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Mid Term Report RETA 6498: Knowledge and Innovation Support for ADB’s Water Financing Program – Pilot

Mid Term Report

RETA 6498: Knowledge and Innovation Support for ADB’s Water Financing Program – Pilot and Demonstration Activity for Philippines: Assessing and Developing Models for Financing Small Scale Water Service Providers

Mid Term Report RETA 6498: Knowledge and Innovation Support for ADB’s Water Financing Program – Pilot

July 2009

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

Table of Contents

Part I: Introduction


Part II. Project Objectives


PART III: Understanding The Current Status Of Small Water Service Providers Vis A Vis The

Philippine Water Sector



Part IV. Evolving Definitions And Role Of Small Water Service Providers


Part V. Financing Small Water Service Providers


Part VI. Exploring Potential SSWSP-Lenders/Partners


Part VII. Understanding the Needs



Part VIII: Preliminary Schemes Under Consideration:








in the Water Program


Annex B: Subsidies Provided Under On-going Financing Programs for WSS Development




LWUA Financing Windows


Annex D. A “Bankability” Checklist for Small Scale Water Providers


Part I: Introduction

A. Background

  • 1. The Philippines is one of the countries that have pledged to halve the proportion of world’s population without access to safe water and sanitation by 2015. IN fact, it even joined the ASEAN countries in pledging to meet the water and sanitation goals by 2010 in order for the country to meet its other MDG goals. The Government of the Philippines has established a target to achieve 87% water service connection by 2015. To date, it is estimated that there are still about 18 million people in the Philippines that lack access to safe drinking water.

  • 2. According to the United Nations’ WHO and UNICEF Joint Monitoring Program, urban access to improved drinking water sources declined from 95% in 1990 to only 87% in 2004. However, rural coverage increased slightly from 80% in 1990 to 82% in 2004. The National Statistics Office reports that only about 80% of the population has access to improved water supply in 2004. The National Statistics and Coordination Board Report on the MDGs estimate about 45% of those with improved water service enjoy piped connections, or Level II water services. These confusion in numbers only reflect the lack of coordination in the sector, even at the level of country data generation.

  • 3. Recent reports from the Joint Monitoring Program of the WHO and UNICEF express optimism about the Philippines achieving its MDG water goals. However, many water experts have voiced serious dissenting concerns that the Philippines’ MDG goals may not be achieved due to several factors including:

Chronic underinvestment for water supply in the Philippines for systems maintenance, and expansion. Actual annual investments over the last decade fluctuated between Php 3 to Php 4 billion. This is considerably below the estimated requirement of Php 6 to 10 billion annually. The government’s limited capital expenditure in the water supply sector primarily reflects low priority accorded to water supply provision and its role in development. It is highly unlikely that actual government investment for water supply in the next years will increase enough to reach the estimated requirement.

General inefficiencies in sector management. There is serious fragmentation and lack of leadership in the water sector that will effectively and efficiently organize sustainable service provision for the unserved and the underserved through more efficient and effective service providers. This includes addressing issues relating to economic and resource regulation, financing, and institutional strengthening, capacity development and the key areas of the depletion and pollution of water resources and limited access to safe drinking water and piped water especially for the poorest of the poor. Furthermore, issues relating to graft and corruption also beset the sector.

  • 4. Water demand is expected to increase every year primarily due to population growth. The population of the Philippines in 2006 registered at 86,972,500 with a growth rate of 2.3 % annually. It is estimated that by 2010 total population will be close to 94 million and approximately 103 million in 2015. The 20% unserved population are mostly the poor and marginalized communities located in hard to reach areas, suburbs, outskirts and towns without a water supply system.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

  • 5. Despite the achievements in terms of water supply coverage, one hundred percent access to safe water may not be possible within the next decade. The gap in service delivery even with the presence of large scale water providers is experienced mostly in unregulated communities (those living in highly vulnerable areas) and areas of informal settlements. Surveys indicate that these residents rely on small water providers (SWSPs).

  • 6. SWSPs play a vital role in meeting the water and sanitation needs of the country. The role of small water service providers (SWSPs) in the provision of water supply services in the Philippines particularly in urban poor communities has been recognized albeit with much debate. There is still a big gap in terms of information related to SWSPs in the Philippines. It is only recently that there has been a growing interest to define, study and recognize the contribution of SWSPs in relation to improving water supply coverage particularly in urban cities.

  • 7. Recent developments in the Philippine water sector now recognize the role of SSWSPs Regulators such as the National Water Resources Board and the MWSS Regulatory Office and financing institutions such as rural banks and other commercial banks are now seeking better ways to sustain their participation in WATSAN service delivery. The SWSPs have even organized themselves into an association called the National Water and Sanitation Association of the Philippines (NAWASA, Inc) for mutual support and to have a common voice in policy advocacy.

  • 8. Despite the vital role of SWSPs in filling in gap in water service provision in many municipalities especially in poor urban and peri-urban areas, there is an absence of an institutional and legal framework regarding their formal participation in water service provision, which significantly limits their access to capital and financial assistance and financing whether from the government, government financial institutions, from private commercial banks and from other formal lending institutions.

  • 9. International experience shows that SWSPs, in comparison with large water utilities, can be more dynamic in filling the gap between supply and demand and have more incentives to grow and expand their services. Be they vendors, tanker truck operators, or managers of small-scale piped distribution networks, SWSPs provide a competitive and appropriate service to households that have no access to utility connection. This is evident in Africa, Asia, and Latin America where SWSPs serve large urban populations.

10. Many literature suggests that profit orientation strengthens SWSPs. Sustained and motivated by profits, SWSPs may be longer lasting and more expansionary than other not-for-profit providers such as cooperatives, NGOs and community based.(Conan, 2004).

11. Recently, many community-based water providers that are traditionally considered not for profit are now generating enough resources to operate and maintain the system (at the very least), while keeping a surplus of profits to cover expansion, upgrades or replacement of depreciated systems.

  • 12. For purposes of this study, the focus will be on SWSPs providing piped water connections. They have more compelling reasons to invest and protect their investments. They collectively comprise a new market for further investments as they strive to improve their service coverage. This would include the community based small water service providers who are serious in sustaining an efficient water service delivery business.

  • 13. SWSPs are here to stay. They provide a valuable service to the society at large. It is a viable solution to meet the urgent needs of the people who are unserved or underserved.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

The lack of institutional or legal framework regarding their formal participation in water service provision and the lack of access to financing needs to be addressed. They are unable to access financing assistance from the government nor from commercial banks and other formal lending institutions and this has affected their operations. But inspite of these weaknesses, they continue to thrive. If given the opportunity, they can be expected to perform more efficiently, effectively and sustainably in the future!

Part II. Project Objectives

14. It

is against these backdrop that the project on Developing Financing Models for SSWSPs in the Philippines was conceptualized. Specifically, the project aims to undertake the following:

  • a. Understand the current status of SWSPs vis a vis the Philippine water sector;

  • b. Address regulatory issues relating to the formal engagement of SWSPs;

  • c. Address the financing needs of SWSPs to allow them to expand and improve their services;

  • d. Explore the current competence of financial institutions regarding the water supply sector and SWSPs and establish how to assist these financial institutions to better understand and get comfortable with the credit risk of SWSPs; and

  • e. Establish a broad framework for suitable financing solution which facilitates partnership building between the government, SWSPS, donors and funding institutions.

Part III: Understanding The Current Status Of Small Water Service Providers Vis A Vis The Philippine Water Sector

National Government’s policy towards the water sector

15. Priority Strategies. The Medium Term Development Plan of the Philippines (2004-2010) outlines specific strategies for the provision of water supply to the entire country:

  • a. Provide potable water to the entire country by 2010, with priority given to at least 432 “waterless” municipalities 1 ;

  • b. Ensure that all barangays / municipalities that will be provided with water supply services have the corresponding sanitation facilities for proper disposal of wastewater/septage;

  • c. Continue to provide capacity building programs and technical assistance on water supply and sanitation planning, management and project implementation for all WSPs needing assistance;

1 “Waterless” municipalities are defined as those having less than 50% household coverage based on the 2004 National Statistics Office data.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

  • d. Develop technology options for water supply;

  • e. Promote private sector or public investment in the provision of water;

  • f. Conduct groundwater resources and vulnerability assessment covering 310 priority LGUs;

  • g. Monitor drinking water of selected poor communities;

  • h. Complete the groundwater resource inventory / assessment in major urban areas and surface water in rural areas, control extraction through moratorium / stringent requirement in the grant of water permits in water-deficient areas and complete registration of all water pumps, metering of water pumps, etc.

16. The MTPDP clearly indicates that the priority is to provide access to potable water to the whole country by 2010. It also states that additional investments –either from public or private sources must be promoted. A few months left to 2010, the country is still a far cry away from its MTPDP priorities.

Current Status of Water Supply Service Delivery by SWSPs

17. Water Supply coverage by small water service providers. In 2006, it was estimated that servicing 50% of the population reported to have access to safe water are various small scale water service providers that are either LGU managed, Rural water and Sanitation Associations (RWSA), Barangay Water and Sanitation Associations (BWSA), Subdivisions or Homeowner’s Associations, Cooperatives or private entrepreneurs. Out of this number, only a very small percentage are known and registered in various agencies such as thru the Cooperative Development Authority for water cooperatives, NWRB for private subdivisions and a few private entrepreneurs. Majority are known to be operating small piped network systems.

18. Estimating






Utilities. Out of the estimated 6,280 water service providers, about 95% may be small.






LGU Utility



Water District

















Estimates from the PWSSR , 2008


LWUA has classified 291 water districts (about 67% of the total number of water districts) as small. All the 200 water cooperatives registered with CDA are small and there is also on record an additional 400 multi-purpose cooperatives with water service delivery businesses. All the BWSAs and RWSAs are small. There are also a good number of private developers who operate on a number of small communities, villages and subdivisions. The only clear known and regulated ones are water districts, the cooperatives and a few private operators. The vast majority of LGU managed systems, RWSA and BWSA are not recorded or registered in any single agency. Some are registered either in the Securities and Exchange Commission, the Department of Trade

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

and Industry or even in the Bureau of Rural Workers under the Department of Labor and Employment. Some are not officially registered in any of the national agencies but operate under a business permit from the LGU.

Financing Policies, Issues and Concerns.

19. There are several financing policies that impact on the water sector. These were designed basically during the time when the sector has not yet included the SWSPs in the radar of service provision. Many of these are designed to cater primarily to water districts and are generally not too favorable for small water service providers.

  • a. National government- LGU Cost Sharing Policy that states that subprojects that are generally considered public enterprises which include among others Level III water supply systems will be subjected to the following loan, grant (from national government) and equity mix:

Box 1: NG-LGU Cost Sharing Policy


Municipalities and Provinces












1 st & 2 nd







3 rd & 4 th







5 th &6 th







Source: DOF, 2008

There are different policies for Level I and II water supply systems.

