About Philippine Water Revolving Fund (PWRF) Support Program

The PWRF Support Program (PWRF-SP) is a collaborative undertaking of Government of the Philippines partners, USAID, Japan International
Cooperation Agency (JICA), LGU Guarantee Corporation (LGUGC), and private financing institutions (PFIs) through the Bankers Association of
the Philippines. The Programs GOP partners are led by the Department of Finance and the Development Bank of the Philippines.

The PWRF Support Program operates around the following main objectives:
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 PWRF-SPs positive impact on the sector, including
corollary regulatory reforms;
Assist water districts and local government units in developing a pipeline of bankable water projects; and
Assist water districts and local government units with reforms in utility governance.

The PWRF Support Program has established 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 USAIDs Development Credit Authority. PWRF-SP has also assisted in financing policy formulation,
regulatory reform, project development and capacity building of water utilities to improve management and operations.

PWRF-SP has actively supported utility reform initiatives, such as the ring-fencing of LGU and cooperative-run utilities. Together the PWRF-SP,
Water and Sanitation Project (WSP) of World Bank, Department of Interior and Local Government (DILG) and Cooperative Development
Authority (CDA) collaborated on developing knowledge products and helping build capacity of LGUs and cooperatives in ring-fencing of water
utility accounts and operations.

The PWRF Support Program is implemented by Development Alternatives, Inc. in association with The Community Group International LLC,
Resource Mobilization Advisors, and CEST, Inc.
 Guide to Establishing LGU-Run Water
Utilities as Economic Enterprises

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.
Acknowledgements
The PWRF Support Program thanks the Water and Sanitation Program (WSP) of the World Bank and the Public-
Private Infrastructure Advisory Facility (PPIAF) for allowing use of the Guide to Ring-Fencing of Local Government-Run
Water Utilities prepared by the Small Water Utilities Improvement and Financing (SWIF) Project in the development
of this guide. In particular, Chapters 2 and 3 of this Guide are quoted directly from the Guide to Ring-Fencing, which
discusses the critical first stepthat of segregating the water utility accountsin the establishment of a discrete
economic enterprise for a LGU-run water utility. Thus the two guidebooks are complementary and provide a uniform
approach for completing the process of establishing a utility distinct from the overall LGU operation, accountable for
its performance and has disposition of its funds.

This Guide benefited from a peer review by accountants and finance specialists from the municipalities of Jagna,
Alburquerque and Antequera in the province of Bohol; and from local resource institutes: Ateneo de Naga University
Center for Local Governance, Batangas State University, Catanduanes State Colleges, UP Los Baos College of Public
Affairs, Father Saturnino Urios University, GenTwoFifteen Development Foundation Inc., Holy Name University Center
for Local Governance, University of Northern Philippines, the Local Government Academy, and WSP.
vi PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
 contents
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

Abbreviations and Acronyms 1

1. Developing the Guide 3
1.1 Ring-fencing approach 4
1.2 Ring-fencing towards corporatization 5
1.3 Ring-fencing pilot experiences 5
1.4 Organization of the guide 7
2. Accounts Reconstruction 9
2.1 Preparatory activities 9
2.2 Steps in the Accounts Reconstruction 12
3. Maintenance of ring-fenced books of accounts 35
3.1 Parallel books 35
3.2 Bookkeeping 36
3.3 System of allocating shared expenses 37
3.4 Accounting and financial reporting system 37
3.5 Monitoring and evaluation 40
4. Evaluation of Water Utility Performance 41
4.1 Benchmarking key performance indicators 41
4.2 Conference with local officials 44
4.3 Strategic business planning 45
5. Financial Management Guidelines for the Utility 47
5.1 Formulation 47
5.2 Review 55
5.3 Institutionalization 55
5.4 Implementation 57
6. Separate Bank Account for the Utility 59
6.1 Rationale 59
6.2 Authority 59
6.3 Cashbook 59

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES vii

7. Separate Budget for the Utility 63
7.1 Budget preparation 63
7.2 Budget authorization 65
7.3 Budget review 65
7.4 Budget execution 65
7.5 Budget accountability 65
8. LGU-Run Water Utility as Economic Enterprise 71
8.1 Corporatization 71
8.2 Creation of a water utility economic enterprise 71
8.3 Restructuring the water utilitys organization 74
8.4 Zero-subsidy and/or positive surplus 76
8.5 Performance contracting 77
Appendix 1 79
Appendix 2 101
Appendix 3 117

List of Boxes
Box 1. Testimonies of local chief executives of pilot LGUs 7
Box 2. Books of accounts and chart of accounts under the ring-fencing system
and the NGAS 35
Box 3. Subsidiary ledgers for major controlling accounts in the general ledger 38
Box 4. Key performance indicators and formulas 43
Box 5. Pro-forma for water utility operation budget proposal 63
Box 6. Important dates in the local planning budget calendar 64

List of Exhibits
Exhibit 1. Benchmarking results for water utilities in small towns 3
Exhibit 2. Comparative analysis of performance of ring-fenced
water utilities for 20082009 6
Exhibit 3. Executive order creating a ring-fencing team 10
Exhibit 4. Inventory count sheet 13
Exhibit 5.1 Useful lives of tangible assets that may be considered part of inventory 21
Exhibit 5.2. Estimated useful lives of property, plant and equipment 23
Exhibit 6. Schedule of aging of receivables 26
Exhibit 7. Sample ring-fencing financial management guidelines 50
Exhibit 8. SB resolution adopting the financial management guidelines 56
Exhibit 9. Cashbook - Cash in Bank 60

viii PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Exhibit 10. Cashbook - Cash in Treasury 61
Exhibit 11. Quarterly report of income 67
Exhibit 12. Quarterly financial report of operations 68
Exhibit 13. Quarterly physical report of operations 69
Exhibit 14. Statement of receipts and expenditures 70

List of Figures
Figure 1. Water utility economic enterprise program 5
Figure 2. Discussion points in conference with local officials 44
Figure 3. FMG review and adoption process 57
Figure 4. Organization chart of a typical LGU-run water utility 76

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES ix

x PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
Abbreviations and Acronyms
ADCOM Additional compensation MDFO Municipal Development Fund
AIP Annual Investment Plan Office
Ave Average MOOE Maintenance and other
BOM Budget Operations Manual operating expenses
CO Capital outlay MPC Multipurpose cooperative
Coops Cooperatives NGAS New Government Accounting
DILG Department of the Interior System
and Local Government NRW Non-revenue water
ECC Employees compensation NWRB National Water Resources
contribution Board
FF Furniture and fixtures OandM Operations and maintenance
FMG Financial management OME Other machineries and
guidelines equipment
GFI Government financing OR Official receipts
institutions PERA Personal Expenses Relief
IEC Information, education and Allowance
communication PFI Private financing institutions
IRA Internal Revenue Allotment PGB Policy Governing Body
JEV Journal entry voucher PI Public infrastructures
KPI Key performance indicators PS Personal services
LCE Local Chief Executive PWRF-SP Philippine Water Revolving
LDC Local Development Council Fund Support Program
LDIP Local Development RA Representation allowance
Investment Plan RWSAs Rural Waterworks Systems
LFC Local Finance Committee Associations
LGC Local Government Code SB Sangguniang Bayan
LGOO Local Government Operations TA Transportation allowance
Officer USAID United States Agency for
LGU Local government unit International Development
LPDC Local Planning and WATSAN Water and sanitation
Development Officer WD Water districts
LWUA Local Water Utilities WSP Water and Sanitation Program
Administration WSPs Water service providers
MandE Monitoring and evaluation

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 1

2 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
 SECTI O N ONE

M any local government units provide

water supply services as part of their
regular operations. This means the budget for
operating the water utility is included in the
LGUs overall budget, and all revenue from
providing water services go to the general
fund. Tasks involving water supply services
are often added on to the regular workload of
the local engineer, accountant, or treasurer.
Since accounts are not ring-fenced and the
water supply function is not governed as a
sustainable entity, the performance of the water
utility is generally poor and service coverage is
inadequate.
One way to address this concern is to improve
the governance system of LGU-run utilities to
compel as well as empower them to become
accountable for their performance, budget
disposition, and revenues generated. The Local
Government Code (LGC) already provides
the enabling mechanism; short of creating an
autonomous corporation, LGUs can establish
economic enterprises that operate on commer-
cial principles to generate revenues adequate to
sustain their operations and, ultimately, invest-
ment needs. Economic enterprises are allowed
to maintain separate accounts and dedicated
personnel.

Exhibit 1. Benchmarking results for water utilities in small towns

Ideal/ Benchmarking results

KPI/utility model industry RWSAs/
standard LGU WD Private Ave
Coops
Sample size 10 9 18 8 45
Coverage (%) 100 57 66 69 66 65
Availability (hours) 24 18 20 23 22 21
Consumption (lpcd) >100 96 127 120 144 120
NRW (%) 20 36 16 26 26 29
Operating ratio <1 1.18 0.87 0.70 0.74 0.85
Accounts receivable (months) <1 2.3 2.6 1.3 1.7 1.8
3
Average tariff (P/m ) - 7.22 7.99 17.82 15.37 13.06
Collection efficiency (%) 98 91 99 99 102 98
Staff/1000 connections 4 9 6.6 6.8 5.8 7.0
Source: Philippines Towns Water Utilities Databook 2004 published in December 2006 by WSP

3
 The need to ring-fence LGU-run water utilities became apparent from results of the
benchmarking survey done by WSP Philippines together with NWRB, DILG, and LWUA.
Data gathered from 45 water utilities revealed that LGU-run water utilities were the poorest
performers among water service providers in terms of financial and operational performance.
They posted the (a) lowest average service coverage; (b) lowest water availability per day; (c)
least amount of water delivered to consumers; (d) lowest average tariff per cubic meter; (e)
lowest revenue collection efficiency; (f) highest average operating ratio; (g) highest staff/1000
connections ratio; and (h) very low capital per expenditure connection.

The process of establishing a water utility as operates as a business concern. On 4 May

an economic enterprise starts with the critical
step of segregating utility accounts. In this
regard, the Guide to Ring-Fencing of Local
Government-Run Water Utilities developed
in 2009 by the Water and Sanitation Program
of The World Bank will be a very useful
reference. It initially addresses account-
ing issues, particularly regarding income
recognition and subsidy level determina-
tion. It provides a uniform approach to the
reconstruction of water utility accounts,
maintenance of parallel books of accounts and
separate records, and preparation of periodic
ring-fenced financial reports. The Guide to
Ring-Fencing will be helpful to LGUs in gener-
ating the following outputs: beginning ledger
balances, reconstructed financial statements,
and separate books of accounts.
However, the end-goal of ring-fencing is
establishing a public utility and economic
enterprise that has its own budget, fund
management system, management policies
and human resource policies. Picking up
from where the WB Guide to Ring-Fencing
leaves off, this Guide covers the remaining
steps and requirements prescribed by the
LGC and other government regulations in
establishing an economic enterprise that
2011, the Department of the Interior and Local
Government (DILG) issued Memorandum
Circular (MC) 2011-65 encouraging LGUs to
adopt ring-fencing as a mechanism to improve
the performance of LGU-run water utilities
and to pursue utility reform. It cites these two
complementary Guidebooks as key reference
materials. MC 2011-65 is shown in Appendix 3.
1.1 RING-FENCING APPROACH
Ring-fencing is a financial and management
arrangement whereby activities and financial
accounts associated with a particular business
are fenced off from the general accounts of
the entity. This approach can be particularly
helpful to LGUs because the financial informa-
tion and records of the LGU-run water utility
are merged with the general fund account of
the LGU.
Ring fencing of LGU-run water utilities essen-
tially involves identifying and isolating the
utilitys activities, assets, costs and revenues,
and obligations for goods and services;
transforming the water utility into a viable
and sustainable public utility and economic
enterprise; and utilizing the utilitys resources
primarily for operations and maintenance, as
well as capital investments.

4 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Figure 1. Water utility economic enterprise program

Accounts reconstruction Full ring-fencing Full-blown economic enterprise

Within 3 months At least 12 months after Water utility operating as a

accounts reconstruction self-sustaining public utility and
economic enterprise
Reconstruction of water Ring-fencing transition period
utility accounts activities: Retains excess income for
Parallel books of accounts operations and improvements
Income statement maintained Implements performance
adjusted based on accrual Revenues recorded when realized contracting
and full costing All costs accounted for, including
shared costs
Balance sheet beginning Separate record of property, plant
balances set-up and equipment
Periodic ring-fenced financial
reports prepared
Financial management guidelines
implemented*
Separate bank account
established*
Separate budget prepared*
Business plan prepared*

*Needs local Sanggunian Resolution

1.2 RING-FENCING TOWARDS involves the preparatory activities for ring-

CORPORATIZATION
Corporatization, as used in this Guide, refers
to an LGU-run water utility that is ring-
fenced and practices corporate governance
and commercial principles in running the
utility as a business. It involves a situation
where the water utility attains viable and
self-sustaining operations without the need
for LGU subsidies. Corporatization describes
a water utility that has been established as an
economic enterprise thus generating revenues
that can sufficiently finance its operations and
maintenance costs and capital investments.
Should it generate excess revenues, these can
be plowed back to the LGU general fund. This
is the goal of ring-fencing.
The ring-fencing of the water utility opera-
tions consists of two (2) phases. Phase 1,
known as the Accounts Reconstruction Phase,
fencing and the reconstruction of water utility
accounts. It also involves the maintenance
of books parallel to the LGU General Fund
accounts, the preparation of periodic financial
reports, the formulation and implementa-
tion of financial management guidelines, the
opening of a separate bank account, provision
of a separate budget, and the preparation of
the business plan for the water utility. This
process will take approximately 18 months
depending on the capacity of the utility and
the commitment of the LGU. See Figure 1
above for details of activities in Phase 1 and
Phase 2.
1.3 RING-FENCING PILOT EXPERIENCES
The PWRF-SP implemented a technical assis-
tance program that included training on ring-
fencing, the pilot testing of accounts recon-
struction in selected LGUs and multipurpose

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 5

cooperatives (MPC), and the conduct of
advocacy activities and policy work to institu-
tionalize ring-fencing. The WSP Philippines
supported the accounts reconstruction of the
LGU-run water utility in Antequera, Bohol.
PWRF-SP supported the initiative by pilot
testing the accounts reconstruction and the
formulation and implementation of financial
management guidelines in five LGU-run water
utilitiesAlburquerque and Jagna in Bohol,
Magallanes in Sorsogon, and Mahayag and
Margosatubig in Zamboanga del Surand three
water multipurpose cooperatives: Matanao
Waterworks and Sanitation MPC in Matanao,
Davao del Sur; Lamac MPC in Pinamungajan,
Cebu; and ODonnell Resettlement Waterworks
MPC in Capas, Tarlac.
Pilot testing began with the reconstruction of
water utility accounts from the year immedi-
ately preceding to establish beginning balances
and to prepare the water utilitys financial
statements. These financial data were used to
compute key performance indicators (KPI).
Exhibit 2 presents a comparative analysis of
performance of ring-fenced water utilities for
the years 2008 and 2009 using ring-fenced
data vis--vis the LWUA/DILG industry
averages. The 2008 analysis revealed that less
than half the utilities met the ideal financial
ratios or levels and half fared poorly in terms
of selected operational indicators. These
results validated the benchmarking study of
small water utilities (Exhibit 1). The 2009
results however noted a slight but remarkable
improvement in some KPIs.
Findings from the pilot further confirmed
the applicability and usefulness of the ring-
fencing initiative. The local chief executives
of the pilot LGUs testified on the benefits of
embracing the ring-fencing approach (Box 1)

Exhibit 2. Comparative analysis of performance of ring-fenced water utilities for 20082009

LWUA Jagna Alburquerque Margosatubig Antequera Mahayag

/ DILG
KPIs
industry 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009
ave
Return on total
6 2.60 7 -5 -6 -1 3 -5 -4 -5 -3
assets (%)
Average cost per
11.44 4.74 3.79 15.9 15.19 12.45 13.13** 13.33 14.87 6.1 8.81
cubic meter
Collection period
2.3 1.3 0.57 1.9 1.7 7.6 8.1** 2 2.3 9.8 13.2
(months)
Collection
91 95 78* 86 88 37 51 90 84 37 51
efficiency (%)
Average tariff
(pesos per cubic 7.22 2.94 3.45 5.68 5.68 6.78 12.64 5.7 6.31 4.31 6.18
meter )
Subsidy level (%) - 38 9 64 64 74 4 58 58 29 30
Staffing ratio 9 8.6 3 6 6 14.88 10 7.4 7 5.38 7
Non-revenue No No No
26 34 63 42 56 35 61 59
water (%) data data data

* Due to increase in billed amount as a result of increase in service coverage

** As a result of investment financed by a loan from the MDFO
Source: Ring-fencing: A Critical First Step to LGU-Run Water Utility Reforms, A Documentation of Results of Pilot-testing in Selected
LGUs, USAID-PWRF-SP

6 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

in their respective water utilities. The pilot
test also revealed areas for improvement as
follows:
1. Large amounts of collectibles were noted
but not reported in the LGUs financial
statements. Water revenues are booked
only when bills are actually collected. As a
result, unpaid water bills are not monitored
and the aging of receivables is often left
undone.
2. Utilities are highly dependent on the
Internal Revenue Allotment, and their
capital and OandM expenses are highly
subsidized. Among the pilot LGUs, the
estimated annual subsidy ranges from
P735,000 to P3.75 million.
3. Budgeted funds of water utilities are
commingled with those of other economic
enterprises such as public markets,
terminals, and cemeteries. This makes the
tracking of financial and budgetary perfor-
mance difficult.
4. There are not enough trained staff to
provide customer service and to keep
track of the individual customer accounts.
This may be due to high staff turnover
rate brought about by frequent changes in
the administration and highly politicized
hiring and firing policies. When the utility
is attached to one of the LGU offices, staff
members have multiple tasks and the
responsibility of handling water utility
records and accounts becomes second
priority.
5. There are no written financial and opera-
tional policies. Personnel are not properly
supervised. No one directs the operations of
the water utility.
6. Political interference, usually in the form of
personnel accommodations or condonation
of payments, contributes to inefficiencies.
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
Box 1. Testimonies of local chief executives of pilot LGUs
Honorable Mayor Exuperio Lloren of Jagna pointed out
that ring-fencing enabled them to gauge the viability
of our water utility and determine proper actions to
enhance our service delivery.
Hon. Mayor Abelardo Arambulo of Magallanes stated
that ring-fencing showed the many things that still
need to be done to enhance water service operations in
their locality. He said that the ring-fencing has made
it easier for us to determine the appropriate level of
tariff.
Hon. Mayor Cirilo Jalad of Alburquerque acknowledged
that findings from the ring-fencing pilot have helped
them identify a plan of action to improve their
waterworks operation.
Hon. Mayor George Minor of Margosatubig said that
ring-fencing the waterworks accounts made it easier
for us to monitor and track the financial performance of
our utility. It opened our eyes to unnecessary subsidies
that we are providing.
Hon. Mayor Paulino Fanilag of Mahayag realized that
their collection plan was inefficient and the subsidy
appropriated to operate the utility was immense.
Hon. Mayor Cecelia Rebosura of Antequera, indicated
that, after ring-fencing, they realigned their waterworks
organization and undertook reforms, such as increasing
the tariff.
Source: Proceedings of the Workshop on Ring-fencing of
Water Utility Accounts, USAID-PWRF-SP, October 2009
1.4 ORGANIZATION OF THE GUIDE
This Guide aims to provide a uniform
approach for LGU-run water utilities in
executing the remaining steps and processes
after successful reconstruction of water utility
accounts and maintenance of separate books of
accounts to achieve the goal of ring-fencing.
Specifically, the Guide
Takes off at the completion of Accounts
Reconstruction and maintenance of parallel
books of accounts
Expounds on steps and procedures in
the conduct of activities at the transi-
tion stage: formulation and adoption of
7
 financial management guidelines, opening
of separate bank account, preparation
of separate budget, and maintenance of
parallel books of accounts
Clarifies guidelines and processes for the
water utility to reach corporatization, or
the establishment of the water utility as a
sustainable economic enterprise
Provides set of sample problems and
suggested solutions to simulate the
Accounts Reconstruction and other
activities
To provide a better grasp of the whole ring-
fencing system, this Guide is organized based
on the water utility economic enterprise
program. Following the phases of ring-fencing,
the eight sections contained in this guide are:
Section 1 Developing the guide
Taking into consideration the pilot testing
experiences, the ring-fencing approach moves
forward from accounts reconstruction to estab-
lishing the water utility as an economic enter-
prise. This section showcases the foundation
of the ring-fencing concept and the eventual
development of the complementary guide.
Section 2 Accounts reconstruction
This section reviews the step-by-step
approaches in reconstructing the water utility
accounts that have merged with the General
Fund account of the LGU. Examples culled
from suggested solutions (Appendix 2) are
provided for each significant step.
Section 3 Maintenance of ring-fenced books of
accounts
This section expounds on the systems and
processes necessary to fully implement ring-
fencing of water utility accounts. A detailed
discussion focuses on the maintenance of
8 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
ring-fenced accounts alongside the LGUs
General Fund books of accounts.
Section 4 Evaluation of water utility
performance
Benchmarking is considered in this section. It
presents financial and operational analyses with
relevant input on the decision making process.
Section 5 Financial management guidelines for
the utility
This section illustrates the formulation of
financial management guidelines for the
water utility as a separate economic entity.
It discusses in detail important processes for
instituting the financial management policy.
Section 6 Setting up a separate bank account
This section focuses on setting up a separate
bank account for water utility funds. It
discusses how maintaining a separate bank
account is essential to transforming the water
utility into a viable, bankable and sustainable
economic enterprise.
Section 7 A separate budget for the utility
One internal control measure is the main-
tenance of a separate budget. This section
presents important considerations in preparing
a separate budget for the water utility.
Section 8 A public utility and economic
enterprise
This section provides guidelines on the estab-
lishment of the water utility as a public utility
and economic enterprise. It suggests uniform
approaches and highlights conditions in the
establishment of a financially viable and self-
sustaining water utility economic enterprise.
Appendices 1 and 2 contain a practice set of
simulation problems and suggested solutions
for the Accounts Reconstruction Phase.

T his section of the Guide provides an
overview of ring-fencing as introduced
in the Guide to Ring-Fencing of Local
Government-Run Water Utilities developed by
the Water and Sanitation Program (WSP) of
the World Bank in 2009. It integrates concepts
and methodologies obtained from pilot testing
experiences.
The ring-fencing concept operates within the
ambit of Section 313 of the Local Government
Code (RA 7160) and the New Government
Accounting System (NGAS) Sections 105 to 110,
which allows the creation of special accounts
for public utilities to be maintained under the
general fund. The methodologies introduced
in the ring-fencing approach enhanced some
of these accounting procedures, such as using
a subsidiary ledgering system for waterworks.
They reinforced the preparation of separate
financial statements for the special account
maintained for the waterworks system. A
subcode 04 (waterworks system) has been
assigned under NGAS for this purpose.
2.1 PREPARATORY ACTIVITIES
A number of preparations need to be made
before an LGU can adopt the ring-fencing
approach. First, local officials should draw a
9
SECTI O N T WO
utility reform agenda and identify programs or
strategies to that effect. Given the fact that local
government accounting follows the one-fund
approach in which all financial transactions
are commingled in the General Fund, all water
utility reform programs therefore will neces-
sitate implementation of ring-fencing as the
first step.
2.1.1 Affirmation of LGU commitment to
ring-fencing
First the LGU must commit itself to adopting
the ring-fencing approach for water utility
operation and management through the
issuance of an executive order by the Local
Chief Executive (LCE) or a resolution by the
local Sanggunian adopting the ring-fencing
system and creating the ring-fencing team
(Exhibit 3). A ring-fencing team is needed to
make sure all involved units and personnel
will participate in the process. This will ensure
collaboration and support among concerned
officers to install, implement and complete the
ring-fencing process.
The ring-fencing team should be composed of
the LGUs key financial management officers,
such as the accountant, treasurer, budget
officer, and chairman on appropriations.
The office to which the water utility unit is development office. The DILG Local
attached should also be involved, whether Government Operations Officer may also be
this be the engineering or planning and involved in monitoring and coordination.

