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Financial Performance Evaluation of Selected WDs and LGUs PWRF

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Financial Performance Evaluation of Selected WDs and LGUs PWRF Powered By Docstoc
					 Financial Performance
 Evaluation of Selected Water
 Districts (WDs) and Local
 Government Units (LGUs)
 Related to Pilot Credit
 Financing of Water Utilities
 A Working Paper of the

 Philippines FORWARD Program




 Prepared for USAID under the FORWARD Task
 Order, Bureau for Asia and Near East, Integrated
 Water and Coastal Resources Management IQC




 David C. Roco




 December 2004




7250 Woodmont Avenue, Suite 200, Bethesda, Maryland 20814
Tel: (301) 718-8699 Fax: (301) 718-7968 Email: info@dai.com
                                                                    i


                                                TABLE OF CONTENTS
A. BACKGROUND .................................................................................................................1

B. OBJECTIVES OF THE FINANCIAL EVALUATION EXERCISE FOR WATER UTILITIES ............2

C. APPROACH USED TO SELECT WHICH WATER UTILITIES TO ANALYZE .............................2
       Water Districts Selection .........................................................................................2
       LGU Selection .........................................................................................................4

D. EVALUATION PARAMETERS..............................................................................................6
      Water Districts .........................................................................................................6
      LGUs ........................................................................................................................7

E. SCORING AND RESULTS OF THE EVALUATION ..................................................................7
      Water Districts .........................................................................................................7
      Local Government Units ........................................................................................10

F. PROPOSED DOF/LWUA PARAMETERS FOR CREDITWORTHINESS CLASSIFICATION........11

G. CONCLUSIONS ................................................................................................................12


  ANNEX 1 WATER DISTRICTS SCORING GUIDE                                                                                        1-1
  ANNEX 2 WATER DISTRICTS SCORING AND RANKING RESULTS                                                                          2-1
  ANNEX 3 LOCAL GOVERNMENT UNITS (LGUS) SCORING GUIDE                                                                          3-1
  ANNEX 4 LOCAL GOVERNMENT UNITS SCORING AND RANKING
          RESULTS                                                                                                              4-1
  ANNEX 5 WATER DISTRICTS SUMMARY OF COMPUTED VALUES                                                                           5-1
  ANNEX 6 WATER DISTRICTS FINANCIAL DATA                                                                                       6-1
  ANNEX 7 LGUS - MUNICIPALITY SUMMARY OF COMPUTED
          VALUES                                                                                                               7-1
  ANNEX 8 LGUS—MUNICIPALITY FINANCIAL DATA                                                                                     8-1
  ANNEX 9 LGUS—CITY SUMMARY OF COMPUTED VALUES                                                                                 9-1
  ANNEX 10 LGUS—CITY FINANCIAL DATA                                                                                          10-1
  ANNEX 11 SUMMARY OF RESULTS OF LWUA
           CREDITWORTHINESS CLASSIFICATION                                                                                   11-1
                                 ii




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                                     LIST OF TABLES

Table

1       Water Districts Classification and Number                              2

2       List of Evaluated Water Districts                                      3

3       List of Evaluated Local Government Units                               5

4       Parameters Used to Evaluate WD Financial and Technical Performance     6

5       Parameters Used to Evaluate LGU Financial Condition                    7

6       Summary of Evaluation of Top Ten Water Districts                       9

7       Summary of Financial Evaluation of Viable LGUs                        11

8       Proposed Creditworthiness Classification System for Water Districts   12

9       Summary of Indicators and DOF/LWUA Creditworthiness Classification    14
                                                 1


                                       A. BACKGROUND

This report is a working paper of the FORWARD Philippines Program supported by the United
States Agency for International Development. The Program was developed in response to the
United States Government’s negotiated action plan on water during the G8 Summit in 2003 that
highlighted the need for innovative financing mechanisms to mobilize domestic capital for water
and sanitation projects. The Philippine FORWARD Program has the following objectives:

 Support GOP efforts to meet the Millennium Development Goals (MDG) for water and
  sanitation.

 Help the GOP and a group of selected water utilities to mobilize private sector investment in
  new water and wastewater infrastructure and services.

As currently planned the Program will have a three pronged work plan: (i) provide technical
assistance to selected water utilities to enhance internal management systems with the objective
of improving their operating efficiency and finances; (ii) design and pilot test a loan syndication
mechanism that blends ODA loan funds with private sector funds, with the latter partially
guaranteed by Local Government Unit Guarantee Corporation (LGUGC); and (iii) assess the
feasibility of creating a revolving fund that could mobilize private sector investment and provide
long-term financing for water and sanitation projects.

This financial assessment of selected water utilities was prepared to provide a basis for
identifying water utilities that could be provided with technical assistance, and to identify
potential clients for the loan syndication mechanism or other new long-term funding for water
and sanitation infrastructure. The study involved reviewing the financial statements for selected
water utilities and local governments, formulating a scoring and ranking system, and analyzing
key financial and performance indicators. The study was undertaken between the end of July and
end September 2004.

