Business Planning Guide For LGUs PDF

Strategic Business Planning for Local Government-Run Water Utilities: Guide and Model for the Preparation of Business
Plans
This guide was published with assistance from the USAID Philippine Water Revolving Fund (PWRF) Support Program. The views expressed here
do not necessarily reflect those of USAID or the United States Government.
The PWRF Support Program is a collaborative undertaking of GOP partners, USAID, Japan International Cooperation Agency (JICA), LGU
Guarantee Corporation (LGUGC), and private financing institutions (PFIs) through the Bankers Association of the Philippines. The Program’s
GOP partners are led by the Department of Finance and include the Development Bank of the Philippines and the Municipal Development Fund
Office.
The PWRF Support Program aims to establish a co-financing facility that combines ODA/JICA resources with PFI funds for creditworthy water
service providers, using a financial structure that allows affordable loan terms without sacrificing the viability of PFIs. PFIs have access to credit
risk guarantees provided by LGUGC and USAID’s Development Credit Authority.
The PWRF Support Program operates around three main objectives, which are to:
• Establish the co-financing facility and develop a long-term financing strategy and mechanism with broader private sector participation;
• Strengthen water project financing and enable other conditions necessary for optimizing the PWRF Support Program’s positive impact on the
sector, including corollary regulatory and utility reforms; and
• Assist water districts and local government units in developing a pipeline of bankable water projects.
The PWRF Support Program is implemented by Development Alternatives, Inc. in association with The Community Group International LLC,
Resource Mobilization Advisors, and CEST, Inc.
Strategic Business Planning for Local
Government-Run Water Utilities:
Guide and Model for the Preparation of
Business Plans
Acknowledgement
This guide was developed by the PWRF Support Program, and is patterned after “Strategic Business Planning for
Water Districts: Guide and Model for the Preparation of Business Plans for Water Districts” prepared by PWRF-SP
with assistance from Valu Add Management Services, LWUA, various water district representatives, and local water
supply and business planning experts.
This guide benefited from a peer review by finance specialists and business planning experts from the following
organizations:
• Water and Sanitation Program of World Bank

• National Water Resources Board
• Water Supply and Sanitation Unit of DILG
• Municipal Development Fund Office
Co
Contents
Strategic Business Planning for Local Government-Run Water Utilities: Guide and Model for the Preparation of Business Plans
ACRONYMS e
1 OVERVIEW OF A LOCAL GOVERNMENT–RUN WATER UTILITY 1

1.1 LGU mandate for water supply and sanitation 1
1.2 Water supply and sanitation as a local economic enterprise 1
1.3 Lines of authority for an LGU-run water utility 2
2 STRATEGIC BUSINESS PLANNING IN WATER UTILITIES 3

2.1 Why do strategic planning? 3
2.2 What to expect from strategic planning: Issues, concerns, direction 3
2.3 Who to involve in the strategic planning process 5
2.4 Preparing a vision statement 5
3 INTRODUCTION TO BUSINESS PLANNING 7

3.1 What Is the purpose of the business planning model and guide? 7
3.2 Strategic planning vs. business planning 7
3.3 Why should a utility do business planning? 8
3.4 Who should be involved in preparing/commenting on the business plan? 8
3.5 Business plan timeframe and updating the business plan 9
4 BUSINESS PLAN MODEL 11

4.1 Structure of the business plan model 11
4.2 Description of key elements of the business plan model 11
4.3 Business plan model spreadsheet workbook 13
5 GENERAL DESCRIPTION OF THE UTILITY 15

5.1 Brief history and background information 15
5.2 Administrative area, coverage and consumer profile information 15
5.3 Key performance indicators 16
5.4 Investment/funding information 26
STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES a

6 MISSION STATEMENT OF THE UTILITY 29
6.1 What is a mission statement? 29
6.2 Importance of the mission statement 29
6.3 What should be considered when developing a mission statement? 30
6.4 Writing the Mission Statement 31
7 MANAGEMENT OVERVIEW OF BUSINESS PLAN 33

7.1 Major challenges in business plan implementation 33
7.2 Monitoring, reporting, and corrective actions 34
8 ASSESSMENT OF CURRENT CONDITIONS AND PRIORITY ISSUES 35

8.1 Current/expected internal conditions 35
8.2 Current/expected external conditions 36
8.3 SWOT matrix 37
8.4 Priority issues 37
9 STRATEGIC GOALS 41
9.1 What is a strategic goal? 41
9.2 Characteristics of strategic goals 42
9.3 Examples of strategic goals 43
10 ANALYZING WATER DEMAND AND FORECASTING WATER SALES 45

10.1 Why is water demand analysis critical in business planning? 45
10.2 Importance of a water balance audit 46
10.3 Non-revenue water and its impact on utility costs 48
10.4 Determining current real water demand of the utility 49
11 ORGANIZATIONAL STRUCTURE AND STAFFING LEVEL 57

11.1 Importance of organizational structure for effective utility performance 57
11.2 Current structure and lines of reporting of the utility 59
11.3 Typical organization structure of an LGU-run water utility 59
11.4 What is an optimal staffing level for an LGU-run water utility? 61
11.5 Changing organizational structure 61
11.6 Transitioning to a new staffing level 61
12 PERFORMANCE IMPROVEMENT PROGRAM 65

12.1 Moving from strategic goals to improved performance 65
12.2 Performance improvement programs 66
12.3 PGB Approval of Performance Improvement Program 68
13 CAPITAL EXPENDITURE AND INVESTMENT FORECAST 69

13.1 Capital renewal (underground assets) 69
13.2 Capital repair and replacement (above-ground assets) 70
b PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

13.3 New capital investments 70
13.4 Building the capital investment/expenditure plan 70
13.5 Identifying sources of capital investment 72
14 OPERATIONS AND MAINTENANCE BUDGET FORECAST 75

14.1 Documentation of recent financial performance 75
14.2 Factors impacting future expenditures 75
15 REVENUE NEEDS 83
15.1 Difference between revenue needs and O&M expenditures 83
15.2 Determining revenue needs 83
16 TARIFF POLICY AND STRATEGY 87

16.1 Addressing the tariff policy issue 87
16.2 Addressing the tariff strategy and structure issue 88
16.3 Selecting the desired tariff structure 88
16.4 Calculation of average tariff 91
16.5 Specific fees and charges 93
17 BUSINESS PLAN UPDATE PROCESS 95

17.1 Scheduling to conduct the business plan update 95
17.2 Preparing for business plan updating process 96
17.3 Conducting the business plan update process 97
17.4 Approval of the policy governing body 97
18 MONITORING BUSINESS PLAN IMPLEMENTATION 99

18.1 Importance of a monitoring process 99
18.2 What should be monitored? 99
18.3 Reporting and monitoring performance 100
APPENDICES 105
Appendix A. NWRB’s 5-year Tariff Methodology 105

Rationale 105
Steps in tariff setting 105
Evaluation of proposed tariff 106
Appendix B. Benchmarking for small water utilities 107

The benchmarking of small towns water utilities 107
Water utility questionnaire 107
STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES c

APPENDIX C: WORKSHEETS 109
Staff List 109
Water Demand Analysis and Sales Forecast 110
Analysis and Forecast of Personnel Structure 112
Capital Expenditures Program 113
Operation and Maintenance Budget Forecast 114
Debt Service 116
Revenue Needs 117
Pricing Strategy 118
d PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Acronyms
AIP Annual Investment Plan O&M Operations and Maintenance
CAPEX Capital Expenditures OPEX Operating Expenditures
CO Capital Outlay PAWD Philippine Association of
DBP Development Bank of the Water Districts
Philippines PEER Property and Equipment
DILG Department of Interior and Entitled to Return
Local Government PFI Public Financing Institution
ELA Executive-Legislative Agenda PGB Policy governing body
GFI Government Financing PIP Performance improvement
Institution plan
HH Household PNSDW Philippine National Standards
KPI Key Performance Indicator for Drinking Water
LCE Local Chief Executive PS Personal services
LDIP Local Development Investment PWRF Philippine Water Revolving
Plan Fund
LGC Local Government Code PWRFSP Philippine Water Revolving
LGU Local Government Unit Fund Support Program
LIRC Local Internal Revenue Code ROI Return on investment
lpcd Liters per capita per day RWSA Rural Waterworks System
LWUA Local Water Utilities Association
Administration SWOT Strengths, Weaknesses,
MOOE Maintenance And Other Opportunities, and Threats
Operating Expenses USAID United States Agency for
MS Microsoft International Development
NBV Net Book Value VMO Vision-Mission-Objective
NGAS New Government Accounting WD Water District
System WDM Water demand management
NGO Non-Government Organization WSP Water and Sanitation Program
NRW Non-Revenue Water WSPs Water Service Providers
NWRB National Water Resources WSS Water Supply And Sanitation
Board WUQ Water utility questionnaire
STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES e

1
OVERVIEW OF A LOCAL
GOVERNMENT–RUN
WATER UTILITY
This section presents an overview

o of the services (WSS), through the establishment of
policy and management structure in a Local public utilities.
Government Unit (LGU)-run water utility. The
mandate of an LGU in running a water utility 1.2 WATER SUPPLY AND SANITATION AS
is also discussed, as well as water supply and A LOCAL ECONOMIC ENTERPRISE
sanitation as a local economic enterprise. The Code grants LGUs the power to create and
broaden their own sources of revenues. It encour-
Unlike corporatized utilities, LGU-run water ages LGUs to be self-reliant in exercising their
utilities do not have a prescribed organizational powers and discharging the duties and functions
structure; as such each LGU utility is organized vested upon them. Section 290 of the Code grants
differently. Strategic planning works best in a set LGUs the authority to establish self-liquidating
up where there are clear lines of oversight and economic enterprises, which are entities created
executive authority. Hence to successfully carry by a local government to undertake commer-
out the preparation of a strategic business plan, cial activities on its behalf. Such an enterprise
this Guide recommends delineating the roles of must have a distinct legal personality and be
the legislative council, local chief executive and established to operate commercially, with its
utility management for a functional governance management and operations ring-fenced from the
structure. The governance structure shall consist general organization and accounts of the LGU. An
of three distinct entities responsible for regula- LGU-run water utility can be established as an
tion, policy making, and operations. economic enterprise.
1.1 LGU MANDATE FOR WATER SUPPLY Ring-fenced water utility accounts
AND SANITATION Ring-fencing or separating the activities, financial
Republic Act 7160 or the Local Government accounts, and financial statements of the water
Code of 1991 (Code) mandates municipal and utility from the LGU’s overall accounts is consis-
city governments to provide water supply and tent with the basic requirement of the National
sanitation services in the absence of water Government Accounting System (NGAS) of
districts in their areas. Specifically, Section 17 of maintaining special accounts not just with subsid-
the Code directs LGUs to address communities’ iary ledgers but by setting up separate financial
basic needs, such as water supply and sanitation records and reports.
1
With ring-fencing, the LGU-run water utility tasked to regulate and control the utilization,
will maintain its own accounting and financial exploitation, development, conservation and
reporting system, thus generating accurate protection of all water resources. The NWRB
financial information on the performance of also regulates water tariffs of private water
the utility, enabling better monitoring, and service providers.
providing a solid basis for tariff setting and
planning more targeted utility reforms. Policy governing body
It is necessary that a policy governing body
1.3 LINES OF AUTHORITY FOR AN (PGB) be constituted in a LGU-run water
LGU-RUN WATER UTILITY utility that will have similar functions as a
Within the ambit of the Code, this Guide board of directors in a corporation. The PGB
presents an ideal structure for an LGU-run will be involved in policy setting and decision
water utility, delineating roles and respon- making on behalf of the owner of the utility,
sibilities that foster good governance. Since that is, the local government. It will supervise
there is no standard organization structure the performance of the water utility manage-
for LGU-run utilities, the establishment of ment. Since the local government, as owner,
functional subdivisions, primarily as regards is interested not simply in the viability of the
regulatory, policy-setting and management enterprise but also in the provision of water
roles, is essential. supply as a basic public service, the PGB will
play a critical balancing role.
Regulator
The Code vests economic regulation (i.e., The composition of the PGB is the discretion of
tariff approval and setting of key performance the local government. It may involve represen-
indicators) on local Sanggunian bodies. The tation from the different sectors of society.
Code gives the local Sanggunian authority
to grant franchises and perform oversight Management
functions over the development of the water There is no standard organizational structure
supply system (Book 3, Title II, Chapter 3, for LGU water utilities but there should be
Article 3). It is also within the authority of the a water supervisor who performs the role
local Sanggunian to convert an LGU-run utility of general manager. The supervisor should
into a water district, which is a separate and manage the utility’s operations, direct and
distinct government-owned corporation. supervise staff, and should be accountable to
the PGB.
Independence is a key precept of effective
regulation. As such, Sanggunian members Given that the WSS unit is just one among
should not be involved in any of the activities various LGU units or departments, some
or decisions related to service provision. administrative/municipal functions may be
shared across units. The water supervisor
The LGU-run water utility may choose the should collaborate with other units or depart-
National Water Resource Board (NWRB) as ments that are involved in the operation and
its regulator under a consensual agreement. provision of water services. He or she should
As a national government agency instituted also keep track of how much time shared
as a “water resource regulator,” the NWRB is personnel contribute to the utility’s operations.
2 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

2
STRATEGIC BUSINESS
PLANNING IN WATER
UTILITIES
This section presents the importance of Strategic planning provides a potential solution
strategic planning for LGU-run water utilities, to this predicament, as it emphasizes planning
and the attributes of effective planning— of activities under a common framework—
necessary in a competitive marketplace. It also linking all planning and budgeting decisions to
serves as a bridge to the business planning the utility’s fundamental goals.
process.
Increasingly, water utility management has
2.1 WHY DO STRATEGIC PLANNING? required an entrepreneurial outlook in recent
Strategic Planning is a tool for making decisions years. More than simply closing competitive-
for resource allocation among core business ness gaps or reacting to perceived threats, the
functions and investments in expanding or challenge for water utilities is understanding
diversifying business functions in a way that the spectrum of potential market conditions
increases the value of the utility to customers and developing strategies that:
and other stakeholders.
• Protect their ability to continue delivering
The concept of value to stakeholders is reliable, cost-efficient service, and
different for public utilities than for private • Provide opportunities for organizational
utilities. In the private arena, value to stake- growth and development.
holders is measured mainly in monetary terms.
In public utilities, stakeholders have a wide This entails making decisions on how to invest
range of competing priorities. Of prime concern limited resources to achieve the greatest
is the provision of safe drinking water, which is desired returns within acceptable levels of risk.
affected by environmental, regulatory, political,
and economic considerations, as well the 2.2 WHAT TO EXPECT FROM
community and social agenda. Utilities conduct STRATEGIC PLANNING: ISSUES,
multiple planning activities that are often CONCERNS, DIRECTION
disjointed, with no reliable way of measuring
Strategic planning is part of the corporate gov-
contributions toward achieving the utility’s
ernance process. A well-constructed strategic
fundamental goals.
plan may be reduced to a one-page document,
3
which can be circulated throughout the organi- • The expectations of the policy body and
zation. The policy governing body will need to stakeholders about what strategic planning
give final approval to any strategic plan. entails must be managed. The management
team must be realistic about the organiza-
Planning requires identifying projected needs. tion’s ability to implement components
Management needs to be able to answer of a strategic plan to rein in unreasonable
the question, "What do we need?" At times expectations.
answering this question might be a simple
• Strategic planning terminology may be
matter, other times it might only be possible
daunting to some managers and staff. Some
to say, "I don't know." Such uncertainty is
education in strategic planning techniques
common. Getting the details exactly right is not
is recommended for the management team.
an easy task, as it is difficult to predict future
opportunities or problems, particularly in a • Varying levels of detail and analytical
dynamic environment. A strategic plan must complexity in strategic planning are needed
also outline the sequence and timing of events. for different circumstances. The level of
detail depends on the target audience. Rank
Since the environment is always changing, a and file staff need specific details to direct
strategic plan must be dynamic as well. The implementation, while a more general
best plans are not rigid parameters, but rather description may be given to management
working documents that may be adjusted executives.
according to varying conditions. Management • In identifying investment options, care must
must keep their goals clearly in sight so be taken to clarify the difference between
they can revise plans when the environment core investments (those required to keep
demands, and make decisions that help them the utility in operation) and strategic
attain their stated goals. investments (discretionary investments
to enhance the value of services, expand
Management is commonly faced with the offerings, or generate new revenue sources).
following major issues and concerns related to • Utilities need further guidance on prioritiz-
the development of a strategic plan for a water ing “soft” (people, knowledge, communica-
utility enterprise: tion) versus “hard” asset investments.
• A business planning tool or template is
• Strategic planning requires a substantial
needed to support the strategic plan and
commitment from executive leadership
drive goal attainment down to various
and its governing body during the planning
planning activities.
process and all the way to its potential
outcome. In the absence of strong com- • Customers and community groups are
mitment and support from management, different stakeholder groups (existing and
a strategic plan may create confusion as potential customers, elected and appointed
regards other planning initiatives and officials, business organizations, citizen
annual budgeting. Strong leadership com- interest organizations, NGOs, and other
mitment to participate in the implementa- elements of civil society) and should be con-
tion of the process is essential for success. sidered separately in evaluating investment

options and communicating the strategic It is important that it has an intimate under-
planning process. standing of the objectives and core elements of
• Strategic planning must be accompanied the strategic and business plans.
by a public relations and communica-
tion program largely focused on staff and Management team
customers to engender a shift to goals- The management team prepares the strategic
focused operations. plan, presents and finalizes it with the PGB.
Local government(s)
2.3 WHO TO INVOLVE IN THE
It is advisable for management to hold consulta-
STRATEGIC PLANNING PROCESS
tions with LGU officials, including the barangays
Strategizing involves setting institutional within the city or municipality, to exchange
goals and finding the best means to reach information on plans and ways to complement
those goals. It bridges the gap between where each others’ services.
an organization is and where it wants to be.
A strategic plan provides a blueprint for the Citizen’s groups
entire organization and its stakeholders. Water utilities provide services that impact
everyone in the community in an essential way.
A well-structured strategic plan will call for the Customers and the community are distinct
involvement of the following stakeholders: stakeholder groups and need to be addressed
separately in strategic and business planning,
Local chief executive (LCE) particularly in the context of goals and per-
The city or municipal council, headed by the formance metrics. Citizens and other water
mayor as local chief executive, is the supreme users all have roles to play in promoting water
decision-making body in a city or municipal quality, both passively and actively. Citizens
government. Important decisions, including participate in water monitoring programs,
approval of the business plan, require involve- water conservation, and serve as advisors to
ment of the LCE. decision makers.
Policy governing body (PGB) Once strategic and business planning has been
The involvement of the PGB in the strategic completed, the outcomes may be documented
and business planning process, in its role as for public consumption. It is also advisable
appointed corporate governing body, is very that public hearings with citizen groups be
important. Although it clearly functions in a organized by the water utility to share with
policy-making and monitoring capacity, the them the planning initiatives while also
PGB should also be briefed on milestones learning more about stakeholder needs.
in the planning process as its opinions and
comments on key issues are vital. 2.4 PREPARING A VISION STATEMENT
A vision is an image of a possible and desirable
Ultimately, it is the PGB that will approve the
future, an end result. It connotes a standard
strategic plan and the five-year business plan
of excellence, an ideal that can be realized. It
for the water utility and endorse it to the LCE.
suggests an answer to questions like:
STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES 5