Exhibit 3. Executive order creating a ring-fencing team

Source: LGU Jagna, Bohol

10 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
2.1.2 Basic information gathering
The ring-fencing team will need to gather
basic information about the water utility to
better understand existing conditions, systems
and procedures. This involves gathering forms,
records and reports used and prepared by the
utility and other LGU units involved in water
utility operations.
Water utility profile
As a minimum, information gathering
and profiling should cover the following
information:
1. Name of the utility
2. Brief history or background (year the utility
was formed or when operations started,
system source and type, utility in-charge,
etc.)
3. Vision and mission statements, goals and
objectives
4. Coverage area (total no. of barangays in
the administrative and service areas, total
population of barangays served, other water
service providers present)
5. Connections (active, inactive, disconnected,
public taps, metered and non-metered
connections)
6. Production levels (annual volume
produced, annual volume billed, treatment
facility type, if any)
7. Customer service (average number of hours
of water availability per day; frequency of
bacteriological, physical and chemical tests;
water meter maintenance)
8. Personnel (permanent, casual, contractual)
9. Waterworks assets (land, building,
machinery, tools and equipment,
infrastructure)
10. Tariff structure (flat or graduated rates)
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
Water utility documents, forms, records and
reports
Documents, forms, records and reports for
the last two years or for the year immediately
preceding should be obtained to facilitate
reconstruction of accounts.
1. Billing and collection reports, such as
meter reading list, file copy of water bills,
customer master list, report of collection
and deposits
2. Customer accounts receivables, such as
customer ledger cards or index cards,
customer logbooks, account receivable
ledgers and subsidiary ledgers
3. Staffing list and salary schedules, including
the payroll
4. Operation and maintenance expense
reports
5. Subsidiary records or ledgers for property,
plant and equipment
6. Registries for infrastructure and grants/
donations
7. Trial balance and, if separate financial
reports are prepared for the water utility,
copies of Statement of Income and
Expenses, Balance Sheet and Cash Flow
Statement or similar reports
8. Operations policies, such as a local
ordinance or Sangguniang Bayan (SB)
resolutions and Local Revenue Code
9. Monthly data sheet (as prescribed by
the NWRB) for LGUs under consensual
agreement
2.1.3 Review of organization and functions
Another important activity is to review how
the utility is organized, including its staffing
structure. Creating a simple organizational
chart will help the ring-fencing team to
understand the organizations systems and
procedures. Understanding the different
processes in water service provision, through
11
activity analysis and perhaps even utilizing a simple flowcharting tool, is valuable preparation for
the installation of the ring-fencing system.

2.2 STEPS IN THE ACCOUNTS RECONSTRUCTION

The reconstruction of the utilitys financial accounts should follow these 13 major steps. We use the
case of Matubig Waterworks System (see Appendix 1) as a sample problem to illustrate steps and
suggested solutions.

Step 1. Set up the books of accounts

The books of accounts shall be composed of journals and ledgers required by NGAS for LGUs, such
as the Cash Receipts Journal, Cash Disbursements Journal, Check Disbursements Journal, General
Journal, General Ledger and Subsidiary Ledger. LGU-run water utilities should also set up a Bill
Register, a special journal to record water bills issued, and Customer Ledger Cards, a special subsid-
iary ledger for maintaining customer records.

Step 2. Establish the balance sheet accounts beginning balances

After deciding on the cut-off date (or January 1) of the immediately preceding year, the beginning
balances of the balance sheet accounts can be established.

Cash accounts. The cash accounts normally consist of data on Cash Collecting Officer, Petty Cash
Fund, and Cash in Bank.

An example of determining the beginning balance of Cash in Bank as of January 1, 2009 can be seen
in Example 1.

Example 1. Example of determining the beginning balance of Cash in Bank as of January 1, 2009

Cash in bank (from loan proceeds) 25,844,515.00

Advances to contractors -
Add/less: Mobilization (3,876,677.25)
Recoupment of mobilization 1,550,670.90
2008 progress payments (11,053,905.82)
2008 BIR remittances (1,063,036.59) (14,442,948.76)
Cash in bank balance 11,401,566.24

Receivables accounts. The receivables accounts common to water utilities are Accounts
Receivable, Allowance for Doubtful Accounts, Due from Other Funds, and Other Receivables.
A sample solution for determining the beginning balance of accounts receivable (AR) and cor-
responding allowance for doubtful accounts (assumed at 2% of ending AR balance) as of January 1,
2009 can be seen in Example 2.

Inventory accounts. The inventory accounts usually consists of Office Supplies Inventory,
Accountable Forms Inventory, Gasoline, Oil and Lubricants Inventory, Spare Parts Inventory,

12 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Example 2. A sample solution for determining the beginning balance of accounts receivable (AR) and corresponding
allowance for doubtful accounts (assumed at 2% of ending AR balance) as of January 1, 2009

Unpaid water bills, 2007 649,465.00

Issued water bills, 2008 2,923,523.60
Collection from water bills, 2008 (2,680,107.00)
Unpaid water bills, 2008 (accounts receivable) 892,881.60

Allowance for doubtful accounts

2% of unpaid water bills = P892,881.60 x 2% = P17,857.63

Construction Materials Inventory, and Other Supplies Inventory. Prepare an inventory count sheet
(Exhibit 4) for each inventory account.

Exhibit 4. Inventory count sheet

Inventory Count Sheet

Sheet no.: Counted by:
Item no. Description Location Quantity Acquisition cost Total cost

Property, plant and equipment accounts. System assets are recorded in the LGU books of accounts
as Public Infrastructure Artesian Wells, Reservoirs, Pumping Stations and Conduits, while non-
system assets are recorded as Property, Plant and Equipment (PPE). The PPE accounts consist of
Land and Land Improvements, Buildings, Office Equipment, Furniture and Fixtures, Machineries
and Equipment, Transportation Equipment, and Other Property, Plant and Equipment.

An example on the determination of property, plant and equipment beginning balance as of January
1, 2009 is presented in Example 3. It shall follow the same format as the schedule of depreciation
to obtain the corresponding beginning balance of accumulated depreciation as of the same cut-off
date.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 13

 Example 3. PPE Depreciation Schedule
Asset description Acquisition Acquisition Salvage Depreciable Estimated Annual Years in Accumulated

14
date cost value cost Useful Life depreciation use as of depreciation
12/31/08 12/31/08
RESERVOIRS
Ground concrete tank - Brgy Silang 2005 228,561.00 22,856.10 205,704.90 40 5,142.62 3 15,427.87
Ground concrete tank - Brgy Oslao 1996 150,000.00 15,000.00 135,000.00 40 3,375.00 12 40,500.00
Ground concrete tank - Brgy Ponong 1994 220,000.00 22,000.00 198,000.00 40 4,950.00 14 69,300.00
Ground concrete - Brgy Banbanon 1989 250,000.00 25,000.00 225,000.00 40 5,625.00 19 106,875.00
Elevated concrete tank - Brgy Magtangale 1997 75,000.00 7,500.00 67,500.00 40 1,687.50 11 18,562.50
Ground Concrete - Brgy Linongganan 1994 120,000.00 12,000.00 108,000.00 40 2,700.00 14 37,800.00
Ground concrete tank - Brgy Jubgan 2004 335,000.00 33,500.00 301,500.00 40 7,537.50 4 30,150.00
Ground concrete tank - Brgy Amontay 2002 228,471.00 22,847.10 205,623.90 40 5,140.60 6 30,843.59
Ground Intake tank - Brgy Baybay 2005 89,071.00 8,907.10 80,163.90 40 2,004.10 3 6,012.29
Sub-total 1,696,103.00 169,610.30 1,526,492.70 38,162.32 355,471.25

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

PUMPING EQUIPMENT
Deep well 150 ft w/ 3HP submersible pump - Brgy Silang 2004 210,000.00 21,000.00 189,000.00 10 18,900.00 4 75,600.00
Deep well 120 ft w/ 1.5HP submersible pump - Brgy Oslao 1995 75,000.00 7,500.00 67,500.00 10 6,750.00 10 67,500.00
Deep well 180 ft w/ 1.5HP submersible pump - Brgy Ponong 1994 170,000.00 17,000.00 153,000.00 10 15,300.00 10 153,000.00
Deep well 60 ft w/ 1.5 HP submersible pump - Brgy 1993 63,000.00 6,300.00 56,700.00 10 5,670.00 10 56,700.00
Banbanon
Deep well 160 ft w/ 2HP submersible pump - Brgy 2001 120,000.00 12,000.00 108,000.00 10 10,800.00 7 75,600.00
Magtangale
Deep well 200 ft w/ 1HP submersible pump - Brgy 2002 175,000.00 17,500.00 157,500.00 10 15,750.00 6 94,500.00
Linongganan
Deep well 250 ft w/ 1.5 HP submersible pump - Brgy 2005 325,000.00 32,500.00 292,500.00 10 29,250.00 3 87,750.00
Jubgan
Deep well 200 ft w/ 1.5HP submersible pump - Brgy 2001 220,000.00 22,000.00 198,000.00 10 19,800.00 7 138,600.00
Amontay
Deep well 200 ft w/ 1.5HP submersible pump - Brgy 2005 177,545.00 17,754.50 159,790.50 10 15,979.05 3 47,937.15
Baybay
Deep well 100 ft w/ 1.5 HP submersible pump - Brgy Diaz 2003 83,000.00 8,300.00 74,700.00 10 7,470.00 5 37,350.00
Submersible pump 3HP - Brgy Honrado Spring 2002 254,000.00 25,400.00 228,600.00 10 22,860.00 6 137,160.00
Deep well w/ 1HP submersible pump Brgy Brazil 1998 28,000.00 2,800.00 25,200.00 10 2,520.00 10 25,200.00
Sub-total 1,900,545.00 190,054.50 1,710,490.50 171,049.05 996,897.15
 TRANSMISSION and DISTRIBUTION MAINS
Distribution line 1 1994 500,000.00 50,000.00 450,000.00 30 15,000.00 14 210,000.00
Distribution line 2 1998 1,025,000.00 102,500.00 922,500.00 30 30,750.00 10 307,500.00
Distribution line 3 2000 1,500,000.00 150,000.00 1,350,000.00 30 45,000.00 8 360,000.00
Distribution line 4 2003 829,180.65 82,918.07 746,262.59 30 24,875.42 5 124,377.10
Transmission line - Brgy Ponong 2005 100,210.00 10,021.00 90,189.00 30 3,006.30 3 9,018.90
Transmission line - Brgy Banbanon 2004 76,977.00 7,697.70 69,279.30 30 2,309.31 4 9,237.24
Pipes - Brgy Macopa 2006 69,250.00 6,925.00 62,325.00 30 2,077.50 2 4,155.00
Sub-total 4,100,617.65 410,061.77 3,690,555.89 123,018.53 1,024,288.24

WATER TREATMENT EQUIPMENT

Water chlorinator 2007 17,292.35 1,729.24 15,563.12 10 1,556.31 1 1,556.31
Sub-total 17,292.35 1,729.24 15,563.12 1,556.31 1,556.31

OFFICE FURNITURE and FIXTURES

Office tables (5 units) 2002 24,250.00 2,425.00 21,825.00 5 4,365.00 5 21,825.00
Filing cabinet 2001 6,935.50 693.55 6,241.95 5 1,248.39 5 6,241.95
Steel cabinet 2007 11,245.50 1,124.55 10,120.95 5 2,024.19 1 2,024.19
Stand fan 2005 821.65 82.17 739.49 5 147.9 3 443.69
Desk fan 2004 695 69.5 625.5 5 125.1 4 500.4
Ceiling fan 2006 928.8 92.88 835.92 5 167.18 2 334.37
Sub-total 44,876.45 4,487.65 40,388.81 8,077.76 31,369.60

OFFICE EQUIPMENT
Typewriter 1998 19,474.00 1,947.40 17,526.60 5 3,505.32 5 17,526.60
Sub-total 19,474.00 1,947.40 17,526.60 3,505.32 17,526.60
OTHER MACHINERY and EQUIPMENT
Plumbing tools 2008 55,000.00 5,500.00 49,500.00 5 9,900.00 0 -
Sub-total 55,000.00 5,500.00 49,500.00 9,900.00 0.00

TOTALS 7,833,908.45 783,390.86 7,050,517.62 355,269.29 2,427,109.15

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

15
Construction in progress accounts. The only construction in progress accounts for water utilities
are Artesian Wells, Reservoirs, Pumping Stations and Conduits and Other Infrastructures.

As an example, the computation of the Construction in Progress beginning balance at January 1,

2009 can be seen in Example 4.

Example 4. Computation of the Construction in Progress beginning balance at January 1, 2009

First billing at 33.94% - P 8,771,628.39

Second billing at 58.76% - 6,414,608.62
Total value of accomplishment - P15,186,237.01

Liability accounts. The current liability accounts of a water utility usually arise from supplies
purchased on credit and payroll transactions, particularly on remittable amounts to government
agencies, like GSIS, HDMC, PHIC and BIR. The current liabilities consist of Accounts Payable,
Notes Payable, Interest Payable, Due to BIR, Due to GSIS, Due to Pag-ibig, Due to PhilHealth, Due
to NGAs, Guaranty Deposits Payable, and Other Payables. The long-term liabilities consist of Loans
Payable Domestic, and Other Long-term Payables.

The following computations are examples of determining beginning balances of current and
long-term liabilities.

Example 5. Examples of determining beginning balances of current and long-term liabilities

Guarantee deposits payable

2009 total deposits from water customers (Note 5) - P 119,500.00
Less: 2009 collections on guarantee deposits - 27,600.00
2009 beginning balance - P 91,900.00

Loans payable domestic

Total loan amount - P25,844,515.00
Less: Quarter payments in 2008:
2nd quarter - P 497,009.91
3rd quarter - P 497,009.91
4th quarter - P 497,009.91 - 1,491,029.73
Loan balance as of Dec. 31, 2008 - P24,353,485.28

Other payables
10% Retention money on contracts
1st progress billing - P 877,162.84
2nd progress billing - 641,460.86
Total - P1,518,623.70

Government equity. The government equity account represents the LGUs (the owners) capital
contribution. This can be obtained by getting the difference between total assets and total liabilities,
as shown in Example 6.

16 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Example 6. Government equity

Government equity
ASSETS Amount
Cash in bank 11,401,566.24
Accounts receivables 892,881.60
Allowance for doubtful accounts (17,857.63)
Office equipment 19,474.00
Accumulated depreciation (17,526.60)
Furniture and fixtures 44,876.45
Accumulated depreciation (31,369.60)
Other machinery and equipment 55,000.00
Accumulated depreciation -
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Accumulated depreciation (2,378,212.94)
Construction in progress - artesian wells, reservoirs, pump 15,186,237.01
Advances to contractors 2,326,006.35
TOTAL ASSETS 35,195,632.88
LESS: LIABILITIES
Guaranty deposits payable 91,900.00
Due to BIR -
Loans payable Domestic 24,353,485.28
Other payables 1,518,623.70
TOTAL LIABILITIES 25,964,008.98
Government equity 9,231,623.90

Step 3. Determine revenues for the year.
Despite the NGAS provision on the use
of accrual basis for revenues, many if not
all LGUs still record most of its revenues
following the cash basis of accounting
(with the exception of the internal revenue
allotment [IRA] which is reported based on
the Statement of Allotment Release Order
received by the LGU from the Department of
Budget and Management). The ring-fencing
approach reinforces the accrual basis for
revenue recognition since this method is more
practical for water utilitiesthe necessary
supporting data are concrete, reliable and
readily available in the form of issued water
bills. Since the amount of water consumption
is clearly supported and recorded in water bills
and billable at the stated amount at a specified
due date, recording of revenues therefore must
originate from issuance of water bills and not
upon collection of payment.
Under the accrual basis of accounting, receiv-
ables are set up for the amount of unpaid
water bills at the end of the accounting period.
Recognizing receivables is useful for monitor-
ing the collection effort, measure collection
efficiency, manage customer accounts, and
secure fund availability to commit expendi-
tures for business operations.
Water consumption is the major source of
revenue for the water utility but there are
other sources which are realized only upon
actual collection. These types of revenue are
therefore recorded on a cash basis.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 17

Considering the variety of income sources, the
ring-fencing approach further recommends
the use of specific account titles to appro-
priately describe the nature of waterworks
income. These account titles are to be main-
tained in parallel to the NGAS only income
account for waterworks revenues called
Income from Waterworks System.
The waterworks revenues would normally
include the following:
1. Water Sales Revenue. This account refers to
the income arising from water consumption
as evidenced by issued water bills. This is
recorded on accrual basis of accounting.
In our example, the Matubig Waterworks
System should record its water sales
revenue based on the 2009s summary of
water bills in the amount of P4,504,367.00,
equal to the total annual water bills issued.
2. Other Business Income. This is a control-
ling account that consists of collections
from all services provided by the water-
works system for a fee. These are recorded
following the cash basis of accounting
and are evidenced by official receipts.
Subsidiary ledgers shall be maintained for
the following sub-accounts:
a. New connection fees - income from
making new service connections
b. Reconnection fees - income from
reconnections
c. Other service fees - income from
operations which cannot be classified
in other business income accounts,
such as tapping fee, inspection fee, and
metering fee
Example: Based on the summary of collec-
tions prepared by the revenue collection
18 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
officer of Matubig Waterworks System, the
total Other Business Income of the utility
is composed of the following:
Example 7. Other Business Income
Application fee = P110,400.00
Reconnection fee = 150.00
Other service fee = 348,294.45
Other business income = P458,844.45
3. Fines and Penalties-Business Income. This
accounts for the total fines and penalties
charged on late payments of water bills
and recorded using the modified accrual
accounting basis; the amounts can be
obtained from the customers ledgers and/
or official receipts
Step 4. Determine expenses for the year
Basically, expenses in LGUs are classified
into Personal Services (PS) and Maintenance
and Other Operating Expenses (MOOE). PS
includes salaries, allowances, benefits and
other personal service expenses. MOOE
includes all non-salary expenditures such
as the cost of chemicals, pump electricity,
plumbing materials and supplies, minor
repairs and maintenance, and all other
expenses incurred in the ordinary course of
providing water services.
Under the ring-fencing approach, expenses
of the water utility are determined using the
full cost accounting method, i.e., all related
costs or expenses in water service provision
whether directly or indirectly incurred by
the utility will be accounted for in the books
of accounts. Hence, the PS and MOOE are
further classified into Dedicated Expenses and
Shared Expenses.
Dedicated expenses
Dedicated expenses are costs incurred by the utility itself or expenses directly attributable to
water service operations. These costs normally consist of salaries, wages, and fringe benefits for
waterworks personnel, repairs and maintenance of transmission and distribution networks, cost of
electricity for waterworks pumps, cost of chemicals used in water treatment, and other expenses
whose vouchers originate from the waterworks unit.

Example: In the case of Matubig Waterworks System, its allotment and appropriation showed the
following items below. The fully utilized allotments become the basis for determining dedicated
expenses for the utility.

Example 8. Dedicated expenses

Dedicated personal services

Personal services
Salaries and wages - Permanent 975,648.00
Salaries and wages - Casual 308,400.00
PERA 83,000.00
ADCOM 144,000.00
Cash gift 120,000.00
Year-end bonus 81,304.00
Life and retirement insurance contribution 117,077.76
Pag-Ibig contribution 19,572.00
PhilHealth contribution 11,700.00
ECC contribution 8,471.40
Other personnel benefits 72,500.00
Total 1,941,673.16

Dedicated maintenance and other operating expenses

MOOE
Electricity 478,634.00
Repairs and maintenance 302,583.40
Miscellaneous expense 159,417.00
Total 940,634.40

Shared expenses
Shared expenses are costs incurred by other LGU offices, units, or departments that provide
support services to the water utility or all expenses that are indirectly attributable to water service
operations charged against the operations of other offices or units. Being a part of the LGU, the
water utilitys transactions follow accounting and budgeting processes used by the LGU, with costs
normally including a share in operation and maintenance expenses of the local finance units. Some
shared staff include the budget officer who is in charge of budget preparation and release, the
treasurer who maintains and controls cash availability, the accountant who certifies the appropri-
ate obligation of every financial transaction, the local planning and development officer and/or
engineer in the management of water operations, human resource officer who handles staffing,
even the electrician or sanitary inspector, whose time and resources also go to the water service
provision.
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 19
Therefore, there will be Dedicated PS, Dedicated MOOE, Shared PS and Shared MOOE. The
dedicated expenses are recorded at cost while the shared expenses are accounted for using the
system of allocation (Section 3.3).The local budget or the Statement or Registry of Appropriation,
Allotment and Obligation is the basis for determining shared expenses.

Example: The Matubig Waterworks System uses man-hours as the basis for allocating shared costs.
The water utilitys share in the PS and MOOE of LGU offices providing support services are as
follows:

Example 9.1. Shared personal services

Sharing percentage 1% 1% 30% 10% 10% 5%

Personal services Mayor MPDC Engineering Treasury Accounting Budget
Salaries and wages
3,400.80 3,420.72 102,621.60 35,062.80 32,558.40 17,103.60
Permanent
PERA - 60.00 1,800.00 600.00 600.00 300.00
ADCOM 180.00 180.00 5,400.00 1,800.00 1,800.00 900.00
RA 846.60 601.80 18,054.00 6,018.00 6,018.00 3,009.00
TA 846.60 601.80 18,054.00 6,018.00 6,018.00 3,009.00
Cash gift 150.00 150.00 4,500.00 1,500.00 1,500.00 750.00
Year-end bonus 283.40 285.06 8,551.80 2,921.90 2,713.20 1,425.30
Life and retirement insurance
408.10 410.49 12,314.59 4,207.54 3,907.01 2,052.43
contribution
Pag-Ibig contribution 68.04 68.52 2,055.60 702.00 651.60 342.60
PhilHealth contribution 42.00 42.00 1,260.00 435.00 405.00 202.50
ECC contribution 12.00 12.00 360.00 120.00 120.00 60.00
Other personnel benefits 60.00 60.00 1,800.00 600.00 600.00 300.00
Total 6,297.54 5,892.39 176,771.59 59,985.24 56,891.21 29,454.43

Example 9.2. Shared maintenance and other operating expenses

Sharing percentage 1% 1% 15% 25% 10% 1%

MOOEs Mayor MPDC Engineering Treasury Accounting Budget
Travelling 1,094.87 195.00 4,986.00
Office supplies 78.00 3,620.00 112.00
Accountable forms 1,647.25
Electricity 6,486.30
Fidelity bond premiums 6,933.75
Repairs and maintenance 17,154.45
Miscellaneous expense 429.45
Total 1,094.87 273.00 24,070.20 8,581.00 8,606.00 112.00

20 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Step 5. Determine the depreciation expense
In consonance with full cost accounting, depreciating all property, plant and equipment (PPE),
including public infrastructure-artesian wells, reservoirs, pumping stations and conduits is a major
step in the ring-fencing approach. This step is a slight departure from the NGAS. Adopting the
ring-fencing approach means treating the artesian wells, reservoirs, pumping stations and conduits
as PPE and therefore subject to depreciation. Depreciating artesian wells, reservoirs, pumping
stations and conduits is also a way of determining the total value of water utility operations; a basis
for allocating funds for future replacement, rehabilitation or improvement of water facilities; and a
factor in setting the appropriate tariff.

NGAS guidelines using the straight line method with 10% salvage value on depreciating PPE will
be followed. A separate depreciation schedule shall be prepared. The annual depreciation expense
of the water utility will include the depreciable amount of artesian wells, reservoirs, pumping
stations and conduits and other PPE accounts. In determining the economic life of assets, reference
should be made to COA Circular 2005-002 dated 14 April 2005 adopting International Accounting
Standards No. 16 in depreciating those assets considered as part of inventory and to the NWRBs
estimated useful lives in depreciating PPE, including artesian wells, reservoirs, pumping stations
and conduits (see Exhibits 5.1 and 5.2).

