Water Champion

Water Champions initiate or implement water reforms in their chosen field, and are directly involved in improving the water situation in their respective countries.

Antonio de Vera: Building Viable Water Utilities for the Country
October 2009

By Maria Christina Dueñas Knowledge Management Officer ABOUT THE CHAMPION
Mr. Antonio de Vera is the chairperson of the Subic Bay Water Regulatory Board (SBWRB), which regulates the private utility Subicwater. He is concurrently ADB’s consultant for a technical assistance grant on small scale water networks. Mr. de Vera spent 25 years with the Local Water Utilities Administration (LWUA), a specialized lending and regulatory institution that oversees the development of water districts in the Philippines. Mr. de Vera rose from a project engineer, to Corporate Planning Manager, to Administrator and finally Vice-Chairman of the Board. He left LWUA in 2000. LWUA’s regular functions include tariff review and promulgation of standards for operational efficiency. For the former, LWUA reviews financial operations, plus business and technical plans, and conducts public hearings and operational audits. For the latter, LWUA was the first in the country to set standards for non-revenue water, tariffs, materials specifications, and more. LWUA even fixes the per diems of Board members to ensure prudent spending. His stint at LWUA enabled Mr. de Vera to see the ins and outs of water utility operations from all angles—as lender, operator, and regulator. Mr. de Vera has also served as specialist or consultant for a variety of projects undertaken by the National Water Resources Board, National Anti-Poverty Commission, Subic Bay Metropolitan Authority, Clark Development Authority, World Bank, Japan Bank for International Cooperation, and more. His professional experience has enabled Mr. de Vera to develop his expertise in the implementation of water projects and its entire project cycle, in institutional development and assessment, and regulation of water institutions.

What is the difference between regulating water districts and private utilities? Philippine water utilities generally fall into the following categories: community-based utilities 1 regulated by the National Water Resources Board (NWRB), water districts 2 regulated by the Local Water Utilities Administration (LWUA), public utilities regulated by local governments 3 , and private concessionaires regulated by contract or by the NWRB. I work with water districts and private utilities. Between the two, I’d say it is easier to regulate water districts because there are many agencies involved in the regulation, i.e. Department of Finance (DOF), Commission on Audit (COA), etc. Some might say this is a case of too many cooks spoiling the broth, but I look at it as lightening the load. Water districts are subject to government laws. If there are many government agencies serving as watchdogs for these laws, then the potential for corruption and inefficiencies is significantly reduced. For instance, when COA says that the water district’s salary levels or operating expenses are too high, they can do something about it. You can’t do that with private utilities, even if you think their executive’s housing allowance alone could easily pay for the salary of several supporting staff. In general, private utilities are also harder to regulate because they may not always disclose the data you need (e.g. salary levels, financial statements), you cannot approve their budgets, and they may have monopoly partners that call the shots.

What challenges have you encountered in regulating water districts and private utilities? For water districts, you can always bank on political pressure not to raise tariffs. In the late 70s, LWUA was even suspended by the Office of the President for granting a tariff increase higher than 60%. A law has now been passed specifying that tariff increases cannot go beyond 60%. Balancing opposing requests is also a constant challenge. What do you do when the water district wants reduced loan terms and the DOF wants increased loan terms? Taking over non-performing water districts also has its own set of challenges. On a good day, the water districts would request us to take over their flagging operations. On a really bad day, I’ve dealt with threats and guns. LWUA has, on occasion, ended up mounting covert operations involving the Philippine Army or Marines. Thankfully, around 85% of takeovers are from requests. As for private utilities, specifically Subicwater, having the franchise agreement amended is a major headache. The 1997 franchise agreement almost leaves no room for regulation. But we have succeeded in pushing for amendments to include provisions on performance benchmarking, and prudent and efficient expenditures. We are now in the middle of negotiating a second amendment to reduce the 22.4% return on equity (ROE) specified in the agreement. As it now stands, if this ROE is not given to Subicwater, they can declare a breach of contract, and SBMA will have to pay millions of pesos.

What future challenges do you foresee for both? For one, we can always expect tariff increases given the spiraling costs of materials and operations. The current water sources are also increasingly under pressure from the growing population and conflicting demands of users. In 10 years or so, Subic’s water source will be in crisis. Their potential source is in Dinalupihan, Bataan, a 40-minute drive from the city, but the local government has yet to give SBMA water rights. All over the country, this scenario is taking place—Baguio, Bulacan, Cebu, Dagupan, and other cities or provinces running out of water. It’s really not hard to imagine water wars taking place because of this. I don’t think we’ll ever get away from the bureaucratic and political tariff review process. And water districts have to watch out for local governments who see big revenues in acquiring a viable utility. This should be fine in principle, except that viable water districts acquired by local governments often end up losing their viability. How much does politics affect the regulatory exercise? It really depends on the politicians in the area. If you get development-oriented politicians, then there is no problem. But one has to understand that tariff increases affect the public, and politicians will always intervene the moment a segment of the public complains. What have been the significant contributions of LWUA and SBWRB? LWUA has now formed 460 operation water districts, serving 13 million rural Filipinos. Almost all these water districts are viable. In fact, there is now competition among lending agencies as to which one would lend to them. Some of the viable water districts are also being eyed by private companies. We also started the practice of benchmarking water utilities in the country, which resulted in professionalizing, and increasing efficiencies of, water operations in the countryside. But I think our most significant contribution is in making people aware of their financial responsibility towards the utility. People used to think of water as being God-given and therefore free. Over the years, we’ve helped change that mindset. As for the Subic Bay Water Regulatory Board (SBWRB), the first change in the franchise agreement was very significant. Our impact is also directly felt by the customers we survey in terms of their satisfaction with the utility. We visit 15 or so households each month, and ask them about Subicwater’s services. If we get a negative response, we directly call Subicwater. Not only does this keep the utility on its toes, but it also lets the people know that they have somewhere to go to in case problems arise. Deciding on tariff adjustments is a critical aspect of regulation. What main factor do you consider when making decisions? For one, you have to check if it is necessary and justifiable. And you have to assess the perceived effect on the people vis-a-vis their incomes. As a rule of thumb, we benchmark against the energy tariff—if people will be paying more for water than electricity, something must be off.

