Small Water Utilities Improvement and Financing Project Leila H. Elvas Country Team Leader WSP Philippines

2 Small utilities are dominant in the Philippines water market  Water supply coverage rate high (80.2% in 2004), but only 44% house connections  > 2,000 utilities, 90% small*  5 different management models with different regulatory and financing frameworks *under 5000 connections; small utilities cover about 1/3 of those with house connections

3 They exhibit classic characteristics of small enterprises  Average annual operating revenues US$0.160M  Range < US$0.0127M to US$383 M  Reliance on keeping costs low vs. increasing revenues  Very little ‘fat’; surplus is used to operate or ‘absorb’ accounts receivables  Expansion is funded mostly by internal cash generation  Average number of staff : 19 (range 6 to 39)  DIY approach taken by staff and managers  Internal systems & controls not well developed  Highly personal relationships with customers and other ‘publics’  Susceptible to ‘political’ interference

4 Average (45) Water Coverage% Water AvailabilityHours2021 Consumption per Capital/c/d Production/ Populationm 3 /c/d Unaccounted for Water% Connections Metered% Operating Ratio Before Depn & Interest Collection PeriodMonths Collection Efficiency% Average TariffPhP New Connection FeePhP Capital Expenditure/ ConnectionPhP Staff Per 1000 Connections Performance of 20 Utilities

5 Small utilities are where piped water at the margin meets emerging demand SWIF aims to improve the viability of small utilities and support them to increasingly access market-based financing in line with Government’s Water Sector Financing Strategy  Majority of piped providers - small  Outside major cities - clients generally lower income  Growth potential is large  Dept of Finance request SWIF Components 1.Performance Improvement & Investment Planning 2.Customer Satisfaction & Willingness-to-Pay 3.Improving Access to Private Finance

6 Challenges of ‘water SMEs’ call for a suite of solutions Small utilities can operate viably & increase services, but issues need to be addressed in concert BENCHMARKINGBENCHMARKING Continuing access to technical & management expertise Understanding effective demand of rapidly changing market Developing finance market/ product for water SMEs Improving franchising policy Strengthening rule-based redress Assessment of opportunities & constraints Performance improvement planning Financial projection & tariff modeling Basic training & peer-peer networking Customer willingness to pay survey Pricing policy review FI support for product development & marketing Sector roadmap Study on Integration of Business Operations Regulations Initiative

7  Public financing in the sector heavily dependent on overseas development assistance available through:  Local Water Utilities Administration  Land Bank of the Philippines  Development Bank of the Philippines  Only a handful of large quasi-public utilities are able to tap these funds  Executive Order 279/2004  Increased participation of commercial financing from government and public financing institutions  Graduation policy where creditworthy WSPs to utilize market based finances, and the rest of WSPs to access the more concessional sources of funds Why the SWIF Project?

8 11 Participating Utilities 1 RWSA 4 Cooperatives 6 LGU-Managed

9 Project Outcome  Improved ability of small utilities to have access to increasingly market-based financing in line with GoP Water Sector Financing Strategy Small Water Utilities Improvement and Financing (SWIF) Project

10 Project Components 1.Capacity building in project financing 2.Consumer survey and water tariff pricing 3.Support for development of financial product for small utilities

11 1. Capacity building in project financing  Worked with 11 utilities under previous Performance Benchmarking projects  Identified and developed potential projects  Generated detailed proposal that will improve utility performance  Trained utility staff in planning and decision- making

12 1. Capacity building in project financing  To be institutionalized in NWRB under SWIF Phase 2  Water utilities to be assisted in capacity building by mentors to be accredited by NWRB

13 2.Consumer survey and water tariff pricing  Support realistic performance improvement planning by:  Understanding customers’ views on service improvement areas and their relative priorities  Estimating an upper & lower bound of price they are willing to pay for these improvements  Providing insights to current tariff policies related to how to distribute costs across time and across different types of customers  Survey tool to be developed in SWIF Phase 2

14 Customers are willing to pay, but pressure on tariff need to be managed  Compared to HHs with piped water, unconnected HHs:  Spent 1% more of monthly income  Paid 70% more for water each month  Customers satisfied with service by & management of small utilities  Service improvements would be met by increased payments from customers:  Php 122/month for improved pressure  Php 66/month for good quality; another Php 106/month for superior quality  WTP values will cover the proposed new investments’ impact on tariffs, BUT:  Bill will rise to 2% of monthly HH income from <1%  Where service is already superior and tariffs high, ability of a small base of customers to finance expansion through tariffs becomes limited

15 3. Support for development of financial product for small utilities  Case studies on experiences of small water utilities in loan financing  Project proposals for submission to banks  Ring-fencing of financial accounts of government-run water utilities  Small Utility Access to Market Credit: Lessons and Options