It preceded the on-going work of the Local Water Utilities Administration (LWUA) to classify
water districts and other water service providers according to degrees of creditworthiness.
LWUA’s exercise was in compliance of Executive Order 279 “Prescribing Guidelines on
Instituting Reforms in the Financing Policies for the Water Supply and Sewerage Sector and
Water Service Providers and Providing for the Rationalization of LWUA’s Organizational
Structure and Operations in Support Thereof”, which required the classification of water
districts into four categories: creditworthy, semi-creditworthy, pre-creditworthy and not
creditworthy. EO 279 and its implementing rules and regulations (IRR) prescribes the guidelines,
criteria, grounds and procedures, which shall govern financing policies for the water supply and
sanitation sector and to rationalize LWUA’s role therein. The classification will guide the
Oversight Committee of EO 279 in identifying the appropriate source of funding for the water
service providers. The parameters for classifying water districts (WDs) were still evolving during
the preparation of this report. At this time, LWUA has proposed a classification system to the
Committee but this system has not been approved and adopted yet. A description of LWUA’s
proposed classification system is discussed in the latter part of this report.




                                            A Working Paper for the Philippines FORWARD Program
                                                                2


          B. OBJECTIVES OF THE FINANCIAL EVALUATION EXERCISE FOR WATER UTILITIES

The objectives of the evaluation are as follows:

 Determine the most creditworthy Water Districts and most potentially viable Local
  Government Units that serve as water service providers.

 Rank the WDs and LGUs in term of creditworthiness/viability

 Use the results to identify those WDs/LGUs that could be potential partners in a USAID-
  supported pilot project designed to help these water utilities improve their operations and
  access credit financing to expand operations.


                 C. APPROACH USED TO SELECT WHICH WATER UTILITIES TO ANALYZE


Water Districts Selection

The GOP’s Department of Budget and Management (DBM) classifies water districts (WDs) into
six categories based on their sizes (physical assets, revenue base, and staff size), complexity of
operation (gravity, pumping and combination), gross receipts and net income.

                                Table 1: Water Districts Classification and Number

                                1
                Categories                              No. of WDs                            Connections
    1. Very Large                                             2                             19,000 – 135,000
    2. Large                                                 12                             15,000 – 58,500
    3. Big                                                   42                              3,500 – 27,000
    4. Medium                                                46                              2,300 – 14,000
    5. Average                                               53                              1,500 – 7,500
    6. Small                                                291                              < 100 – 4,500
    Total                                                   447
Source: LWUA Corporate Planning Office

For purposes of this assessment, we limited the analysis to the “Very Large”, “Large” and “Big”
Water Districts because they represent the utilities with larger client bases, greater financial
strength, and capacity to borrow funds for system expansions. Eight (8) of the initial fifty six
(56) WDs considered for evaluation were excluded for lack of complete records. The list is
shown in Table 2. We used data from the 2003 balance sheets and year-end monthly data sheets
of the WDs to evaluate performance. These documents were obtained from the Local Water
Utilities Administration (LWUA).


1
     For a WD to be reclassified into a higher category, it must meet the minimum size requirement and achieve a certain level of
     operating performance in relation to the following financial indicators: Operating Ratio, Debt Service Ratio, Current Ratio,
     Unaccounted for Water, and Staff Productivity.




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                         Table 2: List of Evaluated Water Districts


        Water District      Region            Province            Category        Number of
                                                                                 Connections
Davao                          XI      Davao del Sur              Very Large       138,680
Metro Cebu                    VII      Cebu                       Very Large       99,280
Cagayan de Oro                  X      Misamis Oriental             Large          60,328
San Juan del Monte             III     Bulacan                      Large          48,749
Zamboanga City                 IX      Zamboanga Sur                Large          46,009
Quezon Metro                   IV      Quezon                       Large          33,049
Calamba City                   IV      Laguna                        Big           28,618
Angeles City                   III     Pampanga                     Large          27,000
Bacolod City                   VI      Negros Occidental            Large          24,630
San Pablo City                 IV      Laguna                        Big           24,297
Leyte Metro                   VIII     Leyte                         Big           24,064
Butuan City                   XIII     Agusan del Norte              Big           23,163
Metro Naga                      V      Bicol                         Big           21,996
Cabanatuan City                III     Nueva Ecija                   Big           21,500
Metro Iloilo                   VI      Iloilo                       Large          19,899
Batangas City                  IV      Batangas                     Large          19,315
Hagonoy                        III     Bulacan                       Big           19,300
Cotabato City                ARMM      Cotabato                      Big           19,296
Mabalacat                      III     Pampanga                      Big           18,900
San Pedro                      IV      Laguna                        Big           18,106
Laguna                         IV      Laguna                        Big           17,688
Camarines Norte                 V      Bicol                         Big           17,298
Dumaguete City                VII      Negros Oriental               Big           17,038
Silang                         IV      Cavite                        Big           16,880
Misamis Occidental              X      Misamis Occidental            Big           16,572
Tagum City                     XI      Davao del Norte               Big           15,824
Dagupan City                    I      Pangasinan                    Big           15,432
Legaspi City                    V      Bicol                         Big           14,666
Metro Roxas                    VI      Iloilo                        Big           14,525
San Fernando City              III     Pampanga                      Big           13,714
Puerto Princesa City           IV      Palawan                       Big           13,658
Ilocos Norte                    I      Ilocos Norte                 Large          12,313
Baliuag                        III     Bulacan                       Big           11,924
Metro Kalibo                   VI      Aklan                        Large          11,566
Meycauayan                     III     Bulacan                       Big           11,416
Surigao Metro                 XIII     Surigao Norte                 Big           10,632
Digos City                     XI      Davao del Sur                 Big            9,234
Mariveles                      III     Bataan                        Big            9,051
Tabaco City                     V      Bicol                         Big            8,203
Tagaytay City                  IV      Cavite                        Big            7,586
Dipolog City                   IX      Zamboanga Norte               Big            7,529
Metro La Union                  I      La Union                      Big            7,460
Malaybalay City                 X      Bukidnon                      Big            6,725
Morong                         III     Bataan                        Big            5,911
Nasugbu                        IV      Batangas                      Big            4,806
Orani                          III     Bataan                        Big            4,779
Concepcion                     III     Tarlac                        Big            3,640
Tuguegarao City                 II     Cagayan Valley                Big            1,914