The above table shows that for cities , 1 st and 2 nd class municipalities, there is no loan or grants for Level III water supply systems, even if there are barangays within these areas that are in need of financing. This policy is applicable in the evaluation and processing of projects involving devolved activities. However, while there are some government agencies that observe this policy (such as the DOF and the DILG), there are some NGAs who disregard these policies in their projects.

  • b. Cost recovery through tariffs. It is the policy of the national government that tariffs should be approved on the basis of cost recovery. The water tariffs are the income base of water supply providers. Methodologies for tariff approval vary. Small water service providers regulated by the NWRB are allowed to have a 12% return on assets 2 . Water districts are regulated by LWUA using the cash flow methodology. LGU run systems are generally not regulated by an external regulatory body but they are generally using cash flow and other local considerations. However, political intervention often plays a role in the determination of the acceptable tariff for a community sometimes at the expense of the viability of the water utility. Many LGU run systems operate on a subsidized level. Cooperatives need a general assembly approval for their water rates.

2 This is mainly attributed to the Public Services Law (amended by RA 2677 of 1960) that puts a cap on return on investments.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

  • c. Executive Order 279. EO 279 (2004) provides the current financing framework for WSS development. Its principles serve as the basis for the rationalization of public resources for WSS development, viz:

Adoption of market-based lending (adoption of market oriented rates, and cost-based lending);

Promotion of private sector participation;

Provision of capacity building to improve creditworthiness of WSPs; and

Provision of incentives to promote graduation to creditworthiness status.

To operationalize the above principles, EO 279 mandates market segmentation. The above EO rationalizes investment requirements for WSS by segmenting water service providers (WSPs) based on their creditworthiness, and steering them to appropriate sources of financing. EO 279 prescribes that creditworthy (CW) WDs tap commercial financing from government and private banks at commercial rate, and the less CW ones be provided with concessional or grant financing. The latter is, however, transitional to support graduation programs that will eventually make the WSPs creditworthy; thus, ultimately shifting the sector’s financing to market- based sources.

The major objective of this promulgation is to redefine the allocation of limited financing resources in the development of water supply sector, that is, LWUA to less creditworthy water districts (semi-creditworthy, pre-creditworthy and non- creditworthy), while government financing institutions (GFIs) to creditworthy ones. Given the situation where LWUA's cost of capital is getting more expensive, providing concessional financing to less creditworthy water service providers (WSPs) may be a difficult proposition. LWUA generates 70% of its total revenues from Creditworthy and Semi Creditworthy WDs and if relegated to Less Creditworthy WDs, LWUA will lose its significant good payors in its revenue base and will weaken its future cash flows and profitability. This is the subject of LWUA’s opposition to the implementation of EO 279 and has resorted to the judicial courts to address this issue.

20. Subsidies in the Water Sector. WSS development in the Philippines has been subsidized by public resources (ODA and government funds). Subsidies are tucked in various WSS financing and investment programs implemented by the conduits (see Annex A for details of the programs). Annex B contains a review of the actual practice in the allocation of public resources for the WSS sector.

The actual impact of these grants and subsidies in the absence of concrete studies remains to be seen. Clearly, they have contributed to WSS development and have expanded water services, albeit at a very slow rate. It is postulated, however, that these subsidies do not necessarily reach the intended beneficiaries. While concessional loans are used to encourage investments in WSS, these have not been used to meet national water goals and objectives including expanding services to poor communities which are deserving of subsidies.

21. The LGU Financing Framework. The Department of Finance (DOF) spearheaded the formulation of this framework in 1996. The goal of the LGU Financing Framework is to graduate the more credit worthy LGUs to private sources of capital which remain largely untapped. The Municipal Development Fund Office (MDFO) was created in 2007 to

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

channel significant amounts of ODA to LGUs either on its own or in partnership with other national government agencies. The MDFO have provided windows for LGU water projects, among others. The LGU Financing Framework have recommended to the LGUs to increase their use of build-operate-transfer (BOT) arrangements, improve their capacity to raise their own revenues and promote access of LGUs to private banks, among others.

Regulatory Policies, Issues and Concerns:

22. Non-exclusive franchises of water service providers. The Supreme Court Decision declaring that the exclusive franchise of water districts of Water Districts is unconstitutional has opened a slew of opportunities for the involvement of the private sector and other types of water service providers. This competitive environment also raises concerns for water providers that have traditionally fallen short in their service requirements and may have to upgrade itself to compete.

23. Regulation of Small Water Service Providers. The National Water Resources Board is mandated by law to regulate the operations of all non-water districts. This includes both economic and resource regulation. This means that all small water utilities are supposedly regulated by the NWRB. However, the reality is that only a small fraction of service providers are actually within the radar of the regulators.


Type of Utility Operators

No. of Utility Operators

Subdivision Developers


Homeowners Association




Water Cooperative














SOURCE: NWRB March 2009

24. Regulating those working in partnership with main utilities. The NWRB very recently issued in June 2009 the “Guidelines for Small Water Service Providers working in Partnership with Main Utilities.” These guidelines is a milestone document for small water service providers who have been working without formal contracts or faulty agreements. The document spells out the minimum conditions for establishing a bulk water arrangement between a main utility provider (referring to either the MWSS concessioners or the water districts). This means that for future agreements with main utilities, terms and conditions will more or less be fair and just between the SSWP and the main providers. Duration of operation, for instance will clarify the level of investments that the SSWP can put in the project. Furthermore, turn-over and buy-out arrangements would also be in place.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

25. Regulating Water Cooperatives. The NWRB and the Cooperative Development Authority (CDA) have signed an agreement in October 2008 that effectively puts in place relaxed regulatory requirements for water cooperatives thru the CDA. The CDA will also provide capacity development support especially in the areas setting up the 5 year tariff methodology among the cooperatives and in performance monitoring.

26. Regulating LGU run systems, RWSAs and BWSAs. The LGUs self-regulate and discussions are now going on with NWRB on how to setup performance monitoring systems. LGUs are also being asked to ring-fence their water accounts as part of better water governance. RWSAs and BWSAs are not generally regulated but many are now formalizaing their operations by getting a Certificate of Public Convenience ( CPC) and water permits from the NWRB.

Part IV. Evolving Definitions Providers


Role Of

Small Water


27. There are different ways the Small Water Service Providers are defined. The experiences with SWSPs in water service delivery show an evolving definition. The literature related to its definition considers the following: coverage or household connection, target population, tariff rates, management systems, asset size and systems operation and performance.

28. The ADB Small Piped Network toolkit definition: The SPWN is the delivery of piped water services by a water provider, using materials conforming to the main utility’s standards, operated legally to bring affordable, safe, and reliable water to a community until the main utility is able to reach these consumers directly.

29. The Small Water Utilities Improvement and Financing (SWIF) Project of the WSP-World Bank categorically defined as small those with 5000 or less connections, taking into consideration the categorization done by LWUA 3

30. Small in Scale: SWSP infrastructure or installation does not cover the whole city of local government unit but only a part of it. The business has a staff of less than one hundred and most of the time it is managed by the owner himself/herself.

Small water utilities may be a benchmark in seeking to define SWSPs. The Small Towns Water Utilities Data Book describes small water utilities as those serving lower than 5,000 connections especially in small settlements, whether urban, peri- urban or rural. The same study notes that the average coverage of small water utilities is 62.5%; water availability varies from 24 hours for small water districts to only less than 5 hours for other small water utilities like cooperatives. Tariff rates range from above 20 pesos to as low as 3 pesos while connection fee is an average of Php 2,500.

A study of 447 water providers operating in Cebu City, are all classified as small- scale. The number of households served and the technical innovations undertaken

3 LWUA developed a point-system to identify whether a utility is small, average, medium, big, large and very large. Factors considered in the initial categorization of a water district include gross receipts, number of personnel, number of service connections, nature of operation, total fixed assets and net income before depreciation and interest. Corresponding weights are then applied to these factors to derive the utility’s’ size.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

are relatively minimal. Similarly, capital investments are low and the types of services offered are limited and diverse.

  • 31. Small in Asset Size: The Republic Act 9501 Magna Carta for MSMEs categorize enterprises as micro, small and medium sized based on asset size. MSMEs shall be defined as any business activity or enterprise engaged in industry, agribusiness and/or services, whether single proprietorship, cooperative, partnership or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, must have value falling under the following categories:

Box 3: Categories of MSMEs based asset size under RA 9501 4


not more than



P3,000,001 -



P15,000,001 -


32. Other definitions: The Development Bank of the Philippines (DBP) defines small and medium enterprises based on their asset size. Such as the following:

Micro: Php 150,000 to Php 1.4M


Php 1.5 M to 15 M

Medium: Php 15 M and above

The World Bank Group defines micro or small enterprise as those with fewer than 50 employees with total assets up to US$ 3 million.

33. For purposes of this study, the term SWSPs would refer to those who are managing a small piped network system ( Level III water system) in a particular location whose asset size is less than 15,000,000, exclusive of land ownership. This is along the RA 9501 definition. Service coverage would be about 5,000 household connections.

34. This categorization provides insights in terms of analyzing SWSPs. SWSPs share the following characteristics with small and medium scale operating in other market segments such as: (1) generally use private capital to develop business, (2) conduct their business in

4 Under the law, the above definitions shall be subject to review and adjustments by the Micro, Small and Medium Enterprises Development (MSMED) Council taking into account inflation and other economic indicators. Furthermore, the Council may also use other variables such as number of employees, equity capital and assets size.

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

a constrained regulatory environment, (3) face difficulties in obtaining financing; and (4) limited access to industry, financial, technical and managerial knowledge and information.

35. SWSPs have played three basic roles (1) fill in the gap in areas/communities with high coverage levels but low service quality, (2) pioneer in developing and operating systems in areas where there is no water service; and (3) acting as sub-concessionaire-buying water in bulk from the utility and selling it on to customers.

36. SWSPs defined as Gap Fillers: Small water providers operate within the service obligation or what was originally known as franchise area of the main utility (can be a WD, LGU utility, private developer) because the franchise holder cannot provide service to some areas yet. Filling in the gap between the existing water supply (water utility and natural water sources) and existing water demand is a niche for the SWSP. The better the service coverage and the availability of water, the lesser the niche market opportunities for the SWSP. Small water providers are mainly thriving in poor urban , peri-urban and rural areas.

37. SWSPs can also operate stand alone water systems in areas where there is demand, with their own, independent source of water supply or electricity – such as a well or borehole; Some may have inherited the system from a grant or a donation coming from the local politician, a government project or a non-government program.

38. Then there are SWSPs who are dependent on a formal public utility for the supply of water. They act as dealers service providers in behalf of the main utility. To date, these arrangements are now being formalized through legal agreements such as contracts and memorandum of agreements with the formal utilities.

39. There are also many SWSPs

that enter into partnerships with LGUs (barangays,

municipalities and cities) for the operation and maintenance of water supply service

delivery. This relationship may be along the models below:




Service Contract

SWSP may engage in service contracts such as specific tasks like installation and reading of meter readers, monitoring leaks and water losses, repairing pipes as well as distributing water bills and collecting water fees are major functions which could be undertaken. Identified and or interested community members may be tapped by the SWSP to oversee the collection of payments for water.