Exhibit 5.1 Useful lives of tangible assets that may be considered part of inventory

Description Useful life (years)

A. Office supplies
1 Blackboard/whiteboard 5
2 Copy holder, clamp type with adjustable arm 5
3 Cutter 5
4 Desk tray 3
5 Eraser blackboard 3
6 Mechanical pencil 2
7 Mini calculators 3
8 Pen 2
9 Pencil sharpener 3
10 Puncher 5
11 Ruler 3
12 Scissors 3
13 Sharpener 3
14 Staple wire remover 2
15 Stapler 2
16 Tape dispenser 3
D. Textbooks and instructional materials
75 Textbooks 5
76 Instructional materials 2
F. Other supplies
Computer peripherals

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 21

 Description Useful life (years)
108 Computer cover 2
109 Computer screen 5
110 Diskette storage 2
111 Mouse 2
112 Mouse pad 2
113 Printer cable 5
114 Printer head 5
115 Printer sharing device 5
116 Surge protector 5
Common janitorial supplies
117 Dust pan 2
118 Mop handle 2
119 Pail 2
120 Trash can 5
121 Wastebasket 5
Other inventory items
122 Tea set 3
123 Cups and saucers 3
124 Desk tray 3
125 Dinner plates 3
126 Emergency light 3
127 Rugs, carpets and mats 5
128 Spoon and forks 5
129 Stool 5
130 Pitcher and glass confectionary 3
Hardware and construction supplies
131 Hammer 5
132 Saw 5
133 Plane 5
134 Paint roller 1
135 Paint brush 1
136 Chisel 5
137 Long nose pliers 5
Electrical supplies
138 Extension cord 2
G. School chairs, desks and tables (wood)
139 Chairs 5
140 Desks 5
141 Tables 5
H. Monobloc furniture
142 Chairs 5
143 Tables 5

22 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Exhibit 5.2. Estimated useful lives of property, plant and equipment

Property, plant and equipment Useful life (years)

Deep wells and pumphouses (Artesian wells)

Deepwell casing 15
Pump assembly 10
Motor for submersible pump 5
Motor control for deep well pump 7
Pump house-mixed materials 10
Pump house-reinforced concrete 40
Booster station (pumping stations)
Pump house-mixed materials 10
Pump house-reinforced concrete 40
Pump assembly 20
Motor for booster and line turbine 5
Motor control for booster station 20
Reservoirs
Concrete reservoir 40
Steel overhead tank 25
Steel tank on ground concrete 30
Chlorinating equipment 10
Pipelines (conduits)
Cast/ductile iron pipes 60
Steel pipes with cement lining 40
Steel pipes cylinder type 20
Asbestos and plastic pipes 30
Flow meters
Water meters 7
Service connections 5
Valves and chambers 30
Fire hydrants 20
Building 40
Building improvements 10
Office furniture and fixtures 10
Office equipment 5
Vehicles 5
Tools and equipment 5

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 23

In determining the depreciation expense for the year, simply add more columns to the schedule of
depreciation shown in Example 3one column for the number of years in use, say as of 12/31/2009,
and another for the amount of depreciation for the year.

Example 10. The case of Matubig Waterworks Systems PPEs, the depreciation for the year 2009 is as follows:

Estd Years in Depreciation

Acquisition Annual
Asset description useful use as of expense for
cost depreciation
life 12/31/09 2009
RESERVOIRS
Ground concrete tank - Brgy Silang 228,561.00 40 5,142.62 4 5,142.62
Ground concrete tank - Brgy Oslao 150,000.00 40 3,375.00 13 3,375.00
Ground concrete tank - Brgy Ponong 220,000.00 40 4,950.00 15 4,950.00
Ground concrete - Brgy Banbanon 250,000.00 40 5,625.00 20 5,625.00
Elevated concrete tank - Brgy Magtangale 75,000.00 40 1,687.50 12 1,687.50
Ground concrete - Brgy Linongganan 120,000.00 40 2,700.00 15 2,700.00
Ground concrete tank - Brgy Jubgan 335,000.00 40 7,537.50 5 7,537.50
Ground concrete tank - Brgy Amontay 228,471.00 40 5,140.60 7 5,140.60
Ground intake tank - Brgy Baybay 89,071.00 40 2,004.10 4 2,004.10
Sub-total 1,696,103.00 38,162.32 38,162.32
PUMPING EQUIPMENT
Deep well 150 ft w/ 3HP submersible pump
210,000.00 10 18,900.00 5 18,900.00
- Brgy Silang
Deep well 120 ft w/ 1.5HP submersible Fully
75,000.00 10 6,750.00 10
pump - Brgy Oslao depreciated
Deep well 180 ft w/ 1.5HP submersible Fully
170,000.00 10 15,300.00 10
pump - Brgy Ponong depreciated
Deep well 60 ft w/ 1.5 HP submersible Fully
63,000.00 10 5,670.00 10
pump - Brgy Banbanon depreciated
Deep well 160 ft w/ 2HP submersible pump
120,000.00 10 10,800.00 8 10,800.00
- Brgy Magtangale
Deep well 200 ft w/ 1HP submersible
175,000.00 10 15,750.00 7 15,750.00
pump - Brgy Linongganan
Deep well 250 ft w/ 1.5 HP submersible
325,000.00 10 29,250.00 4 29,250.00
pump - Brgy Jubgan
Deep well 200 ft w/ 1.5HP submersible
220,000.00 10 19,800.00 8 19,800.00
pump - Brgy Amontay
Deep well 200 ft w/ 1.5HP submersible
177,545.00 10 15,979.05 4 15,979.05
pump - Brgy Baybay
Deep well 100 ft w/ 1.5 HP submersible
83,000.00 10 7,470.00 6 7,470.00
pump - Brgy Diaz
Submersible pump 3HP - Brgy Honrado
254,000.00 10 22,860.00 7 22,860.00
Spring
Deep well w/ 1HP submersible pump - Brgy Fully
28,000.00 10 2,520.00 10
Brazil depreciated
Sub-total 1,900,545.00 171,049.05 140,809.05

24 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 Estd Years in Depreciation
Acquisition Annual
Asset description useful use as of expense for
cost depreciation
life 12/31/09 2009
TRANSMISSION and DISTRIBUTION
MAINS
Distribution line 1 500,000.00 30 15,000.00 15 15,000.00
Distribution line 2 1,025,000.00 30 30,750.00 11 30,750.00
Distribution line 3 1,500,000.00 30 45,000.00 9 45,000.00
Distribution line 4 829,180.65 30 24,875.42 6 24,875.42
Transmission line - Brgy Ponong 100,210.00 30 3,006.30 4 3,006.30
Transmission line - Brgy Banbanon 76,977.00 30 2,309.31 5 2,309.31
Pipes - Brgy Macopa 69,250.00 30 2,077.50 3 2,077.50
Sub-total 4,100,617.65 123,018.53 123,018.53
WATER TREATMENT EQUIPMENT
Water chlorinator 17,292.35 10 1,556.31 2 1,556.31
Sub-total 17,292.35 1,556.31 1,556.31
OFFICE FURNITURE and FIXTURES
Fully
Office tables (5 units) 24,250.00 5 4,365.00 5
depreciated
Fully
Filing cabinet 6,935.50 5 1,248.39 5
depreciated
Steel cabinet 11,245.50 5 2,024.19 2 2,024.19
Stand fan 821.65 5 147.9 4 147.90
Desk fan 695 5 125.1 5 125.10
Ceiling fan 928.8 5 167.18 3 167.18
Sub-total 44,876.45 8,077.76 2,464.37
OFFICE EQUIPMENT
Fully
Typewriter 19,474.00 5 3,505.32 5
depreciated
Sub-total 19,474.00 3,505.32 0.00
OTHER MACHINERY and EQUIPMENT
Plumbing tools 55,000.00 5 9,900.00 1 9,900.00
Sub-total 55,000.00 9,900.00 9,900.00
TOTALS 7,833,908.45 355,269.29 315,910.58

Step 6. Determine the bad debts expense

Commensurate to the accrual method of recognizing water service incomes, the allowance for
uncollectible accounts will also be determined at the end of the accounting period. The allowance
represents the amount of accounts receivable estimated to be uncollectible or the non-collection of
long overdue water bills using the aging of accounts receivable. A schedule of aging of receivables
(Exhibit 6) will be prepared to support the estimates.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 25

Exhibit 6. Schedule of aging of receivables

PAST DUE
Customer Customer Total accounts
Current 130 3160 6190 Over 90
name type receivable
days days days days

Total
% Uncollectible
Allowance for doubtful accounts

Example: Below are the ledger balance and the corresponding aging of Accounts Receivables for
Matubig Waterworks System for the year 2009.

Example 11. Ledger balance

Accounts receivable,
beginning balance - P892,881.60
Less: Water bills adjustments - 68,041.00
Adjusted accounts receivable - 824,840.60
Issued water bills, 2009 - 4,504,367.00
Total accounts receivable - 5,329,207.60
Less: Collections on water bills, 2009 - 2,485,076.04
Accounts receivable, ending balance - P 2,844,131.56

Accounts Allowance for doubtful

Age Uncollectible (%)
receivable accounts
130 days past due 1,422,065.78 0.0 -
3160 days past due 711,032.89 2.0 14,220.66
6190 days past due 426,619.73 4.6 19,624.51
Over 90 days past due 284,413.16 8.1 23,037.47
Total 2,844,131.56 56,882.63

To determine the bad debts expense for the year, simply get the difference between the required
balance in the allowance account based on aging of receivables and the beginning balance in the
allowance account.

26 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Example 12. Bad debts expense

Allowance for doubtful accounts - P56,882.63

Less: Allowance, beginning - 17,857.63
Bad debts expense - P39,025.00

Step 7. Determine the financing expense

Some LGU waterworks systems are financed by loans from government financing institutions
(GFIs) or private financing institutions (PFIs). The corresponding interests that accrue for the
accounting period will be reported as expense for the year. Other financing expenses come from
bank charges, commitment fees, documentary stamps expenses and other finance charges.

Example 13. Common Financing Costs

Interest on loans - P2,264,874.13

Other bank charges - 113,243.71
Total - P2,378,117.84

Step 8. Prepare the trial balance

The trial balance reflects the summary of all ledger balances and becomes the basis for the prepara-
tion of ring-fenced financial statements.

Example 14 on the following page shows a sample trial balance worksheet for the case of Matubig
Waterworks System.

Step 9. Prepare the reconstructed financial statements

The ring-fenced financial statements consist of the Income Statement, Balance Sheet and Cash
Flow Statement. The income statement presents the operation results of the water utility for the
year. The balance sheet presents the utilitys financial condition, showing total assets, liabilities, and
equity of the LGU in the waterworks system. The cash flow statement shows how changes in the
balance sheet and income statement accounts affect the utilitys cash position in a particular year.
Using the direct method, compare total cash outflows with total cash inflows. Examples of recon-
structed financial statements are shown in Example 15.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 27

 Example 14. Trial Balance Worksheet

28
TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Account titles
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash in bank 4,280,535.34 4,280,535.34
Accounts receivable 2,844,131.56 2,844,131.56
Allowance for doubtful accounts 56,882.63 56,882.63
Office equipment 117,474.00 117,474.00
Accumulated depreciation - office equipment 17,526.60 17,526.60
Furniture and fixtures 44,876.45 44,876.45
Accumulated depreciation - Furniture and 33,833.97 33,833.97
fixtures
Other machinery and equipment 55,000.00 55,000.00
Accumulated depreciation - Other machinery 9,900.00 9,900.00

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

and equipment
Artesian wells, reservoir, pumping stations 7,714,558.00 7,714,558.00
and conduits
Accumulated depreciation - Artesian wells, 2,681,759.15 2,681,759.15
reservoirs, pumping stations and conduits
Construction in progress - Artesian wells, 25,844,514.99 25,844,514.99
reservoirs, pumping stations and conduits
Guaranty deposits payable 119,500.00 119,500.00
Loans payable - Domestic 22,365,445.64 22,365,445.64
Other payables 2,584,451.50 2,584,451.50
Government equity 9,163,582.90 9,163,582.90
Water sales revenue 4,504,367.00 4,504,367.00
Other business income 458,844.45 458,844.45
Salaries and wages - Permanent 1,169,815.92 1,169,815.92
Salaries and wages - Casual 308,400.00 308,400.00
PERA 86,360.00 86,360.00
ADCOM 154,260.00 154,260.00
RA 34,547.40 34,547.40
 TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Account titles
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
TA 34,547.40 34,547.40
Cash gift 128,550.00 128,550.00
Year-end bonus 97,484.66 97,484.66
Life and retirement insurance contribution 140,377.91 140,377.91
Pag-Ibig contribution 23,460.36 23,460.36
PhilHealth contribution 14,086.50 14,086.50
ECC contribution 9,155.40 9,155.40
Other personnel benefits 75,920.00 75,920.00
Travelling 6,275.87 6,275.87
Office supplies 3,810.00 3,810.00
Accountable forms 1,647.25 1,647.25
Electricity 485,120.30 485,120.30
Fidelity bond premiums 6,933.75 6,933.75
Repairs and maintenance 319,737.85 319,737.85
Miscellaneous expense 159,846.45 159,846.45
Interest expense 2,264,874.13 2,264,874.13
Other financing charges 113,243.71 113,243.71
Bad debts expense 39,025.00 39,025.00
Depreciation expense - FF 2,464.37 2,464.37
Depreciation expense - OME 9,900.00 9,900.00
Depreciation expense - Artesian wells, 303,546.21 303,546.21
reservoirs, pumping stations and conduits
Subsidy from other funds 4,898,386.94 4,898,386.94
TOTALS 46,894,480.78 46,894,480.78 5,993,390.44 9,861,598.39 40,901,090.34 37,032,882.39
Net surplus 3,868,207.95 3,868,207.95
9,861,598.39 9,861,598.39 40,901,090.34 40,901,090.34

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

29
Example 15 Reconstructed Financial Statements

Reconstructed income statement

MATUBIG WATERWORKS SYSTEM

Matubig, Surigao del Norte
INCOME STATEMENT
For the year ended December 31, 2009

Water sales revenue 4,504,367.00

Other business income 458,844.45
Total operating revenues 4,963,211.45
Less: Operating expenses:
Personal services:
Salaries and wages - Permanent 1,169,815.92
Salaries and wages - Casual 308,400.00
PERA 86,360.00
ADCOM 154,260.00
RA 34,547.40
TA 34,547.40
Cash Gift 128,550.00
Year-end bonus 97,484.66
Life and retirement insurance contribution 140,377.91
Pag-Ibig contribution 23,460.36
PhilHealth contribution 14,086.50
ECC contribution 9,155.40
Other personnel benefits 75,920.00
Total personal services 2,276,965.55
Maintenance and other operating expenses:
Travelling 6,275.87
Office supplies 3,810.00
Accountable forms 1,647.25
Electricity 485,120.30
Fidelity bond premiums 6,933.75
Repairs and maintenance 319,737.85
Miscellaneous expense 159,846.45
Total MOOEs 983,371.47
Total cash operating expenses 3,260,337.02
Net operating income before non-cash expenses 1,702,874.43
Less: Non-cash expenses
Bad debts expense 39,025.00
Depreciation expense - FF 2,464.37
Depreciation expense - OME 9,900.00
Depreciation expense - Artesian wells, reservoirs, pumping
stations and conduits 303,546.21
Total non-cash expenses 354,935.58
Net operating income 1,347,938.85
Less: Financing costs:
Interest expense 2,264,874.13
Other financing charges 113,243.71 2,378,117.84
Net income/loss before other items (1,030,178.99)
Add: Subsidy from other funds 4,898,386.94
Net income 3,868,207.95

30 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 Reconstructed balance sheet
MATUBIG WATERWORKS SYSTEM
Matubig, Surigao del Norte
BALANCE SHEET
As of December 31, 2009

ASSETS
Current assets:
Cash in bank 4,280,535.34
Accounts receivable 2,844,131.56
Less: Allowance for doubtful accounts (56,882.63)
Net receivables 2,787,248.93
Total current assets 7,067,784.27

Property, plant and equipment:

Office equipment 117,474.00
Less: Accumulated depreciation - Office equipment (17,526.60)
99,947.40
Furniture and fixtures 44,876.45
Less: Accumulated depreciation - Furniture and fixtures (33,833.97)
11,042.48
Other machinery and equipment 55,000.00
Less: Accumulated depreciation -
Other machinery and equipment (9,900.00)
45,100.00
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Less: Accumulated depreciation - Artesian wells, reservoirs,
Pumping stations and conduits (2,681,759.15)
5,032,798.85
Construction in progress - Artesian wells, reservoirs,
pumping stations and conduits 25,844,514.99
Total property, plant and equipment 31,033,403.72
TOTAL ASSETS 38,101,187.99
LIABILITIES and GOVERNMENT EQUITY
Liabilities
Guaranty deposits payable 119,500.00
Loans payable - Domestic 22,365,445.64
Other payables 2,584,451.50
Total liabilities 25,069,397.14

Government equity
Government equity 9,163,582.90
Add: Retained earnings 3,868,207.95*
Total government equity 13,031,790.85
TOTAL LIABILITIES & GOVERNMENT EQUITY 38,101,187.99

* The balance of retained earnings is equal to the amount of net surplus since this is the first year that ring-fenced financial statements
have been generated for Matubig Waterworks System.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 31

 Statement of cash flows

MATUBIG WATERWORKS SYSTEM

Matubig, Surigao del Norte
CASH FLOW STATEMENT
December 31, 2009

CASH INFLOWS
Collection of receivables 2,485,076.04
Receipt of guarantee deposits 27,600.00
Receipt of other business income 458,844.45
Subsidy from other funds 4,898,386.94
Recoupment of mobilization fee 2,326,006.35
Collection of retention money 1,065,827.80
Total cash inflows 11,261,741.58

CASH OUTFLOWS
Payment of cash expenses 3,260,337.02
Payment of loans 1,988,039.64
Payment of financing charges 2,378,117.84
Payment to contractors 10,658,277.98
Purchase of equipment 98,000.00
Total cash outflows 18,382,772.48

NET CASH INFLOWS (7,121,030.90)

Add: Cash balance beginning 11,401,566.24

CASH BALANCE, end 4,280,535.34

Step 10. Close temporary accounts

Closing the temporary (income statement) accounts to income and expense summary and to
retained earnings will leave permanent (balance sheet) accounts ready to transfer to the succeed-
ing year (the start of full implementation of ring-fencing) and for maintenance of separate books of
accounts and ring-fencing transition activities.

Example 16. Sample closing journal entries

Particulars Debit Credit

JEV # 14
Water sales revenue 4,504,367.00
Other business income 458,844.45
Subsidy from other funds 4,898,386.94
Income and expense summary 9,861,598.39
To close the income accounts

32 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 Particulars Debit Credit
JEV # 15
Income and expense summary 5,993,390.44
Salaries and wages - Permanent 1,169,815.92
Salaries and wages - Casual 308,400.00
PERA 86,360.00
ADCOM 154,260.00
RA 34,547.40
TA 34,547.40
Cash gift 128,550.00
Year-end bonus 97,484.66
Life and retirement insurance contribution 140,377.91
Pag-Ibig contribution 23,460.36
PhilHealth contribution 14,086.50
ECC contribution 9,155.40
Other personnel benefits 75,920.00
Travelling 6,275.87
Office supplies 3,810.00
Accountable forms 1,647.25
Electricity 485,120.30
Fidelity bond premiums 6,933.75
Repairs and maintenance 319,737.85
Miscellaneous expense 159,846.45
Bad debts expense 39,025.00
Depreciation expense - FF 2,464.37
Depreciation expense - OME 9,900.00
Depreciation expense - Artesian wells, reservoirs, pumping
stations and conduits 303,546.21
Interest expense 2,264,874.13
Other financing charges to close the expense accounts 113,243.71

JEV # 16
Income and expense summary 3,868,207.95
Retained earnings 3,868,207.95
To close net income to retained earnings

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 33

Summary Steps
Accounts Reconstruction

1 Set up the books of accounts

Establish the balance sheet accounts

2 beginning balances

3 Determine revenues for the year

4 Determine expenses for the year

5 Determine the depreciation expense

6 Determine the bad debts expense

7 Determine the financing expense

8 Prepare the trial balance

9 Prepare the reconstructed financial statements

10 Close temporary accounts

34 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM


T his section of the Guide shows the
systems and procedures necessary to fully
implement the ring-fencing of water utility
accounts. We focus on effective maintenance of
ring-fenced accounts after successful accounts
reconstruction. This section further clarifies
some gray areas in the ring-fencing system.
3.1 PARALLEL BOOKS
As provided for in the LGC and NGAS, a special
account for the waterworks system is main-
tained under the general fund. This means that
water service operations still form part of the
Box 2. Books of accounts and chart of accounts under the ring-fencing system and the NGAS
Ring-fencing system
Books of accounts
Journals
1. Cash receipts journal
2. Cash disbursements journal
3. Check disbursements journal
4. General journal
5. Bill register
Ledgers
6. General ledger
7. Subsidiary ledger
35
SECTI O N T HR EE
total general fund with accounts pertaining to
water operations. The accrual basis of account-
ing is used for water revenues and expenses and
full costing accounting for operating expenses.
The water utilitys books of accounts run parallel
to equivalent accounts in the general fund.
One of the most important clarifications is the
maintenance of ring-fencing books of accounts
for the waterworks system parallel to LGU
books of accounts or in the general fund. Box 2
shows the parallel books and chart of accounts
under the NGAS and ring-fencing system.
NGAS
Books of accounts
Journals
1. Cash receipts journal
2. Cash disbursements journal
3. Check disbursements journal
4. General journal
Ledgers
5. Subsidiary ledger
 Ring-fencing system NGAS
Chart of accounts Chart of accounts
Asset accounts
1. Accounts receivable 1. Accounts receivable
2. Allowance for doubtful accounts 2. Allowance for doubtful accounts
3. Artesian wells, reservoirs, pumping stations and 3. Public infrastructures - Artesian wells, reservoirs,
conduits pumping stations and conduits
4. Accumulated depreciation - Artesian wells, reservoirs, 4. Other assets
pumping stations and conduits
5. Other assets
Liability accounts
1. Guaranty deposits payable 1. Guaranty deposits payable
2. Other payables 2. Other payables
Income accounts
1. Water sales revenue 1. Income from waterworks system
2. Other business income
3. Fines and penalties
Expense accounts
Personal services
a. Salaries and wages - Dedicated
1. Salaries and wages - Regular 1. Salaries and wages - Regular
2. Salaries and wages - Casual 2. Salaries and wages - Casual
3. Salaries and wages - Contractual 3. Salaries and wages - Contractual
b. Salaries and wages - Shared 4. Salaries and wages - Part-time
4. Salaries and wages - Part-time

MOOE
1. Chemicals 1. Supplies and materials expenses
2. Electricity expense - Dedicated 2. Electricity expenses
3. Electricity expense - Shared 3. Bad debts expenses
4. Bad Debts expenses
5. Depreciation expense - Artesian wells, reservoirs,
pumping stations and conduits
Other items
1. Subsidy from LGU funds 1. Subsidy from other funds

3.2 BOOKKEEPING Scenario 1. The ring-fenced water utility

accounts are maintained by the utilitys own
The officer in charge of the parallel books
bookkeeper, who is under the supervision of
of accounts must be specifically identified.
the local accountant. The ring-fencing system
This assignment should be supported by
encourages the creation of a separate water-
an executive order or a Sangguniang Bayan
works unit with its own bookkeeper.
resolution, especially when unit heads such as
the local accountant are involved.
Scenario 2. The ring-fenced water utility
accounts are maintained by the accounting
In the case of ring-fencing starters, LGUs may
staff member who is under the supervision of
employ any of the three scenarios to maintain
the local accountant.
ring-fenced water utility books of accounts.