• If we could invent the future, what future • What is our collective agenda? What do we
would we invent for the utility? want to prove?
• What do we have a burning passion about • What is our destiny?
that we would like to be able to express
through our work? Examples of vision statements of LGU-run
• What could be the distinctive role or contri- water utilities:
bution of the utility in our municipality?
“A demand-driven water
ed and
“A well develop service provider to the
r utility under “The Jagna Waterwor
managed wate , whole local communities ks
e c ti ve , e ffic ie nt governance and the nearby
System stands to be th
e sole
eff provider of safe, pota
viding safe ble,
sustainably pro ”
municipalities” af fordable and sustaina
to its citizenry. ble
potable water Mahayag Local Water water supply.”
System, Mahayag,
s
e Waterwork Zamboanga del Sur
Alburquerqu Jagna Waterwork
s System
System
e, Bohol Jagna, Bohol
Alburquerqu

3 INTRODUCTION TO
BUSINESS PLANNING
3.1 WHAT IS THE PURPOSE OF THE

BUSINESS PLANNING MODEL AND
GUIDE?
This business planning model and guide aims
Information needed for the business plan will
be generated by answering questions or filling
in templates provided here. Examples are also
shown to help the planning team in formulating
to provide information and tools necessary their thoughts.
to assist the management of LGU-run
water supply and wastewater utilities in the It is highly recommended that the guideline be
Philippines in the development of a five-year followed step-by-step, as presented here. The
business plan. business plan model is structured to ensure
a standard, consistent and logical structure,
The primary purpose of this document is to especially when in the presentation format. Of
guide water supply and wastewater utilities course, the substance of the business plans will
in the Philippines with a uniform approach be unique to the organization that prepares it.
for the preparation of business plans that will
assure quality services in a cost-effective and 3.2 STRATEGIC PLANNING VS.
transparent manner.
BUSINESS PLANNING
A utility conducts strategic planning to define
The process of business planning will stimulate its vision, set long-range goals and areas of
the creativity of the utility’s management in primary focus, identify key performance indica-
thinking of ways to improve the utility’s overall tors, and consider the more generalized actions
performance. Business plans are essential tools needed to achieve performance improvement
for making rational and coordinated decisions in the long term. The strategic planning process
about levels and types of service provisions where establishes an organization’s core priorities and
an organization’s resources are utilized effectively sets guidelines for future managerial decisions
through clear links to financial planning. in the business planning process.
Following a structured model for a business The strategic planning process is both external
plan, this document will guide the management and internal, in that the utility seeks to build a
team through the business planning process. broad consensus among its various stakeholders
regarding its direction and priorities.
7
This document prescribes an element of Business planning helps:
strategic planning—that is, requiring manage- • Reduce uncertainty
ment to develop a vision, expressed in a (new, • Provide a basis for monitoring/controlling
revised, or affirmed) vision statement, prior to work
developing the business plan.
• Improve the utility’s efficiency
Business planning flows from the strategic
planning process, in which decisions and A business plan provides the means to share
actions are set that will, over time, fulfill the information with employees, customers,
vision of the strategic plan. The business political leaders, and potential investors, so
planning process deals with quantified that there is agreement on the utility’s plans for
strategic goals, which are supported by detailed sustainable operations, quality service, mainte-
performance improvement plans. nance effectiveness, and financial security.
The business plan is the first step in address- 3.4 WHO SHOULD BE INVOLVED IN
ing the overall performance objectives of PREPARING/COMMENTING ON THE
the utility, including becoming operationally BUSINESS PLAN?
and financially self-sustaining. Corollary to A business plan is a practical plan for the entire
this objective is the generation of sufficient utility and its relevant stakeholders. It brings
revenues to fund capital repair and replace- together plans to improve and extend the
ments needed to maintain efficiency of system service being provided, and how this service
assets—cost-wise and reliability-wise. can be financially sustained. As a minimum
requirement, a comprehensive business
3.3 WHY SHOULD A UTILITY DO planning process will call for the involvement
BUSINESS PLANNING? of the following stakeholders:
Business planning helps water utilities plan
technical operations, determine their opera- Management team
tional financing needs, quantify and schedule The most common approach to the preparation
the capital investments for the utility in a of a business plan is to convene the manage-
sustainable and affordable way. No commercial ment team composed of the water supervisor
company can function successfully without a and members representing key sections of
clearly stated and understood business plan. the utility (e.g., operations and maintenance,
customer accounts management, and
Business planning is general administration and finance).
decision making: FAIL
IF YOU
N, This approach is most effective when there
• What is going to
TO PLA
AN is a positive history of interdepartmental
YOU PL
happen?
cooperation and a good working relation-
• When will it TO FAIL
ship among the key sections’ personnel.
happen?
mous
• How much will it - Anony Policy governing body
cost? The involvement of the PGB in the business
planning process is very important. The

PGB should be briefed at milestones in the resource plans, which typically have planning
business planning process to seek its opinion timeframes of up to 50 years.
and comments on key issues. It is the PGB that The water utility should schedule an annual
will approve the final business plan; therefore update of the business plan. It is recommended
it is important that it has an intimate under- that this update be conducted during the first
standing of the business plan’s objectives and month of the fourth quarter of the calendar
elements. year or every October, using data for the
preceding four quarters (e.g., the last quarter of
3.5 BUSINESS PLAN TIMEFRAME AND the preceding year and the first three quarters
UPDATING THE BUSINESS PLAN of the current year).
The common practice in the water supply Every element of the business planning model
and wastewater utility sector is to develop should be reconsidered. Of particular value
a business plan with a five-year horizon. is a comparison of the performance indica-
However, business planning is not a one-time tors from year to year, as well as with stated
activity but a continual process, with the strategic goals. It is very important that the
plan reviewed and updated annually. A water management team be totally objective in evalu-
supply and wastewater utility must constantly ating the performance of the prior year, and in
plan, finance and implement new projects as considering any changes in the action plans to
it repairs, replaces, upgrades and expands its assure the achievement of strategic goals.
systems to improve services.
The water supervisor will facilitate the
Most performance improvement programs in business plan updating process. The water
a utility are implemented over several years, supervisor will set the schedule of the planning
and with such a short planning period (e.g., process and generate the historical reports
one to three years), management decisions will needed to compare past performance against
not capture the entire action plans involved. the business plan. However, it is important that
Business plan horizons greater than five years the update does not focus merely on financial
are interesting to consider, but the predict- details, but also look keenly at progress in
ability of future events diminishes greatly with technical operations and customer services
time. It is for this reason that the business as well. Thus, the water supervisor and the
planning model, and these guidelines for the local accountant will have to be involved.
water supply and wastewater utility sector, is From experience, the technical operations and
structured around a five-year business plan customer service departments of the utility
timeframe. have the greatest impact on overall utility
performance and customer satisfaction.
This does not mean however, that all planning
at the utility should be limited to a five-year The issues of business plan updating and moni-
timeframe. This is particularly true for master toring of performance are discussed in greater
plans of the systems, which commonly have detail in Sections 17 and 18 of this guide.
planning timeframes of 25-30 years, and water

4 BUSINESS PLAN MODEL
This section presents and describes the

business plan model for water supply and/
or sewerage utilities in the Philippines in the
preparation of a five-year business plan.
investments and expenditures necessary
for implementing action plans, and the total
expense budget for each of the forecasted years
of the business plan.
4.1 STRUCTURE OF THE BUSINESS PLAN 4.2 DESCRIPTION OF KEY ELEMENTS OF

MODEL THE BUSINESS PLAN MODEL
The business plan model follows a defined The business plan model consists of the
outline that has been successfully applied in following key elements:
a number of utilities around the world, and
conforms to many generally accepted business General description of the utility
planning formats. This model was developed so Under this element, the utilities will be guided
that the business plan will be understandable in the data collection process that will provide
and useful not only to the utility’s management the requisite quantitative information and the
and staff, but also to its PGB, local government basis for key performance indicators. This
officials, donors and lenders, and other inter- section also includes background utility infor-
ested stakeholders. mation so that someone not familiar with the
utility will have specific information needed to
The model progresses in a building block put the Business Plan in perspective.
fashion, culminating in an assessment of annual
“Total Revenue Need” for the forecasted five Mission statement
years of the business plan, a corresponding Defining a mission statement is the first step
“average tariff per cubic meter” forecast to be in the business plan development process. An
sold in each of the five years, as well as a “Tariff organization will find it hard to define strategic
Policy and Strategy.” goals and identify action plans until its mission
is clearly stated.
To do this, the model will consider the
following: the utility’s strategic goals, specific PGB overview
action plans for achieving these goals, capital Once the business plan is completed, the PGB
11
should take the opportunity to examine major which is a critical concern as water utilities seek
issues affecting performance of the utility and to reduce energy costs and maximize sales of
the actions that have been identified to bring water produced. The utility must place a major
about improved performance. In addition, this emphasis on the need to quantify and account
is a good time to identify the monitoring and for produced water, regarding it as a product
reporting procedures the PGB will establish that must be sold, not produced and lost.
and implement to ensure that any significant
departure from business plan targets and Organizational structure and staffing
milestones are detected early and corrections People are key to achieving performance
are made to the action plans. improvements, so organizational structure
and staffing levels are key components of a
Assessment of current conditions and priority business plan. The review of the organization
issues and staffing requirements of the business plan
Before starting into the formal process of will highlight the impact of labor cost on the
developing a business plan, notice must be overall budget. It will also show that overstaff-
taken of current internal and external condi- ing constrains the utility from providing higher
tions affecting the utility’s performance. benefits or incentives to staff.
This is also intended to help bring focus and
consensus on priority issues that need to be Management must be prepared to break
addressed in the business plan. away from old organizational structures and
staffing policies that have been tradition-
Strategic goals ally used by LGU-run water utilities, and be
Identifying strategic goals is critical to the prepared to restructure the organization with
business planning process since these help in productivity and overall performance as main
setting quantifiable targets for improving the considerations.
utility’s performance. Strategic goals should be
specific, measurable, achievable, realistic, and Performance improvement program
time bound. Once the utility has identified and stated its
strategic goals and has prepared a sound water
Water demand management analysis and demand management analysis, it then needs to
water sales forecast prepare a performance improvement program.
Water demand management (WDM) aims to The utility’s approach to implementing the
optimize production and conserve total water change process is critical to achieving long-
usage by controlling demand. WDM analysis is term, lasting improvements. This will include
useful in assessing water demand and is critical specific performance improvement plans that
in addressing future water demand projected are fairly detailed, with clear implementation
from historical records and expected water schedules and interim milestones.
usage rates by customer category.
Capital investment program
Conducting an annual water balance is This section of the Guide addresses the issue
important and greatly benefits the utility. It can of planned capital investments and capital
also address issues related to the identification expenditures and their impact on the opera-
and reduction of non-revenue water (NRW), tional and financial performance of the utility.

In considering planned capital investments Sustainability not only refers to routine
and expenditures, the utility management operations and maintenance expenses, but also
will be guided by the need for new capital considers the impact of calculated revenue
investments/expenditures as well as for capital needs for capital expenditures, capital renewal
renewal and capital repair and replacement, and capital repair and replacement, as well as
and their impact on tariffs. debt service and repayments on loans.
Likewise, a capital investment program will Tariff policy and pricing strategy
emphasize the need to identify the sources of The business planning process ends with a
capital investments. Simply planning capital series of tariff analysis iterations that may
investments is insufficient for sound utility lead management to reconsider its opera-
management. The business plan should be able tions, maintenance and capital expenditures
to identify a source of investment funds, the budgets. Once a realistic mean tariff has been
terms by which those funds may be offered, calculated, a pricing strategy can be developed
and project the timing for availability of such to reflect any differentiations among classes of
funds. This way, their beneficial use and their customers, and to ensure that needed revenues
impact on performance improvement can be will be generated so the utility is financially
realistically reflected in the business plan. and commercially viable. This condition must
be met, whether the utility is operated publicly
Operations and maintenance budget forecast or under a contract with a private entity.
Forecasting operations and maintenance
expenses is an effective tool for controlling and 4.3 BUSINESS PLAN MODEL
comparing actual against planned (budgeted) SPREADSHEET WORKBOOK
needs and performance. Particularly critical The business plan model is supported by a
to the budget is the impact of management Business Plan Model Spreadsheet Workbook,
decisions on expenses for labor, power, a template created on Microsoft Excel. The
chemicals and spare parts. These four items Workbook allows the utility to record and
drive the budget of most water utilities. calculate results based on data and assump-
tions entered.
Before starting the budget forecasting process,
the utility will be directed on how to consider The Workbook is made up of eight inter-
and evaluate past and present financial and related worksheets, as follows:
technical data to help identify factors that
will impact the projection of budget line item a. Staff list
expenditure. b. Staff analysis and forecast
c. Water demand analysis and forecasted
Revenue needs water sales
This element of the business plan guide will d. Capital investment program
help management determine the utility’s total e. Operations and maintenance budget
revenue needs. The objective of the business forecast
planning process for LGU-run water utilities is f. Debt service
to help ensure financial self-sustainability for g. Revenue needs
the utility. h. Pricing strategy

To use the Workbook, start by making a copy a template for future use. Later sections will
of the Workbook provided with the guide, and discuss how to use the different worksheets.
saving a copy of the workbook under a new Sample worksheets are attached as Appendix C
filename. This way, the Workbook Model, in for reference.
its original form, will always be available as
BUSINESS PLAN MODEL OUTLINE
I. Strategic Direction and Vision Statement of the VIII. Organizational Structure and Staffing Plan
Utility 1. Current Organization and Staffing
1. Strategic Issues, Concerns, and Direction 2. Proposed Revisions to Organizational Struc-
2. Vision Statement ture and Staffing Level
II. General Description of the Utility IX. Performance Improvement Program to

1. Brief History of the Utility Achieve Strategic Goals
2. Franchise Area Profile Information 1. Performance Improvement Plan One
3. Key Statistical Performance Information 2. Performance Improvement Plan Two
4. Corporate Governance Structure 3. Performance Improvement Plan Three
4. Performance Improvement Plan Four
III. Mission Statement of the Utility 5. Performance Improvement Plan Five
IV. Senior Management Overview of the Business X. Five-Year Cost Budget Forecast
Plan 1. Salaries
1. Priority Issues for the Utility 2. Other Personnel Costs
2. Major Challenges Facing Utility in Implement- 3. Contracted Services
ing Business Plan 4. Consumable Expenditures
3. Monitoring, Reporting, and Corrective Actions
XI. Five-Year Capital Expenditure and Invest-
V. Assessment of Current Conditions and Priority ment Forecast
Issues 1. Capital Renewal (Underground Assets)
2. Capital Repair and Replacement (Above
VI. Strategic Goals Ground Assets)
1. Strategic Goal One 3. New Capital Investments
2. Strategic Goal Two 4. Building the Capital Investment/Expendi-
3. Strategic Goal Three ture Plan
4. Strategic Goal Four
5. Strategic Goal Five XII. Revenue Needs
1. Debt Service
VII. Water Demand Management Analysis and 2. Capital Reserves
Water Sales Forecast 3. Basis for Revenue Needs
1. Per Capita Consumption by Class of Customer
2. Non-Revenue Water XIII Tariff Policy and Strategy
3. Forecast of Water Sales 1. Average Tariff per Cubic Meter
4. Sources of Supply for the Planning Period
Appendices

5 GENERAL DESCRIPTION
OF THE UTILITY
5.1 BRIEF HISTORY AND BACKGROUND

INFORMATION
In this section of the business plan, management
• Describe the nature of water treatment used,
the frequency of water quality testing, and
the type of testing parameters
should provide a short description of the history • State the total number of waterworks and
of the utility, as well as background information sewerage staff, as well as the staff structure
on the organization. To prepare this brief history (i.e., number of technical, administrative
and background, management should consider staff )
the following points, as a minimum:
5.2 ADMINISTRATIVE AREA,
• Nature of services provided by the utility COVERAGE AND CONSUMER PROFILE
(e.g., water supply only, water supply and INFORMATION
sewerage services, bulk water supply to
An LGU’s administrative area is the entire
other utilities/systems, etc.)
territory of the local government, but LGU-run
• Date of the utility’s establishment and water utilities rarely cover the entire admin-
relative age of the infrastructure istrative area. There are usually areas within
• Current legal status of the utility and when the administrative area where other water
that status was established service providers operate, like water service
cooperatives, Barangay Water and Sanitation
• Types of licenses/permits held by the utility
Associations (BWSA), and/or private water
• Type, location and safe yield of water service providers. There may also be parts of
sources in active use the administrative area not covered by any
• Nature of the water supply system (e.g., service provider.
pumped, gravity-fed, and/or combination,
level/s of service) The coverage of water service is the expanse or
• Specify seasonal restrictions on water use reach of its distribution system in terms of pop-
ulation. Its covered population should include
• State whether water supply system is used
even those not connected to the system because
for other community requirements, such as
service is available to them. The coverage of a
fire protection
water service provider should be expressed as a
15
percentage of the total city/municipal popula- a minimum, this should include performance
tion. The LGU-run water utility should clearly measures that are in the business plan’s
define its coverage and that of other water targeted areas for improvement. These KPIs
service providers in its business plan. may be presented in table form.
Population figures used by management To get an accurate indication of the water

should be reasonably accurate. The number of utility’s performance, its financial records and
consumer connections by consumer category reports must be ring-fenced. These ring-fenced
(household, commercial, industrial, institu- data will be the basis for the computation of
tional, etc.) should also be presented. KPIs.
5.3 KEY PERFORMANCE INDICATORS Table 5-1 shows commonly used performance
Key performance indicators (KPIs) provide indicators.
information on the utility’s performance. As
Table 5-1. Key Performance Indicators
Key performance Indicator Value
Service coverage (% of total population):
Water supply
Sewerage
Septage management
Population served (% of total population):
Water supply
Sewerage
Septage management
Average water consumption (m3/day/connection):
Residential (also in lpcd)
Level 3
Level 2
Commercial
Industrial
Institutional

Key performance Indicator Value
Metering:
Customer metering (% of total connections)
Production metering (% of total water sources)
Non-revenue water (% of total water production)
Average hours of water supply per day
Water quality compliance (% negative tests):
Physical and chemical
Bacteriological
Average tariff (PhP/m3)
Average cost (PhP/m3)
Working ratio
Collection period
Collection efficiency (%)
Staffing ratio (Employees/1,000 water+sewer connections)
Debt service coverage ratio
Debt equity ratio
Net profit margin
Operating margin
The following section, mostly modified from the Performance Improvement Toolkit for Small Water
Utilities developed by the SWIF Project of World Bank’s Water and Sanitation Program, discusses
the measurements and definitions of the indicators mentioned above. The discussion covers the
normal values and significance of each indicator in business planning.

Service coverage
■ Water service coverage
This shows the percentage of population in the administrative area that is covered by the LGU-run
water utility. This is derived by mapping households and the layout of the water distribution system.
As stated earlier, the service area population is the number of people living in areas where water
service is available.
Formula
Water service Population reached by distribution pipelines
= x 100
coverage (%) Total city/municipal population
Significance
• Water service coverage provides insights into the extent of infrastructure provided by the water
utility.
• A study of the unserved areas will help the water utility assess what has to be improved in its
water service coverage.
■ Sewerage service coverage

This shows the percentage of population in the administrative area covered by the LGU-run water
and wastewater utility. This is derived by mapping households and the layout of the sewerage system.
Formula
Sewerage service Population reached by sewer lines
= x 100
coverage (%) Total city/municipal population
Significance:
• Similarly, sewerage service coverage reflects the extent of the infrastructure provided by the LGU
water and wastewater utility.
• Identification of unserved areas will help the utility assess what has to be improved in its
sewerage service coverage.
■ Septage collection service coverage

This shows the percentage of population in service area where septage collection services are
available from the utility.
Formula
Septage collection Population within septage collection area
= x 100
service coverage (%) Total city/municipal population
Significance:
• Septage service coverage shows the availability of the service based on the septage management
program of the utility.
• Future targets can be easily programmed by the utility.