Apart from these, community members may also undertake the maintenance and reading of meters as well as collection of monthly tariff from the households connected. These functions could be strengthened further and a corresponding incentive fee apart from what is already provided to them will be given. A system of performance evaluation for the community members should be established as a basis for the incentives given to them.

For this particular organizational option the assets ownership is with

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers


SWSP while certain areas of operation and maintenance such meter reading, monitoring of water losses and pipe maintenance are contracted out to identified community members. The responsibility of coordinating the tasks of the community members remain with SMALL WSP.

Modified Management Contract

SWSP will provide water supply for an area either a part of a barangay, a specific area of a barangay or even several barangays. The SWSP provides all aspects of the operation for the provision of water supply. These could include purchasing bulk water from a public water utility (MWCI, MWSI or water districts) and reselling the water to the identified community. A period for the provision of water supply will be determined by the water utility and a corresponding evaluation system for monitoring the performance of the SWSP will be undertaken by water utility.

The water fees to be collected by the SWSP are set together with public water utility such that only a maximum mark up is established. The potential water entrepreneur will be provided with the necessary training by a public water utility in the areas of operation and maintenance of water supply system such as water supply development and management (operation and maintenance, financial management for water supply systems), water quality management and reduction of non revenue water.




The SWSP finances the investments for water supply delivery from


its income and other resources or borrows from banks or other financial institutions. The SWSP uses whatever it gains from the operation back to the further improvement of the water supply system. The SWSP directly manages the operations of the system and assumes all commercial risks.

Lease Contract


A public institution (local government unit or a water utility) finances the capital expenditures and leases the facility to the SMALL WSP. The SWSP assumes the commercial risks and the responsibility for operation and maintenance. To recover its costs, the SWSP is allowed to collect user fees as well as other charges on behalf of the public institution

Joint Venture


Under this agreement, the SWSP and the LGU or water utility share in the risks of the project and operate the system through shared management and organizational structure.

Part V. Financing Small Water Service Providers

40. Small water service providers have difficulty accessing market-based financing. The list of recurring constraints include the following: lack of assets that can be used as collateral, inadequate accounting standards, high administrative/transaction costs for too small loan

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

requests, less reliable projects and project information, inadequate business plans. Lending to SWSPs are considered high risks compounded by asset recovery constraints.

Some GFIs have actually managed to lend to SWSPs on a cash flow basis. This would include LWUA and the National Housing Authority (NHA) for instance in the case of Darasa Rural Waterworks and Sanitation Association. DARASA started operating in 1982 and has grown to serve about 16, 000 people thru its 2,700 connections. DARASA has managed to secure three loans from a GFI or GOCC without collateral.

41. Balibago Waterworks started as a small private operator but is now considered one of the successful private operators that has grown and expanded their services to 29 branches in 8 provinces in a span of 11 years. In a presentation they made on financing, they have cited the following as their source: a) modest equity of shareholders; b) internally generated funds from water tariffs; c) generous supplier’s credit; d) bank loans that are partially secured, with joint stockholder’s signatures; e) finance company loans; f) advances from shareholders and g) the guarantee deposits they require from customers (about P 1,500.00 per connection).

42. Many of the SWSPs who managed to get a loan from the bank had to offer different kinds of collateral to cover the loan. This includes a real estate mortgage on their land and building. This may include the personal properties of the board members, the General Manager and some staff of the organization. Others have offered a deed of assignment of a Special Savings Deposit ( as in the case of Land Bank with Buhi Water and Sanitation Multi Purpose Cooperative) or a hold-out on the deposits of the water utilities ( to Land Bank of the Philippines as in the case of the Maragusan Waterworks and Sanitation Multi- purpose Cooperative).

43. In a study made by the SWIF project of the Water and Sanitation Program, loans obtained by the SWSPs in the study amounted to P150,000 to P3 million. Loans from the GFIs has an interest rate ranging from 4% to 14% p.a. with payment periods ranging between 2 to 20 years. Those that managed to borrow from a private financing institution has a shorter tenor of 18 months, with higher interest rates of up to 23%.

44. In a rapid survey conducted among 92 SWSPs for this study, it appears that the SWSPs who are interested to borrow were generally requiring somewhere between Php 200,000 to Php 4 Million. Many are interested to obtain bigger loans if the interest rate was lower and the repayment period was longer. The loans are generally for a) upgrading of their facilities; b) expansion of services.

45. However, there are also some SWSPs that are not considering loan financing. Some of the reasons include: a) revenues from the past years operation can accommodate water supply expansion projects or b) current level of operation would not sustain loan operations.

46. A few years




reported that

financing was

available but it was grossly

underutilized as there were no takers from the available packages being offered to LGUs

and water districts.

47. It is interesting to note that of the total 283 operational small water districts, ninety-five percent have been granted loans and approximately the same number have been provided grants by the LWUA. Majority of these loans and grants range between P0.5M and

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

P1.0M. As of December 2007, water districts categorized as small provided 303,025 service connections or 10% of the aggregate connections achieved by all water districts. 5

On-going Financing-Related Initiatives

On-going initiatives for establishing financing mechanisms for water and sanitation are generally anchored on the guiding principles of EO 279.

48. Philippine Water Revolving Fund – USAID and JICA supported the establishment of the PWRF, initially as a co-financing arrangement between DBP and private financing institutions. The ultimate objective however is to evolve the co-financing arrangement into a more sustainable program, mobilizing greater private sector participation and more substantial revolving capacity. The current technical assistance of USAID to GOP, the PWRF Support Program (PWRF-SP), is tasked with the development of a long-term financing mechanism that mainstreams and institutionalizes mobilization of PFI and capital market resources. In particular, PWRF-SP is exploring securitization as the initial foray into the capital market and later pooled bond financing for new projects.

More than the financing mechanism though, PWRF-SP aims to facilitate the development of an integrated financing framework that optimizes use of public resources to leverage private funds through credit enhancement of bonds, loan co-financing at pari-passu or subordinated arrangements; or to provide direct lending, grants or grant-loan packages. PWRF SP advocates using the economic benefits of the project as the paramount basis for the allocation of public resources. Priority for PWRF projects are the larger credit worthy water utilities.

49. World Bank Proposed Financing Program. The World Bank is currently commissioning a study to identify the most suitable institution to administer the $17 million grant/concessional loan facility for the WDs and other WSPs involved in the upcoming Local Government Support for Regional Water Supply project. The study will outline in detail the regulatory requirements and capacity strengthening and technical assistance program that will be needed to ensure its success. The main output will be to develop a costed, institutional technical assistance program for the institution to successfully administer the grant facility, and support the overall goals of the project.

The study will be informed by and coordinated with the findings of an ongoing consultancy funded by BNWP to define the best approach to channel concessional financing to the Water Districts and other WSPs, blended with regular loans from a GFI. This concessional financing may consist of grants or very low (or even 0%) interest rate loans repayable in extended terms, similar to IDA loans. The blended loan will aim at financing network extension and optimization projects, non-revenue water reduction and/or the improvement in the operations of the WDs and other WSPs, including administrative, organizational, procurement, financial management, production and commercialization processes.

50. Water and Sanitation Program’s Proposal for Small Utility Access to Market Credit. A study conducted under the Small Utilities Improvement and Financing (SWIF) Program of WSP discussed constraints related to small water utilities access to credit market. There is presently a mismatch between the financial requirements of SWUs and those of the FIs related to interest rates, loan tenor, and size and credit risk. To bridge the perceived

5 SWIF Study of the WSP, 2008

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

financing gap, WSP is exploring the establishment of a government-owned debt fund which will be tapped to co-finance projects with PFIs. The fund will be lent on a subordinated basis. It will be a transitional vehicle for credit enhancement for a defined period of time and will be managed by a fund manager.

51. USAID Environmental Cooperation-Asia’s ( ECO-Asia) Project with the Association of Development Financing Institutions in Asia and the Pacific ( ADFIAP). ECO Asia is working with ADFIAP to develop and replicate innovative, sustainable financing mechanisms for use by water and sanitation service providers. Just last January 2009, they helped facilitate a memorandum of agreement between the Local Water Utilities Administration (LWUA), the People’s Credit and Finance Corporation ( PCFC) and the Rural Banker’s Association of the Philippines (RBAP). PCFC is a government agency established under the Social Reform and Poverty Alleviation Act as the lead agency tasked to mobilize resources for microfinance service for the exclusive use of the poor. PCFC wholesales short, medium term and long term investment loans to accredited microfinance institutions (MFIs) that implement credit assistance programs to finance livelihood projects. They have a cap of P150,000 as sub-loans to end borrowers. Initial idea being floated is that these funds can actually be a source of microfinance loans for service connection fees. The idea of using water districts as MFIs is still being discussed and the PCFC is still exploring whether these kind of loans will be acceptable to their Board considering that the PCFC loans are geared towards livelihood projects.

52. ADB’s Water District Development Sector Project (WDDSP). A project preparatory technical assistance (PPTA)1 for the proposed WDDSP is now underway. The PPTA will prepare the WDDSP as a project suitable for ADB financing. The project will help improve living conditions of the urban population outside Metro Manila, enhance competitiveness by developing water supply infrastructure, and build the capacity of water utilities. It will also support the institutional development of LWUA and contribute to much needed sector reform.

ADB is to administer technical assistance not exceeding the equivalent of $1,200,000 to the Government of the Philippines to be financed on a grant basis by the Multi-Donor Trust Fund under the Water Financing Partnership Facility for preparing the Water District Development Sector Project.

Part VI. Exploring Potential SSWSP-Lenders/Partners

53. The Local Water Utilities Administration (LWUA) has traditionally been the primary finance provider of water districts. LWUA provides institutional, technical and financial assistance to water districts. When the Rural Waterworks Development Corporation was abolished, its functions and loan portfolios for Rural Water and Sanitation Associations have been transferred to LWUA. However, there has been very minimal support from LWUA to non-water districts. They are currently campaigning for the establishment of 200 new water districts and the revival of 100 non-operational ones.

LWUA is set to establish a Water Bank and has recently purchased a thrift bank. It is not yet operational and it remains to be seen how it can really help small water service providers, especially the non-water district ones.

LWUA has an ambitious Php 7.8 billion capital investment program that includes foreign assisted projects and locally funded projects. According to LWUA officials, they plan to float domestic bonds to build up their capital. Small water districts and some large RWSAs

RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

may benefit from the LWUA program. Additionally, LWUA is willing to facilitate loans to non Water Districts if financing is made available thru them. However, they see this not as a separate window but part of their mainstream financing strategy.

The windows they currently offer ( based on their website) are in Annex C.

54. Government Financing Institutions. (GFIs) In recent years, the GFIs have increasingly supported the larger and more creditworthy WSPs for service improvement.

  • a) Development Bank of the Philippines

    • 1. This investment source is supported through JBIC loan funds and is made available to the DBP which will then be re-lent to water utilities with co- financing from commercial private banks

    • 2. The PWRF contributes to the rationalization efforts of credit, investment and financing sector for water supply projects by providing long term financing mechanisms that targets credit worthy water service providers such as water districts and LGU run water facilities.