36 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Scenario 3. The maintenance of ring-fenced
water utility accounts is given as an additional
responsibility of the local accountant.
Bookkeeping will basically follow the usual
government accounting procedures under
NGAS, except for the specific methodologies
discussed in Section 2.
3.3 SYSTEM OF ALLOCATING SHARED
EXPENSES
In relation to full cost accounting of expenses
in ring-fencing, the totality of costs incurred to
generate water revenues is taken into account.
The PS and MOOE incurred by the water utility
itself and by other LGU units providing support
services to the water utility are all accounted
for. It is therefore necessary to establish a
system of allocating shared costs using any or a
combination of the following options:
1. Apply a flat rate
The LGU may agree on a flat rate, stated either
as a ratio or a percentage, to apply to all shared
PS and MOOE. All identified shared costs or
expenses are multiplied by the agreed flat rate
to get the share of the water utility unit.
2. Use ratio and proportion
The LGU may choose to use the ratio and
proportion of the number of water utility
personnel in relation to total LGU personnel.
This is computed by dividing the number of
water utility personnel by the number of LGU
personnel and afterward applying the factor by
multiplying it with identified shared costs or
expenses.
Example: In an LGU where 15 of 149
employees are waterworks personnel, the
factor can be computed as follows:
Total waterworks employees = 15 = 10.06%
Total LGU employees 149
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
3. Count man-hours
The LGU may use man-hours as the basis
for sharing. This can be done by calculating
man-hours spent by support personnel on
water utility operations as a proportion of total
work hours. One-on-one interviews may be
conducted to get the actual number of hours
spent on water utility operations. This is a
more calibrated way of determining the factor
notwithstanding rough estimates of hours. To
get the water utilitys share, multiply the factor
by the amount of shared costs or expenses.
The water utility may also apply a customized
method of allocating its sharable costs. It has
the option of adopting a fixed system of alloca-
tion by stipulation in its financial management
guidelines. Or if the allocation tends to vary
(especially if based on actual man-hours), an
LGU officer or the local accountant may be
assigned to fix cost allocation at the time of
report preparation.
3.4 ACCOUNTING AND FINANCIAL
REPORTING SYSTEM
In the year following the accounts reconstruc-
tion period, the maintenance of separate books
of accounts should be fully implemented.
During this period, the following accounting
and financial reporting procedures should be
observed.
3.4.1 Set up parallel books of accounts
The waterworks system units bookkeeper, or
the local accountant as the case may be, will
set up the following books of accounts for all
waterworks transactions:
a. Cash Receipts Journal. This is the monthly
special journal used to record all cash
receipts or collections of the waterworks
system. This may be generated from
monthly water bill collection, fees from
other water services, and from borrowings.
37
b. Cash Disbursements Journal. This is the
monthly special journal used to record cash
payments, primarily payments of salaries
and wages of the waterworks systems
dedicated staff and liquidation of cash
advances.
c. Check Disbursements Journal. This is the
monthly special journal used to record
transaction payments by check.
d. Bill Register. This is a monthly record of
water sales. As in sales journals, all monthly
receivables and sales are recorded in this
special journal.
e. General Journal. This is used to record all
non-cash transactions or those that cannot
be recorded in any of the special journals.
f. General Ledger. The summary of all trans-
actions within one account is shown in
this book. Each account of the waterworks
system must be assigned one page in the
general ledger, including assets, liabilities,
equity, income and expenses.
g. Subsidiary Ledgers. These break down a
single general ledger account and contain
details on the balances of the general ledger
account. See Box 3 for the general ledger
controlling accounts and corresponding
subsidiary ledger accounts.
Box 3. Subsidiary ledgers for major controlling accounts
in the general ledger
General ledger accounts
Subsidiary ledger
accounts
Accounts receivables a. Customer ledger cards
Other payables a. Due to (specify
agency)
b. Payable (specify fund)
Other business income a. New connection fees
b. Reconnection fees
c. Other service fees
(specify)
38 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
3.4.2 Set up parallel cash books
All cash receipts and cash disbursements of
the local government are controlled by the
local treasurer. With the establishment of a
separate bank account for the water utility,
the treasurer shall set up and maintain the
following cashbooks for the water utility:
a. Cashbook - Cash in Bank (Exhibit 9)
b. Cashbook - Cash in Treasury (Exhibit 10)
3.4.3 Record all water sales and other revenues
The revenue accounts of the waterworks
system consist of the following:
a. Water Sales Revenues. This refers to all
income derived from water consumption
supported by water bills. Using accrual
basis of accounting, the water sales
revenues are reported monthly in the bills
register.
b. Other Business Income. This refers to
all income derived from water service
provision other than water consumption.
These are recorded based on actual collec-
tions. A subsidiary ledger is maintained for
new connection fees (fees charged on new
applications), reconnection fees, and other
service fees (fees on other services such as
inspection, calibration, repair, etc.).
c. Fines and Penalties. All revenues earned
from fines, penalties and surcharges
for overdue and unpaid water bills are
recorded using the modified accrual
basis. These revenues are recorded in
the accounting period in which they are
collected.
d. Subsidy from LGU funds. This refers to
the amount of LGU funds received by the
waterworks system as well as to the water-
works systems obligations paid for by LGU
funds.
3.4.4 Provide separate official receipts
Separate official receipt (OR) booklets shall
be assigned by the local treasurer for the
exclusive use of the waterworks system. The
ORs are used to document all waterworks
collections such as water bills, new connection
fees, reconnection fees, fines and penalties,
other service fees, and other waterworks
receipts.
The bill collector or the revenue collec-
tion officer assigned by the local treasurer
shall take custody and responsibility for the
ORs. Copies of issued ORs are attached to
the Report of Collection and Deposits and
form part of the cash remittance to the local
treasurer.
3.4.5 Account all operation and maintenance
costs of the water utility
All costs incurred directly (dedicated
expenses) or indirectly (shared expenses)
by the waterworks system in delivering
water services must be fully accounted for
and reported. Dedicated expenses are those
incurred by the waterworks itself and are
accounted and reported at cost. Shared
expenses are expenses incurred by other
LGU units or departments in connection
with the delivery of water services. These are
recorded using a system of allocating shared
costs (Section 3.3) and reported based on the
computed share of the water utility.
3.4.6 File a copy of disbursement vouchers and
supporting documents
The LGU-run water utility shall be consid-
ered a separate unit whether or not it has
a physically segregated office. This means
the waterworks shall maintain its own filing
system. If the LGU used to prepare three
copies per transaction, an additional copy of
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
the disbursement voucher for those related
to water service provision shall be made and
furnished to the waterworks unit for their own
records.
3.4.7 Prepare journal entry vouchers
Journal entry vouchers (JEVs) record the
accounting entries that form part of every
transaction, from receipts to disbursements of
funds, from acquisition to disposal of proper-
ties. For ring-fenced LGU-run water utility
transactions, the following processes shall be
observed:
a. All financial transactions shall follow
the regular LGU accounting process.
For recurring transactions, journal entry
vouchers are to be prepared the usual way,
assigned with appropriate accounting
entries. Examples are payroll transac-
tions, bills payments, payment of recurring
expenses, loan repayments, and govern-
ment remittances.
b. For transactions recorded monthly, JEVs
are to be prepared for water revenues and
shared expenses. Issued water bills are
supported by the monthly billing summary
forwarded by the customer accounts man-
agement section. Shared expenses are also
supported by the list of sharable transac-
tions and corresponding computations
based on the system of allocation adopted
by the LGU.
c. For transactions determined only at the
end of the year, JEVs are prepared for the
depreciation, including public infrastruc-
ture accounts, allowance for doubtful
accounts, interest expense and other shared
costs. The supporting documents include
schedules of depreciation, aging of receiv-
ables, and shared costs computation.
39
3.4.8 Reconcile accounts monthly
The reconciliation of the water utilitys
parallel accounts with general fund accounts
shall be done monthly. Total collections
from water bills, other business incomes,
and service fees (revenue accounts) will
be reconciled with total income from the
waterworks account in the general fund. For
shared expenses, the reconciliation shall look
into the amounts of obligations on which the
allocation was based. The LGU office or unit
which provided the appropriation shall also be
considered in the reconciliation.
Bank reconciliation must be done monthly
to monitor the running balance of the water
utilitys separate bank accounts.
3.4.9 Prepare periodic ring-fenced financial
reports
The financial statements of the waterworks
system are prepared to allow fair reporting
of expenses, revenues, assets, and liabilities
for a particular period. The Trial Balance and
Income Statement are to be prepared on a
monthly basis and shall be submitted to the
LCE and LFC within 15 days following the
end of each month. The Balance Sheet and
Statement of Cash Flow are to be prepared
annually and made available within two
months from the close of the year.
3.5 MONITORING AND EVALUATION
Regular monitoring and evaluation (M&E) can
help the utility in improving service delivery,
40 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
planning and allocating resources, and demon-
strating results to consumers and the general
public as part of accountability. Periodic
M&E results can be used as basis for strategic
business planning and for the preparation of
performance improvement plans and business
plans.
The two most common monitoring and evalua-
tion processes adopted in ring-fencing are
aging of accounts receivables and financial
statement analysis using key performance
indicators (KPIs).
1. Monthly Aging of Accounts Receivable
(Exhibit 6). The aging of receivables are
used to monitor past due accounts and
to evaluate the utilitys collection efforts.
It shall be prepared monthly and made
available within 15 days after the close of
each month.
2. Financial Statement Analysis. The annual
ring-fenced financial statements shall
be accompanied by financial statement
analysis using the common KPIs used in
this Guide (Section 4).The financial per-
formance analysis shall be made available
within two months from the close of the
year.
All the above reports shall be prepared by
the utilitys bookkeeper or local accountant.
Copies shall be furnished to the water supervi-
sor, LCE, local Sanggunian and/or other regu-
latory body, and the policy governing board.

T his section presents the usefulness of
ring-fenced financial information in
assessing water utility performance, thereby
informing the decision-making process. This
kind of evaluation can be done at the end of the
accounts reconstruction period as well as that
of the ring-fencing system implementation.
This section is useful in the preparation and
updating of business plans for the water utility.
4.1 BENCHMARKING KEY
PERFORMANCE INDICATORS
Using key performance indicators (KPIs)
enables the measurement of performance of the
water utility for a given period and tracks its
progression in succeeding periods.
Benchmarking is a data collection process for
purposes of identifying best practices, setting
standards and comparing performance by a
group of similar entities. Two types of bench-
marking are referred to in this Guide: industry
and internal. Industry benchmarking looks into
how the water utility fares in terms of perfor-
mance vis--vis other service providers within
the same industry. Internal benchmarking on
the other hand looks into meaningful compari-
sons between the utilitys current and prior
period performances.
41
SECTI O N FOU R
While private business industry has used
benchmarking for many years now, the public
sector, such as LGU-run water utilities, has
only recently adopted the process. For industry
benchmarking, the ring-fencing system used
results from Performance Benchmarking
of Small Towns Water Supply: Enhancing
Performance in the Delivery of WATSAN
Services prepared by the Water Supply and
Sanitation Program Management Office of the
Department of Interior and Local Government
(DILG) in 2008 (Exhibit 1).
In LGU-run water utilities, benchmarking
can be utilized as a management tool to help
improve efficiency and effectiveness of pro-
cedures and processes. It can be utilized to
improve and monitor strategic planning and
provide an assessment of the organization's
strengths and weaknesses. Benchmarking KPI
results can provide management with specific
problem-solving techniques and decision-
making tips to minimize areas of weakness,
maximize areas of strength, and design
measures to reform or improve performance.
Evaluating the performance of an LGU-run
water utility can be done by following the steps
below.
Step 1. Choose the key performance indicators.
It is critical to limit KPIs to those success
factors essential in decision making. Many
things may be measurable but not all measur-
able things indicate success. The ring-fencing
team should keep the number of KPIs small
so as to focus attention on achieving desired
results. The team is urged to follow the KPIs
used in Benchmarking of Small Towns Water
Utilities as described below.
a. Service coverage ratio/population served
shows the percentage of population in the
service area that receives water from the
utility. Coverage levels of 60% are generally
considered normal.
b. Staffing ratio shows efficiency in utilization
of personnel, i.e., whether the utility is over-
or understaffed. In small water utilities like
LGU waterworks, 7 employees are normal
per 1,000 household connections.
c. Average monthly consumption shows how
much water is used by each connection per
month on average. An average monthly con-
sumption of 15 to 18 cubic meters is consid-
ered adequate to meet health and hygiene
requirements without being wasteful.
d. Non-revenue water is the volume of water
produced that does not generate income.
Over 25% NRW is an indication of ineffi-
ciency in the water supply system.
e. Current ratio is a test of liquidity. This
measures capacity to pay current liabili-
ties using current assets. The ideal ratio
is 2:1 for current assets to cover current
liabilities.
f. Operating ratio measures the proportion
of expenses to revenues. An operating ratio
less than 1 means that revenues from tariffs
are able to cover operation and mainte-
nance costs, while a ratio above 1 means the
utility is loss-making. For small utilities,
85% is ideal.
42 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
g. Return on assets measures the capacity of
each peso of asset to generate profits. Since
a water utility is a capital-intensive invest-
ment, 1% return is considered normal.
h. Collection period is the number of days it
takes to collect receivables from customers.
A collection period of longer than 1.8
months is an effect of poor collection
efforts.
i. Collection efficiency measures the pro-
portion of billings collected within the
period. Revenue collection efficiency must
not be less than 90%. Some utilities may
have collection efficiencies higher than
100%, indicating that total collections for
the period included payment of bills for
previous periods.
j. Average tariff per cu. m. measures peso
amount per cubic meter. The average rate
per cubic meter among small utilities is
P13.06.
k. Average cost per cu. m. shows average cost
per cubic meter sold. When compared with
average tariff, indicates whether or not
there has been cost recovery.
l. Cost recovery ratio measures the propor-
tion of operating costs covered by the tariff.
This ratio is expected to be at least 100%,
which means revenues are enough to cover
all expenses.
m. Subsidy level measures the proportion of
total operating costs charged to LGU funds.
Zero-subsidy level is ideal for a public
utility and economic enterprise such as a
waterworks.
Step 2. Compute for the KPI results.
After successfully reconstructing the water
utility accounts (Section 2), the income
statement, balance sheet, and cash flow state-
ments for the waterworks system can now be
generated, followed by analysis of financial
and operational performance. This is one way
of determining the impact of ring-fencing. The
financial data reflected in the reconstructed
reports are used to compute the KPIs shown
in Box 4 below. The results speak of actual
utility performance for the particular year of
evaluation.
Box 4. Key performance indicators and formulas
compare the results with the previous years
KPIs (internal benchmarking) to measure
progress in terms of financial and operational
improvements.
For newly ring-fenced water utilities, internal
benchmarking may be done by comparing

KPI Formula

Current Assets
Current Ratio
Current Liabilities
Total Operating Expenses
Operating Ratio (in %)
Total Operating Revenues
Net Income
Return on Assets (in %)
Total Assets
Accounts Receivables, end
Collection Period (in months)
Water Revenues 12 months
Total Annual Collections
Collection Efficiency (in %)
Total Annual Billings
Water Sales Revenues
Average Tariff / m3
Total Volume Billed
Cash Operating Expenses
Cost Recovery Ratio (in %)
Operating Revenues
Subsidy Level (in %) 100% - Cost Recovery Ratio
Total Operating Expenses
Average Cost / m3
Total Volume Billed
No. of connections x No. of persons per hh
Service Coverage Ratio (in %)
Population in Administrative Area
No. of Staff
Staffing Ratio
No. of connections 1000
Total Volume Billed 12 months
Monthly Average Consumption (in m3)
No. of connections
Total Volume Produced Total Volume Billed
Non-Revenue Water (in %)
Total Volume Billed

Step 3. Benchmark the KPI values.
Having computed for the KPI values, a com-
parison of the utilitys performance for a given
year can be made in two ways. One, compare
the results with the industry average (industry
benchmarking) to check how the utility
fared compared to other water utilities. Two,
the current years financial statements to the
budget or set targets, if any.
Step 4. Communicate your KPI results.
Computing for KPIs after accounts recon-
struction should be done periodically, either
monthly, quarterly, or annually. However KPI

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 43

results are usedwhether as performance
management tool or as motivatorthe most
important thing is to communicate the results
to management, particularly the LCE, or to
other responsible centers most interested in the
information, such as the local Sanggunian or
any regulator and/or the policy governing body.
4.2 CONFERENCE WITH LOCAL
OFFICIALS
Once the KPIs are computed and defined, the
significance of every value must be communi-
cated to all key players in the utility, particu-
larly the decision makers or the LGU officials
(i.e., the executive and local Sanggunian).
The ring-fencing team may call for a confer-
ence or meeting to facilitate dialogue; this
is important when there is a need to agree
and/or to resolve a problem. A dialogue may
Figure 2. Discussion points in conference with local officials
Overview of ring-fencing system
Ring-fenced financial statements
Key performance indicators and values
Next steps
44 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
be conducted at an executive-legislative
agenda meeting, convening both the local
chief executive and the members of the local
Sanggunian. A conference call may also be
arranged to accommodate members unable to
be physically present.
The conference and open forum may be
presided upon and moderated by the local
government operations officer (LGOO) or
the local planning and development officer
(LPDC). The major topics shall be presented
by the water unit head supported by the local
accountant. Figure 2 presents the discussion
points with local officials during the confer-
ence. The overview of the ring-fencing system
is applicable only for ring-fencing starters;
succeeding years conferences shall start
with the presentation of periodic ring-fenced
financial statements or business plans, if any.
Walk through the ring-fencing process flow, the steps in
accounts reconstruction, and the water utility profile
Major assumptions, system of allocation of shared
expenses, reconstructed income statement, balance sheet,
and cash flow statement
Key performance indicators used and their definitions, KPI
formulas and results, benchmarking with industry average
and ideal values, discussion on current performance
Open forum: Discussion on next steps, opening of
bank account, formulation and adoption of financial
management guidelines, business planning
The discussion should include a focused
review of ring-fenced information translated
into KPI results that reflect your utilitys per-
formancedefining the utilitys current status
and revealing the utilitys weaknesses.
The ring-fencing team should win the interest
of local officials, get a reaffirmation of their
commitment to water utility reforms, and
obtain support for more action plans.
Most baseline data for ring-fencing beginners
would usually show negative results in many
KPIs. Management therefore, particularly
the LGU officials, should make the decision
about the best use of these KPI results, such as
preparation of business plans or performance
improvement plans.
4.3 STRATEGIC BUSINESS PLANNING
The ring-fencing approach facilitates the
reconstruction of separate accounts reflective
of the water utilitys performance. Through
the use of KPIs, ring-fencing has made
financial information relevant to manage-
ment decision making. Management is able
to measure the true operational and financial
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
performance of the water utility, and at the
same time discover the utilitys potential to
become a viable and self-sustaining economic
enterprise.
Establishing a viable and sustainable public
utility and economic enterprise can be
achieved through strategic business planning.
A five-year business plan is ideal because it
transcends the three-year term of the local
officials. Whether the incumbent officials are
retained or a new set of officials are elected, a
point of reference is readily available. Another
way to concretize goals and objectives is
through the preparation of performance
improvement plans, which can also be made
part of business plans.
The ring-fencing team should obtain the
approval of local government officials for
the conduct of strategic business planning
for the water utility. An executive order shall
be issued to this effect, creating the team
and setting the deadline for presentation of
business plans. This must be the next big step
agreed upon during the conference with local
officials.
45
Summary Steps
Evaluation of Water Utility Performance

1 Choose your KPIs

2 Compute your KPI results

3 Benchmark your KPI values with

industry average and/or budget

4 Communicate your KPI results to

authorities and stakeholders

46 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM


T he successful reconstruction of water
utility accounts can best be complemented
with the formulation of the financial manage-
ment guidelines (FMG) for the water utility
unit. It is best to define all these guidelines
before fully implementing the ring-fencing
system. This section of the Guide discusses
in detail the basic steps and procedures to
follow, as well as requirements in formulating,
reviewing, institutionalizing, and implement-
ing the ring-fencing financial management
guidelines.
5.1 FORMULATION
Detailed guidelines should be established for
the financial management practices of the
water utility as an economic enterprise. The
guidelines shall set the activities by which the
LGU-run water utility manages its finances.
The guidelines should also spell out functions
and responsibilities of all accountable officers
and employees directly or indirectly involved
in the utilitys financial managementfrom
financial planning and budgeting to recording,
monitoring and control, treasury management
and audit, and fixed asset management. It may
also include policies to institutionalize the
unique processes and methodologies of the
ring-fencing system.
47
SECTI O N F I V E
The drafting of the financial management
guidelines governing the water utilitys
financial operations shall be spearheaded by
the ring-fencing team. Since it is a process of
bringing together planning, budgeting, account-
ing, financial reporting, internal control, pro-
curement, disbursement and evaluation of the
water utilitys performance into one document,
all concerned LGU officers shall be involved,
whether or not they are members of the team.
The presence and active participation of the
local budget officer, treasurer, local planning
officer, and accountant is vital in ensuring the
drafting of efficient and effective financial
management guidelines.
The guidelines should include the following:
5.1.1 Rationale
This section of the guideline presents the
ultimate goal of ring-fencingthe establish-
ment of the water utility as a financially viable
and sustainable economic enterprise, able to
generate revenues to cover its operations and
maintenance costs and to provide for improve-
ment and expansion so that water service can
reach the poor communities. It may free LGU
funds from the need to subsidize the water
utility operations so that they can be used for
other social services.
This section emphasizes the fact that ring-
fencing assures the availability of reliable
information to (1) show the true performance
of the water utility, (2) have a transparent basis
for tariff-setting, (3) effectively monitor and
track the utilitys financial performance, and
(4) facilitate management and operational
changes and improvements.
To provide the legal basis for adopting a
ring-fenced system and subsequently institut-
ing the financial management guidelines for
ring-fencing, cite the executive order or the SB
resolution affirming the LGUs commitment
to adopt ring-fencing as a reform measure and
consequently providing for the formation of
the ring-fencing team.
5.1.2 Objective
Briefly state the objective of the guidelines
governing the financial management activities
of the water utility. The basic objective of the
financial management guidelines is to establish
the processes, procedures and methodologies
for generating reliable and relevant financial
information on the water utilitys operations.
5.1.3 Principles
The guidelines must reiterate the importance
of using the New Government Accounting
System (NGAS) as the operational framework
of the ring-fencing approach. NGAS provi-
sions will be observed, particularly the accrual
method of accounting for water revenues
and full cost accounting for water utility
expenses. This section must emphasize the
use of accounting and financial reporting for
special accounts, like the waterworks system,
to signify that it is not simply following the
Subsidiary Ledger System but rather a more
comprehensive accounting and financial
reporting system to generate complete
financial reports about the water utilitys
operations and financial condition.
5.1.4 Definition of terms
For better context and consistency, the
guideline should explain the following terms
and concepts:
Ring-fencing
Full-cost accounting
Water utility
Public Utility
Economic enterprise
Financially viable and sustainable
Major repairs and maintenance
Dedicated expenses
Shared expenses
Income statement (operational definition)
Balance sheet (operational definition)
Cash flow statement (operational
definition)
5.1.5 Processes, procedures and methodologies
The main section of the guidelines discusses
in detail the processes, procedures and meth-
odologies involved in the financial manage-
ment of ring-fenced water utility accounts. It
spells out activities involving finance under
the six major components: Billing; Collection;
Property, Plant and Equipment; Budgeting;
Accounting and Reporting; and Monitoring.
1. Under billing, the accrual method of
accounting for water revenues is empha-
sized. Revenue is recognized upon issuance
of water bills and not upon the collection of
payments. In this way, receivables are set
up for the amount of water bills uncollected

48 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 at the end of the accounting period. And
in turn the collection effort is monitored,
collection efficiency is measured, customer
accounts are managed, and fund availability
is ensured.
2. Treasury or cash management is the focus
of the collection component. The internal
control system covers the issuance of
official receipts, remittances and deposits
of collections. The opening of a separate
bank account and maintenance of the
corresponding cashbook is stipulated as a
minimum requirement.
3. In the property, plant and equipment
component, depreciation is highlighted.
The ring-fencing methodology involves
subjecting public infrastructure (Artesian
wells, reservoirs, pumping stations and
conduits) to depreciation. This is a slight
departure from the NGAS which exempts
public infrastructure accounts from
depreciation. This is a necessary approach
to determine the total value of water
utility operations as it provides a basis for
allocating funds for future replacement,
rehabilitation or improvement of water
facilities, and a factor in the determination
of appropriate tariff.
4. The creation of a separate budget for the
water utility is emphasized in the budgeting
component. The estimates for annual water
income shall originate from the water
utility unit, prepared by the unit head. To
ensure reasonableness of estimates of water
income, these will be based on past experi-
ences and trends. The establishment of
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
separate budget items for the water utility
is another success indicator of ring-fencing.
5. Accounting for total expenses must take
place in the accounting and reporting
component. This full cost accounting
involves taking into account total costs
incurred by the water utility, whether
incurred directly or by other LGU units in
relation to water service provision. Under
this method, expenses are further classi-
fied into dedicated expenses and shared
expenses. The system of allocating shared
costs may be patterned after the options
provided in this Guide or further custom-
ized according to the LGUs specifications.
If shared costs fluctuate periodically, an
officer should be assigned to fix the basis
for allocation. Initially, pending COA recog-
nition, the periodic preparation of ring-
fenced financial statements will be used
mainly for managerial purposes. Thus, the
reporting component shall also consider
the reporting trail, from preparation to use
of the information.
6. Under the monitoring component, the
periodic evaluation of KPIs should be
discussed, and the operational efficiency
and effectiveness of the water utility should
be established. It is appropriate to mention
the regulatory body which participates
in monitoring the utilitys performance.
This may be under consensual agreement
with the NWRB, the local Sanggunian or
its committee on public utilities, or other
equivalent.
49
Exhibit 7. Sample ring-fencing financial management guidelines

Ring-Fencing Financial Management Guidelines

Mabuhay Waterworks System
Municipality of Mabuhay

I. Rationale
As a provider of reliable and quality water supply service, the Mabuhay Waterworks System aims
to become a financially viable and sustainable economic enterprise, able to meet its operations
and maintenance requirements and provide funds for improvement and expansion of the water
service to reach all Mabuhay constituents, especially its poor communities.