Population served
■ Population served by water service.
This shows the percentage of population in the administrative area that is getting water from the
LGU-run water utility, either through a direct service connection or as part of the community
sharing a public tap.
Formulas
No. of household No. of public taps x
Population served by connections x Persons + Households per tap x
= per household Persons per household x 100
water service (%)
Total city/municipal population
Willingness to No. of household connections x Persons per household

= x 100
connect (%) Population reached by distribution pipelines
Significance:
• The indicator will show how many households are actually availing of the water service.
• The common threshold for willingness to connect to most water utilities is 60% within the
coverage area of the water service.
• This will also show the extent of population having alternative water sources.
• This may also give an indication of the level of dissatisfaction with the service provided by the
water utility.
■ Population served by sewerage service

This shows the percentage of population in administrative area that is connected to the sewerage
system of the LGU-run water utility.
Formula
Population served by No. of household sewer connections x Persons per household
= x 100
sewerage service (%) Total city/municipal population
Significance
• The indicator will show how many households are actually availing of sewerage services.
• This will also indicate how many in the area have other disposal methods.

■ Population served by septage collection service
This shows percentage of population in administrative area that is covered by the septage desludging
service and septage treatment but limited to those with accessible septic tanks only.
Formula
No. of accessible septic tanks within septage
Population served by septage collection area x Persons per household
= x 100
collection service (%)
Total city/municipal population
Average water consumption

■ Average residential water consumption
This shows how much water is used by each residential connection or by the individual.
Formulas
Total annual volume billed for Level 3 residential
Average Level 3 residential connections ÷ 365 days/year
=
water consumption (m3/day)
Total no. of residential connections
This can also be expressed in terms of per capita consumption:
Average Level 3 residential Average Level 3 residential water consumption (m3/day)

= x 1000
water consumption (lpcd) No. of persons per household
This can be similarly performed for metered Level 2 service:
Total annual volume billed for Level 2 residential

Average Level 2 residential connections ÷ 365 days/year
=
water consumption (m3/day)
Total no. of metered public taps
Average Level 2 residential water consumption (m3/day)

Average Level 2 residential
= Ave. no. of households per tap x No. of persons per x 1000
water consumption (lpcd)
household
Significance
• High consumption shows that the system allows for this level of consumption and that consumers
in the area are willing to pay for such services at a given price. In such cases, there may be a need
to review the tariff structure so that consumers are encouraged to conserve water.
• Low consumption may indicate that there are alternative sources of water in the area. It may also
indicate that the utility is not able to supply as much volume as consumers need or want to use. It
may be the result of low pressure or water being available for only a few hours a day, or the utility
may be serving more consumers than the system can handle.
• The normal range of Level 3 per capita consumption is 80–200 lpcd. For a household of five, this
is equivalent to 0.4-1.0 m3/day.
• The normal range of Level 2 per capita consumption is 30–80 lpcd. For an average 10 households
sharing a public tap and a household size of five, these are equivalent to 1.5–4.0 m3/day per public
faucet.

■ Average commercial water consumption
This shows how much water is used daily by each commercial connection.
Formula
Total annual volume billed for commercial
Average commercial water connections ÷ 365 days/year
=
consumption (m3/day)
Total no. of commercial connections
■ Average institutional water consumption

This shows how much water is used daily by each institutional connection.
Formula
Total annual volume billed for institutional
Average institutional water connections ÷ 365 days/year
=
Total no. of institutional connections
■ Average industrial water consumption

This shows how much water is used daily by each industrial connection.
Formula
Total annual volume billed for industrial
Average industrial water connections ÷ 365 days/year
=
Total no. of industrial connections
Metering
■ Customer metering
This shows how many service connections are metered.
Formula
No. of metered connections
Metered connections (%) = x 100
Total no. of connections
Significance
• All connections should be metered to fully account for the water consumption of customers.
• Metering helps customers control their water consumption and provides utilities with tools and
information to better manage the system.
• It is important for meters to be regularly cleaned, repaired, calibrated, or replaced. Best practices
in relation to reducing water losses suggest regular calibration or replacement of meters should
be done every five to seven years.

■ Production metering
This shows how much of water sources are being measured. This is usually the most neglected part
of a waterworks system.
Formula
Metered/measured No. of metered/measured water sources
= x 100
water sources (%) Total no. of water sources
Significance
• Accurate measurement of the volume of flow of all water sources is important to fully account for
water production.
• The difference between the resulting production figure and the amount of water consumed by
customers will reveal the level of non-revenue water in the system.
■ Non-revenue water (NRW)

This shows the volume of water produced that does not generate income.
Formula
Volume produced - Volume billed
Non-revenue water (%) = x 100
Volume produced
Significance
For new water systems, the normal design allowance for NRW is 20% but this can go as low as 5% for
very efficient systems. For old systems or a combination of new and old facilities, NRW is normally
more than 30%. Higher values of NRW should prompt the planner to consider system improvements
that can turn wasted water into revenues. The cost of improvements should always be outweighed by
revenues generated.
• Reducing water losses could mean savings. If losses are reduced or controlled, less water will
need to be produced and less expenses required for pumping and treatment. It could also mean
additional revenues. A substantial reduction in water losses means more water is available to be
sold and more consumers can be served.
• Water losses can be reduced by appropriate technical and organizational solutions. These include
100% metering of production and consumption, repair of visible leaks, elimination of illegal con-
nections, identification and repair of invisible leaks, and repair and replacement of meters.
■ Average hours of water supply per day

This shows the availability of water supply during a day.
Significance:
• All water utilities should aspire for 24-hour water supply. If this is not attained, especially by
those with extremely low operating hours, planners should look into issues or problems—like
inadequacy of supply and other possible deficiencies—and recommend appropriate solutions.
• An operation that needs to keep turning water supply on and off is prone to water quality problems.

Water quality compliance
■ Physical and chemical tests
All water sources should pass the requirements of the Philippine National Standards for Drinking
Water (PNSDW).
Formula
Physical/chemical No. of samples passing test
= x 100
test compliance (%) Total no. of samples
Significance
The indicator should be at 100%. Appropriate water treatment should be employed for parameters
exceeding allowable limits as prescribed by PNSDW.
■ Bacteriological tests
All samples taken from various points of the system should pass bacteriological tests.
Formula
Bacteriological test No. of samples passing test

= x 100
compliance (%) Total no. of samples
Significance
The indicator should be at 100%. If not, the source of contamination should be identified and appro-
priate water treatment be employed.
■ Average water tariff

This is the average price of water per cubic meter that is being charged by the water utility.
Formula
Total water revenues

Average water tariff (PhP/m3) =
Total water volume billed
Significance:
When compared with average production cost (item below), this measure gauges whether tariffs are
able to cover the cost of production. The average tariff of water utilities included in the 2004 bench-
marking study was PhP13.06 per m3.

■ Average production cost
This measures the overall costs (both direct and indirect) incurred per cubic meter of water
produced. Operating expenses should exclude sewerage and septage collection/treatment operating
costs.
Formula
Average water production cost Operating expenses
=
(PhP/m3) Total water volume billed
Significance:
Unit operational costs provide a “bottom line” assessment of the mix of resources (manpower, fuel,
power, chemicals, etc.) used to produce and deliver water.
■ Working ratio
This measures the proportion of expenses to revenues.
Formula:
Operating expenses (net of financing charges and non-cash exp.)
Working ratio =
Operating revenues
Significance
This indicator answers the question: Do revenues exceed operating costs?
An operating ratio less than 1 means that revenues from tariffs are able to cover operation and main-
tenance costs, while a ratio above 1 means the utility is operating at a loss.
For small utilities, 85% working ratio is ideal.
■ Collection period
This measures the number of days/months it takes to collect receivables from customers.
Formula
Account receivable, ending balance

Collection period =
Total annual billings ÷ 12 months
Significance
Long collection periods affect the availability of cash for the utility’s operating expenses.
A collection period that is longer than 1.8 months reflects poor collection performance.

■ Collection efficiency
This measures the proportion of billings collected within the period.
Formula
Total annual collections
Collection efficiency (%) = x 100
Total annual billings
Significance
• Revenue collection efficiency is a direct comparison of collections and billings, and measures the
intensity (success) of the collection effort.
• Revenue collection efficiency must not be less than 90%. Some utilities may have collection
efficiencies higher than 100%, indicating total collections for the period included payment of bills
for the previous periods.
■ Staffing ratio
This suggests whether the utility is overstaffed or understaffed.
Formula
Number of staff
Staffing ratio = x 1000
Total no. of water + sewer connections
Significance
• Staff costs are traditionally a major component of operating costs in a utility. Understanding
correct staffing levels can help management address issues related to overstaffing.
• Low staff ratio among water utilities may reflect an inability to hire staff given that low average
tariffs leave little room to cover operating costs, including personnel salaries.
• Normal staffing ratios of water utilities range from 5 to 8 staff per 1,000 connections.
■ Average total water sales

Significance
This indicator measures overall efficiency of water resource use. Low figures may reflect a shortage
of water resources linked to inadequate investments.
■ Debt service coverage ratio
Formula Net income before interests and taxes

Debt service
=
coverage ratio Fixed interest charges
Significance
This ratio shows the fixed debt repayment levels as a proportion of total utility revenue.

■ Debt-equity ratio
Formula
Debt-equity Liabilities
=
ratio Government equity
Significance
• It indicates what proportion of equity and debt the company is using to finance its assets.
• It is determined to ascertain soundness of the utility’s long-term financial policies.
■ Net profit margin

Formula
Net income
Net profit margin (%) = x 100
Total revenues
Significance:
• This indicator is used to measure overall profitability and hence very useful to decision-makers.
If net profit is not sufficient, the utility will not be able to achieve a satisfactory return on its
investment.
• Obviously, a higher ratio means better profitability. But note that the performance of profits
should also be seen in relation to the utility’s investments or capital and not only to sales.
Operating margin
Formula
Net income before income tax, depreciation,
Operating margin (%) = amortization x 100
Operating revenues
Significance:
This indicator is used to measure how much out of every peso in sales the utility actually keeps in
earnings.
5.4 INVESTMENT/FUNDING INFORMATION

The performance of the utility is affected by the amount and efficiency of investments made in
capital infrastructure. In general, physical investments in infrastructure will start to yield perfor-
mance benefits after two to three years.
Under this section, management should provide information on all investments made over the past
five years (Table 5-2), including both grants and loans, and whether they are from the National
Government budget, bilateral grants/loans, international financing institutions, commercial lenders,
or internally generated funds.
Management should also indicate if any outstanding loan obligations have repayments that will occur
within the five-year period of the business plan.

Table 5-2. Investments classified by funding source
Funding source
Asset Internally
Year acquired Amount Donations/
description generated Loans Other sources
grants
funds

6 MISSION STATEMENT OF
THE UTILITY
6.1 WHAT IS A MISSION STATEMENT?

The first step in the business planning process
is the preparation of a mission statement based
6.2 IMPORTANCE OF THE MISSION
STATEMENT
The mission statement helps the utility
on the utility’s vision. The vision suggests determine and prioritize strategic goals, and
a future orientation—the organization’s guides the execution of its chosen strategies. It
shared aspiration for its future. The mission provides the structure and framework for an
statement is a short, clear statement describ- organization to build upon. Without a mission
ing the utility’s purpose and values. It should statement, an organization will be unable to
be a succinct representation of the utility's integrate different goals and strategies into a
reason for being. It should incorporate socially comprehensive and meaningful framework for
relevant and measurable criteria addressing action and growth.
concepts such as its moral/ethical position,
public image, services provided, target market, The mission statement also allows management
geographic domain and expectations of growth. to define the business down to the most basic
Ultimately, this serves as the guiding principle level. Once in place, an organization’s goals and
for all goals and plans of the utility. plans must be closely aligned with its mission
statement.
The central focus of a utility's decisions and
operations should be its mission, which is the Mission statements are intended to motivate
basic and unique purpose that sets it apart and inspire, set a common direction, promote
from other organizations and determines the accountability, and provide insight on the
scope of its operations. The mission statement organization’s character, attitude, and beliefs.
is an enduring statement of the organization's
intent and describes areas of emphasis for
the organization in a manner that reflects the
philosophy and values of management and
other stakeholders.
29
6.3 WHAT SHOULD BE CONSIDERED statement impacts employees by raising their
WHEN DEVELOPING A MISSION dedication to the organization because they
STATEMENT? can identify with its overall purpose and reason
A mission statement should be a clear set of for existence.
principles that is understood, accepted, and
adopted by the utility’s employees as goals or Example of LGU-run water utility mission
standards to aspire for. Generally, a mission statements:
statement includes the:
• Purpose of the utility in terms of the scope
Jagna Waterworks System
of its operations Jagna, Bohol
• Priorities for the utility’s future Mission Statement
performance Guided by our vision, we commit ourselves to:

• Provide sufficient potable water;
• Values of the utility in the provision of its • Deliver quality services through competent
services and committed personnel and endeavor to
continually enhance systems and technology;
• Ensure sustainable water resources by
In developing a mission statement, the man- being proactive in the preservation of the
environment; and
agement team should consider the following • Become a financially viable and self-sustaining
questions: water utility.
• What do we do as a utility?
• Why does the utility exist? Mahayag Local Water System
Mahayag, Zamboanga del Sur
• What is the ultimate result of our work? Mission Statement
• What are our priorities? To provide, potable, safe, and sufficient water
supply in improving the economic, health, and
• What do we value? living conditions of the people.
• What is the utility’s vision?
• Should we include a standard of Alburquerque Waterworks System
Alburquerque, Bohol
performance? Mission Statement
• Should we include a customer statement?
The Municipal Waterworks System of
• What kind of internal work environment do Alburquerque guarantees to provide sufficient
supply of safe potable water to its constituents
we want for our employees? by improving the utility, safeguarding the
environment and sustaining the working
relationship of stakeholders.
In addition to serving as a guidepost for
organizational goals and plans, a mission
statement contributes to a positive perception
of the utility both externally and internally. When describing the scope of its operations,
The local community, customers, and suppliers many utilities often include a standard for
will appreciate the utility’s commitment to performance in the statement. Some mission
principles and goals declared in its mission statements also convey the utility’s attitude
statement. Internally, a strong mission toward employees and customers.

WRITING THE MISSION STATEMENT

7 MANAGEMENT OVERVIEW
OF BUSINESS PLAN
The management overview section of the

business plan allows management to address
major concerns affecting performance of the
utility. It may also contain a discussion of the
replacement of existing systems. Such capital
can only be obtained by applying for loans
from the Municipal Development Fund Office,
government financial institutions, and private
general nature of the actions that need to be financial institutions.
taken to bring about improved performance.
Not all improvements need capital investment,
In addition, this section describes the moni- however, management must be objective in iden-
toring and reporting procedures to be imple- tifying these challenges as well. It is essential
mented to ensure that any serious departure that strategic goals set by management are
from business plan targets and milestones are responsive to all nature of perceived challenges.
detected early and corrected immediately.
A major milestone for the Philippine water
7.1 MAJOR CHALLENGES IN BUSINESS sector would be the achievement of the
PLAN IMPLEMENTATION Millennium Development Goal of increasing
Management should use this section of the formal access to water supply to 90% by 2010.
business plan to identify major challenges the Under this section of the business plan, manage-
utility is likely to face during the plan’s implement should list the most important challenges
mentation. The ability to address some major for the utility. The following is a list of possible
challenges may not always be within the control challenges that a typical utility may face:
of management; this should be clearly stated in
this section. • Increased water supply coverage for the
administrative area
Water and sanitation services in the Philippines • Secure water supply in sufficient quantity
have not expanded in terms of coverage; poorer and proper quality
households tend to be underserved by existing
• Reduce non-revenue water
facilities. A typical example is the need for large
capital investments for extending water supply • Increase sanitation/sewerage coverage by
coverage to unserved areas, as well as repair and implementing a capital investment program
to reach unserved areas
33
• Provide quality septage/sewage collection, • Persons designated to be responsible for
treatment and disposal services in compli- monitoring
ance with environmental standards • Schedule of meetings to discuss progress
• Operate the utility in a commercial manner, and issues in implementation
i.e., financially self-sustaining based on the
tariff structure Reporting
• Build staff capacity by implementing a Management must specify the reporting
comprehensive staff training program requirements of all sections of the utility.
Reports form the basis of decisions on trouble-
The business plan must include at least one or shooting and therefore must be accurate and
more approaches addressing each of the chal- timely. Under the “Reporting” section, manage-
lenges identified by management. ment must specify reporting requirements for
each section, to include as a minimum:
7.2 MONITORING, REPORTING, AND
CORRECTIVE ACTIONS • Type of reports and data to be provided
After approval by the PGB and once imple- • Frequency of reporting

mented, the business plan will need to be • Number of copies to be filed and flow of
updated from time to time. These measures reporting
are essential to the successful implementa-
• Designation of person in each section who
tion of the business plan, and make it a living
shall be responsible for reporting
document.
Monitoring Upon review and analysis of monitoring

Monitoring requires an observation of progress reports, management will be able to apply cor-
made in the achievement of the utility’s stated rective measures to address problems or issues
strategic goals by measuring their status at arising during implementation.
defined points in time.
Corrective measures
Under the “Monitoring” section, management Management must first identify new challenges
must determine the method of measuring or issues that have been overlooked during the
progress against the goals set by the business preparation of the business plan document, and
plan, specifying the following: provide for appropriate solutions.
• Functional areas to be monitored Applying corrective measures is not intended

as a modification of the utility’s strategic goals.
• Performance indicators to be applied for
Rather, they merely improve the means by
each functional area
which these goals are sought to be achieved.
• Frequency of monitoring or measuring
results against performance indicators

8
ASSESSMENT OF
CURRENT CONDITIONS
AND PRIORITY ISSUES
Before developing a business plan, the man- a way to help describe the utility. The manage-
agement team must come to a consensus on ment team will need to consider these indica-
current conditions of the utility, the external tors, among others, to form an objective conclu-
factors affecting the utility, and the priority sion as to how the utility is performing. The
issues that need to be addressed in the business management team will also need to examine
plan. the quality of its programs for monitoring and
measuring performance. It is important to keep
There are two grounding environments: the following four statements in mind:
external and internal. The external environ-
ment is the area, industry or sector affecting or • If you are not measuring it, you cannot
being affected by the utility, while the internal monitor and manage it.
environment is the utility itself. The internal • If you do measure it, be sure it is being
environment is composed of the resources, measured correctly and consistently.
manpower, systems, processes, capabilities and
• Inaccurate data produces inaccurate
constraints of the utility.
indicators.
Priority issues for the utility can be best iden- • Inaccurate indicators result in bad manage-
tified through a simple exercise conducted ment decisions.
among the management team, which will be
discussed later in this section. Nature of work force and skills
The success of a utility relies ultimately on its
8.1 CURRENT/EXPECTED INTERNAL people and their ability to perform their duties.
CONDITIONS To meet the future demands of the utility,
Management must do its best to make an honest management must assess its work force in
and objective assessment of existing internal terms of skills and training needs. In the short
conditions and set realistic targets from there. term, it is reasonable to expect reductions in
the work force. Likewise, there will be a need
Performance indicators and trends for increased training in the operation and
A number of key performance indicators were maintenance of new technologies.
already suggested in Section 5 of the Guide, as
35
Capital investment program 8.2 CURRENT/EXPECTED EXTERNAL
In the coming years, many utilities in the CONDITIONS
Philippines will be engaged in capital invest- One must consider the impact of national
ment programs to upgrade and expand events and policies on the utility’s ability to
system coverage and improve service levels. perform its activities and services. Some of
Major capital investment programs have a these events will be considered again in later
profound impact on a utility. Management sections of the business planning process, but
must anticipate changes and allow for them in are raised below as examples of things that
their business plan. Among these may be new need to be considered and discussed by the
customers, the need for new worker skills, and management team.
added operational costs.
Changes in sector legislation and regulations
Resource optimization The water supply and wastewater utility sector
The section on resource optimization is greatly driven by legislation and regula-
endeavors to determine if the utility’s resources tions. Even a small change in the water quality
have been efficiently, economically, and effec- standard requirement can have a significant
tively utilized. impact on capital investment needs and
operating costs.
Management process
These are the systems and procedures, both As stated in the World Bank Report “Meeting
formal and informal, which the utility employs Infrastructure Challenges,” a robust regulatory
to achieve its goals. Among these are the framework is critical for sector development
following: planning, programming, budgeting, as it provides for a credible and effective
organizing, staffing, implementing, evaluat- tariff adjustment mechanism insulated from
ing, controlling, coordinating, monitoring, short-term political intrusion. A regulatory
leading, directing, relating, compensating and framework is also crucial to make service
rewarding. providers accountable to consumers. However,
such a framework is still not in place.
Physical assets, environmental conditions
This requires analyzing the state, condition, Trends in power service continuity and price
and competitiveness of the utility’s physical Business planning must be performed with the
assets and working conditions, including the best estimate of power supply continuity and
working environment, infrastructure and price. Since power costs have a major impact
logistics support, utilities and other physical on the operations and maintenance budget,
factors affecting the cost of doing business and management must carefully review the recent
cost of producing products or services. history of electricity price increases and factor
this in the PS & MOOE budget forecast.
Organizational affiliations
This involves evaluating the utility’s affilia- Trends in chemical supply and price
tions, alliances and linkages, including supplier Treatment chemicals are playing an expanding
and marketing networks, industry associations, role in the operations of water utilities in
etc. The costs and benefits of such tie-ups must Philippines, especially for the treatment of
be evaluated.