                                        A Working Paper for the Philippines FORWARD Program
                                                4


LGU Selection

We used a different approach to analyze LGUs because of the absence of separate accounts and
performance data for many LGU-managed water utilities. The factors used to select which LGUs
to analyze were:

The LGU should be a city or a first class municipality: The classifications were based on the
Department of Finance (DOF) Department Order # 32-01 dated Nov. 20, 2001 which uses
regular income (local source and internal revenue allotment) as the primary criteria for
classifying LGUs. Cities and first class municipalities have annual regular income greater than
P35-Million, and thus have a greater borrowing capacity and means to undertake capital
improvements.

The LGU’s water utility operation should not be within the Manila Water and Sewerage
Services (MWSS) franchise area: LGUs within the MWSS franchise area were excluded from
this selection process. The two concessionaires have their own plans for expansion within their
franchise areas.

The LGUs should have no fully operating water district within its jurisdiction: LGUs with
non-operational water districts and that function as water utility operators were included in the
evaluation. It should be noted that a water district can be dissolved and turned over to the LGU
provided it has no outstanding loan with LWUA.

For the LGUs, the study team relied on their Statement of Income and Expenditures (SIEs) for
the period 2001–2003. These documents were obtained from the Bureau of Local Government
Finance. The list is shown in Table 3. Out of the 59 first-class municipalities and cities that
manage their own water utilities, twenty LGUs were excluded due to incomplete year-end
Statements of Income and Expenditure. Hence only seven cities and 32 municipalities were
evaluated. Of these LGUs, eight have non-operational WDs within their jurisdictions.




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             Table 3: List of Evaluated Local Government Units (Cities and Municipalities)

                 Cities and Municipalities                   Region                    Province
                                                          A. Cities
      Calapan                                                   IV      Mindoro Occidental
      Canlaon                                                   VII     Cebu
      Danao                                                     VII     Cebu
      Tagbilaran                                                VII     Bohol
      Ormoc                                                    VIII     Southern Leyte
      Samal                                                     XI      North Cotabato
      Isabela                                                ARMM Basilan
                                                      B. Municipalities
*     Itogon                                                  CAR       Benguet
*     Tabuk                                                   CAR       Kalinga
      Malasiqui                                                   I     Pangasinan
      Baggao                                                     II     Cagayan
      Penablanca                                                 II     Cagayan
*     San Mariano                                                II     Isabela
*     Pulilan                                                   III     Bulacan
*     Capas                                                     III     Tarlac
      San Pascual                                               IV      Batangas
      Binan                                                     IV      Laguna
*     Cabuyao                                                   IV      Laguna
      Sta. Rosa                                                 IV      Laguna
      Candelaria                                                IV      Quezon
      Naujan                                                    IV      Batangas
      Labo                                                       V      Camarines Norte
      Calatrava                                                 VI      Negros Occidental
      Cauayan                                                   VI      Negros Occidental
      Guinhulgan                                                VII     Negros Oriental
*     Quezon                                                     X      Bukidnon
      Pantukan                                                  XI      Compostela
      Kapalonga                                                 XI      Davao del Norte
      Sto. Tomas                                                XI      Davao del Norte
      Malita                                                    XI      Davao del Sur
      Sta. Cruz                                                 XI      Davao del Sur
      Carmen                                                    XII     North Cotabato
*     Malungon                                                  XII     Saranggani
      Tiboli                                                    XII     South Cotabato
      Isulan                                                    XII     Sultan Kudarat
      Esperanza                                                XIII     Agusan del Sur
      La Paz                                                   XIII     Agusan del Sur
      Loreto                                                   XIII     Agusan del Sur
      San Francisco                                            XIII     Agusan del Sur
* First class municipalities with non-operational Water District




                                                      A Working Paper for the Philippines FORWARD Program
                                                      6


                                    D. EVALUATION PARAMETERS

Water Districts

The evaluation measured the operational performance and financial soundness of the utility. This
was possible because WDs operate as independent companies and maintain uniform and standard
commercial accounting systems that clearly define and classify revenues and expenses. Water
districts also track and report on certain performance indicators that were also used in this
evaluation. The parameters listed in the following table were used to evaluate the WDs.