Reforms in financial management are necessary to (a) show the utilitys actual performance
levels, (b) have a transparent basis for tariff-setting, (c) enable effective monitoring and tracking
of financial performance, and, (d) facilitate management and operational changes and improve-
ments. The LGU of Mabuhay therefore adopts the ring-fencing approach to establish separate
records of operational activities and financial transactions for the waterworks system.

The acceptance of the ring-fencing approach into the system of the local government is fully
supported by the Local Chief Executive as per Executive Order No. 008, series of 2009 affirming
the LGUs commitment to adopt ring-fencing as a utility reform measure and organize the ring-
fencing team.

II. Objective
The ring-fencing financial management guidelines are hereby formulated to establish the
processes, procedures and methodologies to generate accurate and relevant financial informa-
tion about the performance of Mabuhay Waterworks System.

III. Principles
The ring-fencing of financial information shall operate within the NGAS environment. The NGAS
provisions will remain valid with particular emphasis on the accrual method of accounting for
water revenues and full cost accounting for water utility expenses. The accounting and financial
reporting for special accounts provided for in the NGAS is overemphasized; it is not simply
following the Subsidiary Ledger System but rather a more comprehensive accounting and financial
reporting system to generate complete financial information for the water utility accounts.

IV. Definition of terms

Ring-fencing is the financial arrangement applied to a water utility whereby the activities and
financial accounts associated with water service provision are segregated or fenced off from the
general accounts of the LGU running it.

Full cost accounting is the method used to account for total operation and maintenance costs,
taking into consideration the costs incurred by the utility and those by other LGU units providing
support services to waterworks unit at just share.

Water utility or utility refers to the waterworks system run by the LGU as a separate unit or
department.

50 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Public utility is a revenue-raising undertaking created for the purpose of providing basic service,
like water, to the general public which cannot be provided adequately by the private sector.

Economic enterprise is an income-generating establishment created to improve production and

delivery of basic goods or services for a specific market or client group.

Financially viable and sustainable means the water utility is able to generate revenues sufficient
to meet its operation and maintenance and capital requirements, without sacrificing affordability,
economic viability and social responsibility.

Dedicated expense refers to cost incurred by the utility or expenses directly attributable to the
water service unit.

Shared expense refers to costs incurred by other LGU offices, units or departments that provide
support services for the utility or all expenses that are indirectly attributable to the water
service unit.

Income statement is the ring-fenced financial report showing actual performance of the water
utility in terms of revenue generation and costs incurred for operation and maintenance.

Balance sheet is the ring-fenced financial report presenting the condition of the water utility as a
public utility and economic enterprise in terms of assets, liabilities and LGU equity.

Cash flow statement is the ring-fenced financial report summarizing all the cash activities of the
waterworks system.

Key performance indicators (KPIs) are quantifiable measurements of the utilitys operational and
financial performance that reflect its critical success or failure factors.

V. Processes, procedures, and methodologies

A. Billing
1. Municipal Ordinance No. 272-2002 provides for the rules and regulations for the waterworks
system operations, particularly billing and collection policies. Any addendum or amending
ordinances affecting the operations of the waterworks system also apply.
2. The monthly water bill for each connection shall indicate the current volume consumed and
the corresponding amount billed. It shall also show in detail previous unpaid water bills,
penalties, adjustments and other charges.
3. The waterworks system office shall prepare a monthly summary of water bills and shall
forward this to the accounting office for recording in the books of accounts.
4. The following types of income shall accrue to the waterworks special account:
Water bills
Fines and penalties
Reconnection fee
Other fees

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 51

 Application fee
Tapping fee
Installation fee
Service fee
Deposit
Transfer fee
5. Recording of water sales revenues shall be made on accrual basis, or upon issuance of water
bills, not collection. Other sources of income shall be accounted for on cash basis upon
collection.
6. The deposit collected from clients applying for water connections shall be treated as
guarantee deposits, used to cover any unpaid water bills upon termination of the contract.
Any balance thereof shall be refunded to the customer.
7. The LGU may acquire water meters for less privileged consumers upon the recommendation
of the mayor. Payment for the water meter may be made in 12 monthly installments.

B. Collection
1. The collection of water bills and other fees of the waterworks system shall be done by the
bill collector who shall be appropriately bonded. He/she shall prepare and submit to the
accounting office the summary of collection (Appendix 2). He/she shall also prepare and
submit to the treasurers office the report of collection and deposit (RCD), which is supported
by a recapitulation of the details of the amounts collected.
2. The treasurer shall assign separate official receipt (OR) booklets for use in recording collec-
tions for the waterworks system. He/she shall be responsible for the complete recording of
collections and the safeguarding of the waterworks collections. The treasurer or revenue
collection officer shall prepare the monthly abstract of collection and forward this to the
accounting office for recording in the books of accounts.
3. The OR issued shall clearly state details of the payment made (e.g., current due, previous
dues, penalties, etc.)
4. For partial payments, the amount shall be applied first to penalties, surcharges and previous
unpaid bills. Any remaining amount shall be applied to current billings.
5. A penalty of 10 percent shall be imposed on bills that have been unpaid starting five days after
due date. The computation of the penalty shall be based on total amount due. Customers
with unpaid bills after the due date will be followed up through demand letters or tracers.
6. Disconnection of water service shall be made after one month of delinquency and/or for
violation of any conditions in the water service contract. Prior to service disconnection, a
follow up shall be made for those accounts which remain unpaid after the due date by issuing
demand letters or tracers. Reconnection or re-opening shall be made only after payment of
all unpaid balances including the reconnection fee.
7. A special account for the waterworks system shall be established and maintained within
the general fund. A separate bank account shall be opened and the corresponding cashbook
shall be maintained by the treasurer for the exclusive use of the MWS.

C. Property, plant, and equipment

1. The straight line depreciation method net of 10 percent residual value as prescribed by
the NGAS for LGUs shall be used for all waterworks property, plant and equipment (PPE)
including artesian wells, reservoirs, pumping stations and conduits.
2. The accounting department shall establish and maintain property ledger cards for all PPEs

52 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 including those waterworks assets classified as public infrastructure.
3. For donations in kind, the donated asset shall be recorded in the books of accounts of the
waterworks system. The donors shall be properly disclosed in the notes to the financial state-
ments. The valuation of donated assets shall be based on acquisition cost or market value.

D. Budgeting
1. The projected collections from the waterworks system will form part of the estimated income
of the LGU for budgeting purposes.
2. A separate budget shall be provided for the waterworks system for its operational and capital
requirements.
3. The head of the waterworks system shall prepare its annual budget proposal and/or work
and financial plan for consolidation in the annual budget of the LGU.
4. The previous years budget shall be used as a tentative budget for the first quarter of the
current year pending the approval of the current years annual budget by the Sangguniang
Bayan.

E. Accounting and reporting

1. A complete set of books of accounts shall be maintained by the accounting department for
all waterworks transactions. These books shall include the:
Cash receipts journal
Cash disbursements journal
Check disbursements journal
General journal
General ledger
Subsidiary ledger
2. Subsidiary ledgers shall be maintained for the following accounts:
Cash
Receivables
Inventories
Property, plant and equipment
Liabilities
Incomes
Expenses
3. Separate cash books shall be maintained by the treasurer and/or disbursing officers for all
waterworks transactions:
Cashbook - Cash in treasury
Cashbook - Cash in bank
Cashbook - Cash advances
4. All disbursements shall follow the usual LGU disbursement approval process and procedure.
5. An additional copy of the disbursement vouchers for all waterworks-related transactions
shall be made available to the waterworks system organization.
6. All procurements charged against the waterworks system shall be initiated by the water-
works supervisor/head based on the approved annual procurement plan.
7. The accountant shall prepare a journal entry voucher (JEV) to record the accounts receivable
and water sales revenue accounts based on the monthly summary of water bills.
8. Collections per the RCD shall be reclassified based on the ring-fenced chart of accounts in
the preparation of the JEV. Examples are as follows:

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 53

 Accounts receivables for current and previous water bills collected
Other business income such as inspection fee, tapping fee, installation fee and recon-
nection fee
Fines and penalties for service fees imposed on late payments
9. At the end of the month, a JEV shall also be prepared and recorded in the general journal for
the following:
Allowance for doubtful accounts
Shared costs - Identifiable
Shared costs - Not specifically identifiable
Depreciation
Interest expense
10. A system for allocating shared costs shall be established by the LGU. The manner of identify-
ing which units or departments contribute to the operations of the waterworks system as
well as determining the costs that should be allocated to the waterworks shall be computed
by the municipal accountant.
11. The municipal treasurer, municipal accountant, budget officer, and waterworks office shall
reconcile their books of accounts on a monthly basis. This is to ensure the:
Completeness of entries captured in the ring-fenced books of accounts
Accuracy of amounts
Correctness of accounts used
12. The following monthly ring-fenced financial statements shall be prepared. This should be
completed not later than 20 days after the end of each month:
Income statement
Balance sheet
Cash flows statement
13. At the end of each year, a JEV shall be prepared for the following accounts:
Interest Payable, if any
Unearned Income, if any
14. A complete set of annual financial statements shall be prepared two months after the close
of each year. At the minimum, this should include the following:
Balance sheet
Statement of income and expenses
Statement of cash flows
Notes to the financial statements

F. Monitoring and evaluation

1. Aging of accounts receivable shall be prepared monthly by the municipal accountant or
bookkeeper assigned.
2. Monthly reconciliation of customer accounts shall be done by the water supervisor, municipal
accountant and municipal treasurer.
3. Financial and operational analysis using the water utilities benchmarking KPIs shall be
prepared by the municipal accountant on an annual basis.
4. The monitoring reports shall be forwarded regularly to the municipal mayor and Sangguniang
Bayan; within 20 days following the close of each month for the aging of receivables and
within two months after the close of each year for the KPI results.
5. The KPI results shall be considered in the preparation or updating of business plans. It shall
also be considered a factor in rating water utility personnel performance.

54 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

5.2 REVIEW
After completing a draft of the financial
management guidelines for the ring-fenced
water utility accounts, the review process shall
commence. Considering that most members
of the ring-fencing team are also LGU officers,
the process of reviewing the provisions in the
guidelines affecting each LGU office shouldnt
take very long.
A thorough review should be done by the
ring-fencing team composed primarily of the
local finance committee, which includes the
budget officer, treasurer, and accountant. The
second draft shall then be subjected to peer
review and consultation with all individuals
concerned, both from the water utility unit
and other LGU units providing support to
water service provision.
The revenue collection officer from the office
of the treasurer assigned to the water utility as
bill collector, for example, needs to be present
during the consultation. The ring-fencing team
will revise the draft guidelines based on inputs
received during the consultations.
The presentation of the third draft before the
local chief executive or policy governing body,
if any, shall follow. The objective is to obtain
more inputs and solicit endorsement. This
three-tiered review process can all take place
in just one session if necessary.
The final draft will incorporate all changes
recommended by the PGB/LCE. The PGB or
LCE shall then issue an endorsement letter
to the local Sanggunian that will subject the
guidelines to legislative deliberation.
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
5.3 INSTITUTIONALIZATION
It is essential to institutionalize the ring-
fencing system and all activities associated
with it. This involves incorporating the ring-
fencing system and related activities, such as
the creation and implementation of financial
management guidelines, into the water utilitys
system and operations. This is the best way
to sustain the adoption of the ring-fencing
approach and ensure its good effects will be
lasting.
When the endorsement letter is issued with
the final draft, the ring-fencing team shall
coordinate with the legislative office to
calendar the presentation and deliberation
of the ring-fencing financial management
guidelines. An SB resolution (Exhibit 9) or an
administrative ordinance adopting the guide-
lines shall be obtained from the legislative
body.
After the SB resolution has been issued, the
water utility management should ensure
that the resolution is updated and passed on
whenever there is a change in local officials.
A more permanent way to institutionalize
the ring-fencing system is through a local
ordinance, which is passed by the LGUs leg-
islative body. A local administrative ordinance
transcends the terms of office of local officials.
55
Exhibit 8. SB resolution adopting the financial management guidelines

Source: LGU Alburquerque, Bohol

56 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

5.4 IMPLEMENTATION officers and employees on the implementation
of the guidelines. The EO may detail the tasks
The release of the signed SB resolution or
and responsibilities of concerned local officers
local ordinance signals the execution of the
and employees, thus helping assure effective
guidelines, and the local chief executive may
implementation of stipulations in the financial
then issue a separate executive order instruct-
management guidelines.
ing the water utility and other concerned LGU

Figure 3. FMG review and adoption process

Financial Management
Guidelines

Ring-Fencing Team

Review/
First Draft Local Finance Committee
Comment

Consultations with water

Second Draft
utility and other LGU staff

Discussions With Policy

Third Draft Governing Board / Local
Chief Executive

Final Draft and Final Draft Endorsement Letter

Endorsement Letter

Local Sanggunian

Sanggunian Resolution Administrative Ordinance

Local Chief Executive

Signed and Approved Executive Order on

Guidelines Implementation

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 57

58 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

T he opening of a separate bank account
for the water utility must be done imme-
diately. This section discusses the importance
of establishing a separate bank account for the
water utility and shares basic procedures for
the maintenance of the fund.
6.1 RATIONALE
Opening a separate bank account for the water
utility is the first move toward full implemen-
tation of the ring-fencing approach. Having
a separate account helps the utility ensure
maintenance of proper cash flow so that funds
are available as need arises. In LGU-run water
utilities, cash flow problems cannot be detected
because utility and general funds are mixed,
concealing the sufficiency or insufficiency of
the water utilitys fund account. With a separate
account, collections, deposits and withdrawals,
and sufficiency or insufficiency of cash to cover
operations can all be monitored.
Further, when funds are merged in the general
fund, the water utility competes with other
units for limited funds. Preventing the mingling
of cash funds will help assure the water utilitys
operational needs are given priority in the use
of funds. It is also a potent tool in monitoring
LGU subsidy.
59
SECTI ON S I X
The next important step is for the LGU to
use the separate bank account exclusively for
water utility transactions. The utilitys bank
account should be used strictly for deposit of
customer payments, funding of operation and
maintenance costs, and payment of suppliers
and employees.
6.2 AUTHORITY
Simply open a bank account exclusively for the
use of the water utility at the usual depository
bank of the local government unit. This may be
a government financing institution such as the
Land Bank of the Philippines or Development
Bank of the Philippines. The basic requirement
is a resolution by the local Sanggunian autho-
rizing the treasurer to open a bank account.
6.3 CASHBOOK
Set up and maintain cashbooks to record cash
transactions. As per NGAS provisions, the
treasurer must maintain a cashbook for each
bank account of the LGU. The maintenance of a
separate cashbook for the water utility accounts
shall follow the same procedure as other cash
accounts in the local treasury. Cashbook entries
generally consist of regular cash remittances
from bill collectors or revenue collection
officers assigned to the water utility unit, bank
deposits, and checks issued for disbursements 2. Cashbook Cash in Treasury (Exhibit 10).
related to water service provisions. This is used to record collections of water
bills and other water services and corre-
The cashbooks to maintain are: sponding deposits of collections.
1. Cashbook Cash in Bank (Exhibit 9).
This is used to record cash deposits to and
withdrawals from the waterworks systems
bank account.

Exhibit 9. Cashbook - Cash in Bank

60 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Exhibit 10. Cashbook - Cash in Treasury

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 61

62 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
 SECTI O N S EV EN

T he preparation of a separate annual budget

for water utility operations is an internal
control measure. Formalizing lines of account-
ability of unit personnel encourages improved
performance. This section discusses steps in the
budgeting processes.
7.1 BUDGET PREPARATION
The annual estimates of income and expen-
ditures of the water utility is an input to the
LGUs Annual Investment Plan (AIP) under
the Economic Services Sector. The head of
the water utility unit in coordination with the
accountant, budget officer, and the engineer-
ing unit, shall prepare the budget proposals
for both annual and supplemental budgets
and submit these to the policy governing body
for review and approval. The PGB-approved
proposal shall then be forwarded to the local
finance committee (LFC) on or before July 15 of
every year (See Box 6 for important dates in the
local planning budget calendar) for review and
consolidation.
The proposed budget for the operations of the
water utility shall be sourced from estimated
total water income consisting of Water Sales
Revenues (from water bills), Other Business
Income (from service fees), and Fines &
Penalties - Business Income. The correspond-
ing allocations are listed below (Box 5).

Box 5. Pro-forma for water utility operation budget proposal

Particulars Amount % to Total

Personal services (PS) xxxx.xx xx

Maintenance and other operating expenses (MOOE) xxxx.xx xx
Capital outlay (CO) xxxx.xx xx
Transfer to general fund xxxx.xx xx
Debt servicing xxxx.xx xx
Reserve (5%) xxxx.xx xx
Unappropriated balance xxxx.xx xx

TOTAL xxxx.xx 100%

63
The actual income and expenses in the third
and fourth quarters of the year immediately
preceding and the first and second quarters of
the current year shall be the basis for the suc-
ceeding years budget estimates. The amounts
and estimates used in the utilitys business
plan should become the basis for the budget
proposals. In this manner, the assumptions
and targets set in the performance improve-
ment plans will be considered and budgeted.
When total estimated water income cannot
cover the capital outlays or capital investment
programs in the business plan, this will be
charged to other LGU funds, such as the 20%
development fund. In this case, the estimated
CO requiring budgetary support shall be
included in the special purpose appropriation.
In preparing the supplemental budget, the
water utility head shall justify the proposal
with proof that funds are actually available.
Most often, the basis for the supplemental
budget is the savings from the excess of actual
collections (realized income) over and above
estimated and allocated income (budgeted
income), which remain free and available
throughout the budget year. Certifications
may be secured from the local treasurer and
accountant. A program of work should be
attached to the supplemental budget. This
applies especially to capital outlays.

Box 6. Important dates in the local planning budget calendar

Step Budget process Fixed budget calendar

1 LDIP/AIP Preparation January 1 to June 15

Issuance of budget call June 16 to June 30 or 1st week of
2
July
3 Preparation and submission of budget proposals July 15
Conduct of technical budget hearings on budget proposals
4 July 16 to August 31
submitted by department heads
Consolidation of budget proposals into local expenditure program
5 (LEP) and preparation of the budget of expenditures and sources of September 16 to 30
financing (BESF)
Preparation of the budget message and submission of executive
6 Not later than October 16
budget to the Sanggunian
Enactment of the annual budget of the ensuing fiscal year by the October 17 onwards
7
local Sanggunian
Submission of the annual or supplemental budgets to proper Within three days from approval by
8 reviewing authority the LCE of annual or supplemental
budgets
Review of the annual or supplemental budgets Within 90 days from receipt of
9 submitted annual or supplemental
budgets for review
Implementation/execution of annual or supplemental budgets/ January 1 to December 31 of the
10
performance monitored and evaluated following year
Source: 2008 Budget Operations Manual for Local Government Units

64 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

7.2 BUDGET AUTHORIZATION
The fundamental principle in local govern-
ment finance is that no money shall be paid
out of the local treasury except in pursuance
of an appropriation ordinance or law. The
authority for the enactment of the appro-
priation ordinance covering the annual or
supplemental budget emanates from the local
legislative body or the Sanggunian.
The Sanggunians committee on appropria-
tion/finance is one of the standing committees
responsible for the conduct of preliminary
reviews and evaluation of the budget. When
requested by the body, the head of the water
utility shall appear before the Sanggunian or
its committee on appropriation/finance to
explain or justify the proposals.
7.3 BUDGET REVIEW
The LGUs appropriation ordinance
along with the whole budget package is
submitted to the Department of Budget and
Management (DBM) or provincial Sanggunian
(for component cities and municipalities)
for review to determine compliance with
budgetary requirements and limitations. The
same bodies shall, within 90 days from receipt,
issue a budget review action that indicates
findings and possible actions to be taken,
after which period the ordinance is deemed
approved and the budget is executory.
If the water utility items of appropriation are
subjected to conditions by the review action,
the budget authority shall take effect only
upon compliance with the conditions imposed.
When the appropriation ordinance is declared
inoperative in its entirety, the reenacted
budget shall take effect until such time that a
new ordinance is enacted and submitted to the
reviewing body by the LGU. The head of the
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
water utility should be conscientious about
the utilitys compliance with the conditions
specified by the budget review action.
7.4 BUDGET EXECUTION
The critical aspect and therefore integral part
of budget execution is the collection of funds.
To actually collect the estimated income is
crucial in meeting committed expenditures.
The NGAS requires that actual disbursements
do not exceed actual collections of revenues.
This is the whole point of involving water
utility personnel in the budgeting process.
Assigning responsibility for estimating the
utilitys annual income to utility personnel
themselves is a way of setting the units
performance targets in revenue generation.
The utility is expected to raise the stated
revenue amounts and staff members are held
accountable for achieving the targeted income
collection.
The maintenance of a separate budget for
the water utility involves the preparation of
separate forms, reports and documents related
to budget utilization. The unit head and his
subordinates are required to formulate an
annual procurement plan, implement the
programs, projects and activities identified
in the plan, and implement the same LGU
accounting processes, internal controls, and
audit of the utilitys financial and budgetary
transactions.
7.5 BUDGET ACCOUNTABILITY
In this last phase of the budgeting process,
the results of programs and projects for which
funds were budgeted are monitored, and the
units performance is evaluated. Responsible
for monitoring the implementation of the
utilitys programs and projects, the water unit
head is tasked to ensure adherence to plans,
65
targets and standards. At the minimum, he/
she must prepare and submit the following
periodic reports to the local finance
committee:
1. Quarterly Report of Income - This report,
prepared in coordination with the local
accountant, tracks the variance between
estimated income based on the monthly
billing summary and actual collections
based on the local treasurers reports (see
Exhibit 11).
2. Quarterly Financial Report of Operations -
This report, prepared in coordination with
the local budget officer, reflects the rate of
utilization of appropriations, or obligations
incurred versus released allotments and
available appropriations (see Exhibit 12).
66 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
3. Quarterly Physical Report of Operations
- This is the monitoring report of physical
outputs and accomplishments prepared by
the water unit head with help from utility
personnel. It presents actual performance
per program/project/activity against target
output (see Exhibit 13).
4. Statement of Receipts and Expenditures
- This report is prepared by the local
treasurer, accountant and budget officer,
and presents the updated total receipts and
disbursements for the fiscal year, copies
of which are posted in public places and
submitted to the DBM (see Exhibit 14).
Exhibit 11. Quarterly report of income