    • 3. Co-financing of direct loans is then planned to transition to capital market- based instruments such as securitization of the loan portfolio and /or pooled bond financing for new projects. Institutional development, capacity building and strengthening of the water and finance sector is provided in partnership by the USAID for PWRF.

  • b) Land Bank of the Philippines supports water supply projects (mostly Level III) implemented by LGUs as well as Water Districts. LGUs typically pledge Internal Revenue Allotments ( IRA) as collateral for loans, hence are viewed to be relatively creditworthy. There are two windows at the LBP:

    • 1. The LGU Investment Program (LIP) whose objective is to facilitate the access of long term funds and addresses the long term financing needs of development projects in LGUs. The eligible borrowers are cities, municipalities and provinces that need funds for sanitation, water supply, drainage and flood control, including construction of low-cost treatment facilities and provision for sludge collection and transportation and all income generating projects except solid waste management projects.

    • 2. The Support for Strategic Local Development and Investment Project (SLDIP) seeks to improve living conditions, public health standards, and the urban environment by providing upgraded and improved urban and rural infrastructure and services (e.g. infrastructure facilities such as water supply and distribution systems, wastewater treatment, solid waste management facilities, housing and power production and distribution). This window targets provinces, cities, municipalities, infrastructure utilities operators (water districts, telecoms) and private sector groups in partnership with LGUs.

  • 55. A few private financing institutions (PFIs) have started to lend directly to water service providers. Many of them are depository banks of the water service providers. This gives the private banks the level of confidence required to provide short term loans. Metrobank for instance, have lent to the San Jose Waterworks in Antique using their time deposits as collateral for their loans.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    • 56. Micro Financing Institutions. (MFIs) There are a lot of micro-financing institutions that have developed throughout the years. The rural banks have also opened micro-financing windows and have served as conduit banks for micro-lending to micro, small, and medium enterprises (MSME) There are several non-government micro-lending institutions. All lending institutions including private banks are mandated by RA 9501 to allocate at least eight percent (8%) for micro and small enterprises of their total loan portfolio based on their balance sheet as of the end of the previous quarter, and make it available for MSME credit. However, there are very very few examples of water lending. For instance, the Peace and Equity Foundation lent thru an NGO MFI for a cooperative water project from their special fund.

    • 57. The Small Business Corporation ( SBC) , created by law under the Department of Trade and Industry, is charged with the primary responsibility of implementing comprehensive policies and programs to assist MSMEs in all areas, including but not limited to finance and information services, training and marketing. To date, about 75% of their funds are wholesale loans thru their 103 conduits, 5% of their funds are utilized to provide guarantees and about 20% of their funds are for retail or direct lending. They managed to lend to two water service providers since their establishment and have expressed interest to expand their market outreach to small water entrepreneurs.

    • 58. The Municipal Development Fund Office ( MDFO) under the Department of Finance is also facilitating water loans. But this is limited to 4 th to 6 th class LGUs only. They require an IRA pledge and the amount of the loan is based on the certificate of borrowing capacity issued by the Bureau of Local Government Financing (BLGF) under the Department of Interior and Local Government. They have different funding windows that can be accessed thru the municipal or provincial governments.

    • 59. The LGU GUARANTEE CORPORATION ( LGUGC) is a private corporation incorporated on 2 March 1998 to guarantee loans or bonds issued by local government units (LGUs) to finance revenue-generating projects. The LGUGC credit guarantee serves to protect private financial institutions (PFIs) and other investors against a payment default by LGUs. LGUGC is the first and only company, under the supervision of Bangko Sentral ng Pilipinas (BSP) that provides this service in the Philippines. LGUGC is owned by a consortium led by the Development Bank of the Philippines (DBP) and the Bankers Association of the Philippines (BAP). ADB has a 25% ownership in LGUGC.

    • 60. It is interesting to note that the LGUGC is now managing a Loan Guarantee Fund (LGF) for “Capacity Building to Remove Barriers to Renewable Energy Development in the Philippines “ (CBRED) project of the Department of Energy in partnership with the UNDP Country Office. This project is funded by the Global Environment Facility. The LGF is intended as a partial loan guarantee mechanism for renewable energy projects, especially in remote, off-grid locations. The LGUGC as fund manager has the responsibility to originate loan guarantee transactions, collect payments, administer release of guarantee in case of default, and manage the recovery of assets from defaulted loans, among others. The funds are held in escrow with a private bank and the proceeds of this fund is the source of the fees for LGUGC. LGUGC has expressed its interest to enter into a similar arrangement for the small water providers.

    • 61. Non-government Partners. The Peace and Equity Foundation ( PEF) is a non-stock non profit organization that administers an endowment fund established by the Caucus of Development NGO networks ( CODE-NGO). They have supported a number of Level II

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    water projects with grants. As a matter of policy, they only grant loans for Level 3 water systems. They have lent to P3M to one NGO for a municipal level water supply from their general loan. Water lending is not yet mainstreamed in PEF and they have expressed interest to explore possibilities of lending to small water service providers in their priority areas.

    Part VII. Understanding the Needs

    While there is significant domestic liquidity among Philippine banks in general, based on informal conversations with GFIs and PFIs who lend to WSPs and LGUs, SWSPs face major challenges which must be addressed to improve viability and increase access to financing:

    62. Regulatory Issues. While the vital role of SWSPs in the Philippines is now generally recognized, the single most critical factor that will enhance their access to financing is regulation:

    63. A formal SWSP registration system and guidelines for bulk water purchases by SWSPs are vital. NWRB recognizes the role that SSWPs have done to fill in the gap for water supply coverage and is going to embark on a nationwide campaign to register and document all SWSPs. However, while the system for registration is being developed, finding the SSWPS and establishing their individual and collective requirements remains a challenge. Establishing a meaningful database of SWSPs will provide better assessment on how to better assess how to assist more SWSPs.

    Furthermore, formal recognition and guidelines for co-existing with water districts and LGU-run operations, and for bulk water sales should still be developed. Experiences in a number of pilot projects can be the basis for developing these guidelines further.

    64. Mentoring, capacity-building and access to pooled

    credible experts and resources is

    required. SWSPs require more than just credit. While water districts have LWUA, the SSWPs don’t really have a government agency that can cater to their needs for capacity development They require access to capacity development and institutional strengthening. They also require expertise:

    • a. To hire top calibre management personnel and staff . Results of a recent benchmarking study of utilities with 1,000 to 5,000 connections suggests that because small utilities rely on a limited revenue base. it does not allow them to hire top managers and skilled staff; however, relatively high levels of performance are achieved when provided with proper institutional support and training.

    • b. To pay for water, feasibility and other studies by credible experts, which are required by cash-flow lenders.

    • c. To prepare financial statements and monitor operating performance, as required by cash-flow lenders.

    • d. To acquire appropriate technology and equipment. Small operators may use low- cost technology and equipment to shorten payback periods which compromises their services and also limits their operations to established urban areas where they can get a quick payback on their investment by catering to a larger established market.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    65. Establishing clear and transparent partnership arrangements. Difficulties in coordination and cooperation and achieving economies of scale may hinder the growth of smaller WSPs. It is important to clarify and formalize partnership arrangements with either the larger utilities such as the water districts operating area or the Local Government Unit in the city or the municipality. This relationship should be formalized with clear time frames and contract termination arrangements. Once formalized, these gives the lenders a clearer picture of the level of investments and rate of return that can be expected from the project.

    • a. The risk of expropriation forces operators to shorten payback period.

    • b. Small operators are more vulnerable to bribes and other petty corruption. They are more prone to political intervention.

    • c. With special negotiated bulk water rates, the city water utilities could generally charge SWSPs lower rates as it supplies low income household communities that are not yet reached by the main service provider.

    • d. Formalizing their status decreases financing costs.

    66. Helping SWSPs become “bankable”. To enhance the chances of securing credit approval to a) help SSWPs make sure their shop is in order; and b) for SSWPs to present their situation and their credit request well. A “Bankability checklist for small scale water providers has been prepared to help SWSPs understand better what financing institutions would normally look for in a “bankable” water service provider. Annex E. Bankability Checklist.

    Part VIII: Preliminary Schemes Under Consideration:

    Preliminary observations and key considerations:

    67. LWUA’s current broad and ambitious PHP7 billion capital expansion program including its significant indicated capacity for grants and low-cost long-term loans to water districts strongly suggests our efforts should focus on SSWSPs unlikely to have access to LWUA’s funding.

    68. LGUs (and LGU-owned and operated water supply service providers) generally have easier access to credit if they have Internal Revenue Allotments (IRAs) to pledge and if they get confirmation of their positive borrowing capacity from the Department of Budget and Management (DBM); the GFIs (DBP and LBP) are active creditors of LGUs; other sources of funding for LGUs are the Municipal Development Fund Office (MDFO) of the Department of Finance and the Local Government Unit Guarantee Corporation (LGUGC, which has also funded several water districts)

    69. Thus, we propose focusing on assisting SWSPs who are privately owned and operated including the water cooperatives and water associations.

    • a. There is no meaningful database of SSWSPs in the Philippines

    • b. From anecdotal information, SWSPs vary very significantly in terms of nature, size, track record and years of operation, ownership, business objectives, etc.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    • 70. Based on the rapid survey of 92 SWSPs and the informal meetings with a number of SWSPs at NAWASA – NWRB Seminars, the financing requirements of SSWSPs vary very broadly, due to the scale of their operations and the nature of the capital outlay, for example:

      • a. Expansion of coverage (a major capital investment)

      • b. Credit to pay outstanding and past due electricity bills (a working capital requirement)

      • c. Modernization of water meters (a moderate capital investment)

  • 71. In addition, the nature of their operations, regulatory recognition, general creditworthiness, and the size and timing of their financing requirements, also vary broadly. Due to a lack of homogeneity, a securitization of SWSP loans is not a practical approach to the Philippine problem at this time. One formula for financing SWSPs might not be appropriate for the others.

  • 72. Therefore, we propose focusing instead on the following initiatives:

    • a. Approach A: SWSPs as Water SMEs. Working with Financing Institutions for MSMEs such as the SB Corporation to establish a lending initiative for SWSPs in two phases: initially through SBC’s Retail Lending Program, and progressing hopefully to SBC’s Wholesale Lending Program for SMEs and getting SBC’s partner or conduit banks to lend directly to SWSPs

    • b. Approach B: Establishing a Financial Services Credit Cooperative focused solely on SWSPs

    • c. Approach C: Developing an extended payment terms scheme for wholesale materials procurement, ( i.e. pipes) with major manufacturers/suppliers, possibly including credit risk insurance

    • d. Approach D: Working with MDFO to encourage a dialogue between LGUs and SWSPs for consideration of collaboration via Public- Private Partnerships

    • e. Approach E: Social Funds coming from the development funds of LGUs, politicians and donors.

  • 73. In all these proposed approaches, government or donors can grant funds or soft loans to capitalize a revolving fund, put up a guarantee facility that can be utilized as a proxy for collateral requirements. Another possibility is to use the output-based aid approach.