surface water sources, disinfection of drinking tend to hinder the attainment of objectives
water prior, and treatment of wastewater. (VMO) and the exploitation of opportunities?
Establishing a reliable supply of quality
chemicals at affordable prices will be an increas- Weaknesses-Opportunities (W-O) Strategic
ing challenge for a growing number of utilities. Options – This matrix asks the question: How
can weaknesses be overcome to take advantage
Changes in economic conditions affecting of or exploit opportunities?
customers
The economic well-being of customers can Weaknesses-Threats (W-T) Strategic Options
have a direct impact on the utility. Customers – This matrix asks the question: How can
who have been laid off due to an economic weaknesses be overcome to counteract threats
downturn can end up paying their utility that tend to hinder the attainment of objectives
bills late or not at all. Conversely, a growing (VMO) and exploitation of opportunities?
economy with a strong job market can mean
an increase in consumption per capita per day, Figure 8-1 SWOT Matrix
as well as an increase in the utility’s overall Internal Environment
Weaknesses
customer base. External Assessment Strengths (S)
Environment Assessment (W)
Opportunities (O) S-O W-O

Changes in labor laws affecting employment
Threats (T) S-T W-T
and wages
It is reasonable to expect that labor laws in
the Philippines will continue to evolve, espe- 8.4 PRIORITY ISSUES
cially as far as minimum wage standards are
The first step toward defining its strategic
concerned. As a major employer, the utility
goals is the identification of priority issues that
must allow for the impact of such changes on
will affect the utility.
its operations.
Problems or issues that affect the performance

8.3 SWOT MATRIX
of the utility should be considered in a struc-
Summarizing the previous observations, the tured way as they relate to different parts of
management team should be able to develop the organization. The following points are
a SWOT analysis which displays four possible provided to assist the management team in
combinations that can be used to generate considering probable problems/ issues.
strategic options. These are:
Management performance
Strengths-Opportunities (S-O) Strategic • Lack of internal regulation
Options – This matrix asks the question: How
• Lack of routine performance improvement
can strengths be used to take advantage of
programs
opportunities?
• Lack of performance monitoring and
Strengths-Threats (S-T) Strategic Options reporting practice
– This matrix asks the question: How can
strengths be used to counteract threats that

• Difficult relations with local government • Aging staff with no qualified replacements
officials within the administrative area of • Political interference in hiring practices
the utility
• Excessive political pressure and influence Customer service
• Fragmented customer service activities
Financial performance • Lack of computerized billing and account-
• Lack of internal audits ing system
• Lack of compliance with accounting • Low billing and/or collection efficiency rate
standards
• High percentage of non-revenue water
• High total labor cost due to overstaffing
• Serious problem with illegal connections
• Insufficient revenues and collections to
• Lack of public relations/customer commu-
cover operations costs
nications plan
• No financial reserves for new capital
investment
After having considered the problems/issues
• Insufficient tariff levels to meet debt listed above, management should conduct the
interest and repayment requirements exercise at the end of this section as a process
to identify the utility’s priority problems and
Operations performance issues.
• Significant water quality problems at
sources Sample format for identifying priorities
Directions: Consider and document the
• Delays in capital investment program
major problems and issues that the utility is
• Insufficient water supply sources confronting.
• Low water supply coverage
• Extremely low access to sewerage network 1. The management team should work col-
lectively in documenting all the significant
problems and issues they can identify
Maintenance performance
under each section, trying to be as specific
• Technical losses from visible leakage
as possible.
• Lack of spare parts to make timely repairs
• No preventive maintenance system in place 2. After listing the problems and issues under
each section, return to each section to rank
• Severe, repeated equipment damage due to
them based on urgency of the problem,
voltage fluctuations
relative to all other problems in that
• Lack of wastewater treatment and disposal section, by checking the appropriate box.
Human resources performance 3. Once this has been completed, proceed

• Overstaffing to the last table and transfer all problems
ranked “Very urgent” to that last table, and
• Poor quality of staff due to low salaries
then rank them in order of priority.

MANAGEMENT Not Urgent Urgent Very Urgent
1
2
3
4
5
FINANCE Not Urgent Urgent Very Urgent

1
2
3
4
5
OPERATIONS Not Urgent Urgent Very Urgent

1
2
3
4
5
MAINTENANCE Not Urgent Urgent Very Urgent

1
2
3
4
5
HUMAN RESOURCES Not Urgent Urgent Very Urgent

1
2
3
4
5
CUSTOMER SERVICE Not Urgent Urgent Very Urgent

1
2
3
4
5

Very Urgent Issues/Problems Not Urgent Urgent Very Urgent
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Although the table of “Very urgent issues/ significant enough, and can be realistically
problems” has allowed for 15 entries, and addressed within the five-year period of the
although more than 15 problems may be identi- business plan. Experience suggests that only
fied, the management should carefully consider five to seven “very urgent” issues and/or
which of the ones ranked “Very urgent” are problems can be practically addressed.

9 STRATEGIC GOALS
9.1 WHAT IS A STRATEGIC GOAL?

Strategic goals are identified to help accom-
plish the organization's mission statement.
environmental issues, water quality, community
involvement, customer satisfaction, and others.
In addition, aspects such as management of
human resources, financial management, and
Strategic goals pertain to the organization as a
customer service can be addressed specifically
whole, rather than just a specific section. Goals
by strategic goals.
identify what an organization wants to achieve,
preserve, reduce or eliminate. Strategic goals
Strategic goals are critical because they provide
provide an organization, specifically its man-
the important element of accountability to the
agement, with a sense of direction by stating
strategic planning process. Management is
quantified performance targets.
responsible to their PGB, local government, or
other governing authority for achievement of
The strategic goals developed within the
measurable objectives. Other members of man-
business planning process provide a utility
agement should be made fully aware and held
with its core priorities and a set of guidelines
accountable for achieving performance relative
for virtually all daily managerial decisions.
to objectives in their areas of operational
Strategic goals should be written down and
responsibility. In some utilities, compensation
management should know what they are at
and other rewards are tied to the achievement
all times. When managers are faced with the
of specific measurable goals stated in the
prospect of making a decision, they should
utility’s business plan, or the action plan of the
always refer to the stated strategic goals and act
particular operating section of the utility.
in a way that helps to achieve them.
A utility can have many important goals, but

Strategic goals should direct the operations
attending to all of them at once can defeat the
of the utility in key areas. Such areas may
purpose of strategic and business planning.
include all the aspects of billing and collec-
When determining strategic goals, the key is to
tion, water demand management, integrated
prioritize.
water resource planning and management,
41
Strategic goals should address the major issues 9.2 CHARACTERISTICS OF STRATEGIC
being faced by the utility and its management, GOALS
in carrying out the utility’s mission statement, When defining a strategic goal, there are
over the next five years. These issues should certain characteristics that must be considered
have been identified and prioritized as for it to be effective. Figure 9-1 illustrates the
described in Section 8 of the Guide. characteristics of a strategic goal and Table 9-1
describes them.
Figure 9-1
= + + + +
Strategic Goal Specific Achievable Mesurable Acceptable Time Bound
Table 9-1
CHARACTERISTIC DESCRIPTION
A strategic goal must be clearly stated in specific terms, so that there is no confusion as to
Specific
the meaning and purpose of the goal.
While a strategic goal should be challenging, it must also be realistically possible to achieve
Achievable as stated. If a strategic goal is unrealistic, employees may become unmotivated because they
will never be able to reach it.
A strategic goal must be measurable in quantitative terms so that it can be monitored and
assessed objectively, which in turn facilitates evaluating progress toward achieving the goal.
Measurable For example, saying "the reduction of non-revenue water will be a priority of the utility" Is less
effective than making the more specific statement: "Non-revenue water will be reduced to an
average level of 30% of water supplied to the system."
If the work force of the utility does not accept a particular strategic goal, achieving it will be
difficult. Effective management requires that the work force take ownership of strategic goals
Acceptable and take responsibility for achieving them. If they do not understand why they are being asked
to adopt a strategic goal, or its impact on them and the utility once achieved, they will not
pursue it with commitment and determination.
A strategic goal should be stated such that it is accomplished within a specified time frame,
say from one to five years. When stating a longer term for a strategic goal, it is advisable to
state interim target goals to be met. For example, if the goal is to increase the bill collection
Time bound
efficiency rate to 95% by the end of Year 4 of the business plan, and if the collection
efficiency rate is currently at 25%, then interim goals could be stated as, "The interim bill
collection goal for end of Year 1 is 35%, 50% at end of Year 2, and 70% at end of Year 3.”

9.3 EXAMPLES OF STRATEGIC GOALS
Table 9-2 presents some examples of how strategic goals should be stated to meet the characteristics
described in Figure 9-1 and Table 9-1.
Table 9-2
STRATEGIC GOAL MEASUREMENT OF PERFORMANCE
Increase billed water production Increase the amount of produced water that is billed, such that the utility is billing
70% (as measured at the sources) of its water production by the end of 2015, with
interim goals of 50% by the end of 2013, and 60% by the end of 2014.
Become financially sustainable Achieve full cost recovery, to include annual interest and capital repayments
on current loans, and a defined annual contribution to a capital repair and
replacement reserve by the end of 2015.
Assure water quality Achieve water quality relative to the presence of E-coli bacteria by not exceeding
the E-coli standard in more than 3% of samples taken and tested by the
Department of Health by 2014.
Build staff capacity Implement a staff-training program that will result in each staff member receiving
a minimum of 24 hours training per year by the end of 2015, with this goal being
met in increments of 8 hours per year by the end of 2013 and 16 hours per year by
the end of 2014.
Improve collection efforts Increase collection efficiency from 60% to 90% by 2015, with interim goals of
70% by 2013, and 80% by 2014. Shorten the collection period from 6 months to 1
month by end of 2015, with partial targets of 4 months by the end of 2013, and 2
months by the end of 2014.

10
ANALYZING WATER
DEMAND AND
FORECASTING WATER SALES
This section provides the user with guidance on Managing water supply and water demand is
assessment of water demand as well as future a function of efficient pricing, effective regula-
water demand, based on historical records, tion, and appropriate public education and
future growth, and expected water usage rates awareness. At the utility level, it is a process
by category of customer. Also discussed is the that combines technical, administrative, and
importance of conducting an annual water financial measures. A critical element of a
balance and its benefits to the utility. Lastly, the WDM program is the implementation of a
section discusses issues related to the identi- comprehensive, reliable metering program for
fication and reduction of non-revenue water, bulk supply, supply zone, and consumers.
which is increasingly a priority issue for water
utilities throughout the world.
pply
10.1 WHY IS WATER DEMAND ANALYSIS ie n t w ater su
Effic nd
CRITICAL IN BUSINESS PLANNING? w a t e r dema
and ortant
By developing an accurate assessment of e m e n t is imp
manag in its ef
forts
water demand, the utility is able to form a u t il ity
for a me
basis for nearly all planning studies, including e d u c e the volu
to r (cost
a business plan. Water demand management w a t e r losses
of rease
(WDM) has always been a priority issue in the in g s) and inc
sa v ter sold
management of a water utility, whether the
v o lu m e of wa
the es).
water supply system is based on gravity flow (revenu
or mechanical pumping.
A standard output of a WDM program is a

water demand analysis/forecast. A sound water The determination of realistic future water
demand forecast, together with an evaluation demand should be based on:
of existing sources of supply, provides valuable • Historical water supply and water sales
insight in determining if and when new sources records
of water supply must be developed.
45
• Current system performance and customer The overall objective of a water balance audit
use patterns is to help the utility select and implement
• Assumed changes in future water use programs to reduce water losses (non-revenue
patterns water) throughout the system. Ultimately,
• Assumed effectiveness of efforts to reduce either a reduction in the volume of water being
non-revenue water produced (cost reduction), or an increase in the
volume of water being sold (revenue increase)
• Unserved demand
should be aspired for.
A simple graphic, presented in Figure 10-1,
describes what is included in preparing a water Water balance audits should be performed
demand analysis. annually to help managers monitor progress
and identify new areas of
Figure 10 - 1 system losses, as well as adjust
Current and Future Demands priorities and establish new
maintenance goals. Once a
Collect and Determine Future Improve Determine comprehensive water balance
Evaluate Basic Demand Projections Management of Key Planning
Flow Data Current Demand Parameters audit has been implemented,
it is usually less expensive to
conduct the annual updates.
The assumptions used in determining water
demand have a permanent effect on planning The cost of a water balance audit depends
outcomes and subsequent planning decisions. on the size of the administrative area to be
Without a thorough analysis of water demand, audited, and the completeness, currency and
premature or excessive investment in capital accuracy of the utility’s records, including
works may result. This in turn may cause those on meter testing programs. The most
additional financial strain on the utility, and expensive task in a water balance audit is the
therefore on its customers. Conversely, inad- testing of large water meters for accuracy.
equate water demand management and infra-
structure investment may lead to decreased The benefits of water balance audits to a utility
quality of service, increased customer service are:
complaints, or negative environmental impact.
• Reduced non-revenue water
10.2 IMPORTANCE OF A WATER • Financial performance improvement
BALANCE AUDIT
• Increased knowledge of the distribution
Conducting a water balance audit is the
system
first step to a comprehensive water demand
management program. A water balance audit • More efficient use of existing supplies
quantitatively accounts for all the water input • Safeguarding public health and property
to the system and identifies how much water is • Improved public relations
lost and what that loss costs the utility.
• Reduced legal liability

• Reduced service disruption to customers Each component of the annual water balance is
• Resource conservation presented in terms of volume per year.
Metering of supply sources is an essential first

The user of this guideline should focus on the
step for water balance calculations. Whenever
areas shaded in pink to appreciate the potential
actual metering is not possible, every effort
negative impacts that water losses, when
should be made to carefully estimate each
combined with unbilled authorized consump-
component of water usage to determine
tion, can have on the financial performance of a
realistic quantities for the water balance.
utility, when and if these volumes are a signifi-
cant percentage of the total system input.
The water balance calculation and analysis
quantifies the total volume of water that
Because of the wide diversity of formats
enters the system, the volume of authorized
and definitions used globally for water
consumption (billed and unbilled, metered and
balance calculations, the International Water
unmetered), as well as the volume of water
Association and its Task Force on Water Losses
losses (apparent and real). This water balance
has produced an international best practice
calculation can be best understood by referring
approach for water balance calculations. This
to Figure 10-2.
approach includes definitions of its components
Figure 10-2 Components of a water balance
Billed Water Exported

Billed
Billed Metered Revenue
Authorized
Exported Consumption Water
Consumption
Water
Billed Unmetered
Authorized
Consumption
Consumption
Own
Unbilled Metered
Sources
Consumption
Unbilled
Authorized Unbilled Unmetered
Total Consumption Consumption
System
Input
Supplied Unauthorized
Water Consumption
Non-Revenue
Customer Metering Water
Apparent Losses Inaccuracies
Data Handling Error
Leakage on Mains
Water Losses
Imported Real Leakage on Service
Water Losses Lines
Leakage and
overflows at Storage

as a basis for comparing performance between a significant amount of electrical power for
utilities. Figure 10-2 is based on the terminology pumping. These costs must be recovered
and standards produced and generally accepted through water sales. If the operations are to be
in the water industry for water balances. Brief sustained and for utilities that have high per-
definitions of these common terminologies are centages of NRW, the consumer ends up paying
presented in Table 10-1. for the inefficiency through increased water
tariffs. Therefore, reducing NRW directly
Table 10-1 Definitions of water balance terminology
Terminology Definition
Own sources Volume of water derived from sources owned by the utility and often referred to as
produced water
Imported water Volume of water purchased from other suppliers
Total system input Volume of water received into the water supply system
Exported water Volume of water sold to another utility, as bulk water
Supplied water Volume of water available to be sold to system users
Authorized consumption Volume of billed and unbilled water supplied to registered customers of the utility
Water losses Volume of water calculated as the difference between total volume of system input
and the volume of authorized consumption
Billed authorized consumption All consumption that is authorized and billed by the utility
Unbilled authorized
All consumption that is authorized but still unbilled by the utility
consumption
Apparent losses Volume of water attributed to unauthorized consumption and all types of inaccuracies
associated with metering and billing
Real losses Volume of water losses attributed to technical conditions and events experienced in
the system
Revenue water Volume of water billed to a customer of the utility, whether metered or unmetered
Non-revenue water Difference between total system input volume and volume of billed consumption
10.3 NON-REVENUE WATER AND ITS reduces costs. In cases of significant electrical
IMPACT ON UTILITY COSTS energy costs, this reduction can be dramatic.
The reduction in non-revenue water remains
one of the major challenges facing water Secondly, if NRW is the result of non-metered
supply and wastewater utilities throughout systems or systems with a high percentage
the world. Reducing NRW can significantly of illegal, non-registered connections, then
impact the financial performance of the utility reducing NRW will result in increased sales
in either of two ways. and therefore, increased revenues for the
utility.
First, water is costly to produce, particularly
considering factors such as the development The components of NRW can be determined
of extraction facilities, any necessary water by conducting a water balance audit, as
treatments which require constructed facili- explained in Section 10.2. This is based on the
ties, chemicals, power and labor, as well as measurement or estimation of water produced,
imported, exported, consumed (sold), and lost.

10.4 DETERMINING CURRENT REAL Total population, service area population, and
WATER DEMAND OF THE UTILITY served population
This subsection builds on the two previous In forecasting water demand, it is important
subsections, and is intended to provide the user to determine first the total population, service
with a common foundation of information for area population, and served population.
considering water demand and the concerns of The total population is the city or municipal
all utilities with water losses. population or the population within the LGU’s
administrative area. The service area popula-
It also presents a methodology for determining tion is the measure of extent or coverage of the
the current real water demand of the utility for water distribution system. The served popula-
each of its customer categories. tion is the number of people that are actually
connected to the water system.
The workbook accompanying this document
contains a specifically designed worksheet to Projected city/municipal population growth
aid management in quantifying current and rates are usually based on historical trend;
projected real water demand. All necessary various government agencies provide estimates
calculations have been pre-programmed into of city/municipal population growth rates.
the worksheet, with formulas that are visible An increase in service area population may be
to the user. The user of this guideline need due to population growth, and an abrupt rise
only input, in the green highlighted cells, the may be due to expansion of distribution lines.
required data for the base year and the assump- There may be areas within the city/municipal-
tions required for the planning period. The ity that have other water service providers.
spreadsheet program will then automatically To get the population of the serviceable area
calculate projected water sales, water demand, of the LGU-run water utility, the service area
and non-revenue water. population covered by these other service
providers should be deducted from the total
The following subsections will guide the city/municipal population. An increase in
user of the water demand analysis worksheet served population may be a result of increased
through the process of considering input willingness to connect due to improved service,
values into the worksheet. improved standard of living, or dissatisfaction
with other water sources.