How would you gauge consumers’ enlightenment in the case of tariff adjustments? I’d say they are and they aren’t. I know many understand the need for tariff adjustments because we generally have 98% collection efficiency among water districts. Too, not many district managers are being targeted for foul play, which was somewhat normal in the 70’s or 80’s. But it is always the unenlightened who are the noisiest during public hearings so we know there’s still a fair number of them out there. Have LWUA and SBWRB protected consumers against poor services or monopolistic abuses? To a great extent, LWUA has, as evidenced by high service levels and viable operations among water districts. But LWUA still needs to improve its benchmarking for operational standards. To date, LWUA is the only agency with data on all the water districts, but it hasn’t given enough priority to updating and expanding that data in recent years. As for SBWRB, we are contract regulators. If the contract is skewed to one side, what can we do? But I would say that because of SBWRB, Subicwater’s services have improved over the years. In fact, these days, most complaints are about billing and leaks, not anymore about water quality or pressure. Have these regulatory bodies successfully protected the utilities against government intervention? It is not always easy in the case of LWUA because it is a government agency, and has to work with other government agencies. In conflicts with local governments, LWUA just has its Administrator, whereas the local governments can get the protection of the Department of the Interior and Local Government’s Secretary. It is easier with SBWRB because the Board is composed of 2 representatives from the Olongapo City government, 2 representatives from the SBMA and an independent chairperson. Government has no need to intervene because their views are ably voiced by the city representatives. If you have to choose between independence and credibility as a trait of a regulatory body, which would you choose? You need both but I would bat for credibility. If a regulating body has credibility, few will question its judgment, and it will have more independence in the long run. An independent, but not credible, body is open to questions and criticisms from all sides, and is deemed fair game by the media. For any city or country planning to establish a regulatory body, what should be foremost in their minds? It is a complex undertaking but the city or country should first think of three things. First, the people. How will they choose the right person for the job? The person should have a fixed term to isolate him from the political pressures that are bound to come with his decisions.

Second, the resources. Where will the budget come from, and how much will be needed? In Subic’s case, SubicWater gives funds directly to the Subic Bay Metropolitan Authority (SBMA), and the latter transfers the needed funds to the SBWRB. The regulatee must never be perceived as giving the budget directly to the regulator; that’s a sure way of losing credibility. Third, the structural requirements. Enabling laws, review process, appeals process, reporting authorities—all these must be defined in advance to set the parameters for the regulating body’s operations. What three basic things must each regulator know in order to do his job well? First, you have to do what you think is right. In whatever decision you make, someone will always say you are not fair or right. Balancing conflicting interests within a political climate is not easy but must be made. Welcome all opinions as they will help you enlarge your solution set. Besides, utility regulators and the public have their own criteria for judgment—it is useful for regulators to know what the public’s are. Secondly, keep yourself abreast of new developments in the sector, and just keep on educating yourself. It is hard to regulate someone who is more knowledgeable than you. Finally, even if you were drinking buddies with the utility prior to your appointment as a regulator, you can no longer afford to be seen drinking with them. That goes straight to your credibility level.

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provincial, municipal or city local council. Water districts differ from LGU-run utilities in that they are autonomous—they source out their own funding and service their debts from revenues. 3 In utilities run by the local governments, the revenues (if there are any) go back to the treasury, and O&M costs are borne by the local government, including salaries of staff.

1 Community-based/beneficiary organizations are technically private entities. They are autonomous but not run along commercial principles. 2 Water districts are quasi-government entities. They are run like commercial businesses but are government-owned and controlled. Water districts are created by virtue of a resolution by the

*This article was first published online at ADB's Water for All website in April 2009: http://www.adb.org/Water/Champions/2009/Lourdes-Fernando.asp. The Water Champions series was developed to showcase individual leadership and initiative in implementing water sector reforms and good practices in Asia and the Pacific. The champions, representing ADB’s developing member countries, are directly involved in improving the water situation in their respective countries or communities. The series is regularly featured in ADB’s Water for All News, which covers water sector developments in the Asia and Pacific region.