  • Preliminary Initiatives under Consideration

    • 74. Approach A: SWSPs as Water MSMEs . Working with SB Corporation (SBC) to establish a lending initiative for SWSPs in two phases: Phase I: through SBC’s Retail Lending Program and Phase II: through SBC’s Wholesale Lending Program for SMEs and getting SBC’s partner banks to lend directly to SWSPs a.

    Key advantages of working with SBC include the following:












    Approach A:

    SWSPs as Water mSMEs Wholesale Small Donor Loans Business Conduit Banks (Pesos) Agencies Corporation Streams, Retail
    SWSPs as Water mSMEs
    Conduit Banks
    Retail Loans
    Other Water
    • Program support
    • Technical advice
    • Capacity dev’t
    PHASE 1
    PHASE 2
    SSWSP #1
    SSWSP #4
    SSWSP #5
    SSWSP #6
    SSWSP #7
    # ...

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    expanding into the water sector

    Existing infrastructure, ready-to-access:


    Extends and administers cash flow-based loans of P0.2-8 million under its


    Retail Lending Program 3 area offices, and 7 desk offices set across Luzon, the Visayas and

    Mindanao Non-collateral based lending: a non-traditional, risk-based lending approach, albeit

    currently based mainly on the borrower’s proven cash flow generating capacity (i.e. during the past 12 months), as an indicator of its future cash flow generating capacity Some, albeit limited, lending to water service providers, although SBC has provided no information on their existing water exposure.

    • b. SBC is currently the Philippine government’s third largest provider of SME financing, with a lending portfolio of over P3 billion, over 3,000 clients and 71 partner financial institutions (see Appendix I). Through 3 area offices and 7 desk offices set across Luzon, Mindanao and the Visayas, SBC serves 57 of the 75 provinces in the country. It was created in 2001 from the merger of the Small Business Guarantee and Finance Corporation (SBGFC, which was established in 1991) and the Guarantee Fund for Small and Medium Enterprises (GFSME, which was established in 1984). SBC has an authorized capital stock of P10 billion. The initial capital of One billion pesos (10,000,000,000.00) shall be established from a pool of funds to be contributed in the form of equity investment in common stock by the Land Bank of the Philippines (LBP), the Development Bank of the Philippines (DBP), in the amount of Two hundred million pesos (P200,000,000.00) each. the Social Security System (SSS) and the Government Service Insurance System (GSIS) shall also set aside Two hundred million pesos (P200,000,000.00) each for the SB Corporation

    • c. Types of Loans Provided by SBC:

      • a. Working Capital Financing – Short-term and Medium-term (permanent working capital loans via amortizing term loan for various working capital requirements)

      • b. Fixed Asset Financing via amortizing term loan for fixed asset acquisition and expansion projects

      • c. Financing for Start-up Enterprises via amortized term loan for start-up domestic entrepreneurs

  • d. A MOA which details a planned partnership with SBC and STREAMS to develop a window under SBC for financing small water entrepreneurs and allocating funds on terms and conditions that will favor water and sanitation service delivery by small water service providers is currently under discussion. SBC has initially committed the amount of PHP 50 Million to startup the water lending.

  • e. Key initiatives will include the following:

    • i. Selecting relatively stronger and more established SWSPs identified in consultation with water sector experts and experienced water sector lenders and players Provide ongoing technical capacity building, training and mentoring to pilot SWSP- borrowers, especially in their self-evaluation before approaching a financing institution such as SBC, and in the preparation of their credit applications (e.g. a manual type of document that will guide SWSPs to prepare themselves before approaching a financing institution):

  • ii.

    RETA 6498: Assessing and Developing

    Models for Financing of Small Scale Water Service


    • a. requirements for their loan applications


    • b. ents

    Financial statem

    • c. Business plan


    Capacity-building at SB

    Corporation to Process and assess SWSPs’ c redits

    • a. ater sector expertise through technical as sistance and

    Enhance its w

    specialist supp ort for start-up, ongoing monitoring and rem edial action if required

    Structure a cas

    • b. h flow-based loan facility under its retail lending operations

    Streamline loan and lower legal

    • c. terms and documentation to facilitate quicke r negotiations costs

    Standardize re

    • d. porting requirements to facilitate administrati on and lower


    costs Offering assistance to

    SBC in connection with its efforts re SSWSPs, f or example:

    Loan documentatio (ideally akin to ste consider benefit of

    n with gives the program enforceable and e ffective rights p-in rights; also the ability to adjust tariffs a s required) LWUA involvement e.g. as Lender of Record ; RBAP, LGU

    and DOF involvem ent re enforcement in the event of a default sce nario

    Professional and t

    ransparent loan administration and remediati on with input

    from water speciali sts

    • v. Ideally finding a soluti Corporation’s loans do

    on to subsidize / reduce the effective interes t rate on SB wn to 10% per annum (from 11-15% p.a.)

    • a. If necessary, f

    inding additional funds for SB Corporation t o add to the

    preliminary PH P50 million expected to be earmarked e.g. from :

    Multilateral agencie Partners already w

    s, donors, etc. orking with SB Corporation

    75. Approach B: Establishing a Financial Services Cooperative

    • a. A cooperative is a firm ow

    ned, controlled, and operated by a group of u sers for their

    own benefit. Each membe r contributes equity capital, and shares in the control of the

    firm on the basis of one-m equity contribution).

    ember, one-vote principle (and not in proportio n to his or her

    us successful credit

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers a. requirements
    • b. Key advantages:

      • a. There are numero

      • b. Benefits both S

      • cooperative models to adapt to SWSPs
        c. Additional funding




    liquidity and tho se with borrowing requirements

    raised specifically for

    SSWSPs would c omplement traditional

    funding sources leverage

    and enable higher




    Some SWSP-primary

    • c. Cooperatives are categ secondary and tertiary. cooperatives have succes sfully financed the expansion of their opera tions through participating in credit sche mes of secondary and tertiary cooperatives.

    RETA 6498: Assessing and Developing

    Models for Financing of Small Scale Water Service


    • d. Financing provided to conservative terms:

    SWSPs without traditional collateral but w ith relatively

    • a. Small loan amount

    relative to its share capital

    • b. Typically , very lo effectively highly co

    w leverage (e.g. 1-3X the member’s share ca pital); hence,

    llateralized by the member’s share capital

    • c. Short-term, typicall life of 6 months)

    y repayable monthly over one year (therefore , an average

    • d. Loans have relative

    ly low interest rates, for example 8% p.a. inter est for a one-

    year amortizing lo an (reflecting the short-term nature of the l oan and the relatively high colla teral cover, e.g. 33-100%).

    • e. The institutions extending borrowing from finance-pro

    credit raise funds from the member’s share cap ital and by

    viders such as [ADD], SB Corporation, etc.

    • f. The cooperative visits the

    borrower to assess the water its operations and finances,

    and ensure that the borrow er is complying with the systems set to ensure payment of the loans.

    • g. Risks are reduced by havi o o o o

    ng the borrower provide the following:

    Post-dated checks

    Share capital equal to

    a minimum 3% of the loan

    A savings deposit in th

    e cooperative bank

    Claim on assets

    76. Approach C. Supplier Fina ncing. Pipes are generally the largest single

    cost item for

    expansion or upgrading of a

    piped water system, and usually represents 7 5-90% of the

    capital outlay. At present, the

    maximum “extended” payment terms which


    currently offer to the more est ablished SWSP buyers is usually 120 days; o thers have to

    pay in cash. We recommend

    working closely with the largest water pipe su ppliers in the

    Philippines to develop an ex tended payment terms scheme for pooled/w holesale pipe

    procurement by SWSPs

    • a. Key advantages:

    Pipe suppliers rec

    ognize the

    large market


    represented by S WSPs; they should be highly m otivated to

    help SWSPs find

    or develop

    financing sourc es, e.g.

    packaging custom er financing

    with the order Given the high co

    ntribution of

    pipes to total proj ect cost, a

    creative vendor


    solution for pipes

    will enable

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers d. Financing

    the SWSPs to focu s their resources on financing the rest of the capital outlay

    (e.g. pumps, etc.)

    Wholesale or volum

    e pricing/discounts perhaps?

    • b. These pipe suppliers are

    likely to be wary of piecemeal and relatively s mall orders

    which are relatively cumbe rsome to monitor and administer

    We propose establ

    ishing a mechanism for collective/wholesale pu rchases from

    the major pipe ma nufacturers/suppliers that is, one pooled or der totaling a

    meaningful amoun t (e.g. Pesos25-50 million, composed of sub- orders from a number of SWSPs

    • c. Possible sources of financi

    ng and/or credit cover for the pipe manufacture rs include:

    RETA 6498: Assessing and Developing

    Models for Financing of Small Scale Water Service


    Export-Import age

    ncies (e.g. for Georg Fischer Piping Syste ms, a Swiss-

    headquartered com pany, can explore options offered by the Swis s government to support its Swiss exporters)

    Credit risk insuran insurance for their general)

    ce cover (in many countries, exporters can b uy credit risk exports, although it may be difficult to find multi -year cover in

    Vendor financing is

    generally funded through general corporate b orrowings, or

    possibly with limite

    d or no recourse if the credit risk of the underlyi ng portfolio of

    receivables due fr om customers is acceptable (the cost of c redit and an allowance for credi t losses should be factored into the credit cha rge imbedded

    in the quote for the goods to be supplied)

    • d. In the absence of credit in

    surance, the manufacturer will need significant hand-holding

    in assessing the credit risk of the pool of buyers

    77. Approach D: Encouragin g Public- Private Partnerships betwe en SWSPs

    and the












    past decade

    by tapping


    sector dynamism,


    access to



    of te chnologies,







    spirit. W ell-executed

    PPPs have been proven to








    projects, co mpared to

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers • Export-

    public sector alternatives. LGUs have relatively easy

    access to credit as lenders generally requir e a pledge of

    IRAs and view such cr edit arrangements as straightforward and lo w-risk credit

    exposure. The hurdle for e ach LGU to borrow more money is to get the

    epartment of

    Budget and Management (DBM)’s confirmation of their borrowing capaci ty. Moreover,

    loans that LGUs need to

    secure for their development projects are

    saddled with

    political interference since approval.

    it has to pass through its law making body and processes for

    However, there is significa pledge their IRAs and c) to

    nt reluctance from many LGUs : a) To borrow

    funds; b) To

    build and operate a water supply network if th e LGUs have

    not laced water supply ( or sanitation) as a priority agenda.

    • a. There have been a numbe

    r of initiatives designed to help LGUs:

    • a. Get comfortable wit

    h the rudiments of PPPs

    • b. Identify suitable pa


    • c. Negotiate fair conc

    ession contracts

    • d. If appropriate, fina water network

    nce the PPP without assuming the commerci al risks of the

    • b. A national initiative to enco

    urage such PPPs could provide the following a dvantages:

    • a. Economies of scale

    in analyzing the feasibility of the proposed PP Ps

    RETA 6498: Assessing and Developing

    Models for Financing of Small Scale Water Service


    • b. LGUs taking comfo

    rt from other LGUs in the same process

    • c. Standardization of

    documentation to set up and finance the PPP would reduce

    the upfront costs

    • c. More successful new LGU water sector – and the

    water PPPs will help address the problems in the Philippine

    relatively easy access

    to credit

    by LGUs

    with sufficient

    borrowing capacity and wil lingness to borrow.