Figure 10-3
The worksheet is also designed to apply (metered and non-metered), as officially

different annual connection increase/decrease recorded by the utility. This entry is made
percentages for the commercial, institutional for each type (metered and non-metered) in
and industrial customer categories. An example the base year. Unless the utility has a better
of the percentage of projected population and source of information, it should obtain data
connection increase variables is illustrated in on “average household size” and “average
Figure 10-4. number of households per dwelling” from the
National Statistics Office. Given the base year
Figure 10-4 willingness-to-connect result, the projected
willingness-to-connect factors should be
inputted in the annual forecast. Multiplying
these by the service area population will give
the served population.
Dividing the service area population by the

city/municipal population will result in a figure
To estimate the served population, manage- representing service coverage, expressed in
ment will have to consider the customer Figure 10-3 as a percentage. Dividing served
records of the utility. To establish this number population by city/municipal population
for the Base Year, the utility should use the yields the population served percentage.
number of registered household connections The utility may have to, as one of its strategic

goals, achieve desired service coverage and The business plan must be practical and
population served percentages within a stated conservative in its served population estimates
timeframe. since this value, along with the assumed per
capita water demand value, drives estimated
The utility management is therefore required water sales, which then directly impacts the
to take a position regarding service coverage estimated revenues of the utility in its financial
increases and willingness-to-connect factors forecast.
over the five years of the business plan. It must
make an entry in the worksheet for each of the Another piece of profile information that is
five years. The formula in the worksheet will valuable in managing water supply systems
multiply the willingness-to-connect factor is the percent of metered connections. Figure
with the service area population in a given 10-5 illustrates how this is considered in the
forecast year, and automatically indicate the workbook for household (HH) connections.
served population for each of five years.
Figure 10-5 Forecasting

metered connections and new
meter installations

Using the data already entered for metered The issue of metered connections for each of
and unmetered household connections, the the other customer categories (i.e., commer-
program will calculate the percentage of cial, institutional and industrial) will be con-
metered household connections for the base sidered in a similar way. In each case, there
year. The utility management must take a are two calculations taking place at the same
position as to any action (investments) that it time. The first is based on assumptions made
plans to make to increase the base year percent by management, as illustrated in Figure 10-4,
metered connections during the five-year regarding the growth rate of connections in
business-planning period. each of the categories, other than household.
This is then combined with assumptions made
With the projected population increase, for increased metered connections, which
projected increase in service coverage, and results in the number of new connections
projected increase in metered household needed to be made in each planning year for
connections, the worksheet will automatically each category of customer.
calculate the “number of new metered connec-
tions” to be made in each of the five years of After having completed the information for
the business plan. This provides management water connections by category, management
with input for a decision on the affordability should describe the current situation for sewer
of those connections. If they think they cannot connections and septage collection by category
afford that level of expenditure, then they will and the future possible changes. This will help
have to revise the household metered connec- automatically calculate the sewer coverage
tion percentage. and septage collection coverage. Figure 10-6
presents registered sewer connections and
septage collection for all customer categories.
Figure 10-6 Sewer connections and septage collection coverage

Current water demand and demand per capita Projected water demand - Norm
To determine the apparent or current water In the water demand forecast, the utility
demand per capita, the utility will input the management will need to decide on a demand
volume of water sales for both metered and per capita norm (liters per capita per day)
non-metered connections for the base year. See that will reflect their estimate of water usage
highlighted cells in Figure 10-7. by customer category in their administrative
area. Therefore, management needs to forecast
Given the water sales by customer category water demand per capita for each of the five
entered in Figure 10-7, and then using both consumer categories (individual household,
the served population and population in the public faucet, commercial, institutional and
administrative area entered in Figure 10-3, the industrial), for each year of the business plan.
program will calculate apparent daily demand
per connection (m3/day) for each category Management should decide these norms based
of customer. For Level 2 and 3 household on calculated per capita demands in the base
per capita demand, the program also uses year, illustrated in Figure 10-8, and water
household demand divided by the served demand norms that are applicable to formal
household population (lpcd). water supply systems in the Philippines.
The result of these calculations is the unit con- Management should start by defining per
sumption by category and total as illustrated in capita demands for each customer category
Figure 10-8. in the fifth year of the business plan and then
Figure 10-7 Water demand forecast

Figure 10-8 Unit consumption by customer category
assume a “trend” of changes over time for each public education on water-saving devices.
category. Some factors that may cause an increase in per
capita demand are: the development of a new
The factors to consider in defining a “trend” industrial estate, entry of “supermalls,” and
include needs to reduce (per capita) demand the designation of a city/town as a regional
through pricing (possibly to avoid the need for growth center. Figure 10-9 illustrates how
capital investments in new supply sources), these demand norms have been applied to the
public awareness on water conservation, and worksheet.
Figure 10-9 Projection of unit demand by customer category

From the unit water demand decided by utility The utility management must settle on the
managers for each of the customer categories, utility’s targeted bulk water sales (cubic meters
the worksheet will calculate the total annual per day) and/or purchased water for each year
water sales forecast for the next five years for of the business plan.
each of the consumer categories, as illustrated
in Figure 10-10.
Figure 10-10 Forecast of water sales
Non-revenue water Lastly, management will need to set a targeted

With reference to Figure 10-11, to determine percentage of non-revenue water in the fifth
the volume and percentage of non–revenue year of the plan and then scale this target back
water, the utility will input base year figures to the NRW percentage in the base year.
for water produced by the utility from its own
sources. Bulk water purchased from other With these input decisions, the program
systems and bulk water sold to other systems will calculate the change in total water to
will be inputted as well. Based on this data, the the system. To the degree that this change
worksheet will calculate total water demand, (reduction) is achieved in purchased water or
total water to system, and the percentage of produced water, different parts of forecasted
non-revenue water. operations and expenses will be affected.
For the five-year forecast, the program will

calculate retail water demand based on the
same formula that was used in the base year.

Figure 10-11 Forecast of production and non-revenue water

11
ORGANIZATIONAL
STRUCTURE AND
STAFFING LEVEL
Organizational structure and staffing levels operational, maintenance and customer service
are both critical elements in helping achieve needs. These principles are shown graphically
the utility’s strategic goals. Management must in Figure 11-1 and explained below.
be prepared to break away from historical
organizational structures and staffing policies Figure 11-1
and restructure the utility to improve its

performance.
Span of
Work Specialization
11.1 IMPORTANCE OF ORGANIZATIONAL Control
STRUCTURE FOR EFFECTIVE UTILITY

Chain of Organization Simple, flexible,
PERFORMANCE Command Principals realistic
A sound, practical organizational structure Delegation of Delegation of

is vital in enabling the utility to respond to Responsiblity Authority
the needs of its customers, and to perform

efficiently and effectively. This is increasingly
true with smaller utilities or utilities that are
overstaffed and are working to reduce the size Chain of command
of their work force. The chain of command is the line of authority
that connects all people in the utility and passes
Organizational structures of utilities will vary vertically down through various branches of
based on utility size, technical complexity of the organization. In the chain of command, it is
systems, the size and nature of its geographic important that there be unity of command, such
administrative area, and the unique skills of the that any given person in the chain of command
water supervisor and next-in-line personnel in reports to only one manager/supervisor above
carrying out their responsibilities. There are that person. In this way, each person is clear
some basic principles that every utility must as to who gives him direction and to whom he
keep in mind when trying to improve its orga- must report.
nizational structure so it can better respond to
57
Span of control On the other hand, staff functions support the
Span of control is the number of subordinates execution of the mission of the utility. Figure
that report to a supervisor or manager. It is 11-3 shows the typical functions of a utility.
inefficient, for example, to have a supervi-
sor with just one subordinate. Likewise, it This distinction between line and staff
is probably ineffective to have 10 people functions, and the emphasis placed on
reporting directly to one supervisor. What execution versus support of execution, is not
is generally accepted, as a realistic span of meant to make one more important than the
control, is in the order of three to seven people other, but rather to clarify the functions and
reporting to a supervisor. their purposes.
Factors to consider as regards span of control Delegation of responsibility and authority

of a manager or supervisor include the Effective, modern utilities actively and aggres-
following: sively delegate responsibility and authority
within the organizational structure. It is
• Capabilities of the manager important that these two delegations are
• Capabilities of subordinates made in parallel. That is, if a person is made
responsible for an action but does not have
• Similarities of work activities supervised by
sufficient authority in relation to that action, it
manager
will merely lead to ineffective and inefficient
• Other responsibilities of the manager performance.
• External pressures on the manager
Too often, management has a tendency to make
• External help available to the manager
individuals in the organization responsible for
many actions but at the same time concentrates
Line and staff authority all authority for those actions at the top of the
Well-managed utilities have a clear distinction organization. This results in an organization
between line and staff functions and authority that is not responsive to changing conditions or
within the organizational structure of the unforeseen events.
utility. Generally, it can be stated that line
functions execute the mission of the utility. It should be kept in mind that delegation of
This is illustrated in Figure 11-2 for a utility’s authority and responsibility takes place along
typical functions. the chain of command. The right to grant or
Figure 11-2
Supply
Treatment Metering
Line Authority
Distribution Commercial

Figure 11-3
Public Relations
Legal
Engineering
Staff Authority
Accounting Personnel
delegate authority comes from a person who is clearly reflect the span of control at each level
above in the chain of command, and who has in the management structure. Lastly, it should
the authority to grant (delegate) that authority. be clear from the graphic representation which
elements are considered line and which are
Work specialization and cross-training staff functions.
The work of a water supply and wastewater
utility is more than likely the most technically Creating a graphic representation of the
complex work performed in the public sector organizational structure is easily managed
at the local level. In that regard, it will require a with computer software programs, such as MS
staff that has specialized skills in defined areas PowerPoint. The absence of a computer or a
of activity. These skills and functions should be supporting program, however, is no excuse for
documented in individual job descriptions. failing to come up with a graphic organiza-
tional structure.
At the same time, particularly in smaller
utilities, staff cannot be so specialized that they 11.3 TYPICAL ORGANIZATION
can do only one thing. This means management STRUCTURE OF AN LGU-RUN WATER
must invest in cross-training of staff so they UTILITY
have a wider range of competencies and skills. For most LGU-run water utilities, the three
This allows for a smaller, more efficient staff, key sections that compose the whole organi-
which has a direct impact on overall opera- zation, as presented in Figure 11-4, are:
tions, maintenance and management costs.
1. Operation and maintenance
11.2 CURRENT STRUCTURE AND LINES 2. Customer account management
OF REPORTING OF THE UTILITY 3. General administration and finance
It is critical to have an accurate representa-
tion of the current organizational structure of The operation and maintenance section
the utility. This requires the utility to prepare is concerned with the technical aspects of
and maintain a graphic representation of its water operations. It implements policies and
organizational structure, consistent with the guidelines and monitors compliance with the
principles discussed above. The graphic repre- same. It is charged with daily maintenance and
sentation should make it clear who reports to upkeep of facilities, including major and minor
whom in the chain of command. It should also repairs of distribution system and facilities.

It provides general guidance, supervision and meter reader, customer account clerk, and bill
planning in the area of operation and mainte- collector.
nance. This may involve the pump operators, The general administration and finance section
electrician, and plumber/pipe fitter. works mainly with accounting, payments, and
general administration. It involves the budget
Customer account management is responsible officer, treasurer, and accountant. This is the
for handling customer accounts, provides only section that normally involves shared
customer support, handles customer enquiries, functions. The persons occupying these
and prepares quotations, scheduling and positions are considered part of the manage-
maintenance contracts. Billing and collection ment team, especially for purposes of business
is its primary concern. This may involve the planning.
Figure 11-4 Organizational structure of a typical LGU-run water utility
LOCAL CHIEF EXECUTIVE LEGISLATIVE COUNCIL
LOCAL DEVELOPMENT &

PLANNING COORDINATOR
POLICY GOVERNING REGULATOR
BOARD
LOCAL BUDGET OFFICER
WATER SUPERVISOR
LOCAL TREASURER
OPERATION AND CUSTOMER ACCOUNTS

LOCAL ACCOUNTANT MAINTENANCE MANAGEMENT
HUMAN RESOURCE
OFFICER PUMP OPERATOR METER READER
Legend:
Black text: Waterworks Units ELECTRICIAN BILL COLLECTOR
Blue text: Other LGU officers performing
support functions for the water utility
CUSTOMER ACCOUNTS
PLUMBER
CLERK

11.4 WHAT IS AN OPTIMAL STAFFING When assessing the current situation in the
LEVEL FOR AN LGU-RUN WATER utility, management needs to calculate this
UTILITY? performance indicator for its own utility, and
Staffing costs (including salary and personal ask what can be done to move the value they
benefits) are normally the highest cost have calculated so that it is closer to the ranges
component of the budget of a typical, well-run presented above. This is an important consid-
utility. Controlling this cost is essential to a eration in the business planning process.
utility’s overall financial performance.
11.5 CHANGING ORGANIZATIONAL
The ideal size of a utility’s staff will vary,
STRUCTURE
depending on the level of technology to be The business planning process is an opportune
operated and maintained, the degree of auto- time to consider changing the organizational
mation installed, the skill level of staff, and the structure of the utility to better address the
geographic size and distribution of the admin- mission and stated strategic goals that manage-
istrative area. ment has developed. Through this process,
management may identify areas where the
Notwithstanding these factors, when consider- utility is not staffing positions to execute its
ing utilities of approximately the same size, mission statement or achieve its strategic goals.
there is a commonly accepted performance
indicator used in the water supply and waste- 11.6 TRANSITIONING TO A NEW
water utility industry to monitor what is STAFFING LEVEL
termed “staffing efficiency.” This indicator is Once management decides to change its orga-
defined as the number of staff per 1,000 water nizational structure and bring its staffing level
supply plus sewer connections served by the closer to the norms of well-performing water
utility, where a connection is defined as a billed supply and wastewater utilities, they will have
customer. to face some difficult decisions that will impact
on specific utility personnel.
For well-performing utilities, this performance
indicator is between 2.5 and 4 per 1,000 water
connections, for water supply services only,
eeds
and 3.5 and 5 per 1,000 water and sewer con- e e t in g the n
In m sole
nections, for both water supply and sewerage
st o m ers, the
of c u ent
services. The smaller utilities that perform o f m a nagem
e
well tend to be at the higher end of this range, objectiv fficient
o u ld b e the e
sh
and larger utilities tend to be at the lower end n and
operatio ial
of this range, simply due to their economies
n a n c e, financ
of scale. Small utilities like LGU-run water mainte nd
ance, a
perform ility.
utilities require at least 7 dedicated staff—
b il ity o f the ut
a
whose responsibilities are directly related to sustain
water service provision—to run the business
operations.

Management should start the process of five-year business plan horizon. Management
transitioning to a new staffing level by clearly will need to consider such factors as normal
documenting the utility’s current staffing attrition of staff due to retirement or resigna-
situation as illustrated in Figure 11-5. tions or retraining of staff for new positions or
vacancies as shown in Figure 11-6. If severance
In all likelihood, the transition to a new staffing or termination of staff is a necessary action, the
level will have to be implemented over an additional costs of such terminations should be
extended period of time, possibly over the factored in the business plan budget forecast.
Figure 11-5

Figure 11-6

12 PERFORMANCE
IMPROVEMENT PROGRAM
This section describes the need to establish the

imperative for change. The utility’s approach
to implementing the change process is critical
to achieving long-term, lasting improvements
The first step in improving performance is
establishing clear performance standards.
Management must define the skills and per-
formance levels necessary for the achievement
based on its strategic goals. of its stated goals. The management team can
determine appropriate standards by assessing
This section also provides a structure for a the following: Services required to satisfy the
performance improvement program that has customer; lessons learned from past experi-
to be designed by the management team to ence; the performance of other well-performing
translate strategic goals into a set of concrete utilities; research on trends in the water sector
and measurable actions. as a whole.
Finally, it is recommended that a system of The next step after setting a performance
performance measures be put in place to help standard is monitoring performance against
document the success of each strategy and that standard, so it is essential that standards
provide a comprehensive success measure for be expressed quantitatively—be it in terms
the overall performance improvement program. of deadlines, cost, quality, quantity, or other
relevant measures.
12.1 MOVING FROM STRATEGIC GOALS
TO IMPROVED PERFORMANCE A performance standard is a model, criterion,
Performance improvement efforts flow from or level of expectation required to achieve a
the utility's mission statement and strategic strategic goal. The key to a good performance
goals. To accomplish its strategic goals, the standard is clarity and a common understand-
utility needs to know where it stands against its ing among management and all staff.
articulated aims. This difference between the
current situation and desired future condition The next step is measuring performance.
is known as the “performance gap.” This repre- Once management has identified performance
sents an opportunity for the utility to improve standards, the next question is "how will those
its systems and procedures. standards be achieved?" This requires knowing
what, how, and when to measure performance.
65
First identify the behavior or results to be The important thing is for corrective action to
measured. Based on the performance standard, become part of daily work. The long process
management may want to measure quantity of setting standards, measuring and evaluat-
(how many?), quality (how effective?), ing performance will go to waste if corrective
schedule (how timely?), or cost (how much?). actions do not take place. Both management
If performance standards have been carefully and staff must be held accountable for per-
developed, it will be relatively easy to identify forming at expected levels, and recognize that
what needs to be measured. there are consequences for the entire utility if
these standards are not met.
Once management decides what to measure, it
is imperative to determine the method of data 12.2 PERFORMANCE IMPROVEMENT
collection. Since measuring performance takes PROGRAMS
time and money, tracking should focus on those Once the utility has articulated its strategic
key areas that have the most impact on the goals and developed a capital investment
stated goal. Further, the availability of data and program and organizational and staffing
who will be collecting the information must structure, it needs to prepare a performance
also be considered. improvement program to achieve its stated
goals. This will include specific performance
Data should be collected in a consistent improvement plans (PIPs) that are fairly
manner and at intervals that allow an accurate detailed to provide clear direction to manage-
understanding of common performance trends ment and staff on what must be done to achieve
at the utility. Schedules and procedures will stated goals, with implementation schedules
need to be developed to identify when and how and interim milestones. More detailed work
the data will be collected. plans can be prepared on a weekly or monthly
basis, with direction stemming from the PIPs.
Once performance standards have been identi-
fied and performance has been measured, the A suggested performance improvement plan is
next step is to evaluate actual against expected included at the end of this section.
performance. When performance deviates
from the standard, managers must interpret the The format and content of a performance
deviation, identify the problem and, if necessary, improvement plan is fairly straightforward and
make adjustments in the current action plan. contains the following elements:
Analyzing actual performance against the per- Statement of specific action - Briefly
formance standard produces useful informa- describes the specific action intended to
tion that indicates where corrective measures support the strategic goal addressed.
should be made. Management must determine
what kind of changes are needed and where. Example:
Managers may seek a change in the worker's Increase amount of billed water as percentage
behavior, or in the relevant policy or procedure. of total water produced.
The standards and plans themselves may have
to be modified.

