2019 Regulatory Review – Water Utility
Based on initial survey results of industry stakeholders, these are the regulations that are difficult to comply with:
- The water sector is largely fragmented due to the large number of government agencies (at least 30) dealing with various facets of water – water resource development / dams, watersheds, domestic water supply, flood control, ground water use, sanitation, irrigation, water quality monitoring; water use permitting (Annex 1).
- As a result of regulatory fragmentation, the development of the industry is largely uncoordinated; there is no coherent set of principles and practices to price water as a scarce resource; water pricing does not reflect the true price of water resource as a scarce commodity; policies on land use, agriculture, watershed, urbanization, industrialization are largely uncoordinated with respect to the use of water;
- Overlapping responsibilities. Also, as a result of fragmentation, there is some overlaps in the powers and responsibilities of local government units and the National Water Resources Board (NWRB);
- Regulatory uncertainty. The water sector faces various kinds and magnitudes of regulatory uncertainty. The first involve cases where ex-post penalties are imposed for violations of regulations and non-compliance with contractual obligations by concessionaries (Manila water as a case in point). A second case involve local governments imposing unwarranted local resource use taxes. A third case of uncertainty surrounds regulations on the approval of large dam projects (for example the Kaliwa dam project); it takes about 6 to10 years to get dam projects approved due to regulatory hurdles, especially environmental and consent from local communities. Finally, there are uncertainties due to unregulated powers of local government councils to issue water franchises that leads to the practice of water permit banking, a form of speculation and rent seeking.
- Regulatory red tapes. Regulatory red tapes in the application for water permits, construction and ancillary permits from local governments remain a common concern for the industry.
- Regulatory speculation. Undercapitalized businesses secure water franchises for purposes of securing water rights permits to be sold later to property developers for high margins.
- Regulatory capture. Regulatory capture appears to be prevalent in the sector, for example in cases where powerful property developers and conglomerates engage in water permit banking (i.e. water use rights and permits are locked in and owned by property developers for future use); there are also cases of the politicization of local water authorities that favors powerful property developers.
- Weak regulatory capacity. This is especially the case for the NWRB, LWUA and LGUs which lacks manpower and budgets to properly fulfill their mandates; the Local Water Utilities Administration (LWUA) has prioritized providing credit to water utilities and capacity building has been relegated as secondary priority; there is a lack of national water information database as a basis for a rational approach to water use planning and allocation.
As a result of this problematic regulatory environment, the future development of the industry in particular and the economy in general could be hampered. For instance, cities are the main drivers of growth but the growth and sustained development of cities is constrained by the availability of fresh water. The supply of water in turn depends on the willingness of public and private agencies to invest in water infrastructure (dams, bulk and retail water supply and sanitation). The willingness to invest depends on, among others, on the risk-return ratios faced by investors which in turn depends on a host of risks – regulatory and political risks, commercial risks, construction and operational risks, supply risks, financial risks, among others. Mitigating these risk factors is crucial for the ability of the water industry to provide for water services in a manner that is safe, affordable and environmentally sustainable to support rapid urbanization.
As a result the industry regulatory review for the water utility, the study generated the following recommendations:
To consider the following provisions in the drafting of the law creating the Department of Water
1. The Department of Water should focus on two core functions: 1) water as a resource and 2) water as a service. There should be an autonomous water regulatory agency to regulate matters such as tariffs, service levels, joint venture agreements, among others.
2. LWUA Administrator should have the requisite qualifications including 10 years of managerial experience in local water districts or industry.
3. Creation of water regulatory commission (WRC) with adequate staffing and enforcement capacity. WRC should deputize local water districts in the monitoring and enforcement of water permit regulations.
4. Create a Water industry development Fund for water resource development
5. Condonation of fines, charges of Local Water Districts, to make them viable as self-sustaining enterprises and make them attractive for joint ventures with the private sector. This is the same approach taken for ailing Rural Electric Cooperatives under the EPIRA Law.
6. To pass a law converting Laguna Lake into a Class A body of water. This will help make more raw water available to water concessionaries while awaiting the uncertainties in the development of the Kaliwa Dam Project.
National Water Resources Board
1. To significantly shorten processing period for the review, evaluation and approval of water permits which currently takes between 6-months and in some case 9 years. This can be done by significantly increasing staff, imposing hard deadlines and streamlining document flow and handling.
2. To simplify the application and documentary requirements for water permits for Barangay Water Supply and Sanitation Associations. The compliance costs is too onerous and the benefits of these documentation is not warranted.
3. To review the use of the Return on Rate Base (RoRB) for LWDs because it does not account for time value of money. RoRB leads investor to frontload on capex which are then passed on to consumers. Instead it is recommended that RoRB be replaced with the tariff model used in the Metro Manila concession model using time value of money. This way, frontloading of capex will be avoided and consumers are spared from paying high capex costs.