    78. Approach E. Social Funds fo r SWSPs. SWSPs come in different shapes an d sizes and have a broad range of funding requirements

    • a. It will take some time fo


    many SWSPs to be “bankable” (for our App


    A, tapping SB Corporat ion)

    or even to have share capital to join a credit cooperative (for our Approach B)

    • b. Start ups and those in


    of new or additional wa ter

    sources may not have the seed capital for the initi al critical investments

    • c. In addition, certain outl for example, capacity


    development, benchma rking,

    etc. – although importa

    nt in

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers b. LGUs

    the medium and long t erm, will not be priorities for many SWSPs, especially tho se who operate at the subsistence level

    79. Conclusions and Recomme


    • a. The lack of familiarity o

    f the Financing Sector with the Water Sector is an issue that

    can be bridged with dialog ue, discussions and interactions. Several proj ects are now

    on going to address this g


    • b. Even within the water sector, the issues and concerns of SWSPs ar

    e now slowly

    being addressed. At the m inimum, there is recognition of the roles they p lay and their

    potential to help meet the country.

    needs of the unserved and underserved popu lations of the

    • c. In some areas, their ro

    le as gap fillers can be an interim solution. If t he terms and

    conditions of their enga gement are clear and transparent, investm ents can be

    tempered accordingly. M ain utilities or local governments can also contracts clear transition a nd or buy-out arrangements.




    • d. There is a need to fur

    ther explore and discuss the proposed appro aches among

    different stakeholders to g enerate feedback and support.

    • e. Appreciating small wat er service providers as water SMEs will open

    the doors of

    opportunity not only for SW

    SPs but also increasing the market outreach

    of the funding


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    f. Cognizant of the current scenario of SWSP operations and taking advantage of the responsiveness of government to help the plight of SWSPs, especially in the area of financing, it is of utmost importance that one or two of the proposed approaches be immediately established and tested.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers


    Asian Development Bank. Republic of the Philippines: Preparing the Water District Development Sector Project. Technical Assistance Report. Project Number: 41665. September 2008.

    Asian Development Bank. In the Pipeline: Water for the Poor – Investing in Small Piped Water Networks, 2008.

    Congress of the Philippines. Republic Act No. 9502. Magna Carta for mSMEs, 2008

    Executive Order 279: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 Thereof, Manila, 2000.

    Investment Coordination Committee- Cabinet Committee ( ICC-CC) “Guiding Principles and NG-LGU Cost Sharing Policy in the Evaluation and Processing of Projects Involving Devolved Activities. NEDA Board February 2, 2004.

    Mehta, Meera. “ Assessing Microfinance for Water and Sanitation- Exploring Opportunities for

    Sustainable Scaling Up. A study commissioned by the Bill and Melinda Gates Foundation. July


    McIntosh, Arthur, Asian Water Supplies: Reaching the Poor. Asian Development Bank, 2003

    Porciuncula, Alma. Philippine Water Revolving Fund. A powerpoint presentation delivered on December 12-14, 2006, Haikou City, Hainan Province, P.R. China.

    Presidential Decree 198:. Manila: , 1976.

    Soriano, Cecilia G. Credit, Financing and Investments in the Water Supply Sector. Annex III, Philippine Water Supply and Sanitation Roadmap. March 2008.

    World Bank 2005: Meeting Infrastructure Challenges. East Asia and Pacific Region: The World Bank, Infrastructure Sector Department, 2005

    UNDP. Loan Guarantee Fund ( LGF) Program Implementation Agreement between Department of Energy and the LGU Guarantee Corporation, 2006.

    STREAMS of KNOWLEDGE. Business Opportunities for Pro-poor Public Private Partnerships for Water Service Delivery. 2008

    Water and Sanitation Program. Small Utility Access to Market Credit: Lessons and Options. SWIF Project – Component 3 Completion Assessment Report. December 2008.

    Rationalizing Grants and Subsidies. May 2009. Draft report prepared for the Philippine Development Forum Task Force on Water Supply and Sanitation.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Web Sources:

    Persons Interviewed:

    Mr. Jay Tecson USAID ECO-ASIA

    Ms. Alma Porciuncula, USAID Philippine Water Revolving Fund

    Ms. Leila Elvas, Water and Sanitation Program

    Mr. Danny Gonzales, Small Business Corporation

    Ms. Amelia Supetran,. United Nations Development Program

    Daniel Landingin, Local Water Utilities Administration

    Mr. Ramon Alikpala, National Water Resources Board

    Ms. Lydia Oriel, LGU Guarantee Corporation

    Ms. Helen Habulan, Department of Finance, Municipal Development Fund Office

    Ms. Veronica Villavicencio, Peace and Equity Foundation

    Ms. Patricia Calilong, Philippine Business for Social Progress

    Mr. Neil Santillan, Cooperative Development Authority

    Ms. Fely Nicomedes, People’s Credit and Financing Corporation

    Ms. Elsa Mejia, National Water and Sanitation Association of the Philippines

    Mr. Robert Quinto, Jhaymart Enterprises

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Annex A: Subsidies in the Water Program


    Box 2

    Subsidies in the Philippine WSS


    Financing Conduit


    Source of Funds

    Form of Subsidy


    PD 198 (1973) – mandates LWUA to serve as a specialized lending institution for the promotion, development and financing of local water utilities.

    GOP Equity, ODA and local borrowing

    Long-term tenor of loans, lower than market interest rate (based on project cost threshold)


    PD 1914 (1984) – mandated the creation of a special revolving fund capitalized by proceeds of loans and grants made available to LGUs for their investment requirements

    Seed capital from GOP (re-flows of ODA loans), new ODA, Second Generation Funds

    Long-term tenor of loans; lower than market interest rate (selected access)


    RA 7160 (1981) - allows LGUs

    IRA, ODA

    Capital and

    to exercise devolved functions and delegated powers. The establishment of a waterworks system is a delegated power of the LGUs since there is no supervising authority or a particular national government agency responsible for municipal waterworks, and therefore becomes their main responsibility.

    operating subsidy

    GFI (LBP)

    PD 251 (1973) – revitalized the Land Bank and granted it universal or expanded commercial banking powers and established it as the universal bank with a social mission of spurring countryside

    ODA, own funds

    Long-term tenor

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers


    Box 2

    Subsidies in the Philippine WSS


    development; expanded its powers from lending to the agricultural sector to among others LGU, GOCC and private sector development projects.


    GFI (DBP)

    RA 85 (1947) –established DBP

    ODA, own funds

    Long-term tenor

    as the premier bank for the development of agriculture, commerce and industry; EO 81 (1986) - reopened its lending windows for housing, agriculture, and small and medium scale industries.

    Co-financing with PFI - PWRF (ODA, GFI and PFI funds)

    DOH (previously by

    General Appropriations Act

    GOP budget

    Capital grant for


    (GAA) – annual budgetary allocation for water supply projects in poor communities


    water less barangays

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Annex B: Subsidies Provided Under On-going Financing Programs for WSS Development

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms





    1. Window 1 – Level

    Mixed LWUA

    Levels II & III WS

    For Level III

    Loan Limit:

    II & III Loans

    capital & borrowed local & foreign capital

    > Start up of existing water supply system

    For Level III - 50% to 100% of Project Cost

    For Level II - 40% to 100% of Project Cost


    > Repair/rehab of existing system

    > Immediate Impact

    Interest Rates:

    development for new/existing system

    1st P2.0M = 8.5% p.a.

    > Comprehensive

    Next P5.0M=10.5% p.a.


    Next P13.0M=12.5% p.a.

    For Level II

    Next P30M=14% p.a.

    > Repair / rehab / expansion of existing water supply system

    Over P50M=15% p.a.

    > Development of new

    Repayment Period:


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms





    For LWUA capital funded loans, maximum of 25 yrs including a maximum grace period of 4 yrs inclusive of construction period. For borrowed local and foreign capital funded loans, equivalent to the repayment period of the borrowed funds of up to a maximum of 25 yrs including a maximum grace period of 4 yrs inclusive of construction period.

    2. Window 2 - New Service Connection


    Level III

    New service connection, watershed

    Loan Limit:



    For new service connection: 100% of Project Cost

    emergency loans

    For special loan: 50- 100% of Project Cost

    Interest rate & repayment period:

    For new service connection: Interest rates shall be based on prevailing applicable rates. Repayment period of 5 yrs to start 1 yr after initial disbursement

    For special loan: Interest rates shall be based on prevailing applicable rates. Repayment period of up to a maximum of 15 years


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms






    Window 3 - Water


    Levels II & III

    > Expansion of Water

    Loan Limit:

    Supply Facilities-


    Commercial Loan

    Maximum of 100% of Project Cost

    > Source Development

    > Service Connections

    Interest rates:

    > Construction of admin building

    Funding cost (interest rates of borrowed local

    > Purchase of vehicles /equipment/tools

    capital funds and other bank charges) PLUS Minimum of 2% spread but not to exceed the current prevailing commercial/market rates.

    > Other facilities that will enhance efficient water service

    Repayment period:

    Equivalent to the life of the asset acquired or the repayment period including the grace period of the borrowed funds, whichever is shorter.


    Window 4 - PDEIF

    GOP Grant

    For PDEIF Project

    For PDEIF Project

    For PDEIF Project Development

    & A.O. No. 192

    broken down as




    Loan Limit:

    > All WDs

    > Feasibility Study

    > PDEIF (P125M

    No limit on the maximum loan amount


    Interest rate: 6.56% per annum

    For PDEIF Efficiency

    > Test Well Drilling


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms






    related to the feasibility study

    Repayment Period:

    > PDEIF (P125M Efficiency Improvement)

    > Semi-Creditworthy & Pre-Creditworthy

    • 5 years inclusive of up to two (2) years grace period

    > A.O. No. 192 (P50M ARMM)


    For AO 192

    For PDEIF Efficiency Improvement

    > NRW reduction program


    No Equity requirement; 20% cap for Creditworthy WDs

    > WDs in ARMM

    > Revenue enhancement program

    For PDEIF Efficiency Improvement

    > Cost reduction

    Loan Limit:


    Single borrower limit of P30 M

    > Capacity building

    Interest rate: 8.2 – 8.7 % per annum

    > Studies related to the above

    Repayment Period:

    • 5 years for loans P10 Million and below

    • 10 years for loans above P10 M to begin 1

    For AO 192

    month after last drawdown

    > WS projects in ARMM


    • 10 % minimum equity requirement


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms





    For AO 192

    Allocation reviewed jointly by LWUA and DOF


    Window 5 -P5.0M


    To fast track project


    Loan Limit:

    Authority of



    management is

    Up to P5.0M

    authorized to release project cost or loan funds not exceeding 80% of basic construction cost prior to financial evaluation/execution of the loan contract

    Interest rate: Existing interest charges based on total loans granted shall be applied with repayment period depending on the result of financial evaluation.