Strategic goal addressed - A quanti- • Install meters at all customer connections
fied expression of the strategic goal being throughout the system
addressed. • Identify and eliminate all illegal and unreg-
istered connections, based on inventory
Example: findings and routine field investigations
Increase the amount of billed water such that
the utility is billing 70% of its water produc-
Schedule of tasks and key milestones
tion, as measured at sources, by the end of
- Shows the utility’s action schedule for
2015, with interim goals of 40% by the end of
achieving stated objectives. (See Fig 12-1
2013, and 55% by the end of 2014.
Schedule of tasks and key milestones)
Responsible person - Identifies the person
Application of investment capital - Details
responsible for implementing the primary
the capital cost estimate for capital investments
actions described below.
to be made by the utility to implement the
stated PIP, and when those investments will be
Description of Primary Actions - Describes
made during the planning period (see Figure
the primary actions that will be undertaken to
12-2 Application of investment capital).
achieve the stated strategic goal.
Measurable improvement in performance –

Example:
Lists interim milestones related to the strategic
• Install production meters at all sources of
goal set to be achieved within the period
supply
covered by the business plan. These interim
• Install zone meters to record the volume milestones provide the basis for monitoring
of water entering each of the water supply progress during the years of implementation.
pressure zones in the system
Fig 12-1 Schedule of tasks and key milestones
Task 2011 2012 2013 2014 2015

Install production meters
Install zone meters
Install meters at household connections
Identify illegal or unbilled connections
Fig 12-2 Application of investment capital
Unit cost Total cost

Item Quantity 2011 2012 2013 2014 2015
(PhP) (PhP million)
New customer meters
Household (install only) 5,000 7,400 37.0 18.5 18.5
Additional households 2,300 18,500 42.6 14.2 14.2 14.2
Total by utility 79.6 18.5 32.7 14.2 14.2

Example: plan is finalized. This may be done through a
a. Bill 40% of water production by the end of detailed briefing with all concerned manage-
2013. ment staff, who may respond to the PGB’s
b. Bill 55% of water production by the end of concerns and comments. Management must
2014. show that the performance improvement
c. Bill 70% of water production by the end of program for bridging the performance gap is
2015. sound, practical and timely.
d. PGB approval of performance improvement
program If the PGB is not entirely satisfied with a
performance improvement plan, manage-
12.3 PGB APPROVAL OF PERFORMANCE ment and relevant staff must consider their
IMPROVEMENT PROGRAM feedback and identify revisions or alternative
If the PGB of the utility is not directly involved approaches in response to these concerns.
in the business plan preparation process, the Such a process helps create buy-in from all
performance improvement program must levels and improves the chances of successful
be reviewed by the PGB before the business implementation.
Sample format of performance improvement plan
NAME OF UTILITY
PERFORMANCE IMPROVEMENT PLAN TITLE OF STRATEGIC GOAL
Statement of Strategic Goal Addressed
Department (s) and Key Manager (s) Responsible:
Description of Actions to be Taken:
Schedule of Tasks, Key Milestones, Performance Indicator:
Action Item Year 1 Year 2 Year 3 Year 4 Year 5
Use of Capital, Amount and Timing:
Capital Expenditure (in PHP millions) Year 1 Year 2 Year 3 Year 4 Year 5
Total
Measurable Improvement in Performance:

13
CAPITAL EXPENDITURE
AND INVESTMENT
FORECAST
This section will address the issue of planned With historical under-investment in capital
capital outlay (capital expenditures and capital maintenance apparent even in the water and
investments) and their impact on the opera- wastewater utility sectors around the world,
tional and financial performance of the utility. the issue of capital renewal and capital repair
and replacement (capital maintenance) is a
When management considers the utility’s significant area of concern for the industry.
capital expenditure and capital investment
needs, it should clearly distinguish between In considering this situation during the
capital expenditures meant to preserve the business planning process, management should
operational integrity and capacity of existing look at its existing assets as two separate
systems (renewal, repair, and replacement) groups: underground assets, which need to
versus capital expenditures made to upgrade be considered when planning capital renewal
technology or services, or increase the served expenditures, and above-ground assets, which
population within the administrative area (new need to be considered when budgeting capital
capital investment). Each of these types of repair and replacement reserves.
capital expenditures, and how they should be
considered by management, will be discussed in 13.1 CAPITAL RENEWAL
greater detail below. (UNDERGROUND ASSETS)
Although all assets are amortized based on
This section will also emphasize the need to national standards of accounting, such amor-
identify the sources of capital investments. tization may not reflect practical realities
To simply plan for capital investment is insuf- for a utility. The fact is that, particularly for
ficient for sound utility management. The underground assets (transmission lines and
management team should realistically identify networks), their useful life is somewhat inde-
sources of investment funds, the fund terms, terminate. Some pipelines may fail at any time
and the timing or when those funds might due to conditions both inside and outside the
become available, so their beneficial use and pipeline, whereas others may be fully func-
impact on performance can be reflected in the tional for periods well beyond their declared
business plan. useful life.
69
In light of this, management needs to consider Such capital expenditures are commonly
capital renewal expenditures for underground funded through grants or loans from the
assets on an expense basis. Management must national government or its agencies, foreign
determine a defined level of expenditure financing institutions, or commercial sources.
per year for capital renewal based on their For debts, repayment becomes an annual
knowledge of the condition of these assets. budget item for the term of the repayment
period.
13.2 CAPITAL REPAIR AND
REPLACEMENT (ABOVE-GROUND However, the utility may also choose to budget
ASSETS) an annual expenditure under its budgeted
When considering operating equipment and capital outlay, or budget an item in the 20%
structures (above-ground assets), management development fund’s annual investment plan
will need to look at individual amortization (AIP) to allow for a new capital investment
rates for each piece or groups of equipment or reserve to be created for the purpose of making
structures, and determine an aggregate average new capital investments without having to take
contribution per year that will be made a part on new debts.
of revenue needs and reflected in the final
tariff. These contributions will go to a capital In the various individual performance
repair and replacement reserve for above- improvement plans (discussed in Section 12),
ground assets and will be used as needed. management will have identified specific
capital investments which need to be funded
In a utility that is operating normally, capital from various sources of capital, and then
renewal and capital repair and replacement made a part of a debt repayment schedule
expenditures are largely funded from the when taken as a loan. Management needs to
cash flow of the utility’s tariff structure, not summarize these capital investments so they
from the creation of debt. This may not be a can decide on possible sources of capital and
practical reality in LGU-run water utilities in accompanying debt service requirements. This
the Philippines, especially if there is a backlog summary and list of sources should be part
of underinvestment in capital maintenance. of the section on capital investments in the
However, management should strive to adopt business plan.
this approach over the longer term.
13.4 BUILDING THE CAPITAL
13.3 NEW CAPITAL INVESTMENTS INVESTMENT/EXPENDITURE PLAN
New capital investments are made to perma-
nently enhance service levels—to achieve A simple worksheet has been provided in the
24-hour pressurized water supply service, business planning workbook to help manage-
comply with higher standards for water or ment record a summary of each of the capital
wastewater treatment; make more water investments identified in the individual perfor-
available for sale, improve metering of flows, mance improvement plans.
etc.—or to extend the system to reach unserved
areas of the population within the administra- Figure 13-1 illustrates how the Capital
tive area. Investment Program Worksheet addresses

capital expenditures. Management is first Next, the spreadsheet asks for the annual
asked to determine the level of annual capital amounts for future new capital investments.
expenditure under the renewals budget that After determining these amounts, management
it can or must spend for underground assets. must select the financing sources for its new
These expenditures can start out rather small capital investment needs. This will be a com-
and increase to the ideal level over time. bination of capital from the new capital invest-
ment reserve, as well as capital to be raised
The worksheet then asks management to from grants or loans. Initially, and for some
determine the level of annual contribution time, this expense could be left at zero, with
that may be applied to the capital repair and management relying on grants and/or loans to
replacement reserve for above-ground assets. meet all of its new capital investment needs.
Again, this contribution can start out small and
increase to a higher level over time.
Figure 13-1 Capital investment program
(The capital amounts inserted in the table above should take in consideration an inflation rate, if necessary.)

As the business planning process continues appropriation every year until such time that
into the revenue needs stage in Section 15, the total accumulated amount is enough to
where the totals for capital renewal expendi- fund the capital investment program, whether
ture, capital repair and replacement reserve, for capital renewal, repair and replacement, or
and new capital investment reserve are auto- new capital investment.
matically reflected, management will likely
need to revisit this capital investment/expen- Borrowings
diture plan as part of the Executive Legislative Government-financing institutions such as
Agenda, Local Development Investment the Municipal Development Fund Office,
Plan and Annual Investment Plans, and make Development Bank of the Philippines, and
modifications to better fit the financial consid- Land Bank of the Philippines have opened
erations of the overall business plan. lending windows catering to water projects
under a new financing policy. Private commer-
13.5 IDENTIFYING SOURCES OF cial banks have also become aware of invest-
CAPITAL INVESTMENT ment opportunities in the water sector, and
As stated previously, the management of the are now an option for LGU-run water utilities,
utility is responsible not only for developing a especially those with robust cash flow and
capital investment plan, but also for identifying who can afford shorter tenors. Public-private
sources of investment capital from internal co-financing schemes are now also being
funds, grants and loans. This will require promoted by government, as it allows leverag-
extensive discussions between the utility ing of public with private resources (e.g., the
management and its PGB, its local officials Philippine Water Revolving Fund in DBP).
(executive and legislative), and financing
institutions. Timing of fund availability must also be practi-
cally determined. The water supervisor should
Capital outlays work closely with the budget officer, accoun-
With a ring-fencing system in place, the utility tant and treasurer on this matter, primarily on
is able to maintain a separate bank account the capital outlay annual appropriation.
with funds at its own disposal. One way to
secure reserved funds for major programs The Business Planning Workbook has been
and projects is to accumulate annual savings. designed to include an extra worksheet for
Savings can come from excess actual collec- debt service obligations. In this worksheet,
tions from the annual budget requirements for management needs to incorporate the terms
the water utility’s operation and maintenance. and conditions of loans, identifying their
The savings shall be forwarded as additional duration, allowable grace period, and applica-
capital outlay for the current year by enacting ble interest rate. The Debt Service Worksheet
a supplemental budget. The water supervisor asks management to aggregate line items by
shall support the appropriation with a program interest payment and principal repayment for
of works. The reserved amount in the form existing Loans, new capital investment loans,
of capital outlay may or may not be used or and other loans. Total interest payment and
obligated within the year and may increase principal repayment amounts for debt services
over subsequent years through repeated will then be automatically reflected in the

Revenue Needs Workbook presented in Section Worksheet summarizes interest payments and
15. Figure 13-2 illustrates how the Debt Service principal repayments.
Figure 13-2 Debt service

14
OPERATIONS AND
MAINTENANCE BUDGET
FORECAST
This section addresses operations and main- required are the staff and section heads who
tenance budget forecasting as an effective are actually involved in carrying out this work.
control tool for comparing actual performance They can also determine what maintenance
needs with planned (budgeted) performance. will be required to keep the system operating
The operations and maintenance budget is the reliably. Although engineers and technicians will
detailed expenditure plan for labor, material, have a fair idea of these costs, they will need to
energy and other expenses needed, for during a work with accounting and finance staff to help
specified future time, to produce and sell water determine the exact figures.
and to collect, treat and dispose of wastewater.
Before starting the budget forecasting process, The accounting records of the organization
the utility should consult and evaluate past and contain a wealth of valuable financial data. Past
present financial and technical data to identify and present ring-fenced accounting records track
factors that will affect future expenditures. the expenditures of the utility and can provide
management with a thorough understanding of
14.1 DOCUMENTATION OF RECENT what will constitute the utility’s base year figures.
FINANCIAL PERFORMANCE The management team should analyze budgets
To forecast a budget effectively, management and accounting reports for the last three years
needs to understand how expenditures have at least, and consider trends by noting where
been made over the last several years, the previous expenditures were over or under the
current and future needs of the utility, and how established budgets, and by how much. After
these needs should be prioritized. Historical evaluating expenditure trends, they may project
cost data gathered from the operations and expected costs for each of the five years covered
financial/accounting areas of the utility form by the business plan, starting from the base year.
the basis for developing the forecast for the
operations and maintenance budget. The 14.2 FACTORS IMPACTING FUTURE
water supervisor should gather all information EXPENDITURES
necessary for a complete analysis of past per- In forecasting the operations and maintenance
formance and future possibilities. The people budget, it is important to note past trends as
best suited to provide input on estimated costs well base projections on current management
and quantities of materials, supplies, and labor policy and external factors that may have an
75
impact on future costs. To simply accept the the business plan, this Guide has defined some
historical rate of increase for a particular specific line items that should appear in the
line item in the budget, and project it into operations and maintenance budget of a typical
the future, can result in a major mistake in water supply and wastewater utility in the
planning and forecasting. Philippines. An illustration of how to work and
forecast in the Operations and Maintenance
To help the management team make a budget Budget Worksheet is shown in Figures 14-1,
forecast for the five-year period covered by 14-2, 14-3 and 14-4.
Figure 14-1

Figure 14-2
The Operations and Maintenance Budget A utility may wish to have an even more
Forecast format consists of an initial column detailed budget, but these details should
for base year data and five columns for fore- appear under one of the line items shown in
casted budgeted costs. This table is one of the the sample format and discussed in more detail
worksheets (O&M Budget) in the workbook. below. The following describes the budget
When using the O&M Budget Worksheet, the line items to be included in the operations
user will input data only in the green high- and maintenance budget of a utility, with an
lighted cells. Formulas have been designed to explanation of factors to be considered in
calculate all forecasts based on assumptions making a forecast for each of the five years of
made by the user. the business planning period.

Figure 14-3
Personal services the water utility. The computation of shared

The personal services (PS) category includes expenses is based on the ring-fencing alloca-
all the forms of compensation that the utility tion system adopted by the LGU. All inputs
intends to make, including the following: should be the net ring-fenced amounts for
annual base salary for all regular employees; waterworks operations.
salary of casual/job order employees; other
compensation, allowances, bonuses and incen- Factors that affect costs for PS are planned
tives; and other personnel benefits. Shared reductions or increases in overall staffing
costs on PS should also be considered, i.e., the throughout the five-year planning period;
share of the utility in the salaries and compen- planned annual wage increases of staff per
sation of officers and staff of other LGU units each employment category; planned level of
or departments providing support services to overtime pay as a percent of average annual

Figure 14-4
base salary; planned bonus/incentive program the business plan will have been determined
for good performance as a percent of average under Section 10 (Organizational Structure
annual base salary; and any annual increase and Staffing Level) of the Guide. The decisions
rate of other compensation, benefits and for planned reductions in overall staffing over
allowances. the five-year planning period will be recorded
in the Staff Analysis Worksheet. Annual wage
The planned reduction or increases in staffing increases, by category and by year, expressed
level over the five-year planning period of

as a percent of annual increases, will also be Maintenance and other operating expenses
entered in same worksheet. The maintenance and other operating expenses
(MOOE) category includes the various con-
Similarly, the planned level of overtime, as a sumables used for operations and maintenance,
percent of average annual base salary, as well such as supplies and materials, fuels, lubri-
as the planned level of bonus/incentive as a cants, spare/replacement parts, small tools,
percent of base salary will be entered in the chemicals, energy and other utilities, com-
Norms Table, illustrated in Figure 14-3 as it munication, professional services, repairs and
would appear on the O&M Budget Worksheet. maintenance, and other operating expenses.
Personnel costs When forecasting these costs, management

Personnel costs, as a sub-category of PS, should first consider the line items addressing
include costs for GSIS, Philhealth, Pag-Ibig, repairs and maintenance, and the quantitative
employee compensation (except for contrac- variance that the utility can expect to experi-
tual/job order staff ), and training costs of ence over the next five years. This is a particu-
both dedicated and shared staff. The GSIS, larly important consideration where materials
Philhealth, Pag-Ibig, employee compensation, are concerned.
and training line items will be affected by
the GSIS, Philhealth, Pag-Ibig and employee Since chemicals represent a significant part
compensation calculation table and the level of of water production, they are presented as
expenditures planned for staff training. Each a separate line item in the budget. When
of these expenditures are forecasted based on budgeting for chemicals, management should
the automatically calculated norms for the base note its quantitative variance (which bears a
year, showing the percentage of these expendi- strong relation to levels of produced water) and
tures compared with annual base salaries and its cost per cubic meter produced.
the commitments made by management for
training. Historically, water supply and wastewater
utilities in the Philippines have fallen short in
If management believes that, within the period the performance of required routine and pre-
of effectivity of the business plan, legislative ventive maintenance activities. Management
changes may take place affecting expenditures would do well to consider more aggressive
for GSIS, Philhealth, Pag-Ibig, and employee expenditure increases under these line items to
compensation, they should adjust the assumed bring the utility closer to a more realistic level
percentages for the said line items in the years of annual expenditures.
they think those changes might occur.
Since electrical energy can be a major cost
Each of these annual percentages (GSIS, factor for a utility, it is important to budget
Philhealth, Pag-Ibig and employee compensa- separately for electrical energy used for
tion) should be reflected in the Norms Table on equipment operation and that for lighting and
the O&M Budget Worksheet of the Workbook. office support. In addition, considering the
decisions and assumptions made in performing
the water balance and water demand analysis
under Section 8 of the Guide, management

will need to budget electrical energy costs by Management will need to create an allowance
considering its quantitative variance and cost for the public relations item. Historically, this
per cubic meter produced. This cost is strongly line item is not specifically budgeted by water
related to any reduction in non-revenue water; supply and wastewater utilities. However, as
therefore any reduction in water production the utility’s customer service activities become
will impact the quantity of electrical energy more sophisticated, they have more public
needed to meet the needs of customers. outreach activities and frequently communi-
cate with customers and the local public. If a
The management needs to consider other communications program has been developed,
sub-categories of MOOE, such as supplies and the annual cost of implementing that program
materials expenses (office supplies, account- should be presented under this line item for
able forms, fuel, oil and lubricants, etc.), water the base year. If not, management may wish to
expenses, communication expenses (postage, start by simply setting a targeted expenditure
telephone, internet, cable and radio, etc.) and for public relations/customer relations as a
professional services (legal, consulting, janito- set amount per registered customer for the
rial, security, etc.). forecasted year. The amount of money planned
to be spent for a registered customer in a year
Management also needs to consider the should be reflected in the Norms Table on the
utility’s shared costs, which are those expenses O&M Budget Worksheet of the Workbook.
incurred by other LGU units or departments
that provide support services to the water The last expenditure item is an allowance
utility. The computation of shared expenses for O&M contingency. This line item shows
is based on the ring-fencing allocation system the amount budgeted for any unintended
adopted by the LGU. occurrence.
The purchased water line item of the budget With an established base year of expenditures,
shows the cost the utility might incur from management will now have to consider how it
purchasing bulk water from other suppliers in anticipates these expenditures to change over
order to meet the total water demand of the the five years covered by the business plan.
system. This line item is directly related to This is done by incorporating to the Norms
decisions on purchased water made in Section any forecasted increase or decrease during the
9 of the Guide (Analyzing Water Demand). The five-year period.
price per cubic meter of the purchased water
should be reflected in the Norms Table on the After selecting and approving all norms, the
O&M Budget Worksheet of the Workbook. user must reflect them in the Table of Norms
located in the O&M Budget Worksheet of the
Once management has carefully assessed Workbook.
the definable expenditures for the budget
forecast, it will need to make an assumption
regarding the “other expenditures” line item
based on historical experience. Such a line
item should be relatively small as a percent of
the overall budget.