           Table 4: Parameters Used to Evaluate WD Financial and Technical Performance

    Water Districts                   Formula                         Description of Indicators
1. Net Worth to Total      (Capital + Retained Earnings)   Represents WD’s share on total assets;
Assets                     / Total Assets                  indicates financial stability
2. Debt to Equity Ratio    Long-Term Debt / Net Worth      Represents proportion of debt to equity;
                                                           measures solvency
3. Current Ratio           Current Assets / Current        Represents proportion of current assets to
                           Liabilities                     current liabilities; measures liquidity

4. Average Net             (Retained Earnings/ Total       Measures net earnings per connection;
Earnings/Connection        Active Connections)/No. of      indicates ability to manage O&M and to fund
                           Years                           more connections

5. Net Income Ratio        Net Income / Total Income       Income after deducting operating and
                                                           maintenance expenses; indicative of ability to
                                                           sustain operations and invest in new projects
6. Operating Ratio         O & M Expenses /Utility         Measures the ability of the operating units to
                           Operating Income                manage costs and to operate within budget

7. Average Return on        (Retained Earnings/ No of      Measures ability of the WD to earn from the
Assets                     Years in Operation)/ Total      use of its assets
                           Assets
8. Cost Recovery Ratio     Total Revenues /
                           (O&M+Dep’n+Interest             Measures the ability to recover O&M, debt
                           Expense)                        service, interest expense and depreciation.
9. Collection Efficiency   (Collections CY + PY Arrears)   Measures ability of WD to collect the
                           /                               necessary fees and charges from customers
                           (A/R, beg. + CY Billings)
10. Non-Revenue Water      (Volume Produced – Water        Measures systems loss and losses from illegal
                           Billed)/                        connections, pilferages, erroneous billing, etc.
                           Volume Produced
11. Staffing Ratio         No. of Active Connections /     Represents proportion of active connections
                           No. of Staff                    to number of staff; measures efficient use of
                                                           human resources




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LGUs

In the case of the LGUs, the parameters measure the owner’s (LGUs) capacity to financially
support the development and operating cost of the system from its overall budget. In LGU-
operated systems, revenues and expenses, along with other economic enterprises are recorded
and kept in the LGUs General Fund Account, making it difficult to specifically identify the
revenues earned and expenses incurred in operating the water facilities. Similarly, most LGU-
managed water systems do not maintain statistical financial and technical data relating to the
operation of their water utilities. The indicators used to evaluate LGUs are presented in the
following table.

                   Table 5: Parameters Used to Evaluate LGU Financial Condition

1. Net Income to Regular        (Local Tax + Non-tax                Measures net operating income over
Income Ratio                    Revenues) / Regular Income          regular income; indicative of ability to
                                                                    sustain operations and generate
                                                                    returns from operations
2. Percent Local Revenue to     Net Operating Revenue /             Measures ability to generate revenues
Regular Income                  Regular Income                      from local sources; hence indicates
                                                                    ability to be less dependent on IRA
3. Percent Cash ending to       Cash Ending / Regular Income        Measures solvency
Total Receipts                  + Other Receipts)
4. Cash Flow Ratio              (Regular Income + Other             Measures liquidity
                                Receipts) / (O&M Exp. + Other
                                Disbursements)
5. Debt Service Capacity        20% of Total Regular Income –       Measures borrowing capacity
                                Current Debt Service
6. Population                   National Statistic Office data of   Indicative of the LGUs potential market
                                2000                                revenue base




                            E. SCORING AND RESULTS OF THE EVALUATION

Water Districts

LWUA’s Industry Averages (LIA) for 2002 and the Water District’s Group Averages (WDGA)
were used as reference points in the scoring system. Pre-determined incremental points were then
assigned to each defined range of values. The LIA or the WDGA, whichever is lower is used as
the lowest value in the range. Zero points were given to Water Districts with scores below this
threshold. The highest value is the based on the highest performance indicator among the very
large, large and big water districts.




                                               A Working Paper for the Philippines FORWARD Program
                                              8



         Points Earned                         2.5            5.0              7.5         10

                                                  R A N G E         O F     V A L U E S
     Performance Indicators        0

        Ratio of Net Worth to             > 0.50 but <   > 0.62 but <     > 0.73 but <
 1                               < 0.50                                                   > 0.84
        Total Assets                      0.62           0.73             0.84

                                          ≤ 0.50 but >   ≤ 0.40 but >     ≤ 0.30 but >
 2      Debt to Equity Ratio     > 0.50                                                   ≤ 0.20
                                          0.40           0.30             0.20

                                          > 3.0 but <
 3      Current Ratio             <3                     > 4.0 but < 5    > 5.0 but < 6   > 6.00
                                          4.0

        Ave. Net Earnings Per             > 322 but <    > 718 but <      > 999 but <
 4                               < 322                                                    > 1280
        Connection                        718            999              1280

                                          > 0.14 but <   > 0.18 but <     > 0.22 but <
 5      Net Income Ratio         < 0.14                                                   > 0.26
                                          0.18           0.22             0.26

                                          ≤ 0.75 but >   ≤ 0.66 but >     ≤ 0.60 but >
 6      Operating Ratio          > 0.75                                                   ≤ 0.52
                                          0.66           0.60             0.52

        % Return on Assets                > 0.07 but ≤   > 0.09 but ≤     > 0.12 but ≤
 7                               ≤ 0.07                                                   > 0.15
        (Current)                         0.09           0.12             0.15

                                          > 1.0.but <    > 1.18.but <     > 1.27.but <
 8      Cost Recovery Ratio      < 1.0                                                    > 1.35
                                          1.18           1.27             1.35

                                          > 0.87 but <   > 0.90 but <     > 0.93 but <
 9      Collection Efficiency    < 0.87                                                   > 0.96
                                          0.90           0.93             0.96

                                          ≤ 0.28 but >   ≤ 0.24 but >     ≤ 0.20 but >
 10     .Non-Revenue Water       > 0.28                                                   ≤ 0.16
                                          0.24           0.20             0.16

        Staffing Ratio/100                > 140 but <    > 159 but <      > 203 but <
 11                              < 140                                                    > 247
        connections                       159            203              247




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     Further details of this scoring system can be found in Annex 1. Using a maximum possible score
     of 100, WDs were classified into A, B, and C categories based on the aggregate score and in the
     case of a tie, the cost recovery ratio was used to decide the ranking.

