and sewerage projects or create the collateral needed to borrow from GFIs and PFIs. To allow LGU recovery and some minimal return on its investments in the WSPs pursuant to (c) (i) and (c) (iv) of this Section, LWUA shall formulate benchmarks for LGU sharing in the earnings of the WSPs in coordination with MFC and the DOF within 180 days upon effectivity of these IRR. v) Education - refers to communication and information initiatives on the benefits of graduation initiatives including cost recovery tariffs, amalgamation, private sector participation and LGU/WSP resource coordination. vi) Technical Assistance to non-creditworthy and pre-creditworthy WSPs - refers to technical assistance to support graduation initiatives which may be given with or without charge within the value threshold that may be determined by LWUA-WDG. LWUA-WDG shall monitor the implementation of the graduation plan and evaluate the effectiveness of the graduation initiatives undertaken by the semi-creditworthy, pre-creditworthy and non-creditworthy WSPs. d) The LWUA-WDG shall prepare and submit quarterly reports on its activities to the Oversight Committee and DOF. For purposes of Section 5.1 A (c) of these IRR and Sec. 12 of EO 279, LWUA shall submit to the Oversight Committee, guidelines to encourage graduation as approved by the LWUA Board of Trustees within 180 days upon effectivity of these IRR. Said guidelines shall include incentives such as, but not limited to greater flexibility in WD's operation as WD graduates from one stage to the next, and enjoyment of LWUA's streamlined waiver procedures. 5.1.B Water Development Financier (WDF) WDF shall have the following responsibilities: a. It shall be primarily tasked to enhance and/or strengthen LWUA's lending functions and evaluate the applications for financial assistance. b. Re-orientation Towards Banking Principles - LWUA, through the WDF, shall enhance and/or strengthen its mandate as a specialized lending agency under PD 198 as amended by providing financing particularly to non-creditworthy, pre-creditworthy and semi-creditworthy WDs, grounded on sound development banking principles. To this effect, LWUA shall adopt development banking principles, which cater to the financing needs of WSPs and shall develop its own procedures for the monitoring of its loan portfolio. LWUA shall develop lending policies and guidelines in pursuit of the policies and principles espoused underEO 279 in coordination with the MFC and GFIs within 90 days from its effectivity and submit the same to the Oversight Committee. The new lending policies and guidelines shall only apply to new loans to be approved by LWUA for prospective WD-borrowers. c. Strengthening of Collection Function - In the exercise of its lending functions, LWUA shall also strengthen its collection function from WDs as well as enhance its payment of loans to LWUA creditors. To this effect, all collections arising from LWUA's receivables shall constitute a special fund to be apportioned to debt servicing of LWUA loans, additional funding necessary to support the LWUA's graduation and technical assistance functions under the WDG and TAG. d. Segregation of LWUA Loan Portfolios - For purposes of identification and administrative efficiency, LWUA shall maintain separate accounting, payment and collection systems for existing loans and loans to be granted henceforth pursuant to the reforms instituted under EO 279. 5.1.C Technical Assistance Group (TAG) TAG shall have the following responsibilities: a. It shall continue LWUA's program of providing technical assistance to WSPs, in accordance with the proceeding sections. b. It shall extend project-related technical assistance to GFIs, PFIs and creditworthy WSPs on a competitive basis, consistent with the applicable laws, rules and regulations on government procurement. c. Above a certain value threshold, which threshold shall be determined by LWUA in accordance with the definition provided for under Section 4 of these IRR, TAG shall extend project-related technical assistance to semi-creditworthy WSPs on a competitive basis, consistent with applicable laws, rules and regulations on government procurement. d. It shall extend project-related assistance to non-creditworthy and pre- creditworthy WSPs funded by the LWUA-WDF. This assistance may be with or without charge within a certain value threshold to be determined by LWUA on a yearly basis. 5.1.D Within 30 days from the effectivity of EO 279, LWUA shall review its current structure and submit its rationalized plan to the Oversight Committee, consistent with the policy reforms enunciated under the said EO. The Oversight Committee shall evaluate the rationalization plan within 30 days from receipt. 5.1.E LWUA with the endorsement of the Oversight Committee, shall submit the rationalization plan to the President for final approval not later than 75 days upon the effectivity of the EO.a. Upon approval by the President of the reforms in the water supply and sewerage sector, including the rationalized organization and staffing structure of LWUA, an EO shall be issued attaching LWUA to DOF, for policy and program coordination. 