4. To give LWD powers to review water permit applications, monitor and enforce compliance with permit regulations, impose penalties and to close illegal water sources. At present, monitoring and enforcement of private well owners is not adequate due to limited capacity by NWRB. Stricter monitoring and enforcement is to ensure sustainability of water sources and ensure a level playing field.
5. To require Class A and B water districts to use automated data transmission devices for water extraction using water meters or data loggers. The purpose is for NWRB to more effectively monitor water extraction are within sustainable limits. The cost of automation should be built into application for water permit for major wells. Automation will help NWRB ensure compliance with water use regulation.
6. To reconcile records with Local Water Districts to determine the legality of private wells. There are many reported cases whereby private wells were given permits by NWRB but are actually illegal due to lack of permit to drill as documented by LWDs.
7. To review the widespread practice of water permit banking (like the practice of land speculation or spectrum warehousing). During consultations, stakeholders report that even undercapitalized businesses were awarded water rights which they hold on to and later sell for a large margin to large property developers. There should be a water tax – like land speculation tax – to be imposed against water speculators.
Local Water Utilities Administration
1. To fix a hard deadline for the processing of loan applications from LWC (in one case > 2 years due to personnel and organizational changes and handling of documents;
2. To strengthen its program for capacity building of LWD.
3. To educate new elected local chief executives on the scope and limitations of their powers over the water district (appointment of board members, natural resource fees)
4. To revise existing tariff model to take into account current opex, future capex, big ticket projects, replacement and expansion.
Environmental Management Bureau (EMB)
1. To review DAO 2016 – 08 on effluent standards using regulatory cost benefit analysis, regulatory impact analysis and stakeholder engagement. Some stakeholders note that the standards are excessive and even exceed those from highly developed economies.
2. Strengthen compliance monitoring of individual STPs in Boracay
1. Allow water concessionaire /LWD to process applications for digging permits to connect households from main lines instead of the current approach of every household applying for their own permits. This will simplify and shorten the permitting process. In the case of Quezon City, this approach led to a 50% cut in processing time from 21 days to about 9 days.
1. To review guidelines on joint venture agreements (JVAs) especially whether it has met its objectives of 1) improving service delivery; 2) reducing non-revenue water; 3) expanding service coverage; 4) providing access to poor households. Of the 500 local water districts, about 70 have joint venture agreements with the private sector ranging from projects on NRW, bulk water source, among others. At present, JVAs are mostly with already strong LWD (class A and B) and weaker ones (Class C and D) are unlikely to attract investments.
2. Adopt a standard template for JVA (pre-qualification, tender documents, JVA model contract) to be more efficient and to minimize customization that could favour certain bidders. A study by the Philippine Competition Commission showed that 90% of all the 70 Joint Venture Agreements in the Water Sector have been won by the original proponent from one company. Part of the reason is that the bidding qualification criteria tend to be too specific that has the effect of limiting the competitiveness of the bidding process;
3. Determine the optimal structure of water utility in a service area; in some cities, there tend to be sub-optimal number of water service providers leading to inefficient outcomes.
Local Water Districts
1. Metro Cebu Water District with LWUA and OSG to appeal 2007 SC decision on Adalla case which prohibits exclusivity of LWD as exclusive water supplier. Public interest is the main ground for appeal. At present, more than 150 private wells are inadequately regulated leading to excessive and unsustainable ground water extraction and high levels saline water and nitrate intrusion as documented by studies by JICA and University of San Carlos Water Resource Council 
Tourism Infrastructure Economic Zone Authority
1. To exercise its regulatory powers on tourist zones especially on ensuring level playing field for water service providers.
Philippine Statistics Authority, Manila Bay Coordinating Office, MWSS Regulatory Office
1. To harmonize and centralize reporting requirements i.e. KPI Business efficiency measures;
Department of Public Works and Highways – Central Office
1. To reiterate in a memo to its district offices that 1) local water districts should not be required to repave the entire block of road affected by pipe laying because this will significantly increase the cost of water passed on to consumers especially if extensive pipes runs under national highways (for example six lane highways); 2) to set aside budget in the program of works for the compensation of damages / relocation of water pipes affected by road concreting projects rather than pass this cost on water consumers; 3) mandatory regular coordination with LWD and power utilities; whatever is the right of way of DPWH should also be the right of way of LWD.
2. To finalize its MOU with the Philippine Association of Water Districts to matters related to DPWH and LWDs.
Department of Budget and Management
1. To stop other government agencies (DILG, DoH, DoTr, DPWH) from getting involved in water supply projects and instead channel the funds as grants to local water districts which has the capacity to operate, maintain and sustain the water business. At present, water supply projects by these agencies are not sustainable because water users do not pay operation and maintenance fees leading to their deterioration. In contrast, LWDs are mandated to collect water fees in return for the operation and maintenance of facilities.
 Japan International Cooperation Agency and University of San Carlos 2010. The Study for Improvement of Water Supply and Sanitation in Metro Cebu