                   Class                          Description                        ≥Aggregate Score
     Class A                            Most Creditworthy (MCW)               52.5 - 100.0
     Class B                            Creditworthy (CW)                     25.0 – 50.0
     Class C                            Less Creditworthy (LCW)               2.5 – 22.5



     Based on the aggregate score, five (5) water districts were classified Class A, the most
     creditworthy; 20 were Class B, creditworthy; and the rest were Class C or less creditworthy. The
     water districts scoring and ranking results are shown in Annex 2. The study team short listed the
     top ten water districts coming from Class A and B, as potential candidates for future technical
     assistance. Except for one WD, Davao City, which falls under the category of Very Large, the
     rest are classified as “Big”. Five (5) are in Central Luzon, two (2) in Southern Tagalog, and three
     (3) in Mindanao. Table 4 shows the summary of indicators for the top ten WDs.

                           Table 6: Summary of Evaluation of Top Ten Water Districts

                                                  San        Dava                         Sn.             Caban
 Water Districts    Baliuag   Dipolog   Silang   Pedro       o City   Orani   Mabalacat   Fdo.    Tagum   atuan
Rank                     1       2         3       4           5        6        7         8        9       10
Aggregate Score        70.0     70.0     67.5     55.0        52.5    52.5      50.0      50.0     47.5    47.5
Class                    A       A         A       A           A        B        B         B        B       B
Financial Indicators:
% Net Worth to
Total Assets          79%      77%      95%      71%         79%      61%        87%      68%      49%     71%
Debt to Equity          0.2     0.2     0.05      0.3         0.1      0.6       0.06      0.2      0.5     0.2
Ratio
Current Ratio           3.3     3.0      15.7     5.1         11.3     6.2       2.2       1.1     1.0     1.5
Net Earnings per       978     1,422     916      714        1,068     833      1,041     1,386    816
Connection
% Net Income          31%      27%      24%      18%         25%      22%        26%      25%      20%     15%
Ratio
Operating Ratio        0.59    0.61     0.64      0.63        0.65     0.64     0.65       0.65    0.66    0.53
% Return on          16.0%    12.2%     6.1%     13.1%        15.8    12.1%     9.6%      19.1%   15.7%    9.6%
Assets                                                         %
% Cost Recovery       145%     138%     132%     122%        133%     128%      135%      133%    125%     118%
Technical Indicators:
Collection           95.1%    97.5%     94%      97.8%       79.1     97.2%     80.7%     85%     90.3%   87.1%
Efficiency                                                    %
Non-Revenue          15.6%    22.7%     26.3%    17.0%       31.5     23.0%     18.6%     33.6%   15.1%   21.1%
Water                                                         %
Staffing Ratio         229     209       205      137        153       159       145       177     272     120




                                                  A Working Paper for the Philippines FORWARD Program
                                                 10


Local Government Units

The LGU’s three year averages were used as benchmarks in assigning points in each of the
defined parameters. The lowest value is the LGU group average and the highest value is the best
performance indicator garnered among the cities and first class municipalities. Pre-determined
incremental points were then given to each succeeding range of values as shown below. Further
details of the LGUs scoring guide is shown in Annex 3.

       Points Earned               0            2.5              5.0               7.5             10

                                             R A N G E         O F         V A L U E S
  Performance Indicators
 1 Net Income Ratio              < 0.09    ≥ 0.09 but <     ≥ 0.18 but <      ≥ 0.27 but <        ≥ 0.36
                                           0.18             0.27              0.36

 2 % Cash Accrual                < 0.09    ≥ 0.09 but <     ≥ 0.18 but <      ≥ 0.27 but <        ≥ 0.36
                                           0.18             0.27              0.36

 3 Cashflow Ratio                < 1.12    ≥ 1.12 but <     ≥ 1.28 but <      ≥ 1.44 but <        ≥ 1.60
                                           1.28             1.44              1.60

 4 Debt Service Capacity         < 15      ≥ 15 but < 28    ≥ 28 but not <    ≥ 41 but < 54        ≥ 54
   (In Millions)                                            41

 5 Population (In                < 82      ≥ 82 but < 112   ≥ 112 but <       ≥ 142 but <         ≥ 172
   Thousands)                                               142               172




With a maximum possible score of 50, LGUs were classified into A, B, C and D categories based
on their aggregate scores and in case of a tie, the population size was used for the final ranking.

              Class                          Description                       ≥Aggregate Score
Class A                            Highly Viable                       37.5 - 50.0
Class B                            Viable                              25.0 – 35.0
Class C                            Less Viable                         12.5 – 22.5
Class D                            Non-Viable                          Less than 12.5



Of the 39 LGUs evaluated, only one, Binan in Laguna was rated Class A, highly viable; two
municipalities, Malungon in Sarangani and Cabuyao in Laguna; and one city, Canlaon in Negros
Occidental were rated Class B, viable; and three were rated Class C, less viable. The rest were
rated non-viable. The LGUs scoring and ranking results are shown in Annex 4. Only the viable
LGUs, i.e., three (3) municipalities, all first class, and one city were short-listed. Table 6 shows
the summary of indicators for these four LGUs.