    Window 6 –


    All WDs

    > Expansion projects

    Loan Limit:

    Special Loan


    Up to P10 M

    > Well drillings including development of new water sources

    Interest rate:

    7.5% p.a. for 10-year loan

    9.0% p.a. for 15-20 year loan


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms




    Repayment Period:

    10-20 years



    1. Municipal Development Fund

    MDF (2 nd gen funds)

    > All LGUs

    > revenue generating projects

    Loan Limit:

    Program ( MDFP)

    > social projects

    None provided loan is within the LGU’s borrowing capacity as certified by BLGF

    > environment projects including sewerage, drainage,

    Interest rate:

    sanitation/public toilets and waste water treatment

    Fixed rate of 9% p.a.

    > other infra projects

    Repayment Period:

    For infra projects: 15 years inclusive of 3-year grace period on principal payment

    For equipment: 10 years inclusive of 2-year grace period on principal payment


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms





    No equity required; only IRA intercept in case of default

    2. MDG - Fund

    P500 M from the MDF (2 nd gen

    > All 4 th to 6 th class municipal LGUs

    > projects, not limited to infrastructure projects,

    Loan Limit:

    ( Millennium Development Goals Fund)


    > provincial LGUs intending to provide and

    that contribute to the attainment of the MDG goals

    Up to 100 % financing of proposed projects

    make its 4 th to 6 th class

    Interest rate:

    municipalities the beneficiaries

    For softer-support projects: fixed rate of 7.5 % p.a.

    For heavy equipment: fixed rate of 7.5 % p.a.

    For civil works: fixed rate of 8%

    Repayment Period:

    For softer-support projects: 5 years inclusive of 1 year grace period on principal

    For heavy equipment: 10 years inclusive of 2 year grace period on principal

    For civil works: 15 years inclusive of 3 year grace period on principal


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of



    Eligible Projects

    Loan Terms






    No equity required; only IRA intercept in case of default

    3. PTAC Fund

    P 50 M from MDF- (2 nd gen

    > All income class LGUs, except highly

    > Project feasibility studies;

    Loan Limit:

    ( Project Technical Assistance and Contingency Fund)


    urbanized/ing cities and provinces

    > Detailed engineering design;

    Feasibility studies – 3% of estimated project cost

    > Foreign exchange

    Detailed Engineering Design - 6% of estimated project cost

    differential (incurred upon project

    Foreign Exchange Differential – actual cost

    implementation); and

    Others T.A. Requirements of LGUs – actual cost

    > Other technical assistance (TA) needs of the LGU. Examples of such TA include:

    Interest rate:

    4th - 6th class municipalities – 0 %

    capacity building;


    2nd - 3rd class municipalities – 0.5 %

    tests; revenue

    1st class municipalities – 1.0 %

    enhancement program;

    Cities and Provinces – 1.5 %

    other studies related to the project


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms




    Repayment Period:

    Within the term of the borrower/incumbent LCE


    No equity required; only IRA intercept in case of default



    Co-financing facility


    CW WDs, LGUs, Private

    > Capital investment for

    Loan Limit:

    DBP and PFI funds)


    WSS projects

    Up to 50 % PFI financing & 50 % DBP financing of total project cost

    Interest rate:

    DBP: cost of fund (ODA, guarantee fee + forex cover + GRT) + risk spread + fixing premium;

    PFI: PDST R-1 for 10 year benchmark + project specific spread + guarantee fee + SCL fee

    Repayment Period:


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms




    DBP : Up to 20 years

    PFI: max of 10 years with possible extension


    Equity required from borrower



    Support for Strategic

    WB (P5 B)

    WDs & LGUs, private

    > income generating

    Loan Limit:

    Local development & Investment Project

    corporations with projects LGU-based projects

    infrastructure projects

    Up to P500 million per project

    Interest rate:

    Up to 5 years - Fixed rate at 9% p.a.

    • 5 to 10 years – 10 % p.a.

    • 6 11 to 15 years – 11% p.a.

    Repayment Period:

    Up to 15 years, with 2 years grace period



    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Financing Conduit/

    Source of


    Eligible Projects

    Loan Terms




    10% equity required from borrower; with IRA intercept in case default

    DOH (previously by DPWH)

    P1.5 B GOP budget appropriation for

    Community based WSPs

    WS in waterless municipalities

    Proposed mechanism: Grant to be used as equity of LGUs; LWUA to provide loan portion

    President’s Priority Program on Water




    IRA, ODA

    > Levels I & II WS projects

    > Capital and operating subsidy


    Source: Draft report: Rationalizing Grants and Subsidies, PWRF, March 2009


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Annex C: LWUA Financing Windows

    Lending operations

    ( From





    Loan Program



    Loan Terms

    • 1 Level III

    Start-up of existing water

    50% to

    Interest Rates:

    supply system;

    100% of

    First P2.0M = 8.5% p.a.

    Repayment Period:


    repair/rehabilitation of


    Next P5.0M = 10.5% p.a.

    existing system;


    Next P13.0M = 12.5% p.a.

    immediate impact development for new/existing system; comprehensive

    Next P30.0M = 14% p.a. Over P50.0M = 15% p.a.


    For LWUA capital funded loans,


    Level II


    40% to

    maximum of twenty-five (25) years including a maximum

    expansion of existing

    100% of

    grace period of four (4) years

    water supply system;


    inclusive of construction

    development of new system


    period. For borrowed local and foreign capital funded loans, equivalent to the repayment period of the borrowed funds of up to a maximum of twenty- five (25) years including a maximum grace period of four (4) years inclusive of construction period.

    • 2 New Service

    For Level III's generation

    100% of

    Interest Rates shall be based


    of additional service


    on prevailing applicable rates;



    Repayment period of five (5) years to start one (1) year after initial disbursement.


    Special Loan

    Watershed management


    Interest Rates shall be based

    of 100%

    on prevailing applicable rates;

    of Project

    Repayment period of up to a


    maximum of fifteen (15) years


    Emergency purposes,

    50% to


    e.g., to make operational

    100% of

    inactive water supply and


    repair/rehabilitation of system damaged by typhoon/calamities



    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    • 3 Water Supply

    Expansion of water


    Interest Rates:

    Facilities -

    supply system; source

    of 100%

    Funding cost (interest rates of


    development; service

    of Project

    borrowed local capital funds

    Repayment Period:


    connections; construction


    and other bank charges) PLUS

    of administration building; purchase of vehicles/equipment/tools; other facilities that will enhance effiicient water

    minimum of 2% spread but not to exceed the current or prevailing commercial/market rates.


    Equivalent to the life of the

    asset acquired or the repayment period including the grace period of the borrowed funds, whichever is shorter.

    • 4 Project

    Project Development

    No limit

    Interest Rate:


    in loan


    and Efficiency

    • a. Feasibility Studies



    • b. Test well drilling

    Repayment Period:

    Fund (PDEIF)

    related to feasibility study

    Up to 5 years inclusive of up to 2 years grace period

    Click here for

    Eligibility: All WDs


    other details

    Efficiency Improvement


    Interest Rate:


    8.2% / 8.7%

    • a. limit=

    NRW reduction

    • b. Revenue enhancement


    Repayment Period:

    • c. Million

    Cost reduction

    Up to 5 years for loans P10

    • d. Capacity building

    Million and below

    • e. Studies related to


    Up to 10 years for loans above P10 million


    Semicreditworthy and Precreditworthy WDs


    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Annex D. A “Bankability” Checklist for Small Scale Water Providers 6


    This primer was conceived and developed as a result of an ADB-funded project study on “Assessing and Developing Models for Financing Small Scale Water Service Providers” as well as the collective experience of the project team.

    Significant efforts are being made to familiarize banks with the water sector including SSWPS. But it is equally important to enhance the chances of securing credit approval to a) help SSWPs make sure their shop is in order; and b) for SSWPs to present their situation and their credit request well.

    So, you want to borrow from a bank for your water supply needs? If you are the potential lender and a total stranger with your aspirations and past record approaches you for a loan, would you agree to extend the loan? You would? Well, probably not outright but just to make

    sure (the borrower is a stranger



    you would probably ask for some documents and look

    at the place of operations just to make sure that the borrower is telling you the whole truth and

    nothing but the truth.

    So what makes you different from other banks? You will find that all banks are almost the same in terms of safeguarding their interests (not the borrowers’). So how do banks assess whether you are “creditworthy” or bankable? They generally closely examine the 3 Cs of credit

    underwriting ...Character,

    Capability and Capital of the borrower and the borrower must score

    well overall on the 3 Cs before a loan can be granted. The 3 Cs can be translated into the

    “creditworthiness” or “bankability” of the borrower. Banks will evaluate your 3Cs prior to deciding whether to approve or reject your loans application. The bank will assess the borrower’s ability to pay and also his willingness to pay. Each bank will establish their own credit scheme ( and generally carefully keeps such details confidential) and the minimum “passing score” required for a borrower’s loan application to be approved.

    Objective of the Guidelines

    If you, the borrower, have several millions worth of collateral acceptable to banks or you know personally the president of a bank who will personally endorse and guarantee your loan with the bank, then you should have no problem securing external financing. If not, then these guidelines are intended for you to be able to assess your “creditworthiness” and enhance your “bankability” so you will be able to improve your chances of success in getting loan funding by scoring well on the 3 Cs for creditworthiness.

    6 Prepared by Engr. Antonio de Vera with inputs from the Project Team, Developing Financing Models for Small Water Service Providers, May 2009.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Coverage of the Guidelines



    will review the basic


    requirements for


    SSWP to score

    well on







    The first criterion of creditworthiness is “character” and this refers to how a person or

    an organization has handled past debt obligations. From the borrower’s credit history and personal background, the honesty, track record and reliability of the borrower to pay credit debts is evaluated. If the borrower has a history of non-payment or consistently delayed remittances of debt payments, all banks are likely to assume that behavior is congruent and will also assume that you will handle their loan to you in the same manner. Banks will check your other loans and credit card payment history, or ask your suppliers or other trade creditors your payment history or past record.

    Make sure that you update your existing obligations and maintain a constructive dialogue with your creditors and make amends if necessary so they will be able to speak highly of you.


    The second criterion of creditworthiness is “capacity”- how much debt a borrower can comfortably handle. And banks will look into 4 criteria for capacity of utilities. The 4 criteria for SSWPs to be able to achieve the creditworthy grade are Institutional, Operations, Technical and Financial. The lender will assess you capacity to pay versus the purpose of the requested financing, the amount and the tenor of financing.



    To pass this criterion you must be able to prove that your business is operating legally for a time period long enough for you to repay the money you intend to borrow and that you do not have major problems with the community you are serving or will not have potential franchise conflicts with the main utility.

    “Main utilities” are piped water providers given the franchise for an entire town/city or at least a major portion of it. It could be a water district, a private concessionaire, privately owned utility, an LGU-run system or a government corporation.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers


    There are many forms of SSWPs and the first requirement is for you to determine to which government agency should your utility be registered with. Your utility must be registered so its existence will be recognized legally by a financing institution. Banks do not lend to illegal or unregistered operators.