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 67

 Exhibit 12. Quarterly financial report of operations

68
PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
Exhibit 13. Quarterly physical report of operations

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 69

 Exhibit 14. Statement of receipts and expenditures

70
PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

A total separation from the mother (LGU)
entity, otherwise termed as corporatiza-
tion, is the ultimate goal of ring-fencing. This
is seldom an easy undertaking for the LGU-run
utility, however, so mere successful reconstruc-
tion of the water utility accounts does not
automatically qualify the waterworks unit to
reach Phase 2 of the ring-fencing process.
This section presents activities and prepara-
tions of the utility it may engage in as a separate
unit, operating as a commercial entity. It
highlights the conditions required for a water
utility to be established as a financially viable
and sustainable economic enterprise.
8.1 CORPORATIZATION
Though the ring-fencing approach refers
primarily to financial separation, it in fact
prepares the water utility to achieve corporati-
zation. Corporatizationwhich is the creation
of new entitycan be achieved through two
different strategies. One involves the establish-
ment of an economic enterprise; the other
involves the conversion of the LGU-run water
utility into a water district.
The ring-fencing system will remain valid for
the first strategy, i.e., when the water utility is
71
SECTI O N EI GHT
operating as a full blown economic enterprise.
An LGU is empowered to create an income-
generating economic enterprise for the purpose
of improving production and delivery of basic
goods or services for a specific market or client
group. The LGU-run water utility can operate
on commercial principles, generate revenues to
sustain operations, and ultimately cover invest-
ment needs. It can maintain separate accounts
and have its own dedicated personnel. Hence,
this Guide uses the term water utility economic
enterprise to refer to an optimally operated
water service utility owned by an LGU.
8.2 CREATION OF A WATER UTILITY
ECONOMIC ENTERPRISE
The LGU-run water utility can be created as a
viable and self-sustaining economic enterprise.
This step requires a political environment
focused on community service and economic
development.
The power to establish and develop a water
utility as an economic enterprise is contained
in LGC Section 22 on Corporate Powers, which
states that LGUs shall enjoy full autonomy
in the exercise of their proprietary functions
and in the management of their economic
enterprises (public utilities), subject to the
limitations provided in this Code and other
applicable laws.
The Budget Operations Manual (BOM) for
LGUs published by DBM in 2008 cited the
following rationale and criteria for the estab-
lishment and operation of a local public utility
and economic enterprise:
a. It satisfies both the economic and social
objectives of the LGU concerned
b. It fills in service gaps not adequately
provided by the private sector
c. It shall operate with a lean and mean
staffing complement to satisfy its income
objective
d. It shall operate like a corporate body with a
separate strategic plan and budget
The adoption of the ring-fencing system
facilitates the creation of a public utility and
economic enterprise. The separate water
utility books of accounts (including bank
account and annual budget) are maintained,
ring-fenced financial reports are periodi-
cally prepared, organization and staffing are
restructured, operational and financial
performance are monitored, and business
plans are prepared. All these activities in
the ring-fencing transition are intended to
adequately prepare the water utility to become
an economic enterprise.
What further actions need to be done to
create a public utility? The following are some
suggested steps:
Step 1. Comply with prerequisites
The DBMs Budget Operations Manual cites
two requirements for the establishment of a
public utility and economic enterprise. First is
a feasibility study showing proof of economic
and social viability in the long term. Second
72 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
is a business development plan for (long,
medium, and annual plans) stating its mission
or purpose, clients or beneficiaries, strategies,
activities, projects, organizational structure,
financial plan, budget and expected returns.
Newly created LGU-run water utilities must
comply with the said requirements. LGU-run
water utilities already in operation that have
adopted ring-fencing, the preparation and
submission of a business plan will suffice.
Step 2. Structure the new organization
Staffing is an essential part of the proposal.
The BOM indicates the public utility and
economic enterprise may be staffed initially
with hired casual or contractual personnel or
detailed regular staff of the LGU; only when
the public utility has become viable may
regular positions be created for its staffing.
These regular positions shall be funded solely
from public utility revenues under the general
fund annual budget of the LGU. The personal
services (PS) requirements of the public utility
shall not be included in the computation of
maximum PS of the LGU for purposes of
determining PS limitation provided under
Section 325 (a) of RA7160. In the case of
regular LGU staff members that are detailed
to the public utility, the PS requirements shall
be included in the PS limit computation of the
LGU concerned.
In the absence of a standard staffing structure,
some existing LGU-run water utilities have
hired dedicated staff and some have a mixture
of dedicated and shared staff. Dedicated staff
members are personnel, whether casual or
contractual hires, performing tasks directly
related to water utility service provision.
Shared staff members are personnel of other
LGU units (who may be regular or casual
hires) detailed to the water utility unit. Refer
to subsection 8.3 for a discussion of the organi-
zational structure of a typical water utility (see
also Figure 4).
Step 3. Set new tariff rates
Another important consideration that must be
incorporated in the proposal is the determina-
tion of rates to be charged as user fees or tariff
rates. The utility is required to be prudent
and use the criteria of affordability, economic
viability, and social responsibility. Strategic
business planning with a pricing model based
on utilitys total revenue needs or total cost
recovery method can aid in the tariff-setting
process.
The proposed tariff rates shall be presented
together with other aspects of the proposal in
public hearings and consultations. As required
by law, no such rates shall be charged unless a
majority of the served communities have been
consulted and have reached an agreement.
An ordinance relative to the approved tariff
rates and other service fees shall be enacted by
the local Sanggunian and elevated to a higher
Sanggunian, if any, for final approval.
Step 4. Set the separate budget
As mentioned in Section 7 of this Guide, the
budget for the utility and economic enterprise
shall be presented separately under the General
Fund Annual Budget of the LGU, subject to the
usual accounting and budgeting processes.
The BOM mentions that the initial operating
requirements of the utility and economic
enterprise, in excess of current internally
generated funds, may be treated as advances
or loans to be specifically appropriated by the
LGU in its annual budget. After three years of
operation, or as reflected in the business plan,
the funding requirements of the public utility
shall be sourced from its operating revenues
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
or tariff charges. For ring-fenced LGU-run
water utilities, the five-year strategic business
planning exercise is recommended and the
water utilities are expected to be self-sustain-
ing within the five-year period.
The capital outlay requirements of the public
utility, such as buildings, equipment, land,
water system, etc. which cannot be financed
by internally generated funds shall be treated
as an investment or part of the development
project of the LGU, which may be charged
against the 20% of the IRA for development
projects. If viable and bankable, public utility
capital outlay requirements may be financed
through any of the credit financing conduits,
such as the Philippine Water Revolving Fund
credit facility at Development Bank of the
Philippines and the PWRF Standby Credit at
the DOF-Municipal Development Fund Office.
The business plan should also indicate the
financing mechanism to be adopted.
The budget for a public utility should be
authorized by the Sanggunian through an
appropriation ordinance pursuant to Section
325 of RA7160.
Step 5. Obtain approval from authorities
The proposal to establish the water utility as
an economic enterprise is subject to public
hearings and deliberations by concerned
sectors and stakeholders of the LGU. The
move to establish the water utility as an
economic enterprise should then be adopted
and approved by the Local Development
Council (LDC).
The local Sanggunian shall enact an ordinance
to authorize the creation of a public utility,
citing as justification its viability or capacity
to exist on its own funds as shown in the
approved business plan.
73
Therefore, public hearings and consultations
with constituents should be calendared by the
ring-fencing team in collaboration with the
LDC and Sanggunian, after which the LDC
resolution and local Sanggunian ordinance
creating the water utility as economic enter-
prise should be obtained.
Step 6. Carry forward the separate books of
accounts
With ring-fencing fully implemented, the LGU
now maintains separate special accounts in
the general fund for the water utility. Upon
approval of the creation of the water utility as
economic enterprise, the separate set of books
is simply carried forward.
Step 7. Submit a complete proposal to the DBM
After complying with all the above require-
ments, compile all required documentation
and submit the complete set of proposals
to the nearest DBM Regional Office. The
complete documentation should include the
following:
Feasibility study (for newly created water
utility)
Business development plan or five-year
strategic business plan (for ring-fenced
water utilities)
Staffing list and salary schedule
Certification on separate bank account by
local treasurer
Certification on separate budget by local
budget officer
Minutes of meetings or records of proceed-
ings of public hearings and consultations
Local development councils resolution
approving the establishment of water utility
as an economic enterprise
74 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
Local Sanggunians enacted ordinance
approving the tariff rates
Local Sanggunians enacted ordinance
appropriating the separate budget
Local Sanggunians enacted ordinance
approving the creation of the water utility
as economic enterprise
Local chief executives request letter to
DBM
Step 8. Continue operation and maintenance of
the ring-fenced water utility
The water utility as an economic enterprise
operates like a corporate entity with a
business-like philosophy. This is when the
water utility is fully ring-fenced, its organiza-
tional structure more clearly defined, and its
financial resources autonomous from the LGU
general fund. As an independent enterprise
able to support its operations, maintenance,
and capital requirements, the utilitys financial
performance will also require zero-subsidy or
even exhibit positive surplus that can support
other LGUs social services.
8.3 RESTRUCTURING THE WATER
UTILITYS ORGANIZATION
There has been no standard organizational
structure recorded for LGU-run water utilities.
Thus as a minimum, the organizational chart
should define functional subdivisions: from
regulatory, policy making to management roles
(see Figure 4).
Regulator
The LGC vests the role of economic regula-
tion (i.e., tariff setting and approval) on the
local legislative council or Sanggunian. Title
II, Chapter 3, Article 3 of the LGC cites the
authority of the Sanggunian to grant franchises
and to perform an oversight role over the
development of the water supply system. It
is also the local Sanggunian that approves
the creation of the water utility economic
enterprise. The LGU may also submit to the
National Water Resource Board (NWRB) for
regulation on a consensual basis.
Policy governing body
It is necessary that a policy governing body
(PGB) be constituted in the LGU-run water
utilities that will function in the same way as
the board of directors of a water district. The
PGB will be involved in policy formulation and
decision making on behalf of the local govern-
ment. It will supervise the performance of the
water utility management.
Management
The water utility management is in charge of
providing the water supply services. There
should be a water supervisor or an equivalent
position who performs the role of the general
manager. The supervisor should manage oper-
ations, direct and supervise utility personnel,
and be accountable to the policy governing
body and the local chief executive.
Key operational sections
For LGU-run water utilities, the three key
sections are (1) operations and maintenance,
(2) customer account management, and (3)
general administration and finance.
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
Operations and maintenance is concerned
with the technical aspect of water operations.
It implements policies and guidelines and
monitors compliance with these policies and
guidelines. It is in charge of daily maintenance
and upkeep of facilities, including major and
minor repairs for the distribution system and
facilities. It provides general guidance, super-
vision and planning in the area of operations
and maintenance. This section will require
at the least a pump operator or tank guard,
electrician and plumber/pipe fitter.
Customer account management is respon-
sible for handling customer accounts, provides
customer support and handles customer
enquiries, prepare quotations, scheduling and
maintenance contract. Billing and collection is
its primary concern. This section will require
at least a meter reader, customer account
clerk, and bill collector.
General administration and finance works
mainly with accounting, payments, and
general administration in the administration
and finance group. It involves the local finance
committee (budget officer, treasurer, and
accountant), local planning and development
officer and human resource management
officer. This is the only section that involves
shared functions performed by other LGU
units supervisors. In this regard, the water
utility head shall collaborate with heads of
other units or departments involved in the
operations of the water utility.
75
Figure 4. Organization chart of a typical LGU-run water utility

LOCAL CHIEF EXECUTIVE LEGISLATIVE COUNCIL

GENERAL ADMIN
& FINANCE

POLICY GOVERNING REGULATOR

BOARD

LOCAL DEVELOPMENT &

PLANNING COORDINATOR

WATER SUPERVISOR

LOCAL BUDGET OFFICER

LOCAL TREASURER OPERATION AND CUSTOMER ACCOUNTS

MAINTENANCE MANAGEMENT

LOCAL ACCOUNTANT
PUMP OPERATOR METER READER

HUMAN RESOURCE
OFFICER
ELECTRICIAN BILL COLLECTOR

Legend:
Orange Boxes : Waterworks Units
Blue Boxes : Other LGU officers
performing support functions CUSTOMER ACCOUNTS
PLUMBER
for the water utility CLERK

8.4 ZERO-SUBSIDY AND/OR POSITIVE Zero-subsidy is a measure of full cost recovery.

SURPLUS
Water utilities run by LGUs are ordinarily
highly subsidized, as reported by a bench-
marking study and validated by ring-fencing
pilot testing experiences. It is usually the case
that revenues generated by the utility are not
sufficient to cover the utilitys operations and
maintenance costs, so financial assistance from
LGUs in the form of cash subsidies help keep
the utilitys operations running.
This happens when earnings from services are
enough to cover operating costs. The capacity
to break-even is crucial. As an economic enter-
prise, the water utility is expected to sustain
its operations and provide quality service in
the long term. Tariff setting therefore should
consider the total revenue needs of the water
utility, allowing for costs of major repairs,
asset replacement, water system improvement
and rehabilitation, and eventual expansion of
utility service coverage.

76 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

The public utility is expected to generate
positive surplus within the first three years
of operations or as reflected in their business
plan. The resulting positive returns shall
be utilized first of all to cover the costs of
improvement, repairs, and other related
expenses of the water utility, and secondly
to repay advances or loans made according
to provisions of Section 313 of RA7160. Any
excess shall form part of the general fund of
the LGU concerned.
8.5 PERFORMANCE CONTRACTING
Local government units carry out several
functions but often dont have the capacity
to satisfactorily carry out the functions of a
water utility. Hence, LGUs are usually unable
to fully undertake such functions effectively
and efficiently to meet targets and objectives.
The use of a performance contract is one way
of ensuring operational needs are adequately
met. Performance contracting improves
transparency and clarity in operations, fosters
better commitment among involved parties,
and facilitates monitoring of performance.
A performance contract is an agreement
between two parties to undertake specific
actions to meet targets to improve perfor-
mance within a fixed time frame. Contracting
arrangements vary based on the objectives,
responsibilities of parties, and the terms and
conditions of the contract. They can be under-
taken internally or outsourced to an external
entity. Performance contracting works best
with incentives for good performance.
GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES
A possible internal contracting arrangement
would be between the PGB/LCE and the water
utility management, i.e., the staff responsible
for service delivery, subject to approval of the
local Sanggunian. The Sanggunian could set
up a committee to mediate disputes that might
arise between the contracting parties. The
performance contract will focus on a specific
activity or set of activities (billing and collec-
tion, construction or expansion of facilities,
metering, and NRW management, among
others) to be undertaken by utility staff and
envisioned to contribute to overall service or
performance improvement. The regularization
of casual employees or promotion of regular
employees to the next salary grade level may
be part of the incentive system for internal
performance contracts.
An outsourced performance contract, on the
other hand, is a more formal type of arrange-
ment in line with the public-private partner-
ship schemes being promoted by government.
The LGU may enter into an agreement with
other juridical entities (either private or other
government entity) for the management of the
water utility or for specific activities. This type
of formal contractual arrangement can range
from short-term simple management contracts
(with or without investment requirements) to
long-term or more complex and sophisticated
build-operate-transfer forms.
77
Summary Steps
Creation of LGU-Run Water Utility as Economic Enterprise

1 Comply with the prerequisites: Feasibility

Study and/or Strategic Business Plan

2 Structure the new water unit organization

3 Set the new tariff rates

4 Set the separate budget

5 Obtain approval from authorities and

stakeholders through Sanggunian Resolutions
and Minutes of Public Hearings

6 Carry forward the ring-fenced books

of accounts

7 Submit to Department of Budget and

Management (DBM) the complete proposal

8 Continue the operation and maintenance of

the ring-fenced water utility

78 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

SAMPLE PROBLEM
UTILITY PROFILE
Matubig Waterworks System (MWS) is a local
government-run utility established in 1925.
The utility initially drew water from the Brgy
Banbanon spring, a Level II type source distrib-
uting water by gravity to five nearby barangays.
The donated site for the reservoir and the
spring, courtesy of Gasta and Ardos families,
benefited the residents in barangays Baybay,
Hubas, Oslao, Ponong and Banbanon.
The LGU received a USAID grant for barangay
waterworks system in 1982. Four more
barangays benefited: Barangays Silang, Jubgan,
Brasil and Macopa. These barangays managed
their own water systems through the creation
of peoples organizations. This was later taken
over by the LGU in 1989 through a Sangguniang
Bayan resolution.
Of the original water structures, the reservoir
in Brgy Banbanon remained usable since
1989. Thus, efforts have been made to come
up with a cost effective and financially sound
program to provide immediate rehabilitation
and improvement to the water supply system,
covering the original five barangays. In the
1990s, well drilling commenced. Development
79
costs for a Level III type water system were
funded from the LGUs 20% development fund
and internally generated funds. In this decade,
more water structures were put in place, the
distribution lines, water tanks, electric pumps
and water meters were installed.
In 2001, aid from Rep. Escatrons community
development fundwas received to finance the
construction of water facilities to cover more
barangays: Magtangale, Honrado, Linongganan
and Amontay.
As of December 2008, the MWS service
area covered 13 out of the municipalitys 33
barangays totaling 1,487 active household con-
nections and 76 public taps. Only 1,113 house-
holds and 90% of public taps however availed of
the metered system.
Due to the abundance of surface and ground
water, the MWS has come up with an
expansion and improvement project with a
total estimated cost of P30,496,527.70. In 2007,
the LGU secured a loan from the Development
Bank of the Philippines to finance the said
project, which would allow MWS to reach
and serve an additional nine barangays.
Construction commenced in January 2008 and WATERWORKS ORGANIZATION
was completed in May 2009. The system began
Presently, the MWS operates under the Office
operation in July of the same year.
of the Municipal Engineer. It is managed by a
supervisor who is a civil engineer by profes-
As of the ring-fencing mentoring visit date,
sion. There are 14 staff members under him, 7
the LGU-run water utility catered to 2,012
of whom are casual employees.
households.
The following information has been provided
MUNICIPALITY PROFILE by the supervisor:
Matubig was once a part of the municipality
of Mailog (now a city), province of Surigao del VISION STATEMENT
Norte. As the population increased, the people
An ecologically balanced water and sanitation
of Matubig resolved that it be made a separate
system that ensures quality service to a healthy
town. On 13 June 1950, the late President
and progressive community.
Elpidio C. Quirino signed RA507 that created
the Municipality of Matubig. MISSION STATEMENT
The Matubig Water System shall provide
Matubig is a third class municipality with a
potable and sustainable water to healthy and
population of 42,462 people in 8,026 house-
progressive community through a dynamic
holds (2007). Its average family nuclei is five
effort of committed personnel and Local
persons and the average annual family income
Government Unit as a whole.
is P30,000.00.

KEY RESULTS AREAS

The Municipal Development Planning Office
declared that the population in the service
area of 22 barangays as of December 2009
totaled 44,087. This figure was confirmed
by the Municipal Health Office, adding that
the population density is at 226.2 per square
kilometer.
Safety and cleanliness of water distribution
system
Maintenance of watershed areas
IEC on the use and conservation of water
Training and education of water system
personnel

80 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

MWS Organization Chart

Sangguniang
Municipal Mayor
Bayan

Municipal Budget Mun. Planning and Municipal Municipal Municipal

Officer Devr Coordinator Engineer Accountant Treasurer

Waterworks
Supervisor

Pump Operators/
Electrician Plumbers Pipe Fitters Meter Readers Clerks Bill Collector
Water Tenders

Pump Operators/
Plumbers Meter Readers Clerk
Water Tenders

Pump Operators/
Water Tenders Meter Readers

Meter Readers

TASKS AND RESPONSIBILITIES PIPE FITTER - Measures, cuts, threads, and

fastens pipes, repairs leaks in the transmission
WATER SUPERVISOR - Supervises skilled
and distribution lines and other accessories of
and technical personnel in the production,
the entire water system
treatment of water and in maintenance and
other operations
METER READER Conducts monthly
reading and delivery of bills, receives
BILL COLLECTOR - Receives payments from
complaints from consumers and prepares
water consumers, conducts field collections
corresponding maintenance orders or
and remits collections to the Treasurer
service requests, and disconnects delinquent
consumers
CLERK - Assists the bill collector, maintains
customer records, encodes monthly readings
ELECTRICIAN - Monitors electrical writings
and prepares statements of accounts and
of water system facilities and pumps
notices of disconnection

WATER TENDER/PUMP OPERATOR

PLUMBER - Assembles transmission and
- Oversees and maintains intake boxes, reser-
distribution pipes, valves and hydrants, and
voirs, calibrating machines, transmission lines,
performs routine repairs and plumbing works
chlorinator, water pumps and other structures
of water system

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 81

Other information
The customer accounts clerk assists the bill
collector and receives payments. Since they
maintain the record of unpaid bills, they
also conduct field collections.
The electrician also joins the meter readers
in disconnecting delinquent member
consumers.
In 2009, there were 276 new all-metered
connections; of the total connections, only
28 were commercial/industrial consumers.
Though the LGU has not procured flow
meters for the eight water sources, the
estimated 2009 annual production per
manual computation is at 639,480 cubic
meters; the systems production capacity is
at 18 lps.
The penalty for late payments stipulated in
the ordinance has never been imposed.
LEGISLATION ON THE WATERWORKS
SYSTEM
The following excerpts are relevant informa-
tion gathered from municipal ordinances,
the Local Revenue Code, and its subsequent
amendments:
Application
Accomplish application forms and attend
the required orientation seminar
Pay to the Office of the Municipal Treasurer
the following installation fees and charges:
Filing fee - P50.00
Installation fee - P50.00
Service fee - P300.00
Water meter installments - P150.00
Guaranty deposits - P100.00
82 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM
Guaranty deposit (P100.00)
Shall answer for unpaid water charges
which shall automatically be charged after
failure to pay the monthly bill within 30
days of the succeeding month
Shall be refundable if the consumer desires
to withdraw from the service and all water
bills have been fully paid
Tariff rates
Residential / Commercial/
Institutional Industrial
First 10 m3 1 00 200
Excess of 10 m3
to 20 m3 20 30
Excess of 20 m3
to 30 m3 25 40
Excess of 30 m3 30 50
Billing
Water meter shall be read one month after
connection and every month thereafter
Collection
Water fees are due and payable to the Office
of the Municipal Treasurer within the first
five days of the following month of water
consumption
Any consumer who fails to pay the monthly
water bill shall be given 30 days grace
period after which the consumer shall be
liable to pay the surcharge
Penalty
Failure to pay within the time required
shall subject the consumer to a surcharge of
20% of the original amount due
Such surcharge is to be paid at the same
time and in the same manner as the fee due
Disconnection They further declared that for maintenance
In case the deposit is no longer sufficient and other operating expenses (MOOE), the
to cover water fees and surcharges, the following shall be the basis for computing the
water connection shall be disconnected water utilitys share:
after failure to settle the difference after a
period of 10 days from receipt disconnec- Accounting - 10% of traveling and office
tion notice supplies expenses
Treasury - 25% of traveling, fidelity
Reconnection bond premiums and
The reconnection fee is P50.00 accountable forms expenses
Budget - 1% of office supplies
Disconnected subscribers may be recon-
expenses
nected upon full payment of fees due and
MPDC - 1% of traveling and office
required on their outstanding account and
supplies expenses
within 72 hours upon completion of an
Engineering - 15% of traveling, repairs and
orientation seminar
maintenance, electricity,
office supplies and miscel-
RING-FENCING TEAM FIELD WORK laneous expenses
Executive Order No. 088 formalized the Mayors Office - 1% of traveling expenses
creation of the ring-fencing team composed of
the municipal accountant as the lead member, Municipal accounting office
and the municipal engineer, waterworks The municipal accountant furnished copies
supervisor, municipal planning and develop- of audited municipal financial reports for the
ment officer, municipal treasurer, budget calendar year 2009, as follows:
officer, and municipal local government opera-
tions officer.