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                    Table 7: Summary of Financial Evaluation of Viable LGUs

                                          Binan,      Malungon,       Cabuyao,         Canlaon
       Local Government Units             Laguna      Sarangani        Laguna        City, Negros
                                                                                      Occidental
 Rank                                        1             2              3                4
 Aggregate Score                           47.5          32.5           27.5             25.0
 Class (A- highly viable; B- viable)         A            B               B                B
 Population                               201,000       93,000         107,000          47,000
 Financial Indicators:
 % of Net Operating Income to Regular     41.52%        41.09%          10.95%         27.76%
 Income Ratio
 % of Local Revenue to Regular Income     66.21%        5.27%           85.62%         7.66%
 % of Cash Ending to Total Receipts       39.29%        41.09%          16.28%         33.92%
 Cash flow Ratio                           1.65          1.70            1.19           1.46
 Annual Debt Service Capacity (Php         45.3          16.31           66.11          27.86
 million)



Supporting financial data and computed values are found in the following annexes:

   Annex 5    WDs Summary of Computed Values
   Annex 6    WDs Financial Data
   Annex 7    LGUs-Municipalities Summary of Computed Values
   Annex 8    LGUs-Municipalities Financial Data
   Annex 9    LGUs-Cities Summary of Computed Values
   Annex 10   LGUs-Cities Financial Data


     F. PROPOSED DOF/LWUA PARAMETERS FOR CREDITWORTHINESS CLASSIFICATION

The oversight committee of EO 279 requested LWUA in consultation with DOF to prepare a
classification system for water districts. The first proposed system emphasized financial
performance over operating performance, assigning 75-25 weights on the financial and technical
performance indicators respectively. Subsequently, the DOF requested that the system be revised
to equally weigh the financial and technical performance parameters. The revised scoring system
proposed by LWUA is shown in table 8 below. Using this revised system, LWUA rated its top
50 borrowers, which consisted of very large to average sized water districts. Annex 11 shows a
summary of LWUA’s ratings.

The FORWARD system used 11 indicators, 8 of which are financial in nature and only 3 are
technical. Note that the only common indicators used by FORWARD and LWUA are: current
ratio and debt equity ratio for the financial aspect and collection efficiency, non-revenue water
and service connection to staff ratio for the technical aspect. The FORWARD system assigned
equal weights to all indicators, which effectively results to an overall 70-30 weighting system in
favor of financial indicators. LWUA’s system used unequal weights for individual indicators,
e.g., 15% for current ratio and 10% only for debt equity ratio, but the aggregate of the financial




                                           A Working Paper for the Philippines FORWARD Program
                                                           12


and technical equaled 50% each. Table 9 below shows the summary of the results of the
FORWARD analysis vis-à-vis the interim classification of LWUA. The unclassified districts in
the list have not been rated by LWUA yet.

             Table 8: Proposed Creditworthiness Classification System for Water Districts

                     Creditworthy             Semi CW        Pre-CW                         Non CW
  Parameter             8.5-10                 5.5-8.4       3.0-5.4                         0.0-2.9
                                                       RANGE
    Points                 10                     6             3                               0         Weight (%)
Financial                                                                                               50%
Current Ratio*     CW>2.00               1.2<SCW<2.0             0.9<SCW<1.2             NCW<0.9          15
Debt Service       CW>2.30               1.2<SCW<2.0             0.9<SCW<1.2             NCW<0.9          10
Ratio
D/E Ratio*         CW<0.75               .75<SCW<.85             .85<SCW<1.0             NCW>1.0            15

Net Profit         CW>15%                10%<SCW<15%             5%<SCW<10%              NCW<5%             10
Margin Ratio
Operational                                                                                             50%
Collection         CW> 92%               85%<SCW<92%             75%<PCW<85%             NCW<75%          15
Efficiency*
Non-revenue        CW<25%                25%<SCW<45%             45%<PCW<55%             NCW>55%            15
Water*
SC to Staff        CW> 120               100<SCW<120             80<PCW<100              NCW<80%            5
Ratio*
Service            >15,000               5000<SCW<               1000<PCW<               NCW< 1000          10
Connections                              15000                   5000
Service Hours
@10 psi            CW>24                 18<SCW<24               12<PCW<18               NCW<12             5
Notes:
Debt equity ratio based on 0.75 acceptable benchmark for creditworthiness
Fifteen (15%) was adopted as acceptable ration for net profit margin. The 2002 LWUA overall industry average for
net income/ operating revenue is 14%.
Service connections used as a measure of active market size.
Hours of service at 10 psi adopted as an indicator of production capability or availability of supply. It also reflects
reliability of service
Source: LWUA, October 2004


The two classification systems show very different results, i.e., what was rated as less
creditworthy by one system is creditworthy in the other. The divergence can be explained by the
different indicators and weights applied and by the threshold levels used.


                                                 G. CONCLUSIONS

1. Scoring systems become relatively arbitrary depending upon the thresholds and weights
   given different factors and can result in very different conclusions as shown in Table 9
   below.

    It is beyond the scope of this study to conclude which is the better system. The indicators
    used by FORWARD were selected before LWUA developed its proposed system, and the
    paramount consideration was to find an appropriate mix that reflects bankability. However,



Development Alternatives, Inc.
                                               13


   ultimately financiers will look at creditworthiness indicators as one factor only. Bankers will
   give significant consideration to the results of the project feasibility study.