5.2 Oversight Committee (OC) The Oversight Committee constituted pursuant to Section 3 of EO 279 shall coordinate and oversee the implementation of the reforms in the financing and graduation policies in the water supply and sewerage sector. In addition to the function explicitly taken from the EO, the OC shall: a. Review the criteria for the classification of WSPs, recommended by the LWUA within 30 days upon submission by LWUA; b. Review the classification of WSPs prepared by LWUA pursuant to Sec. 9 A(b) EO 279, duly certified by the LWUA Administrator that the same is in accordance with the criteria presented to and reviewed by the Oversight Committee pursuant to Sec. 5 (d) of EO 279. The Oversight Committee shall review the same within 60 days upon submission by LWUA. The Oversight Committee may subject the classification of the WSP to audit; Immediate actions include, among others, the review of LWUA Charter as provided under Section 5 of EO 279 including the classification of water districts, graduation of WSPs, reform in LWUA financial waiver process and compliance of LWUA to provisions of EO 279 and of these IRR within the specified timelines. On the other hand, medium term actions include the determination of appropriate incentives for GFIs and PFIs to lend to WSPs. All functions of the Oversight Committee, which are continuing in nature, shall be performed by the DOF, as provided for under Section 15 of EO 279. SECTION 6. Attachment - Upon approval by the President of the reforms in the water supply and sewerage sector, including the rationalized organization structure and staffing pattern of LWUA, LWUA shall then be attached to the DOF. Pursuant to Section 51 of PD 198, at least three (3) of the trustees must be employees of the National Government (NG). NG representatives must be at least Director level. DOF shall always be represented in the LWUA Board of Trustees. SECTION 7. Expenses - Members of the Oversight Committee and its Technical Secretariat shall be entitled to receive honoraria and/or reimbursement of expenses as may be allowed subject to availability of funds and prevailing rules and regulations. FINANCING POLICIESSECTION 8. Responsibility of LGUs - In line with the principle of devolution of the provision of basic services under the Local Government Code, LGUs shall be encouraged to provide delivery of water supply and sewerage services through but not limited to, investments in, or loans to WSPs. LGUs shall as a general policy, be financially and operationally responsible for the WSPs, excluding WDs and RWSAs, within their respective jurisdictions. SECTION 9. Source of Financing - The sources of financing for the water supply and sewerage sector shall be as follows: a. Creditworthy WSPs shall be eligible to source financing at commercial lending rates from GFIs and PFIs. Pursuant thereto, LWUA, with respect to creditworthy WDs shall enhance and streamline its waiver procedures to effect the reform objectives/policies enunciated under EO 279. However, LWUA shall work out an arrangement to GFIs/PFIs to ensure repayment of LWUA loan to WSP. GFIs shall strengthen their skills base and develop lending programs specially tailored to the needs of the water supply and sewerage sector; b. Creditworthy WDs may be eligible for financing from LWUA in case no funds are available from other sources, subject to a prioritization criteria giving preference to NCW up to SCW WDs/WSPs, availability of funds and provided that these WDs undertake graduation initiatives such as pooling of resources, amalgamation, among others with the end objective of accessing financing from GFIs/PFIs and sources other than LWUA; c. Semi-creditworthy (SCW) WDs shall be eligible to source concessional project financing as grants from donor agencies, financial assistance made available through representative of the District, LGU financial assistance packages or financing from other donors made available and are coursed through the LWUA-WDF. Said WSPs shall be re-oriented towards meeting the lending criteria of GFIs and PFIs to qualify them for eventual financing in the medium term whenever possible; d. Pre-creditworthy (PCW) WDs shall be eligible to source grants from donors and deep concessional financing from the LWUA-WDF. e. Non-creditworthy (NCW) WDs shall continue to be eligible for financing under the LWUA-WDF. However, LGUs are hereby encouraged to provide financial and operational support for such WDs and other WSPs within their respective jurisdictions. DILG and MFC shall provide the necessary technical and financial support within their respective mandates; f. Whenever concessionary loan/grant funds are available from the NG and other sources, the LWUA shall allocate the said funds to the SCW, PCW and NCW and WDs which have the potential to demonstrate increased viability; andg. WSPs, including eligible WDs, can access financing from the GFIs, PFIs, MFC, and LGUs, whenever possible and shall be consistent with the provisions of these IRR. DILG shall, within its mandate and existing programs, pursue an active campaign program to implement policies in the EO which concern the LGU. SECTION 10. Role of Financial Institution - The classification of WSPs shall merely be a determinant of eligibility for the various sources of financing, and shall not in any way be construed as an outright guarantee of actual financing from the designated source. SECTION 11. Repealing Clause - All Circulars or Resolutions or parts thereof, which are inconsistent with these IRR, are hereby repealed or modified accordingly. SECTION 12. Effectivity - These IRR shall take effect fifteen (15) days after its publication in the Official Gazette or in a newspaper of general circulation. Adopted: 16 July 2004 (SGD.) JUANITA D. AMATONG (SGD.) ROMULO L. NERI National Economic and Development Secretary of Finance Authority Chairman Director-General Vice Chairman (SGD.) EMILIA T. BONCODIN (SGD.) JOSE D. LINA, JR. Department of Budget and Department of Interior & Local Management Secretary Government Member Secretary Member (SGD.) GAMALIEL A. CORDOBA (SGD.) LORENZO H. JAMORA Office of the President Local Water Utilities Administration Deputy Executive Secretary Administrator Member Member Source: Supreme Court E-Library This page was dynamically generated by the E-Library Content Management System (E-LibCMS)