Each office determined the percentage of their

total Personal Services (PS) to be devoted to
operation of the waterworks system:

Accounting - 10%
Treasury - 10%
Budget - 5%
MPDC - 1%
Engineering - 30%
Mayors Office - 1%

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 83

 STATEMENT OF INCOME AND EXPENSES
For the Year Ended December 31, 2009
GENERAL FUND

INCOME
Business tax 258,123.50
Community tax 114,199.73
Franchise tax 16,004.00
Occupational tax 2,860.00
Real property tax 468,806.53
Other local taxes 16,637.00
Fines and penalties - Other local taxes 19,550.00
Fees on weighs and measures 9,200.00
Permit fees 260,232.35
Registration fees 99,268.00
Other permit and licenses 312,931.50
Clearance and certificate fees 183,228.50
Garbage fees 7,640.00
Inspection fees 12,121.00
Medical, dental and laboratory fees 17,680.00
Other service income 27,310.00
Income from cemetery operations 25,915.00
Income from markets 292,748.50
Income from slaughterhouses 91,350.00
Income from waterworks systems 2,971,520.49
Landing and parking fees 56,861.60
Interest income 48,999.71
Internal revenue allotment (IRA) 45,752,715.88
Miscellaneous income 753,388.36
Total income 51,819,291.65

Less: EXPENSES
Personal services (see Schedule I) 26,636,453.37
Maintenance and other expenses (see Schedule II) 19,848,711.39
Total expenses 46,485,164.76
OPERATING INCOME 5,334,126.89
Less: FINANCE COST
Bank charges 1,650.00
Interest expense 368,081.14
Other financial charges 19,982.94 389,714.08

INCOME BEFORE SUBSIDIES AND EXTRAORDINARY ITEMS 4,944,412.81

Less: Subsidy to other funds 115,000.00
115,000.00
NET INCOME 4,829,412.81

The attached schedules to the above Income Statement showed the following details:

84 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 SCHEDULE I - PERSONAL SERVICES

PERSONAL SERVICES
Salaries and wages - Regular 14,151,424.25
Salaries and wages - Contractual 580,022.00
Personnel economic relief allowance (PERA) 598,500.00
Additional compensation (ADCOM) 2,007,000.00
Representation allowance (RA) 1,122,750.00
Transportation allowance (TA) 1,122,750.00
Clothing/uniform allowance 444,000.00
Subsistence, laundry and quarter allowance 133,200.00
Productivity incentive allowance 196,000.00
Other bonuses and allowances 1,425,000.00
Cash gift 553,500.00
Year-end bonus 1,212,318.50
Life and retirement insurance contributions 1,696,010.45
Pag-Ibig contributions 133,108.08
PhilHealth contributions 166,262.50
ECC contributions 109,029.43
Terminal leave benefits 401,466.77
Other personnel benefits 584,111.39
TOTAL 26,636,453.37

SCHEDULE II - MAINTENANCE and OTHER OPERATING EXPENSES

MAINTENANCE and OTHER EXPENSES

Travelling expenses - Local 1,437,795.25
Training expenses 33,630.00
Scholarship expenses 94,150.00
Office supplies and expenses 2,122,745.48
Accountable forms expenses 6,589.00
Animal/zoological supplies expenses 49,994.00
Food supplies expenses 673,343.17
Drugs and medicines expenses 3,000.00
Medical, dental and laboratory supplies expenses 437,157.60
Gasoline, oil and lubricants expenses 731.50
Agricultural supplies expenses 706,618.16
Other supplies expense 79,524.00
Electricity expenses 623,365.64
Postage and deliveries expense 1,000.00
Advertising expenses 199,800.00
Transportation and delivery expenses 154,775.00
Survey expenses 50,000.00
Auditing services 67,907.54
Environment and sanitary services 16,800.00
Other professional services 507,300.00
Repairs and maintenance - Land improvements 32,226.00
Repairs and maintenance - Office equipment 123,866.40
Repairs and maintenance - Furniture and fixture 60,295.00
Repairs and maintenance - IT equipment and software 64,984.95

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 85

 Repairs and maintenance - Agriculture , fishery and forestry equipment 50,000.00
Repairs and maintenance - Sports equipment 12,500.00
Repairs and maintenance - Other machineries and equipment 30,306.84
Repairs and maintenance - Motor vehicles 833,192.51
Repairs and maintenance - Watercraft 317,251.70
Repairs and maintenance - Roads, highways and bridges 38,550.00
Repairs and maint. - Artesian wells, reserv., pumping stn., cond. Etc. 302,583.40
Repairs and maintenance - Irrigations, canals and laterals 133,911.00
Repairs and maintenance - Waterways, aqueducts, seawalls, and others 4,000.00
Repairs and maintenance - Other public infrastructures 3,616,937.52
Donations 453,069.00
Depreciation expenses - Municipal building 46,845.00
Depreciation expenses - Hospitals and health centers 11,849.16
Depreciation expenses - Office equipment 74,750.88
Depreciation expenses - Furniture and fixtures 113,798.88
Depreciation expenses - IT equipment and software 299,434.20
Depreciation expenses - Communication equipment 88,639.92
Depreciation expenses - Construction and heavy equipment 33,637.56
Depreciation expenses - Medical , dental and laboratory equipment 6,648.00
Depreciation expenses - Technical and scientific equipment 32,240.76
Depreciation expenses - Other equipment 21,230.64
Depreciation expenses - Motor vehicle 21,600.00
Depreciation expenses - Other property plant and equipment 5,760.00
Other maintenance and operating expenses 5,752,375.73
TOTAL 19,848,711.39

86 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 BALANCE SHEET
As of December 31, 2009
ASSETS
CURRENT ASSETS
Cash - Note 2 14,224,463.79
Receivables - Note 3 2,680,318.34
Inventories - Note 4 599,306.49
Total current assets 17,504,088.62
INVESTMENT AND PROPERTY, PLANT AND EQUIPMENT
Land and land improvement
Land 968,531.99
Land improvement 2,592,513.59 3,561,045.58
Building
Office building 7,922,230.06
Less: Accumulated depreciation - Office building 245,058.50 7,677,171.56
School buildings 92,500.00
Hospitals and health centers 1,705,260.62
Less: Accum. dep.- Hospital and health centers 48,509.40 1,656,751.22
Market and slaughterhouses 3,729,003.00
Other structures 367,350.00 13,522,775.78
Office equipment, furniture and fixtures
Office equipment 1,099,653.00
Less: Accum. dep. - Office equipment 187,512.08 912,140.92
Furniture and fixtures 669,932.75
Less: Accum. dep. - Furniture and fixtures 447,383.46 222,549.29
IT equipment and software 2,325,895.95
Less: Accum. dep. - IT equip. and software 689,037.55 1,636,858.40
Library books 626.00 2,772,174.61
Machineries and equipment
Machineries 24,800.00
Less: Accum. dep. - Machineries 22,320.00 2,480.00
Communication equipment 652,020.50
Less: Accum. dep. - Communication equipment 293,968.61 358,051.89
Construction and heavy equipment 299,000.00
Less: Accum. dep. - Const. and heavy equip. 200,330.33 98,669.67
Medical, dental and laboratory equip. 149,255.00
Less: Accum. dep. - Med., dental and lab. equip. 24,360.50 124,894.50
Technical and scientific equipment 225,063.80
Less: Accum. dep. - Technical and scientific equip. 72,713.76 152,350.04
Other machineries and equipment 583,014.17
Less: Accum. dep. - Other machineries and equip. 88,851.50 494,162.67 1,230,608.77
Transportation equipment
Motor vehicles 1,672,528.00
Less: Accum. dep. - Motor vehicles 121,980.00 1,550,548.00
Other transportation equipment 2,544.00
Less: Accum. dep. - Other transportation equipment 0.00 2,544.00
Other property, plant and equipment 151,223.45
Less: Accumulated dep. - Other prop., plant and equip. 23,040.00 128,183.45
Public infrastructure
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Other public infrastructure 11,635,022.00 19,349,580.00

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 87

 Construction in progress
Construction in progress - Agency assets 976,487.65
Construction in progress - Artesian wells, reservoirs, pump. 15,186,237.01
Construction in progress - Waterways, aqueducts, etc. 1,179,530.00
Construction in progress - Other public infrastructure 529,854.92 17,872,109.58
Other assets
Work/other animals 2,100.00
Total investments and property, plant and equipment 59,991,669.77
TOTAL ASSETS 77,495,758.39
LIABILITIES AND GOVERNMENT EQUITY
LIABILITIES
Currents liabilities
Payables - Note 5 641,413.33
Inter-agency payables - Note 6 3,548,309.63
Intra-agency payables - Note 7 1,797,150.00
Other liability accounts - Note 8 2,817,826.90 8,804,699.86
Long-term liabilities - Note 9 22,365,445.65
Other liabilities
Deferred credits - Note 10 1,407,826.83
TOTAL LIABILITIES 32,577,972.34
EQUITY
Government equity - Note 11 44,917,786.05
TOTAL LIABILITIES AND GOVERNMENT EQUITY 77,495,758.39

Note 1 Summary of significant accounting policies:

a. The agency uses accrual basis of accounting. All expenses are recognized when incurred and
reported in the financial statements in the period to which they relate. Income is on accrual basis
except for transactions where accrual basis is impractical or when other methods are required by
law.
b. The Modified Obligation System is used to record allotments received and obligations incurred.
Separate registries are maintained to control allotment and obligations for each class of allotment.
c. The cost of ending inventory of office supplies and materials and other inventory are computed
using the Moving Average Method.
d. Supplies and materials purchased for inventory purposes are recorded using the Perpetual
Inventory System.
e. Petty Cash Fund (PCF) account is maintained under the Imprest System. All replenishments are
directly charged to the expense account. The PCF is not used to purchase regular inventory items
for stock.
f. Property Plant and Equipment are carried at cost less accumulated depreciation.
g. Public Infrastructure/Reforestation Projects and serviceable assets not used in operation are not
subject to depreciation.
h. The Straight-Line Method of depreciation is used in depreciating Property, Plant and Equipment
with estimated useful lives ranging from 5 to 50 years. A residual value computed at 10% of the
cost of asset is set and depreciation starts on the second month after purchase.
i. Payable accounts are recognized and recorded in the books of accounts only upon acceptance of
the goods/inventory/other assets and rendition of services to the agency.
j. All accounts in the previous year's financial statements were reclassified to conform to the Revised
Chart of Accounts under the New Government Accounting System as per COA Memorandum No.
2003-01 dated 17 June 2003.

88 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Note 2 Cash
This account is broken down as follows:
Cash in vault 2,649,730.96
Cash disbursing officers 0.00
Petty cash fund 55,096.22
Cash in bank - LCCA 11,519,636.61
Total 14,224,463.79

Note 3 Receivables
This account includes the following:
Due from officers and employees 559,424.36
Real property tax receivables 1,371,583.53
Due from NGA's 462,415.15
Due from LGU's 65,262.56
Due from other funds 27,103.63
Receivables, disallowances, charges 147,866.97
Other receivables 46,662.14
Total 2,680,318.34

Note 4 Inventories
This account consists of:
Office supplies inventory 254,996.49
Accountable forms inventory 8,915.00
Medical, dental and laboratory supplies 335,395.00
Total 599,306.49

Note 5 Payables
This account consists of:
Accounts payable 519,667.29
Guarantee deposits payable from water consumers 119,500.00
Due to officers and employees 2,246.04
Total 641,413.33

Note 6 Inter-agency payables

This account consists of:
Due to BIR 336,272.27
Due to GSIS 727,394.08
Due to HDMF 90,981.97
Due to PhilHealth 389,216.62
Due to other NGA's 1,752,373.50
Due to LGU 252,071.19
Total 3,548,309.63

Note 7 Intra-agency payable

This account consists of:
Due to other funds/trust fund account 1,797,150.00

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 89

 Note 8 Other liability accounts
This account consists of:
Performance/bidders/bail bonds payable 5,210.00
Other payables 2,812,616.90
Total 2,817,826.90

Note 9 Loans payable - Domestic

This account consists of:
DBP loan grant 22,365,445.65

This account is the loan granted by the Development Bank of the Philippines to the LGU to finance
the expansion and improvement of the Matubig Waterworks System. Under the long term agreement
signed by the above parties on 21 July 2007, the loan shall be secured in part by a continuing assign-
ment in favor of DBP of a portion of the municipalitys quarterly internal revenue allotment (IRA) and
other revenues including but not limited to the income to be derived from the municipalitys project
financed by the loan, to the extent of the amount due from the municipality as of the date of the IRA's
remittance to its account with DBP.

Note 10 Deferred credits

This account is composed of the following:
Deferred real property tax income 1,371,583.53
Other deferred credits 36,243.30
Total 1,407,826.83
Note 11 Government equity
This account is composed of the following:
CDF 20% continuing appropriations 3,022,212.29
Retained earnings * 22,302,968.86
Invested capital - Principal 19,444,737.93
Contingent capital 147,866.97
Total 44,917,786.05
* Including prior years adjustment (2007)

MUNICIPAL TREASURERS OFFICE

The municipal treasurer said that the water system has no separate bank account and no petty cash
fund. Should there be a need for a separate bank account, she can activate one dormant account for
the said purpose. The bill collector, she reported, is a permanent revenue collection officer and is
bonded but still not allowed to handle cash. All daily collections are duly remitted and kept in her
safe.

The bill collector discussed the manner in which she handles the issuance of official receipts by
showing the following samples:

90 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 Official Receipt Official Receipt
of the Republic of the of the Republic of the
Philippines Philippines

No. 0054201 No. 0054211

Date Date
Agency LGU Matubig Fund Agency LGU Matubig Fund
Payor Ruby Cedeo Payor Ferdinand Abraham
Nature of Account Nature of Account
Amount Amount
Collection Code Collection Code

Water Service Water Service
for for
Jul-09 100 - Jun-09 814 -
Jul-09 814 -











TOTAL 100 - TOTAL 1,628 -
Amount in Words Amount in Words
One hundred pesos only One thousand six hundred twenty eight pesos only

Cash Drawee
Number Date Cash Drawee
Number Date
Bank Bank

Check Check

Money Order Money Order

Received in the amount stated above. Received in the amount stated above.

Collecting Officer Collecting Officer
NOTE: Write the number and date of this receipt on the back of the NOTE: Write the number and date of this receipt on the back of the
check or money order received. check or money order received.

She further reported that all cash collections from water system operations were documented in
the Report of Collections and Deposits (RCD). However, the said report reflected only the number
series of the official receipts that were used. The expected detailed collection items were not
captured in the report. A sample of the report is shown on the following page.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 91


REPORT OF COLLECTIONS AND DEPOSITS
MATUBIG, SURIGAO DEL NORTE
LGU
Fund: GENERAL FUND Date: Aug. 28, 2009
Name of Accountable Officer: SUSAN LOPERA Report No.:

A. COLLECTIONS
1. For Collectors
Official Receipt/Serial No.
Type (Form No.) Amount
From To

AF # 51 0541001 0541150 14,241.00



2. For Liquidating Officers/Treasurers
Name of Accountable Officer Report No. Amount
SUSAN C. LOPERA - BILL COLLECTOR 0541101 - 150 14,241.00



B. REMITTANCES/DEPOSITS
Accountable Officer/Bank Reference Amount
SUSAN MAE OROCEO - MUN. TREASURER 0541101 - 150 14,241.00

The recapitulation, which is done by the accounting office to support the said report, identified only
one item, Income from Waterworks Systems, as total amount of collections.

The treasurer and bill collector were requested to prepare a detailed monthly collection schedule
following the format of the Abstract of Monthly Collections they usually prepared for collections
related to real property taxes. The said format was expanded to include six additional columns for
the following items: Water bills, arrears, guaranty deposits, application fees, reconnection fees, and
metering fees.

The bill collector, after two days of retracing the water collections in the 12-month RCDs and
attached triplicate copies of official receipts,produced the following information:

92 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 Month Water bills Arrears Guarantee Application fee Reconnection Metering fee
deposits fee
Jan-09 240,531.00 1,118.00 3,600.00 14,400.00 45,731.64
Feb-09 172,456.64 1,118.00 5,700.00 22,800.00 31,828.68
Mar-09 208,703.00 500.00 3,300.00 13,200.00 32,780.41
Apr-09 213,652.00 1,000.00 4,800.00 19,200.00 32,439.93
May-09 165,857.00 1,118.00 2,000.00 8,000.00 24,495.46
Jun-09 174,922.00 1,118.00 700.00 2,800.00 150.00 26,647.27
Jul-09 128,069.00 1,118.00 900.00 3,600.00 20,504.60
Aug-09 139,832.00 1,118.00 1,500.00 6,000.00 18,576.60
Sep-09 171,017.00 500.00 1,200.00 4,800.00 21,636.10
Oct-09 408,740.00 1,118.00 1,500.00 6,000.00 30,734.60
Nov-09 214,425.80 1,000.00 900.00 3,600.00 25,983.66
Dec-09 235,044.60 1,000.00 1,500.00 6,000.00 36,935.50

Amounts in the column Water bills refer to the current years water bill collections; the entries
in the column Arrears refer to collections of previous years unpaid bills; data in the column
Metering fees refer to the collection of monthly installments of water meters financed initially
by the LGU. The treasurer shared a copy of the DBP loan amortization schedule for the borrowed
funds that financed the rehabilitation and expansion of the water system. The loan repayments
were found to have been automatically made through a quarterly deduction from the IRA share of
the LGU. The bank has so far strictly adhered to the payment schedule, as follows:

MUNICIPALITY OF MATUBIG, SURIGAO DEL NORTE

Loan from Development Bank of the Philippines
Loan payment schedule
Total amount of loan 25,844,515.00
Date granted December 1, 2007
Less: Payment - Quarterly
Bank Total interest and
Year Date Principal Interest Total Balance
charge financial charges
2008 1-Jan 633,190.62 31,659.53 664,850.15 664,850.15 25,844,515.00
1-Apr 497,009.91 621,013.87 31,050.69 652,064.57 1,149,074.48 25,347,505.09
1-Jul 497,009.91 608,837.13 30,441.86 639,278.99 1,136,288.90 24,850,495.19
1-Oct 497,009.91 596,660.39 29,833.02 626,493.41 1,123,503.32 24,353,485.28
2009 1-Jan 497,009.91 584,483.65 29,224.18 613,707.83 1,110,717.74 23,856,475.37
1-Apr 497,009.91 572,306.90 28,615.35 600,922.25 1,097,932.16 23,359,465.47
1-Jul 497,009.91 560,130.16 28,006.51 588,136.67 1,085,146.58 22,862,455.56
1-Oct 497,009.91 547,953.42 27,397.67 575,351.09 1,072,361.00 22,365,445.65
2010 1-Jan 497,009.91 535,776.68 26,788.83 562,565.51 1,059,575.42 21,868,435.75
1-Apr 497,009.91 523,599.93 26,180.00 549,779.93 1,046,789.84 21,371,425.84
1-Jul 497,009.91 511,423.19 25,571.16 536,994.35 1,034,004.26 20,874,415.93
1-Oct 497,009.91 499,246.45 24,962.32 524,208.77 1,021,218.68 20,377,406.02
2011 1-Jan 497,009.91 487,069.70 24,353.49 511,423.19 1,008,433.10 19,880,396.12
1-Apr 497,009.91 474,892.96 23,744.65 498,637.61 995,647.52 19,383,386.21
1-Jul 497,009.91 462,716.22 23,135.81 485,852.03 982,861.94 18,886,376.30
1-Oct 497,009.91 450,539.48 22,526.97 473,066.45 970,076.36 18,389,366.40

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 93

The following list of property and equipment, with estimated useful life of 5 years each, was
forwarded by the Municipal Treasurer. The items on this list were originally used by other depart-
ments and units but were re-issued to the waterworks unit for their use while waiting for available
capital outlay appropriation for furniture and equipment for the unit which was granted in 2009.

OFFICE FURNITURE and FIXTURES Date Acquired Cost

Office tables (5 units) 2002 24,250.00
Filing cabinet 2001 6,935.50
Steel cabinet 2007 11,245.50
Stand fan 2005 821.65
Desk fan 2004 695.00
Ceiling fan 2006 928.80
OFFICE EQUIPMENT
Typewriter 1998 19,474.00
Computer set and water dispenser March 2009 48,000.00
Computer set May 2009 50,000.00
OTHER MACHINERY and EQUIPMENT
Plumbing tools 2008 55,000.00

MUNICIPAL BUDGET OFFICE

The local budget officer offered her record book of appropriations, allotments and obligations. The
blue book was re-sectioned to isolate budget information for all offices in the municipality.

The budget for the waterworks however was merged with the total appropriation for all economic
enterprises of the LGU, such as the public market, slaughterhouse or abattoir, and public hospital.
The Local Budget Office provided the following details on budgetary items for the economic enter-
prise - waterworks system:

2009 Annual budget for waterworks system

WATER SYSTEM
Personal services
Salaries and wages - Permanent 975,648.00
Salaries and wages - Casual 308,400.00
PERA 83,000.00
ADCOM 144,000.00
Cash gift 120,000.00
Year-end bonus 81,304.00
Life and retirement insurance contribution 117,077.76
Pag-Ibig contribution 19,572.00
PhilHealth contribution 11,700.00
ECC contribution 8,471.40
Other personnel benefits 72,500.00
MOOE
Electricity 478,634.00
Repairs and maintenance 302,584.00
Miscellaneous expense 159,417.00
Capital outlay 350,000.00

94 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

It was discovered that half the salaries of casual employees was charged to the 20% Development
Fund; some were under the office of the municipal engineer, and some under the office of the
municipal mayor.

The following annual data were culled from the local budgets blue book:
2009 Annual municipal budget

OFFICES
BUDGET ITEMS MAYOR MPDC ENGINEERING TREASURY ACCOUNTING BUDGET
Personal services
Salaries and wages
- Permanent 340,080.00 342,072.00 342,072.00 350,628.00 325,584.00 342,072.00
Salaries and wages
Casual
PERA - 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00
ADCOM 18,000.00 18,000.00 18,000.00 18,000.00 18,000.00 18,000.00
RA 84,660.00 60,180.00 60,180.00 60,180.00 60,180.00 60,180.00
TA 84,660.00 60,180.00 60,180.00 60,180.00 60,180.00 60,180.00
Cash gift 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00
Year-end bonus 28,340.00 28,506.00 28,506.00 29,219.00 27,132.00 28,506.00
Life and retirement
insurance contribution 40,809.60 41,048.64 41,048.64 42,075.36 39,070.08 41,048.64
Pag-Ibig contribution 6,804.00 6,852.00 6,852.00 7,020.00 6,516.00 6,852.00
PhilHealth contribution 4,200.00 4,200.00 4,200.00 4,350.00 4,050.00 4,050.00
ECC contribution 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00 1,200.00
Other personnel benefits 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00
MOOE
Travelling 109,487.00 19,500.00 49,860.00 20,000.00
Office supplies 24,745.00 7,800.00 36,200.00 11,200.00
Accountable forms 6,589.00
Electricity 43,242.00
Fidelity bond premiums 27,735.00
Repairs and maintenance 114,363.00
Miscellaneous expense 2,863.00
CO (data not available)

Information on capital outlay (CO) is not included since it bore no relevant information to complete
the accounts reconstruction for waterworks.

The local budget officer added that in the current year 2010 there is no increase in the budget for
personal services and MOOE for each municipal office, including the economic enterprise budget,
except for capital outlays. The LGU Matubig is expected to purchase four flow meters this year
with a total estimated cost of P600,000. To date, two units have been procured; one worth P150,000
purchased on February 28 and another worth P95,000 purchased on July 1.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 95

MUNICIPAL ENGINEERING OFFICE
The waterworks system is an attached unit to the Municipal Engineering Office. The municipal
engineer then produced the following list of existing water facilities. The whole amount was recon-
ciled, recorded and reported as public infrastructure by the municipal accountant in the Registry of
Public Infrastructure.

Public infrastructure - Artesian wells, reservoirs, pumping stations and conduits.

PARTICULARS Acquisition Date Acquisition Cost

RESERVOIRS (estimated useful life 40 years)
Ground concrete tank (6,000 gals cap) - Brgy Silang 2005 228,561.00
Ground concrete tank - Brgy Oslao 1996 150,000.00
Ground concrete tank (16,000 gals cap) - Brgy Ponong 1994 220,000.00
Ground concrete tank (26,000 gals cap) - Brgy Banbanon 1989 250,000.00
Elevated concrete tank - Brgy Magtangale 1997 75,000.00
Ground concrete tank (120,000 gals cap) - Brgy Linongganan 1994 120,000.00
Ground concrete tank (26,000 gals cap) - Brgy Jubgan 2004 335,000.00
Ground concrete tank (32,000 gals cap) - Brgy Amontay 2002 228,471.00
Ground intake tank - Brgy Baybay 2005 89,071.00
PUMPING EQUIPMENT (estimated useful life 10 years)
Deep well 150 ft w/ 3HP submersible pump - Brgy Silang 2004 210,000.00
Deep well 120 ft w/ 1.5HP submersible pump - Brgy Oslao 1995 75,000.00
Deep well 180 ft w/ 1.5HP submersible pump - Brgy Ponong 1994 170,000.00
Deep well 60 ft w/ 1.5 HP submersible pump - Brgy Banbanon 1993 63,000.00
Deep well 160 ft w/ 2HP submersible pump - Brgy Magtangale 2001 120,000.00
Deep well 200 ft w/ 1HP submersible pump - Brgy Linongganan 2002 175,000.00
Deep well 250 ft w/ 1.5 HP submersible pump - Brgy Jubgan 2005 325,000.00
Deep well 200 ft w/ 1.5HP submersible pump - Brgy Amontay 2001 220,000.00
Deep well 200 ft w/ 1.5HP submersible pump - Brgy Baybay 2005 177,545.00
Deep well 100 ft w/ 1.5 HP submersible pump - Brgy Diaz 2003 83,000.00
Submersible pump 3HP - Brgy Honrado Spring 2002 254,000.00
Deep well w/ 1HP submersible pump - Brgy Brazil 1998 28,000.00
TRANSMISSION and DISTRIBUTION MAINS (estimated useful life 30 years)
Distribution line 1 1994 500,000.00
Distribution line 2 1998 1,025,000.00
Distribution line 3 2000 1,500,000.00
Distribution line 4 2003 829,180.65
Transmission line - Brgy Ponong 2005 100,210.00
Transmission line - Brgy Banbanon 2004 76,977.00
Pipes - Brgy Macopa 2006 69,250.00
WATER TREATMENT EQUIPMENT (estimated useful life: 10 years)
Water chlorinator 2007 17,292.35
TOTALS 7,714,558.00

The ring-fencing team agreed that the computation for the depreciation shall follow the NGAS
using the straight-line method with 10% salvage value for each item of property and equipment,
including the public infrastructure for water facilities. The assets useful life shall use the NWRBs
recommendation found in the ring-fencing guide.