2. The financial evaluation using the FORWARD scoring system revealed the following:

   a. Twenty five of the 46 very large, large and big water districts evaluated were considered
      creditworthy, which in qualitative terms means:

      More than half of their total assets is contributed by their capital and retained earnings.
      They are generally not highly leveraged, their equity is more than their debt. Except for 5
       of the 25 creditworthy water districts debt equity ratios are more than 1.
      All of the 25, except one are liquid. Current assets exceed current liabilities. However
       only about half exceeded the threshold ratio of 3:1.
      All of the creditworthy water districts fully recover capital, and operating and
       maintenance costs. Overall all only two of the water districts evaluated were unable to
       recover both O&M and capital costs.
      Collection efficiency averages, 81%, low compared to the 90% threshold
      Only 4 of the 25 water districts had non-revenue water above the 28% threshold. The
       average is about 20%.

   a. Only 4 of the 39 LGUs evaluated were considered viable. Three were rated marginally
      viable and the rest not viable.

   b. Ninety-two (92%) or 37 of the 39 LGUs evaluated are highly dependent on the internal
      revenue allotment (IRA) to finance their operations. On the average, LGUs local revenue
      sources contribute only 20% to the municipal coffers.




                                           A Working Paper for the Philippines FORWARD Program
                                                                                     14


                                         Table 9: Summary of Indicators and DOF/LWUA Creditworthiness Classification

                                                                            FINANCIAL INDICATORS                                             TECHNICAL INDICATORS
   Rank/            FWRD         LWUA Credit       % Net      Debt to    Current     Net     Operating   Return on     Cost     Collection      Non-     Number of    Service
Water Districts   Creditworthi    worthiness      Worth to    Equity      Ratio    Income     Ratio       Assets     Recovery   Efficiency     Revenu     Active      Connec
                  ness Classi-   classification    Total       Ratio                Ratio                             Ratio                    e Water  Connections    tion to
                    fication                      Assets                                                                                                                Staff
                                                                                                                                                                        Ratio

1. BALIUAG        MCW                             79%        0.2        3.3       0.31       0.59        16.0%       1.45       95.1%         15.6%     11,924        229
2. DIPOLOG
CITY              MCW                             77%        0.2        3.0       0.27       0.61        12.2%       1.38       97.5%         22.7%     6,490         209
3. SILANG         MCW                             95%        0.05       15.7      0.24       0.64        6.1%        1.32       94.0%         26.3%     6,355         205
4. SAN PEDRO      MCW                             71%        0.3        5.1       0.18       0.63        13.1%       1.22       97.8%         17.0%     18,109        137
5. DAVAO CITY
                  MCW            CW               79%        0.1        11.3      0.25       0.65        15.8%       1.33       79.1%         31.5%     138,680       153
6. ORANI          CW                              61%        0.6        6.2       0.22       0.64        12.1%       1.28       97.2%         23.0%     4,779         159
7. MABALACAT
                  CW                              87%        0.06       2.2       0.26       0.65        9.6%        1.35       80.7%         18.6%     19,184        145

8. SAN FDO.
(PAMPANGA)
                  CW                              68%        0.2        1.1       0.25       0.65        19.1%       1.33       85.0%         33.6%     13,802        177
9. TAGUM
CITY              CW                              49%        0.5        1.0       0.20       0.66        15.7%       1.25       90.3%         15.1%     15,224        272
10.
CABANATUAN        CW                              71%        0.2        1.5       0.15       0.53        9.6%        1.18       87.1%         21.1%     21,539        120
11. METRO
NAGA              CW                              78%        0.2        5.0       0.18       0.68        10.3%       1.22       86.5%         24.6%     21,996        164
12. METRO
ROXAS             CW             CW               65%        0.4        2.8       0.16       0.50        8.2%        1.19       82.9%         25.3%     14,525        155
13.
MARIVELES         CW                              76%        0.2        4.5       0.09       0.85        5.6%        1.10       95.0%         13.6%     9,051         181

14. SAN
PABLO CITY
                  CW             SCW              77%        0.2        3.2       0.08       0.75        4.4%        1.08       95.5%         16.5%     24,297        145
15. LEGASPI
CITY              CW                              47%        0.9        1.1       0.28       0.45        12.9%       1.39       94.7%         26.7%     14,666        151
16. METRO LA
UNION             CW                              60%        0.3        0.9       0.25       0.68        13.7%       1.33       85.3%         47.5%     7,460         173
17. TAGAYTAY
                  CW                              72%        0.3        2.4       0.21       0.69        9.5%        1.27       80.6%         25.1%     7,586         135




     Development Alternatives, Inc.
                                                                                   15

                                                                          FINANCIAL INDICATORS                                               TECHNICAL INDICATORS
Water Districts   FWRDCredi       LWUA          % Net      Debt to   Current    Net        Operating     Return on   Cost       Collection     Non-      Number      Service
                  tworthiness     Credit        Worth to   Equity    Ratio      Income     Ratio         Assets      Recovery   Efficiency     Revenue   of Active   Connectio
                  Classificatio   worthines     Total      Ratio                Ratio                                Ratio                     Water     Connectio   n to Staff
                  n               s             Assets                                                                                                   ns          Ratio
                                  classificat
                                  ion