15 REVENUE NEEDS
Business planning supports the process of

improving short-term financial management
of the utility, as well as longer-term financial
planning to achieve financial sustainability.
O&M expenditures refer to the expenditures
necessary for the utility’s daily operation
and routine maintenance. Note that these do
not qualify as capital expenditures. Included
Effective business planning helps the manage- in these routine O&M expenditures are: all
ment employ good management practices that compensation and benefits of staff, all consum-
reduce long-term financial risks in planning able supplies and materials (lubricant, fuel,
for future service improvement, expansion and chemicals, small tools, replacement parts, etc.),
upgrade of the water supply and wastewater plus subcontracted services and energy costs.
system. It also opens an opportunity for the Also included are such items as public and
utility to benefit from commercial financing customer relations expenditure, and legal and
and to engage the private sector, if that is accounting services.
regarded as the best way to improve perfor-
mance and service delivery. The revenue needs of a water supply and waste-
water utility exceed the amount of operational
Considerations on financial sustainability and maintenance expenditures since revenues
revolve around the utility’s ability to predict- must also cover allowances for principal and
ably generate sufficient revenues to meet all interest payments on loans, planned capital
of its payment obligations in a timely manner expenditures for renewal of buried infra-
through the course of the year. This quantity structure, contributions to capital repair and
of sufficient revenues is what is commonly replacement reserves, and contributions to new
referred to as revenue needs. capital investment reserves.
15.1 DIFFERENCE BETWEEN REVENUE 15.2 DETERMINING REVENUE NEEDS

NEEDS AND O&M EXPENDITURES Every utility must generate enough revenue to
Revenue needs represent a sum greater than support the process of improving short-term
the routine operations and maintenance (O&M) financial management and long-term financial
expenditures of the utility. planning for financial sustainability. The
management team of the utility should consider
83
the following elements in developing a revenue The third component affecting revenue needs
needs analysis: is capital expenditures, which is composed of
capital renewal expenditures, capital repair
• Interest on outstanding or near-term debt and replacement reserve, and new capital
• Principal repayments on outstanding or investment reserve line items. The Capital
near-term debt renewal expenditures item shows the amount
of money to be expensed in the year in order
• Debt repayment reserve
to undertake capital renewals of buried
• Allowances for annual planned capital infrastructure.
renewals
• Contributions to capital repair and replace- The capital repair and replacement reserve and
ment reserve new capital investment reserve line items show
the annual contributions deposited for each one
• Contributions to new capital investment
of these reserves. These reserves are used when
reserve
an above-ground capital repair or replacement
• Subsidy from national/local governments or a new investment must be made. Capital
expenditure decisions that affect revenue needs
A Revenue Needs Worksheet is provided in are discussed in greater detail in Section 13
the workbook to help management calculate (Capital Investment Forecast) of the Guide.
and forecast the utility’s revenue needs. The Amounts for capital renewal expenditures,
revenue needs table shown in this worksheet capital repair and replacement reserve, and new
starts with total operations and maintenance capital investment reserve come directly from
expenditures coming directly from the O&M the Capital Investment Program Worksheet.
Budget Worksheet.
The fourth component affecting revenue
The second component affecting revenue needs is subsidies (from national or local
needs is debt service, which is composed of the governments). Subsidies in the calculation of
following line items: loan interest payments, revenue needs are treated like credit, in that,
principal repayments, and debt repayment for the period that subsidies are expected to be
reserve. The loan interest and the principal received, they reduce overall revenue needs for
repayment line items show a year-by-year the year.
summation of total interest repayments on out-
standing and near-term debt, and total principal As mentioned above, revenue needs must
repayments on outstanding and near-term generate sufficient funds to cover all the costs
debt. As described in Section 14, the amounts of the utility. In order to accumulate all the
for interest payment and principal repayment funds, revenue needs must be adjusted with the
come directly from the Debt Service Worksheet. annual collection efficiency rate.
Management should reflect and insert the Debt
Repayment Reserve as an assumed amount for The last two lines of the Revenue Needs
the period of the business plan. Worksheet present two reporting lines
showing the total debt service reserve (O&M

contingency, debt repayment reserve, capital Figure 15-1 illustrates that aspect of the calcula-
expenditures) expressed as total amounts and tion of forecasted revenue needs of the utility.
as a percentage of adjusted total revenue needs. Reference should be made to the Revenue
These two lines of debt service reserve are Needs Worksheet of the enclosed Workbook.
designed to make it easier for a water utility,
with existing loans, to ensure that obligations
are met.
Figure 15-1

16 TARIFF POLICY AND
STRATEGY
Once revenue needs (as shown in Section

15) and forecasted water sales (Section 10)
have been calculated, management can then
determine how tariffs and fees will be struc-
formulate different policies for implementation.
Table 16-1 illustrates how local conditions
influence tariff policy. In considering Table 16-1,
the user should first look at the specific condi-
tured to ensure that needed revenues will tions in the left column to identify ones that are
actually be generated and the utility becomes particularly relevant in the utility’s administra-
financially and commercially self-sustaining. tive area. There may actually be several that
are relevant. The right column states a desired
16.1 ADDRESSING THE TARIFF POLICY behavior
ISSUE
Before proceeding directly to the calculation or Once the utility management has selected the
determination of a tariff or tariff schedule, it is policy or combination of policies it wants to
important to take some time to consider a tariff implement, it can then proceed to determine
policy that is supported by the PGB. Depending the tariff strategy and structure that best meets
on the specific conditions within the utility’s their policy objective.
administrative area, management may
Table 16-1
Specific local condition Corresponding tariff policy
Abundant water supply Encourage water consumption and sales
Limited water supply Encourage water conservation

Conserve usage in high season and encourage
Largely variable seasonal demand
consumption in low season
Consider both fixed and variable elements to price
High fixed cost element in revenue needs
structure
Customer group with low ability to pay Offset rates to subsidize initial “life-line” quantities
Customer categories have similar usage patterns Apply a uniform pricing policy
87
16.2 ADDRESSING THE TARIFF • Do existing laws constrain the utility’s
STRATEGY AND STRUCTURE ISSUE capacity to reduce its losses, regener-
ate assets, write off bad debts, and other
The tariff strategy addresses a variety of issues
revenue generation activities?
that need consideration before arriving at a
tariff structure consistent with the tariff policy. • What are the established tariff method-
There are many options for tariff structures, ologies and how flexible are they in their
which can be applied in various combinations. application?
These can differ according to the category of • How is the tariff approval procedure
the customer, when cross-subsidies between applied?
customer categories are used.
• Is the tariff going to cover all costs, or only
part of them?
Ultimately, the aim of any water supply and
wastewater utility that applies commercial • Will tariffs vary for citizens at different
principles in its operations is to improve its income levels?
financial performance for full cost recovery. • How many and what customer categories
For LGU-run utilities, it may be necessary will exist in the tariff structure?
to establish interim objectives that ensure a • What has been the tariff trend over the past
gradual progression to full cost recovery over five years, and how does this compare with
the years, and as the performance of the utility the cost trend?
improves.
• What are the main problems associated
with the collection of tariffs?
In the process of determining the appropri-
ate tariff strategy and structure, management
should make a careful assessment of all other When diverse and competing objectives are
conditions affecting the utility, and take into well understood, a water utility is in a better
full account all interim performance improve- position to establish a tariff structure that will
ment objectives, so that the tariff structure is achieve its cost coverage objectives.
consistent with all other assumptions made in
the business plan. 16.3 SELECTING THE DESIRED TARIFF
STRUCTURE
In formulating the tariff strategy and structure, A tariff structure is the way that a fee, or
the following questions may be helpful to schedule of fees, will be applied to the sale
management: of water supply and wastewater services to
• What is the current tariff structure of the recover the utility’s costs. The design of the
utility? final tariff structure is the result of many
• Does the utility have a separate tariff for diverse and sometimes competing objectives.
wastewater? Figure 16-1 has been prepared to illustrate
some of the key factors that affect the selection
• To what extent do political considerations
of a tariff structure.
influence decisions on tariff setting within
the administrative area?

Figure 16-1
Infrastructure Water Demand

Legal Framework
Improvements Growth
Water Utility Costs

• Capital
•O&M
Tariff Development
Financial Strategies
Strategies
Water Utility
Revenue Requirements
Utility Tariff
Structure
Generally, the selection process of a tariff It is not the intent of this business planning
structure involves three steps: guide to comment on or suggest anything that
deviates from the current regulatory standards,
1. Defining the goals and objectives of the methodologies and procedures in the
tariff structure. Philippines for water supply services. However,
2. Evaluating available alternatives in meeting this Guide, does present concepts that may be
these goals and objectives. considered when addressing the challenging
3. Understanding and communicating issue of tariff strategy and structure.
potential effects to customers.
To assist the utility management in considering
The tariff setting methodologies in the how it might develop its tariff structure, several
Philippines are specifically defined by the tariff structures which have broad application,
Local Water Utilities Administration (LWUA) and which can be applied directly or in com-
for water districts and by the National Water bination, are presented and briefly described
Regulatory Board (NWRB) for private water below. The users of this Guide are advised to
utilities. There is no uniform methodology for pursue other information on the subject of tariff
LGU-run water utilities. They either set their structures as issued by LWUA and the NWRB.
tariff on their own or follow LWUA or NWRB.
LGUs that voluntarily submit to NWRB as their Uniform rates
regulator will follow the NWRB’s five-year A uniform rate is a constant unit price for all
tariff methodology (see Appendix A). metered volumetric units on water consumed

on a year-round basis. Utilities may consider • Has the analytical capability to design block
using a uniform rate structure when: rate structures, including the amount of
water sold per block and potential demand
• Customer groups have similar usage responses to differential rate impacts
(demand) patterns • Is confronting system capacity constraints
• Varying rates are undesirable from an equity or potential system expansion
or other perspective • Decides to send a stronger price signal
• Other rate structures are not justifiable
• Cost and customer usage data are unavail- Seasonal rates
able or costly to develop A seasonal rate is a type of time-differentiated
rate, or a rate that varies by time period.
Declining block rates Utilities may consider using a seasonal rate
A declining block rate is a rate structure in which structure when:
the unit price of each succeeding block (volume)
of usage is charged at a lower unit rate than the • There is substantial variation in water
previous block(s). Utilities may consider using a demand across different seasons
declining block rate structure when: • A utility is capacity-constrained as a result
of peak-period demands
• Water supplies are plentiful • Systems experience seasonal fluctuations in
• Production costs respond favorably to the number or types of customers served
economies of scale
• A single rate structure is used for all Combined fixed and volumetric rates
customer classes of service The tariff structures of water supply and
• The system has an array of customers with wastewater utilities have changed in recent
varying usage and demand requirements years. Most urban utilities in western countries
use a combination of a monthly minimum
charge (fixed rate per billing period) to cover
Since the average cost of a unit of supplied
overhead and capital costs (fixed costs), and a
water tends to decline with increasing water
commodity charge (volumetric rate based on
production (i.e., economies of scale), this
water consumption) to cover defined operating
type of rate structure can be used as a price
costs. Utilities may consider using a fixed and
incentive to encourage specific, large-volume
volumetric rate structure when:
customers to remain on the system.
• Consumption patterns vary greatly through

Increasing block rates
the year and the utility wants to have a
Increasing block rates charge increasing
more uniform cash flow to meet its average
volumetric rates for increasing consumption.
revenue needs
Utilities may consider using an increasing
block rate structure when the utility: • Certain fixed charges (e.g., service charges
or meter charges) are customer and not
• Is able to distinguish separate customer volume-related
categories for billing

It should be kept in mind that even with this • Annual water revenues from base rate (PhP/
form of tariff structure, the commodity charge conn./month), which are based on the
(volumetric rate) can also be an increasing number of connections per category and the
block rate, thereby combining a third strategy monthly minimum charge in each category
in the tariff structure. for use of the first consumption level (first
10m³/month) expressed annually. Annual
Non-metered tariffs revenues from base rate will be automati-
For consumers without water meters or with cally calculated for the base years and future
malfunctioning water meters, the utility years after completing the base rate assump-
may establish tariffs based on the number of tions for the future years.
users (inhabitants) per household, and apply • The calculation of annual water revenues
a standard norm of water consumption on from unit cost (PhP/m³) is based on the
a per capita basis (cubic meters per month total annual water demand of the customer
per inhabitant, for example). This may also category, after subtracting the annual
be based on the area of living space in the volume consumed in the first level (first
household, with a standard norm of cubic 10m³/month) from each customer category
meters per square meter per month. and billed as fixed. The Pricing Worksheet
automatically calculates the average tariff
16.4 CALCULATION OF AVERAGE per cubic meter in the base year from
TARIFF current revenues generated by the variable
The calculation of average tariff for a cubic fee (unit cost). In the future years the
meter of water is important since it functions revenues from variable fee will be automati-
as a benchmark for present and future consid- cally calculated after completing the future
eration in developing the tariff structure, and structure of the variable fee.
in assessing the utility’s progress in managing
• Annual sewer revenues are calculated only
or reducing costs.
for customers with a sewer connection and
are based on the total annual water revenues
Based on this Guide, the calculation of the
of each customer category, sewer coverage
average tariff is a direct function of the fore-
by customer category (number of sewer
casted revenue needs, determined under Section
connections divided by the number of water
15, being divided by the forecasted annual water
connections), and the sewer fee (%).The
sales (cubic meters), which was established
annual sewer revenues are designed to be
under Section 10 (Analyzing Water Demand).
automatically calculated for the base years
The result of this calculation is performed
and the future years based on the sewer
automatically by the Workbook and it appears
fee. The number of sewer connections does
on the Pricing Worksheet, shown in Figures 16-2
not necessarily equal the number of water
and 16-3.
service connections. Their ratio is automati-
cally applied to calculate the revenues.
The calculations applied in the Pricing
Worksheet are: • Annual septage collection/treatment
revenues are based on the water volume
consumed and the septage collection/
treatment tariff (PhP/m³ of water

consumed). Annual septage collection/ fees and charges (“Others”) are designed as
treatment revenues are designed to be input cells, for the base and future years of
automatically calculated for the base and the business plan. Management is directed
future years. The number of households/ to reflect these revenues for the base year
establishments served by the septage col- and make assumptions based on the stream-
lection/treatment program does not neces- lining of these revenues in the future.
sarily equal the number of water service
connections. Their ratio is automatically Figure 16-2 presents the planned pricing for
applied to calculate the revenues. Added to water to support the utility’s revenue needs.
this are the revenues from non-customers The price strategy inputted is usually higher
availing of the service but paying on a fixed than the present charging/tariff. This further
per-service basis. shows the need to impose tariff rate increases.
• Annual revenues from bulk water sales are The water supervisor and the PGB shall
calculated based on the annual bulk water keep abreast of changes in the Local Internal
demand and the bulk water tariff (PhP/m³). Revenue Code (LIRC), which is usually revised
• In addition, the Pricing Workbook reflects every three years, in order to apply water tariff
total revenues from specific fees and increases based on the approved business plan.
charges. Annual revenues from specific
Figure 16-2

Figure 16-3
Since the collection efficiency of the utility full cost recovery in delivering its services to its
(percent collection of the value of bills issued) registered customers. In this regard, it should
has already been considered and factored into act like any other business in charging for all of
the overall Revenue Needs, the calculation of the services that it performs for its customers.
the average tariff reflects the typically less than
100% collection efficiency and need not be Utilities in developed countries, along with the
adjusted further. tariff for water supplied, will also apply special
charges for services (sometimes referred to as
16.5 SPECIFIC FEES AND CHARGES user fees) to recover the cost of specific other
The water supply and wastewater utility sector goods or services that they provide, or for the
is expected to employ commercial principles in use of public facilities.
managing its activities, and to progress toward

As general water rates increase because of the overall water tariff. Table 16-2 has been
water resource limitations, development costs, prepared to illustrate a number of typical goods
new plant requirements, more stringent water and services that are provided by a utility, for
quality standards, and general inflation, poli- which a separate fee or charge, can be applied
cymakers and utility management view user by the utility.
fees and charges as a way to slow increases in
Table 16-2
Service application,
Contract work and
Field service charges Office service charges engineering, and
merchandise sales
inspection fees
• Turn off/ turn on fees • New account or transfer • Main inspection, filing • Service line repairs
• Field collection charge charge and contract fees • Leak detection
• Repair of damaged • Collection-related • Administrative fee for • Service tap installation
facilities charges service connection • Meter installation
• Special meter readings and • Account status at inspection • Meter size change
final readings property sale • Cross-connection • Main location services
• Meter resetting fee • Public documents inspection • Main relocation services
• Appointment charge • Construction plans, • Engineering design fee • Backflow prevention
• Meter-testing charge drawings and maps device installation
• Backflow-prevention • Consulting services
testing
• Pressure testing
• Fire-flow test
• Water audits
• Temporary hydrant meters

17 BUSINESS PLAN
UPDATE PROCESS
As stated initially in Section 3, business planning

is a continuous process, with the business plan
being reviewed and updated annually, such that
the utility always has a current five-year business
17.1 SCHEDULING TO CONDUCT THE
BUSINESS PLAN UPDATE
The business plan update is best conducted

plan as a reference. In this regard, the manage- during the first month of the fourth quarter of
ment of the utility must set a date each year to the utility’s fiscal year. In the Philippines, the
update its business plan. fiscal year of water utilities coincides with the
calendar year; hence, the business plan update
The updating process allows management should be conducted in October. Management
to objectively review its accomplishments— should target completing the update and
relative to the goals and measurable targets securing approval from the PGB by the middle
in the business plan—over the course of the of November.
year, and assess how effective the performance
improvement plans were in achieving the An indicative schedule for the business plan
targeted goals for that year. update is shown in Table 17-1.
Every element of the business planning model

should be reconsidered. Of particular value is
a comparison of performance indicators from
year-to-year, as well as with the stated strategic
goals. It is very important that the management
team be totally objective in considering the
prior year’s performance and any changes in
action plans to assure achievement of the plan’s
stated goals.
95
Table 17-1
Timing of planning action Planning action
General Administration and Finance and Customer Accounts Management

End of second week of October sections close financial reports for 3rd quarter and issue reports to
management for four preceding quarters
Operation and Maintenance Section issues operating reports for four

End of second week of October
preceding quarters
Management team, facilitated by water supervisor, meets to review and

Third week of October
comment on performance; and make preliminary modifications to PIPs
Management team meets to finalize modifications to PIPs and provide input

Fourth week of October to General Administration and Finance Section on budget adjustments and
forecast assumptions
General Administration and Finance Department issues new first year budget
First week of November forecast, revenue needs and recommendations for tariff and fee adjustments,
for agreement by management team
Management presents updated business plan to the PGB with the

Second week of November
recommendation for any tariff adjustments
17.2 PREPARING FOR BUSINESS PLAN To get performance data for an entire year,
UPDATING PROCESS when the updating process begins in the fourth
quarter:
As presented in Table 17-1, the water supervi-
sor of the utility will facilitate the business • Use data from the preceding four quarters
plan updating process. The water supervisor to establish one year (i.e., the last quarter
sets the schedule and generates the historical of the preceding year and the first three
financial reports needed to assess past perfor- quarters of the current year)
mance against the previous business plan. This • Or, as financial management staff and
is done in cooperation with the Operation and systems become more accustomed to
Maintenance Section (the source of operating the planning process, use the first three
performance data) and the Customer Accounts quarters of the calendar year and a forecast
Management Section (the source of water sales of performance in the fourth quarter,
and collection efficiency data). which may be developed by the General
Administration and Finance Section
It is important that the updating process is
not seen merely as a financial exercise, since Since the management team participates in
technical operations and customer service will monthly management meetings, it will have
ultimately have the greatest impact on overall reviewed reports for each preceding month
utility performance and customer satisfaction. and compared performance improvements to

planned targets. As such, the updating process to fit it into small time allocations. Three or
should not be viewed as a major undertaking, four half-day meetings are all that it should
but merely a chance to reassess both the PIPs take, once the historical data is available. To
and the budgets in light of performance. expedite decision-making on various issues in
the planning process, the local chief executive
17.3 CONDUCTING THE BUSINESS PLAN should be present in all of the half-day meetings.
UPDATE PROCESS
The discipline applied by management in 17.4 APPROVAL OF THE POLICY
preparing the business plan should also be GOVERNING BODY
apparent during the updating process. If they Once the business plan has been updated for
are not producing the expected results, man- another five-year period, it should be presented
agement should consider making changes to to the PGB for its approval. The water supervi-
the performance improvement plans. sor, along with members of the PGB, should
meet with the chief executives and other
Likewise, the Excel-based workbook should key officials of the local government in the
also be used to assist management in quantify- administrative area to communicate the results
ing the impact of its assumptions and expected of the business plan update, share any major
results. This includes the water demand operational decisions that would affect them,
analysis and budget forecasting. and state whether the utility will be filing for a
tariff adjustment with the regulator based on
It is best to undertake the updating process the outcome of the updating exercise.
in large work installments, instead of trying