    If you are a cooperative, then your coop must be registered with the Cooperative Development Authority. If a Rural Water and Sanitation Association (RWSA), with either the LWUA or the Securities and Exchange Commission (SEC) as a non-profit organization. If a Homeowners Association or a privately owned utility, registration with the SEC is mandatory. Official receipts need registration with the Bureau of Internal Revenue (BIR).

    Of course there are also local laws or ordinances with the locality that must be complied with such as business permits, barangay clearances, etc.

    Regulatory Requirements

    Any form of utility will be regulated by the state as there is an element of a monopoly situation. Even if you are officially registered with the LGU, the question is do you have a permit from the state to operate as a utility and do you have the water rights if you have your own sources of water. If you are getting water from a main utility, then it is their problem to secure the water rights, but it will be important to also establish that your supplier meets the requirements above. But if you own and operate your own source of supply, either from wells or springs, you better make sure that you have the water rights or permits otherwise the bank will consider you as a very high security risk- resulting in outright denial of your loan request.

    Franchise Issues

    The Philippine Supreme Court has decided that it is unconstitutional for anyone to be given an “exclusive franchise.” While you have the utility business now, remember that you were given a franchise because the main utility water lines have not reached your area of coverage or that there is no main utility. But in the future, the main utility could be capable of servicing your area of operations and they might insist on that right. This could be settled by “buy out” negotiations if you were given the franchise earlier than the main utility. If your permit to operate came later, then the bank will look for a take-out agreement with the main utility.

    A take-out agreement is a contract with the main utility stating the minimum number of years that an SSWP will be allowed to operate, its area of operation and contains provisions for buying out and take over of the SSWPs’ facilities.

    The bank will need this information to determine its “tenor” or loan repayment period.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    Community Relations

    Banks will determine how you get along with the community or barangay that you are serving. If court cases have been filed by your concessionaires or barangay officials against your utility, banks will have a tendency to lose your application papers or look deeply in other criteria for other deficiencies.

    2. Operations

    To pass this criterion you must be able to prove that you, as the management or owner, know how to professionally run a water utility business and how long you’ve been running the same business or worked at similar businesses. To determine this capability, banks will look into the following:


    Banks will want to know a lot about your water source, including your actual current production and your losses (non-revenue water). If you don’t know how many cubic meters of water you produce in a day or month or your monthly billed consumption, it is strongly suggested that you do something about this 7 first before going to the bank.

    Water Quality

    Banks do not usually lend to a utility which has a high probability of causing an epidemic lest their name be dragged into subsequent court cases or bad media coverage. And they will look for chlorine residual documented results and/or bacteriological and other laboratory test results. The Philippine National Drinking Standards for Water (PNDSW) contains all the needed information on the tests that need to be done as well as its frequency by a utility. Do you even have a copy of the PNDSW pamphlet in your office? Test results are also good evidence on your behalf when you encounter a complaint or a lawsuit for contaminated water. So do this on a regular basis.

    Commercial Practices

    Are your finance and accounting records of your utility divorced or ring fenced from other business interests you may have? Are the utility records and accounts separate from your real estate dealings or loan operations? It is important to be able to show that your utility is profitable on its own and not being subsidized by other business operations.

    Does your utility utilize a chartered accountant?

    Do you have a system of billing and collection? What is the utility’s policy for connection and disconnection? Are disconnections being enforced?

    7 Production can be measured through several ways aside from putting in production meters. You can rent “portaflow” flowmeters, use pump capacity curves with pressure gauges or use a bypass pipe to measure the flow.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    What are your policies on field collections an reconciling bank statements with day-to-day operations?

    Do you operate on a budget? Are your actual revenues and expenses being monitored relative to the budget?

    All of the above questions are the major questions that the banks will ask. If you answer no to any of the questions above, then you know what to remedy or actions to take to improve your creditworthiness.

    Key Performance Indicators (KPIs)

    How well are you performing relative to the standards, goals or the industry? To evaluate your performance, banks will look at certain indicators of performance and these are the KPIs. KPIs are quantitative measures of a particular aspect of service providers’ performance. If the utility, for example, targets a lowering of its non-revenue water, the KPI NRW would give the quantitative figure of say, 35% to 32%.

    Examples of KPIs that the banks may look into are shown below together with the utility goals.

    Key Result Areas

    Key Performance Indicators

    Service Levels


    Hours Supply



    Operating Ratio

    Collection Efficiency

    Customer Satisfaction

    Response time, new connections

    Complaints/1000 connections

    Operationally Efficient

    Non revenue water (NRW)

    Staff/1000 connections

    Compliance with Government Standards

    % Samples Passing Tests

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    It is suggested that you evaluate your own performance for the above KPIs. If you rate yourself as poor on any KPI, bankers will rate you poorer. Do something first to improve your performance.

    Record Keeping

    Having an as-built plan of your system may not be related for your loan purposes but it will give the bankers an idea of your housekeeping and record keeping capabilities. If you dont have one, do it before going to the bank. Why should the bank grant you additional funds for facilities when you don’t even know what facilities you have now or where they are located.

    Some of the questions the banks may ask with respect to record keeping are listed below and it will be embarrassing if you answer no to any one of them:

    Is your utility maintaining a record system of recording a history of each meter? You need this to determine meter replacement policies.

    Do you make financial statements on an annual basis? Are these statement statements audited? To whom do you furnish these statements on a regular basis? If you don’t have or do this, then it shows that you have been delinquent in your obligations to the regulatory or registering agency.

    What is your annual NRW? (Need production and billing records for these.) If you don’t care what is happening to your system, why should the bank also care.

    3. Technical

    To pass this criterion, you must be able to prove that the purpose of getting the loan is both technically and/or financially viable.

    The best way to show viability of a future project is through a pre-investment or a feasibility study. The study need not be several volumes thick. It can be only a few pages long for as long as the necessary information are complete.

    An SSWP forwarded their business plan to NWRB as part of their proposal for tariff adjustments.
    An SSWP forwarded their business plan to NWRB as part
    of their proposal for tariff adjustments. In essence, the one
    page plan mentions that the connections will increase from
    80 to 250 and a total of Php 5.5 million
    for :
    would be needed
    Various facilities:
    The NWRB analyst merely scratch her head and said “if
    they don’t know or are guessing what they need, why
    should I endorse what they want for tariffs.”

    If you borrowing to expand your service

    area, the study must include demand

    cash flow projections, new sources of

    supply (if needed), project components

    and cost and projected financial

    statements based on the proposed


    A business plan is a “must” to assure

    the bank that the proposed project has

    been incorporated in the business plan.

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    A business plan is basically a document outlining the the utility’s goals for at least 3-5 years with specific quantitative measures (demand, connections, level of service, new facilities required and cost, projected revenues and expenses)) on how the utility intends to achieve them 8 .

    The utility must be able to prove that the project being proposed is the best solution to the need or problem being addressed. If the problem is high NRW, for example, replacing 50% of all the pipelines might not necessarily be the best solution if you don’t know the source of the high NRW. Find out the causes of the problems first.

    In a utility, the source of water supply is the “heart” of the system. Do not cut corners when you are drilling a new well or tapping a spring source. For the spring source, ensure that you have spring flow measurements during the dry period. For wells, ensure that you have a scientific basis for selecting the specific area and the best driller money can hire. If you can even find a driller willing to work on a “no water, no pay” basis, by all means go for it.

    4. Financial

    To pass this criterion, you must be able to show that you can generate enough revenues to pay for all your expenses including debt service.

    Assuming that the bank is satisfied that the projected revenues can pay for the loan, the bank will still look into your current financial operations. You must be able to show that the your current operation is profitable or at least breaking even. To ascertain this, the banks will generally look into 5 aspects of your financial operations.

    “Free” Cash 9 in a Bank: You must have some free cash in a bank which can be used as equity for the project and for maintaining a minimum hold out deposit. Banks do not lend 100% of project requirements. You will be required to have equity participation. 10 One way of improving your cash balance is to require some deposits from prospective new clients.

    Collection Efficiency (total collections/annual billings): If your collection ratio is less than 90%, then it means that your receivables are piling up or many of your clients are not paying. Your utility will be classified as a high-risk borrower and correspondingly, higher interest rates will likely be imposed and/or shorter loan tenors.

    Return on equity (net income/total net worth): This ratio measures an entity’s efficiency at generating profits from every peso of equity. Your return should be more than the interest rate than the bank lending rate.

    Debt-Service Coverage Ratio: This ratio is calculated by dividing the EBITDA (earnings before interest, tax, depreciation and amortization) by the annual debt amortization. The ratio

    • 8 The WSP can refer to the NWRB manual of rate setting for developing business plans

    • 9 Not earmarked for any obligation 10 Equity participation will depend on the project risk factor and the bank policies

    RETA 6498: Assessing and Developing Models for Financing of Small Scale Water Service Providers

    indicates how many times over cash flow from operations cover the utility’s obligation. This ratio should ideally be more than 1 and the higher it is, the more creditworthy you are.

    Approval on Projected Tariffs for the next 5 year: Your projected tariffs for the next 5 years should have been submitted to NWRB for its approval (better if NWRB has already approved it). This gives the bank some assurance that the tariffs submitted in your projected financial statements are confirmed and no longer assumptions.


    If after passing all the requirements outlined in sections B and C above, the bank may still be hesitant in approving your loan, then the problem could either be the inexperience of the bank in lending to the water sector or existing inflexible bank policies like requiring collaterals. This could be solved by the last C of credit.- Capital.

    Capital refers to current available assets of the borrower, such as real estate, savings or investment that could be used to repay debt if income should be unavailable.

    Bankers, being natually conservative, will ask “ what if something should go wrong during the tenor of the loan, what is my back-up plan.” Many things could go wrong like wells becoming dry or earthquakes breaking pipelines or even a fire in your community wherein many consumers decide to transfer residence elsewhere. And bankers back up plans are called “collaterals.” If you have these assets which are acceptable to banks, you will never encounter any difficulty in securing loans. Unfortunately, the reason we go to the banks in the first place is because we don’t have the assets.

    Banks will not accept the infrastructure assets of your utility as collateral as they do not really have commercial market values if the banks decide to sell it to recover their loans. Would you know anyone willing to buy buried pipelines or a steel elevated tank (usually rusted) unless it is for scrap.

    However, a last ditch effort that you can do is to sign an agreement with the bank that if you are in arrears for 6 months or more, the bank has the right to temporarily take over your operations, sans judicial proceedings, until the utility is again on current status with respect to debt servicing. However, consult with your lawyers on this for providing safety nets for you as the bank may want to keep your business forever.


    The potential lender will also assess, primarily based on its past experience and legal advice it has received, whether the borrower has the necessary legal basis to borrow the funds - does the borrower has the legal right to borrow and will the claim on the borrower and the proposed documentation create a legal, valid and binding payment obligation on the part of the borrower. That is, will the bank be able to legally enforce its collection rights?