18. P. PRINCESA
CITY
                  CW                            69%        0.3       3.4        0.14       0.73          11.9%       1.17       82.4%         26.9%     13,826       147

19. ANGELES
CITY
                  CW              CW            37%        1.6       2.1        0.10       0.57          2.8%        1.11       98.1%         15.5%     27094        291

20. CONCEPCION
                  CW              SCW           46%        1.1       1.3        0.24       0.60          11.5%       1.31       73.9%         6.7%      3,681        205
21. ILOCOS
NORTE             CW              SCW           37%        1.7       11.9       0.17       0.50          6.6%        1.20       87.6%         41.8%     12,313       155
22. METRO
KALIBO            CW              SCW           26%        2.5       5.8        0.09       0.57          2.6%        1.10       94.3%         17.6%     11,466       123
23. TUGUEGARAO
                  CW              SCW           62%        0.1       1.5        0.02       0.79          0.8%        1.02       75.8%         14.6%     19,114       265
24. MORONG        CW              SCW           37%        1.5       4.9        0.15       0.72          10.4%       1.18       91.4%         13.1%     5,911        141
25. NASUGBU       CW                            45%        0.9       2.4        0.16       0.64          7.5%        1.19       86.0%         15.9%     2,913        132
26. SURIGAO
METRO             LCW             CW            41%        1.4       3.8        0.08       0.60          1.9%        1.08       97.2%         21.6%     10,632       122
27. MALAYBALAY    LCW                           72%        0.3       8.9        0.06       0.81          2.4%        1.06       93.6%         37.4%     6,725        125
28. ZAMBOANGA
                  LCW             SCW           46%        1.0       2.8        0.23       0.61          12.7%       1.29       75.1%         56.0%     39,288.00    120
29. QUEZON
METRO             LCW             SCW           60%        0.6       3.3        0.20       0.69          8.4%        1.25       85.3%         43.2%     28,627.00    113
30. COTABATO
CITY              LCW             CW            29%        2.3       2.5        0.17       0.55          5.4%        1.21       87.7%         33.0%     19,361       140
31. TABACO CITY
                  LCW             CW            65%        0.5       5.3        0.14       0.68          8.2%        1.16       88.7%         37.2%     8,203        139
32. SAN JOSE DM
                  LCW             SCW           26%        2.6       4.2        0.07       0.74          4.7%        1.07       89.0%         23.7%     42,749       208
33. BATANGAS
CITY              LCW                           53%        0.8       5.8        0.12       0.79          8.7%        1.14       45.5%         32.6%     19,315       155
34. DAGUPAN
CITY              LCW             SCW           44%        1.2       3.2        0.03       0.62          0.8%        1.03       88%           25.6%     15,432       162
35. DUMAGUETE
                  LCW             SCW           20%        3.8       7.8        0.10       0.57          4.2%        1.11       86.0%         41.3%     17,038       151




                                                                                                       A Working Paper for the Philippines FORWARD Program
                                                                                    16


                                                                                                      Water Districts                                   Rank
Water Districts     FWRD            LWUA          % Net      Debt to   Current   Net      Operating     Return on       Cost       Collection   Non-       Number      Service
                    Credit          Credit        Worth to   Equity    Ratio     Income   Ratio         Assets          Recovery   Efficiency   Revenue    of Active   Connectio
                    Worthiness      worthines     Total      Ratio               Ratio                                  Ratio                   Water      Connectio   n to Staff
                    Classificatio   s             Assets                                                                                                   ns          Ratio
                    n               classificat
                                    ion
36. DIGOS CITY
                    LCW             CW            41%        1.3       1.9       0.10     0.74          5.6%            1.11       90.7%        20.9%      9,234       118
37. CAM. NORTE
                    LCW             CW            31%        1.9       1.6       0.09     0.56          3.5%            1.10       86.6%        24.8%      17,298      184
38. BUTUAN CITY
                    LCW             SCW           14%        5.9       2.0       0.12     0.66          1.9%            1.13       92.6%        64.6%      23,163      178
39. METRO CEBU
                    LCW             SCW           29%        1.8       2.2       0.08     0.52          2.4%            1.08       87.7%        32.6%      91,968      152
40. CAG. DE ORO
                    LCW             CW            45%        1.1       6.2       0.13     0.74          4.2%            1.15       73.5%        32.1%      60,328      133
41. METRO ILOILO
                    LCW             SCW           17%        4.7       3.8       -0.02    0.47          -0.5%           0.98       86.2%        51.6%      19,899      90
42. MISAMIS OCC.
                    LCW             SCW           -79%       -2.2      8.3       0.08     0.68          8.7%            1.09       63.9%        48.3%      11,774      106
43. LAGUNA          LCW             SCW           33%        0.9       1.1       0.05     0.83          3.7%            1.06       94.8%        35.0%      17,397      123
44. CALAMBA
CITY                LCW             SCW           27%        1.9       1.1       0.01     0.76          0.4%            1.01       93.0%        47.4%      28,634      141
45. MEYCAUAYAN
                    LCW                           7%         6.7       0.4       -0.06    0.96          -6.8%           0.94       93.9%        31.8%      11,416      136
46. BACOLOD
CITY                LCW             SCW           18%        4.0       2.0       0.12     0.66          8.4%            1.14       84.8%        38.9%      24,821      64

Average
                                                  48%        1.2       4.0       0.14     0.66          7.1%            1.17       87%          29%                    157




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