18
PROCESS
MONITORING BUSINESS
PLAN IMPLEMENTATION
18.1 IMPORTANCE OF A MONITORING
Monitoring plays an essential role in imple- Monito

ring the
n of the
menting a successful business plan and in p le m entatio
im ust be
assessing progress made in improving utility ines s plan m
bus ed,
performance. A properly designed monitoring o u s , d isciplin
continu d
system provides stakeholders with a way to ent, an
consist
.
assess the effectiveness of the business plan in focused
achieving its performance objectives.
However, management should recognize that

the success of plan depends on the regular
monitoring and updating of progress, and in certainty of assumptions used in the original
taking corrective action when performance plan and make other adjustments as necessary.
is falling short of agreed goals. To ensure that
planned activities and actions are progressing 18.2 WHAT SHOULD BE MONITORED?
as expected, the management team needs to Management should monitor accomplishments
monitor financial, operational, and customer against interim targets for each of the per-
service data, which should be reflected in formance improvement plans. These interim
formal monthly reports, with the end view of targets are expressed in quantifiable terms, and
comparing the utility's actual performance with can be monitored through assessing both data
the strategic goals of the business plan. and performance indicators.
Monitoring activities must be continuous, dis- There is a limited number of key performance
ciplined, consistent, and focused. But while it is indicators considered as fairly typical for any
important to ensure that initiatives and invest- utility. Although some larger, more sophis-
ments are made according to the timetables and ticated utilities use more indicators, as a
budgets set forth in the business plan, manage- minimum the key performance indicators that
ment should also use new information gained should be monitored regularly or routinely by
from the plan’s implementation to improve the management are those presented in Table 18-1.
99
Table 18-1 Key performance indicators
1 Service coverage (% of population in administrative area)

Water supply
Sewerage
Septage management
2 Population served (% of population in administrative area)
Water supply
Sewerage
Septage management
3 Metering
Customer metering (% of total water service connections)
Production metering (% of total no. of water sources)
4 Non-revenue water (% of total water production)
5 Average of hours of water supply (hours/day)
6 Water quality compliance (% negative tests)
Physical and chemical
Bacteriological
7 Average tariff (PhP/m3)
8 Average cost (PhP/m3)
9 Working ratio
10 Collection period
11 Collection efficiency (%)
12 Staffing ratio (employees/1,000 water+sewer connections)
13 Debt service coverage ratio
14 Debt equity ratio
15 Net profit margin
16 Operating margin
18.3 REPORTING AND MONITORING by the utility. Figure 18-1 illustrates the key
PERFORMANCE stakeholder interests in the performance of
The monitoring of the business plan is only a the utility and the nature of the reporting and
portion of the overall reporting and monitoring monitoring required.
that is essential for effective management of a
water supply and sewerage utility, as well as for Utility
ensuring compliance with Philippine laws and The key monitoring entity is the utility, which
regulations on a utility’s operation and output. concerns itself with routine internal reporting
as a part of its standard management proce-
It is helpful to learn more about the reporting dures, its interactions with customers through
and monitoring structure and fully appreci- communications and notifications, and with
ate how the elements interact, their roles and its policy governing body, which performs an
interests, and how they need to be addressed oversight role.
100PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

The utility has a service agreement signed Establishment of reporting scheme from all
with every customer formally connected sections of the utility
to the system. This agreement defines the Establishing a reporting scheme from each
mutual responsibilities between the utility section is the first step in gathering informa-
and its customers for the provision of tion on actual performance. The section’s
services. It will also detail when the utility reports should be in written form and prepared
is required to notify its customers of certain monthly. At the beginning of each month,
conditions that might impact the quality of reports on the preceding month’s performance
service, and how the customer should contact are submitted to management.
the utility with any concerns or complaints
about the service being received. The reporting process should originate from the
rank and file to help cultivate a sense of respon-
Management reporting/monitoring sibility and accountability among the staff.
methodology
Management must provide for regular and Reports must be reviewed and summarized
continuous monitoring of the implementa- through meetings conducted within 7-10 days
tion process. Monitoring takes place at all after the end of the month. A sample monthly
management levels, with top management summary report outline for a utility is provided
being ultimately responsible for coordination at the end of this section.
and decision-making. The standard approach
and methodology of the monitoring process is Data recording and reporting standards
based on the following: The establishment of standards for data
recording and reporting is important. Reports
• Establishment of reporting scheme from all will include both numeric data and narrative
sections of the utility accounts. The narrative part of the report
• Establishment of reporting standards and should be limited to the explanation of any
formats anomaly in the trend of data, which might occur
as a result of unusual conditions at the utility.
• Management review and analysis of reports
• Undertaking of corrective action Management review and analysis of reports
Monthly section reports should also be
The ultimate goal of monitoring is to ensure collected and reviewed by management on a
the faithful implementation of performance monthly basis. Management should review
improvement plans. In case of difficulty, monthly reports in the context of overall
management must decide on appropriate progress, so that reports from different sections
corrective action. tell one coherent story.
It is important to distinguish between applying A regular monthly meeting with higher level
corrective actions and updating the business managers or the LCE may be held where
plan (discussed in Section 17). Corrective questions or issues may be clarified to deepen
actions are not intended to change any of the the management team’s understanding of the
plan’s strategic goals, but merely modify the status of progress.
performance improvement action plans.

Undertaking of corrective actions corrective actions should be taken to respond
After the meeting with the LCE, the water to problems and issues.
supervisor of the utility will prepare a
summary report on the previous month’s Upon deciding on changes to the performance
performance compared with the objectives improvement plans, the water supervisor will
set by the performance improvement plans. communicate these decisions and instructions
If necessary, he will then determine what in writing to all the sections of the utility.
Figure 18-1
LOCAL CHIEF EXECUTIVE

POLICY GOVERNING BODY REGULATOR
LOCAL GOVERNMENT
WATER SUPERVISOR
WATER SUPPLY AND

WASTEWATER UTILITY
Customer Service
Agreement
CUSTOMERS
Policy governing body monitoring methodology The PGB will perform a thorough review
The PGB has oversight responsibility for of the utility’s performance on a monthly,
the implementation of the business plan quarterly, semi-annual and annual basis. These
and should be given periodic updates by reviews shall be supported by appropriate
management. reports prepared by management, containing
an analysis of current performance against
The PGB need not be involved in deciding interim objectives stated in the performance
on and applying corrective actions based on improvement plans. The reports will also
progress against performance improvement explain what corrective measures have been
programs as these do not alter the business undertaken during the relevant periods, and
plan’s strategic objectives. It is enough that contain an assessment of the effectiveness of
they are informed of the application of such such measures.
adjustments and corrections.

Regular review meetings between management National government
and the PGB will take place on a quarterly The final group is the National Government,
basis, or as frequent as necessary, as deter- which requires the utility to file reports as
mined by the PGB or the water supervisor. necessary. The key national government unit
that has a direct interest in the performance
Local government and monitoring of LGU-run water utilities
The local government group in Figure 18-1 is is the Department of Interior and Local
represented by the local chief executive (mayor Government (DILG). The DILG’s Program
or governor). The mayor or governor appoints Management Office for Water Supply and
the members of the policy governing body. Sanitation monitors the establishment,
development and performance of LGU-run
The LCE will report to the local council on water utilities. The NWRB is another national
all matters related to the delivery of water government agency that has a direct interest
supply and wastewater services. The PGB then in the performance of LGU-run water utilities
reports to the LCE and the Local Planning and under consensual agreements.
Development Office on all matters related to
policy development and financial performance
of the utility.

REPORT FOR THE MONTH OF _____________, 201____
GENERAL MANAGEMENT REPORT (by the General Manager)

• Narrative Summary of Monthly Report
• Progress in Addressing Strategic Goals
- Increase % of Billed Water
- Increase % Collection Efficiency of Billed Water
- Increase Revenues to Cover Costs
- Others
• Status of Investments
CUSTOMER SERVICE REPORT (by Customer Service Department)
Customer Report
• New Customers by Category
• Terminated Customers by Category
• Total Customers by Category
• Customer Analysis
Water Sales Report

• Water Sales by Category (m3)
• Water Sales by Category (PhP)
Collections Report
• Collection by Category (PhP)
• Collection Efficiency Rate by Category
Customer Complaints Report
Activities under Customer Communications Program
FINANCIAL REPORT (by Finance/Accounting Department)

• Operations and Maintenance Costs for the Month
• Operations and Maintenance Cost Analysis versus Budget
• Cost Coverage Analysis
TECHNICAL REPORT (by Technical Department)

• System Operations Report
- Hours of Water Supply by Zone
- Number of Pipe Breaks Needing Repair by Zone
- Number of Sewerage Blockages by Zone
• Non-Revenue Water Report
- Total Water Produced
- Water Supplied to Zones
- NRW Water by Zone
- Status of Meter Installation Program
- Status of Construction Projects
• Progress and Status of Construction Projects

APPENDICES
APPENDIX A. NWRB’S 5-YEAR TARIFF METHODOLOGY
RATIONALE for tariff adjustments should be based on a
sound business plan, which is in turn based on
NWRB adopted the 5-Year Tariff Methodology
performance targets and other assumptions.
in 2005 in accordance with Resolution No.
Moreover, business planning can help the water
001-0105 dated 14 January 2005. This method-
utility plan operations, investments and finance
ology specifically aims to help WSPs plan their
in a sustainable way.
business and attain full cost recovery.
Full cost recovery is emphasized as the basic

The main features of the tariff methodology are
principle in tariff setting. This means that,
as follows:
in providing adequate water service to its
customers, the WSPs must receive sufficient
1. Computation of tariffs based on agreed
revenue to ensure proper operation and upkeep,
levels of service
system sustainability, and maintenance of the
2. Submission of a 5-year business plan with
system’s financial integrity.
detailed proposed OPEX and CAPEX
3. Use of Excel-based tariff model
4. Computation of average ROI to reduce price
STEPS IN TARIFF SETTING
shocks The first step in setting utility rates is determin-
5. Mechanism for disallowances and upward ing the total annual operating revenue require-
adjustment in succeeding tariff proposal ments for the period in which the rates are to
be effective. This is computed by adding the
Tariff levels should be established in consulta- following amounts: operating expenses, depre-
tion with customers or representatives based ciation and maximum allowable net income.
on agreed targets, such as average hours of
service per day, water quality, non-revenue The second step is dividing the total revenue
water, percentage of population served, requirement by the volume sold to get the
managed water pressure, and more. Proposals required tariff.
105
Operating expenses include expenditures number of customers. A final step in setting the
on labor (salaries and wages), management average tariff is using the average ROI to help
fees, power, chemicals, materials, and others. avoid erratic price increases over the five-year
Expenses pertaining to revenues that are not period.
regulated, as well as financing expenses, such
as interest on loans, are excluded. The water rate structure consists of two parts:
the minimum charge and the commodity
The allowable amounts of depreciation are charge. The minimum charge, or the service
the annual depreciation expense of property charge or demand charge, should be low
and equipment entitled to return (PEER). enough to enable low-income users to pay
These are assets in service that are directly for 10 cubic meters of water a month. Water
used in the operations of the water system, and supply service fees should not exceed 5% of
funded by the owner’s own funds, internal cash the family income of low-income users. On
generation, or by loan. Assets funded by grants the other hand, the commodity charge, or
and donations or recovered in other ways aside the amount charged for consumption beyond
from water tariffs are not entitled to return. the minimum charge, may vary according to
volume produced and consumer category. The
Maximum allowable net income is computed incremental factor may be determined by the
by multiplying the maximum allowable rate water utility, depending on the desired interval
of return of 12% with total invested capital between quantity blocks. A sharper increase
entitled to return. Total invested capital is the in a block may be used as a mechanism to
total of net book value (NBV) of PEER and discourage more consumption and encourage
working capital good for two months. water conservation. The set of incremental
factors for commercial/industrial consumers
EVALUATION OF PROPOSED TARIFF is fixed at twice that of residential consumers.
The system has an added feature in the tariff Should the minimum charge be beyond the
methodology, the Evaluation Sheet, which low-income group’s capacity to pay, these
is a mechanism to verify the reasonableness incremental factors can be adjusted until an
of rates. This is a computation sheet that affordable minimum charge is reached. The
determines the required average tariff for evaluation should reveal an acceptable tariff
the projected five years, starting with the rate.
maximum allowable ROI of 12%. It also allows
the water utility to change the ROI rate as The tariff proposal (to be approved by the PGB
needed or desired, as long as this rate does not and LCE, and supported by a legislative council
exceed 12%. The approved tariff rates shall not resolution) is an integral part of the application
be increased or decreased from year to year. for a Certificate of Public Convenience.
However, the NWRB may allow the water
utility an average ROI of 12%. Refer to the enclosed CD copy of the Primer
on Tariff Setting and Regulation (NWRB,
The resulting tariff may vary from year to year March 2005) for more details. The attachments
depending on actual investments made and the include the Excel-based worksheet for the
tariff methodology.

APPENDIX B. BENCHMARKING FOR SMALL WATER UTILITIES
THE BENCHMARKING OF SMALL associations (RWSA) and water districts
TOWNS WATER UTILITIES (WD). The questionnaire is Excel-based, with
Benchmarking is a data collection process features specifically designed to guide the user
made from a group of similar entities for in properly supplying the required benchmark-
purposes of identifying best practices, setting ing information.
standards and comparing performance. There The WUQ has a total of 19 sheets: 3 cover
has been no defined benchmark for LGU-run pages, including the table of contents and
water utilities due to the absence of a regula- instructions, 13 input sheets, and 3 output
tory body for this sector and anonymity of sheets.
ring-fencing approach.
Data is entered by typing answers in the yellow
In 2004, however, government initiated the cells and by ticking one or more boxes or
Benchmarking of Small Towns Water Supply buttons. The input sheets are as follows:
Study, with support from the World Bank
Water and Sanitation Program and executed • Utility profiles 1 and 2 – Sheet 1 requires
jointly by the DILG, NWRB, LWUA and PAWD. basic information on the utility (name,
The study covered 45 water utilities of five address, contact details, brief history and
types, including LGU-run utilities, and results mission statement). Sheet 2 requires infor-
showed that LGU-managed water systems mation on the type of provider, services
performed poorly compared with other types offered, its regulatory body, plans and
of water utilities. While it did not set standards budgets, and the utility’s priority needs.
or benchmarks, the study provides a starting • Coverage area – Information on the utility’s
point for efforts to improve services and per- area of responsibility, the service area popu-
formance, and for setting service targets. lation, and whether other water service
providers are present within the area.
To push the benchmarking process further • Production – Data on production, treatment
forward, the Water and Sanitation Program plants, and distribution networks.
of the World Bank developed a Water Utility
• Service connection – Information on con-
Questionnaire for LGU-run water utilities to
nections and disconnections, the basis for
help in the annual update of organizational
and frequency of billing water, and payment
and performance profiles of these utilities. The
methods instituted or accepted by the
complete questionnaires are submitted to the
utility.
DILG’s Water Supply and Sanitation unit.
• Customer service – Information on handling
WATER UTILITY QUESTIONNAIRE customer care, like ensuring water availabil-
ity, reporting and repair of leaks, receiving
The Water Utility Questionnaire (WUQ)
and addressing complaints, and conduct of
is designed for all types of water service
water quality tests.
providers, cooperatives, LGUs, private
operators, rural water and sanitation

• Automation – On the utility’s use of infor- Once the questionnaire is completed, the
mation management systems. results are automatically generated to the
• Staff – Information on personnel, skills output sheets, which will contain:
development and training programs, salaries • Indicators summarizing the utility’s per-
and benefits. formance and the relevant data used to
calculate them.
• Financial information – Data on reports,
audits, capital expenditures, debt service • A utility profile, showing all information
payments and performance highlights. captured about the utility, including its tariff
structure and the priority needs.
• Balance sheet – Figures based on the annual
ring-fenced balance sheet. • An area profile, which summarizes infor-
mation particularly on production and
• Income statement – Figures based on the
consumption, including pie charts on water
annual ring-fenced income statement.
usage, billings and O&M expenses.
• Tariff structure – Information on the
current tariff structure used by the utility.
The copy of the WUQ in the enclosed CD is a
• Notes – For additional comments/notes to “read only” file, click “Save As” command from
the data provided. the File menu to make a new copy of the file.

APPENDIX C: WORKSHEETS
STAFF LIST

WATER DEMAND ANALYSIS AND SALES FORECAST

ANALYSIS AND FORECAST OF PERSONNEL STRUCTURE

CAPITAL EXPENDITURES PROGRAM

OPERATION AND MAINTENANCE BUDGET FORECAST

DEBT SERVICE

REVENUE NEEDS

PRICING STRATEGY


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Strategic Business Planning for Local Government-Run Water Utilities: Guide and Model for the Preparation of Business

• Water and Sanitation Program of World Bank

1 OVERVIEW OF A LOCAL GOVERNMENT–RUN WATER UTILITY 1

2 STRATEGIC BUSINESS PLANNING IN WATER UTILITIES 3

3 INTRODUCTION TO BUSINESS PLANNING 7

4 BUSINESS PLAN MODEL 11

5 GENERAL DESCRIPTION OF THE UTILITY 15

STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES a

7 MANAGEMENT OVERVIEW OF BUSINESS PLAN 33

8 ASSESSMENT OF CURRENT CONDITIONS AND PRIORITY ISSUES 35

10 ANALYZING WATER DEMAND AND FORECASTING WATER SALES 45

11 ORGANIZATIONAL STRUCTURE AND STAFFING LEVEL 57

12 PERFORMANCE IMPROVEMENT PROGRAM 65

13 CAPITAL EXPENDITURE AND INVESTMENT FORECAST 69

b PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

14 OPERATIONS AND MAINTENANCE BUDGET FORECAST 75

16 TARIFF POLICY AND STRATEGY 87

17 BUSINESS PLAN UPDATE PROCESS 95

18 MONITORING BUSINESS PLAN IMPLEMENTATION 99

Appendix A. NWRB’s 5-year Tariff Methodology 105

Appendix B. Benchmarking for small water utilities 107

STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES c

d PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES e

This section presents an overview

2 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

4 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES 5

6 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

3.1 WHAT IS THE PURPOSE OF THE

8 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES 9

This section presents and describes the

4.1 STRUCTURE OF THE BUSINESS PLAN 4.2 DESCRIPTION OF KEY ELEMENTS OF

12 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

STRATEGIC BUSINESS PLANNING FOR LOCAL GOVERNMENT-RUN WATER UTILITIES 13

BUSINESS PLAN MODEL OUTLINE

II. General Description of the Utility IX. Performance Improvement Program to

14 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

5.1 BRIEF HISTORY AND BACKGROUND

Population figures used by management To get an accurate indication of the water

Table 5-1. Key Performance Indicators

Key performance Indicator Value

Service coverage (% of total population):

Population served (% of total population):

Average water consumption (m3/day/connection):

Residential (also in lpcd)

16 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Customer metering (% of total connections)

Production metering (% of total water sources)

Non-revenue water (% of total water production)

Average hours of water supply per day

Water quality compliance (% negative tests):

Physical and chemical

Average tariff (PhP/m3)

Average cost (PhP/m3)

Collection efficiency (%)

Staffing ratio (Employees/1,000 water+sewer connections)

Debt service coverage ratio