96 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

The engineer disclosed that the above listing did not include the newly constructed expansion. He
provided the office copy of the program of work and other data on progress payments, as follows:

Program of work - Water system rehabilitation, improvement and expansion.

ENGINEERING COST ITEMS

MATERIALS Qty. Unit Unit cost Total cost TOTAL
A. WELL DRILLING 100 ln.m 25,000.00 2,500,000.00 2,500,000.00
B. PUMPING STATION
Pumphouse 1 unit 800,000.00 800,000.00 2,704,500.00
Electro-mechanical facilities (25-hp) 1 set 1,200,000.00 1,200,000.00
Powerline/distribution transformer 1 set 139,500.00 139,500.00
75mm flow meter 1 unit 40,000.00 40,000.00
Generation set 1 set 525,000.00 525,000.00
C. TRANSMISSION and DISTRIBUTION LINES
760mm uPVC pipe series 10 2200 ln.m 1,100.00 2,420,000.00 4,462,180.00
75mm uPVC pipe series 10 3044 ln.m 360.00 1,095,840.00
63mm uPVC pipe series 10 2608 ln.m 180.00 469,440.00
Valves and fittings 1 LS 476,900.00 476,900.00
D. RESERVOIR
Elevated steel tank 100 c.m. 75,000.00 7,500,000.00 7,750,000.00
Soil investigation 1 LS 250,000.00 250,000.00
E. CHLORINATING FACILITIES
Hypochlorinator 1 unit 100,000.00 100,000.00 100,000.00
F. SERVICE CONNECTIONS 750 set 2,186.00 1,639,500.00 1,639,500.00
G. FIRE HYDRANTS
100mm assembly 7 set 34,245.00 239,715.00 239,715.00
H. TRENCH EXCAVATION
Excavation 12990 cu.m. 250.00 3,247,500.00 6,448,620.00
Backfilling 12990 cu.m. 188.00 2,442,120.00
Concrete demolition 110 cu.m. 1,600.00 176,000.00
Restoration 110 cu.m. 5,300.00 583,000.00
TOTAL COST 5,844,515.00
Price and physical contingencies (10% of total cost) 2,584,451.50
Engineering studies (5% of total cost) 1,292,225.75
Construction supervision (3% of total cost) 775,335.45
TOTAL PROJECT COST 30,496,527.70

It was further revealed that the actual contract cost with LGA Construction Company amounted to
only P25,844,515.00. The construction started in January 2008 and was completed as planned on
May 10, 2009. The contractor assumed all engineering and construction supervision costsno extra
works or any variation orderand that the LGU has not provided any counterpart on the project

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 97

 cost. The total contract amount was loaned from DBP at 9.8% interest per annum payable over 15
years.

Inquiries were made to find out why the total completed project still appeared as Construction in
Progress in the books of accounts. The accountant reasoned that since the 10% retention is yet to be
released in May 2010, and that the Commission on Audits Technical Inspection Report was not yet
received to date, the amount cannot be transferred to the Public Infrastructure account.

The following are the records of the Engineering unit on the progress billings and payments related
to the expansion project:

PROGRESS BILLINGS AND PAYMENTS

PAYMENT SCHEDULES VOUCHER DETAILS
DV Progress Billed Withholding
Date Check no. Particulars Recoupment Retention Net amount
no. (%) amount tax
12/22/ 15%
2007 81 6988302 mobilization 3,876,677.25 3,876,677.25
5/24/ 1st partial
2008 579 6988306 payment 33.94 8,771,628.39 775,335.45 877,162.84 614,013.99 6,505,116.11
10/23/ 2nd partial
2008 1658 6988310 payment 58.76 6,414,608.62 775,335.45 641,460.86 449,022.60 4,548,789.71
3/8/ 3rd partial
2009 363 6988313 payment 71.65 3,331,357.98 775,335.45 333,135.80 233,195.06 1,989,691.68
5/31/ Final
2009 994 6988316 payment 100.00 7,326,920.00 1,550,670.90 732,692.00 512,884.40 4,530,672.70
5/31/ Release of
2010 888 6988412 retention 2,584,451.50 2,584,451.50
TOTAL 3,876,677.25 2,584,451.50 1,809,116.05 24,035,398.95

WATERWORKS SYSTEM UNIT

The waterworks units staff members were mobilized to gather data on actual water consumption
by both paying and non-paying connections on yearly receivables and water bills. All this informa-
tion were traced from the pile of water bills stubs and the customer ledger cards the office clerks
maintained for each connection.

Data on water bills issued in the year 2010

Month Consumption (cu. m.) Receivables
Jan-10 35,262.50 466,129.20
Feb-10 32,252.50 428,260.40
Mar-10 32,901.00 439,711.20
Apr-10 41,917.50 553,875.60
May-10 33,593.00 452,635.20
Jun-10 34,661.50 465,980.40
Jul-10 35,914.00 481,216.40

98 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Data on water bills issued in the year 2009
Month Consumption (cu. m.) Billings (account receivables)
Jan-09 36,794.00 422,577.00
Feb-09 41,613.00 437,876.00
Mar-09 34,064.00 352,174.00
Apr-09 28,651.00 331,616.00
May-09 46,585.00 373,553.00
Jun-09 37,341.00 394,552.00
Jul-09 28,840.00 476,594.00
Aug-09 30,104.00 444,389.00
Sep-09 28,657.00 458,202.00
Oct-09 16,529.00 268,769.00
Nov-09 18,695.00 273,940.00
Dec-09 20,519.00 270,125.00
Total 368,392.00 4,504,367.00

Date on issued water bills and collections for the year 2008
Month Billings (account receivables) Collections
Jan-08 217,241.60 422,695.50
Feb-08 221,278.00 181,951.00
Mar-08 169,534.50 185,907.00
Apr-08 171,379.00 209,926.00
May-08 234,011.50 177,119.50
Jun-08 255,656.00 161,352.50
Jul-08 282,135.50 211,198.50
Aug-08 259,265.00 203,922.50
Sep-08 276,376.00 245,900.25
Oct-08 284,407.50 207,285.75
Nov-08 272,587.50 262,730.50
Dec-08 279,651.50 210,118.00
Total 2,923,523.60 2,680,107.00

Data on unpaid water bills

Month 2007 2008
January 591.00 4,772.00
February 967.50 4,778.00
March 908.00 4,158.00
April 2,292.00 4,866.50
May 3,809.00 11,719.00
June 4,813.50 16,283.00
July 8,681.00 30,020.00
August 20,028.00 56,926.00
September 54,213.50 100,356.50
October 124,514.50 141,090.20
November 167,634.50 197,280.70
December 261,012.50 252,590.70
Total 649,465.00 824,840.60

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 99

 Data on water bill adjustments
Month 2008 2009
January 2,653.00 6,778.00
February 4,717.50 1,237.00
March 2,081.00 22,162.50
April 6,479.50 4,867.00
May 18,976.50 20,362.00
June 1,045.00 1,681.00
July 9,034.50 2,593.00
August 1,385.50 9,701.50
September 17,887.50 2,812.00
October 714.50 16,140.50
November 1,502.50 3,125.50
December 1,564.00 799.50
Total 68,041.00 92,259.50

These negative adjustments however were determined and made known to the accounting unit
after the close of each year.

PROBLEM REQUIREMENTS
1. Reconstruct account balances. Assume a 2% allowance for doubtful accounts based on the
ending balance of accounts receivable.
2. Prepare journal entries
3. Post in the ledger
4. Prepare trial balance worksheet
5. Prepare financial statements at December 31, 2009
6. Journalize closing entries
7. Post in the ledger
8. Prepare post-closing trial balance
9. Prepare interim financial statements for the period ended July 31, 2010

100PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

SUGGESTED SOLUTIONS

A. ESTABLISHMENT OF BEGINNING BALANCES

Cash in bank
Cash in bank (loan proceeds) 25,844,515.00
Add/Less: Advances to contractors (mobilization) (3,876,677.25)
Recoupment of mobilization 1,550,670.90
2008 progress payments (11,053,905.82)
2008 BIR remittances (1,063,036.59) (14,442,948.76)
Cash in bank balance 11,401,566.24

Accounts receivable
Unpaid water bills, 2007 649,465.00
Issued water bills, 2008 2,923,523.60
Collection from water bills, 2008 (2,680,107.00)
Unpaid water bills, 2008 892,881.60

Allowance for doubtful accounts

2% of unpaid water bill = P892,881.60 x 2% = P17,857.63

Property, plant and equipment

Date Cost Salvage Depreciable Estd Annual Years in Accumulated

acquired value cost useful depreciation use up to depreciation as
life 12/31/08 of 12/31/08
OFFICE FURNITURE and FIXTURES
Office tables (5) 2002 24,250.00 2,425.00 21,825.00 5 4,365.00 5 21,825.00
Filing cabinet 2001 6,935.50 693.55 6,241.95 5 1,248.39 5 6,241.95
Steel cabinet 2007 11,245.50 1,124.55 10,120.95 5 2,024.19 1 2,024.19
Stand fan 2005 821.65 82.17 739.49 5 147.90 3 443.69
Desk fan 2004 695.00 69.50 625.50 5 125.10 4 500.40
Ceiling fan 2006 928.80 92.88 835.92 5 167.18 2 334.37
Sub-total 44,876.45 4,487.65 40,388.81 8,077.76 31,369.60
OFFICE EQUIPMENT
Typewriter 1998 19,474.00 1,947.40 17,526.60 5 3,505.32 5 17,526.60
OTHER MACHINERY and EQUIPMENT
Plumbing tools 2008 55,000.00 5,500.00 49,500.00 5 9,900.00 0 -

101
 Artesian wells, reservoirs, pumping stations and conduits

102
Accumulated Accumulated
Estd Years in Depreciation Net book
Acquisition Acquisition Salvage Depreciable Annual depre- depre-
Asset description useful use as of expense for value
date cost value cost depreciation ciation as of ciation as of
life 12/31/08 2009 12/31/09
12/31/08 12/31/09
RESERVOIRS
Ground concrete tank (6,000 gals
2005 228,561.00 22,856.10 205,704.90 40 5,142.62 3 15,427.87 5,142.62 20,570.49 185,134.41
cap) - Brgy Silang
Ground concrete tank - Brgy Oslao 1996 150,000.00 15,000.00 135,000.00 40 3,375.00 12 40,500.00 3,375.00 43,875.00 91,125.00
Ground concrete tank (16,000
1994 220,000.00 22,000.00 198,000.00 40 4,950.00 14 69,300.00 4,950.00 74,250.00 123,750.00
gals cap) - Brgy Ponong
Ground concrete tank (26,000
1989 250,000.00 25,000.00 225,000.00 40 5,625.00 19 106,875.00 5,625.00 112,500.00 112,500.00
gals cap) - Brgy Banbanon
Elevated concrete tank - Brgy
1997 75,000.00 7,500.00 67,500.00 40 1,687.50 11 18,562.50 1,687.50 20,250.00 47,250.00
Magtangale
Ground Concrete tank (120,000
1994 120,000.00 12,000.00 108,000.00 40 2,700.00 14 37,800.00 2,700.00 40,500.00 67,500.00
gals cap) - Brgy Linongganan

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Ground concrete tank (26,000
2004 335,000.00 33,500.00 301,500.00 40 7,537.50 4 30,150.00 7,537.50 37,687.50 263,812.50
gals cap) - Brgy Jubgan
Ground concrete tank (32,000
2002 228,471.00 22,847.10 205,623.90 40 5,140.60 6 30,843.59 5,140.60 35,984.18 169,639.72
gals cap) - Brgy Amontay
Ground Intake tank - Brgy Baybay 2005 89,071.00 8,907.10 80,163.90 40 2,004.10 3 6,012.29 2,004.10 8,016.39 72,147.51
Sub-total 1,696,103.00 169,610.30 1,526,492.70 38,162.32 355,471.25 38,162.32 393,633.56 1,132,859.14
PUMPING EQUIPMENT
Deep well 150 ft w/ 3HP submers-
2004 210,000.00 21,000.00 189,000.00 10 18,900.00 4 75,600.00 18,900.00 94,500.00 94,500.00
ible pump - Brgy Silang
Deep well 120 ft w/ 1.5HP
1995 75,000.00 7,500.00 67,500.00 10 6,750.00 10 67,500.00 67,500.00 -
submersible pump - Brgy Oslao
Deep well 180 ft w/ 1.5HP sub-
1994 170,000.00 17,000.00 153,000.00 10 15,300.00 10 153,000.00 153,000.00 -
mersible pump - Brgy Ponong
Deep well 60 ft w/ 1.5 HP sub-
1993 63,000.00 6,300.00 56,700.00 10 5,670.00 10 56,700.00 56,700.00 -
mersible pump - Brgy Banbanon
Deep well 160 ft w/ 2HP submers-
2001 120,000.00 12,000.00 108,000.00 10 10,800.00 7 75,600.00 10,800.00 86,400.00 21,600.00
ible pump - Brgy Magtangale
Deep well 200 ft w/ 1HP submers-
2002 175,000.00 17,500.00 157,500.00 10 15,750.00 6 94,500.00 15,750.00 110,250.00 47,250.00
ible pump - Brgy Linongganan
 Accumulated Accumulated
Estd Years in Depreciation Net book
Acquisition Acquisition Salvage Depreciable Annual depre- depre-
Asset description useful use as of expense for value
date cost value cost depreciation ciation as of ciation as of
life 12/31/08 2009 12/31/09
12/31/08 12/31/09
Deep well 250 ft w/ 1.5 HP
2005 325,000.00 32,500.00 292,500.00 10 29,250.00 3 87,750.00 29,250.00 117,000.00 175,500.00
submersible pump - Brgy Jubgan
Deep well 200 ft w/ 1.5HP sub-
2001 220,000.00 22,000.00 198,000.00 10 19,800.00 7 138,600.00 19,800.00 158,400.00 39,600.00
mersible pump - Brgy Amontay
Deep well 200 ft w/ 1.5HP
2005 177,545.00 17,754.50 159,790.50 10 15,979.05 3 47,937.15 15,979.05 63,916.20 95,874.30
submersible pump - Brgy Baybay
Deep well 100 ft w/ 1.5 HP
2003 83,000.00 8,300.00 74,700.00 10 7,470.00 5 37,350.00 7,470.00 44,820.00 29,880.00
submersible pump - Brgy Diaz
Submersible pump 3HP - Brgy
2002 254,000.00 25,400.00 228,600.00 10 22,860.00 6 137,160.00 22,860.00 160,020.00 68,580.00
Honrado Spring
Deep well w/ 1HP submersible
1998 28,000.00 2,800.00 25,200.00 10 2,520.00 10 25,200.00 25,200.00 -
pump - Brgy Brazil
Sub-total 1,900,545.00 190,054.50 1,710,490.50 171,049.05 996,897.15 140,809.05 1,137,706.20 572,784.30
TRANSMISSION and
DISTRIBUTION MAINS
Distribution line 1 1994 500,000.00 50,000.00 450,000.00 30 15,000.00 14 210,000.00 15,000.00 225,000.00 225,000.00
Distribution line 2 1998 1,025,000.00 102,500.00 922,500.00 30 30,750.00 10 307,500.00 30,750.00 338,250.00 584,250.00
Distribution line 3 2000 1,500,000.00 150,000.00 1,350,000.00 30 45,000.00 8 360,000.00 45,000.00 405,000.00 945,000.00
Distribution line 4 2003 829,180.65 82,918.07 746,262.59 30 24,875.42 5 124,377.10 24,875.42 149,252.52 597,010.07
Transmission line - Brgy Ponong 2005 100,210.00 10,021.00 90,189.00 30 3,006.30 3 9,018.90 3,006.30 12,025.20 78,163.80
Transmission line - Brgy Banbanon 2004 76,977.00 7,697.70 69,279.30 30 2,309.31 4 9,237.24 2,309.31 11,546.55 57,732.75
Pipes - Brgy Macopa 2006 69,250.00 6,925.00 62,325.00 30 2,077.50 2 4,155.00 2,077.50 6,232.50 56,092.50
Sub-total 4,100,617.65 410,061.77 3,690,555.89 123,018.53 1,024,288.24 123,018.53 1,147,306.77 2,543,249.12
WATER TREATMENT EQUIPMENT
Water chlorinator 2007 17,292.35 1,729.24 15,563.12 10 1,556.31 1 1,556.31 1,556.31 3,112.62 12,450.49
Sub-total 17,292.35 1,729.24 15,563.12 1,556.31 1,556.31 1,556.31 3,112.62 12,450.49
TOTALS 7,714,558.00 771,455.80 6,943,102.20 333,786.21 2,378,212.94 303,546.21 2,681,759.15 4,261,343.05

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

103
 Construction in progress
First billing at 33.94% - P 8,771,628.39
Second billing at 58.76% - 6,414,608.62
Total value of accomplishment - P15,186,237.01

Advances to contractors
15% Mobilization granted P 3,876,677.25
Less: Recoupment on first billing (775,335.45)
Recoupment on second billing (775,335.45)
Balance P 2,326,006.35

Guarantee deposits payable

2009 total deposits from water customers (Note 5) - P 119,500.00
Less: 2009 collections on guarantee deposits - 27,600.00
2009 beginning balance - P 91,900.00

Due to BIR
As a rule, tax withheld shall be remitted every 10th day of the following month. Therefore the withholding
taxes on contract payments are assumed to have been remitted fully before the end of year 2008.

Loans payable - domestic

Total loan amount - P25,844,515.00
Less: Quarter payments in 2008:
2nd Quarter - P 497,009.91
3rd Quarter - P 497,009.91
4th Quarter - P 497,009.91 - 1,491,029.73
Loan balance as of Dec. 31, 2008 - P24,353,485.28

Other payables
10% Retention money on contracts
1st progress billing - P 877,162.84
2nd progress billing - 641,460.86
Total - P1,518,623.70

Government equity
ASSETS Amount
Cash in bank 11,401,566.24
Accounts receivables 892,881.60
Allowance for doubtful accounts (17,857.63)
Office equipment 19,474.00
Accumulated depreciation (17,526.60)
Furniture and fixtures 44,876.45
Accumulated depreciation (31,369.60)
Other machinery and equipment 55,000.00
Accumulated depreciation -
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Accumulated depreciation (2,378,212.94)
Construction in progress - artesian wells,
reservoirs, pump 15,186,237.01
Advances to contractors 2,326,006.35

104 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

 TOTAL ASSETS 35,195,632.88
LESS: LIABILITIES
Guaranty deposits payable 91,900.00
Due to BIR -
Loans payable - domestic 24,353,485.28
Other payables 1,518,623.70
TOTAL LIABILITIES 25,964,008.98
Government equity 9,231,623.90

B. DETERMINATION OF REVENUES AND EXPENSES

1. Water sales revenue
Summary of water bills = P4,504,367.00

2. Other business income

Summary of collections:
Application fee = P 110,400.00
Reconnection fee = 150.00
Other service fee = 348,294.45
Other business income = P 458,844.45

3. Dedicated personal services

From the waterworks allotment and appropriation:
Personal services
Salaries and wages - permanent 975,648.00
Salaries and wages - casual 308,400.00
PERA 83,000.00
ADCOM 144,000.00
Cash gift 120,000.00
Year-end bonus 81,304.00
Life and retirement insurance contribution 117,077.76
Pag-Ibig contribution 19,572.00
PhilHealth contribution 11,700.00
ECC contribution 8,471.40
Other personnel benefits 72,500.00
Total 1,941,673.16

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 105

4. Shared personal services
From the municipal budget

Sharing percentage (%) 1 1 30 10 10 5

Personal services Mayor MPDC Engineering Treasury Accounting Budget
Salaries and wages - permanent 3,400.80 3,420.72 102,621.60 35,062.80 32,558.40 17,103.60
PERA - 60.00 1,800.00 600.00 600.00 300.00
ADCOM 180.00 180.00 5,400.00 1,800.00 1,800.00 900.00
RA 846.60 601.80 18,054.00 6,018.00 6,018.00 3,009.00
TA 846.60 601.80 18,054.00 6,018.00 6,018.00 3,009.00
Cash gift 150.00 150.00 4,500.00 1,500.00 1,500.00 750.00
Year-end bonus 283.40 285.06 8,551.80 2,921.90 2,713.20 1,425.30
Life and retirement insurance contribution 408.10 410.49 12,314.59 4,207.54 3,907.01 2,052.43
Pag-Ibig contribution 68.04 68.52 2,055.60 702.00 651.60 342.60
PhilHealth contribution 42.00 42.00 1,260.00 435.00 405.00 202.50
ECC contribution 12.00 12.00 360.00 120.00 120.00 60.00
Other personnel benefits 60.00 60.00 1,800.00 600.00 600.00 300.00
Total 6,297.54 5,892.39 176,771.59 59,985.24 56,891.21 29,454.43

5. Dedicated maintenance and other operating expenses

From the waterworks allotment and appropriation:
MOOE
Electricity 478,634.00
Repairs and maintenance 302,583.40
Miscellaneous expense 159,417.00
Total 940,634.40

6. Shared maintenance and other operating expenses

From the municipal budget

Sharing percentage (%) 1 1 15 25 10 1

MOOEs Mayor MPDC Engineering Treasury Accounting Budget
Travelling 1,094.87 195.00 - - 4,986.00 -
Office supplies 78.00 - - 3,620.00 112.00
Accountable forms - - - 1,647.25 - -
Electricity - - 6,486.30 - - -
Fidelity bond premiums - - - 6,933.75 - -
Repairs and maintenance - - 17,154.45 - - -
Miscellaneous expense - - 429.45 - - -
Total 1,094.87 273.00 24,070.20 8,581.00 8,606.00 112.00

106 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

7. Bad debts expense
Accounts receivable, beginning P892,881.60
Less: Water bills adjustments 68,041.00
Adjusted accounts receivable 824,840.60
Issued water bills, 2009 4,504,367.00
Total accounts receivable 5,329,207.60
Less: Collections on water bills, 2009 2,485,076.04
Accounts receivable, end 2,844,131.56
2% Allowance for doubtful accounts 56,882.63
Less: Allowance, beginning 17,857.63
Bad debts expense P39,025.00

8. Financing costs
Interest on loans - P2,264,874.13
Other bank charges - 113,243.71
Total - P2,378,117.84

C. JOURNAL ENTRIES
Particulars Debit Credit
JEV # 1
Cash in bank 11,401,566.24
Accounts receivable 892,881.60
Office equipment 19,474.00
Furniture and fixtures 44,876.45
Other machineries and equipment 55,000.00
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Construction in progress - Artesian wells, reservoirs,
pumping stations and conduits 15,186,237.01
Advances to contractors 2,326,006.35
Allowance for doubtful accounts 17,857.63
Accumulated depreciation - Office equipment 17,526.60
Accumulated depreciation - Furniture and fixtures 31,369.60
Accumulated depreciation - Artesian wells, reservoirs,
pumping stations and conduits 2,378,212.94
Guaranty deposits payable 91,900.00
Loans payable - Domestic 24,353,485.28
Other payables 1,518,623.70
Government equity 9,231,623.90
To record the beginning balances

JEV # 2
Accounts receivable 4,504,367.00
Water sales revenue 4,504,367.00
To record the water sales

JEV # 3
Government equity 68,041.00
Accounts receivable 68,041.00
To record water bills adjustments

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 107

JEV # 4
Cash - Collecting officer 2,971,520.49
Accounts receivable 2,485,076.04
Guaranty deposits payable 27,600.00
Other business income 458,844.45
To record collections

JEV # 5
Cash in bank 2,971,520.49
Cash - Collecting officer 2,971,520.49
To record deposits

JEV # 6
Salaries and wages - Permanent 975,648.00
Salaries and wages - Casual 154,200.00
PERA 83,000.00
ADCOM 144,000.00
Cash gift 120,000.00
Year-end bonus 81,304.00
Life and retirement insurance contribution 117,077.76
Pag-ibig contribution 19,572.00
PhilHealth contribution 11,700.00
ECC contribution 8,471.40
Other personnel benefits 72,500.00
Electricity 478,634.00
Repairs and maintenance 302,583.40
Miscellaneous expense 159,417.00
Cash in bank 2,728,107.56
To record dedicated expenses

JEV # 7
Salaries and wages - Permanent 194,167.92
Salaries and wages - Casual 154,200.00
PERA 3,360.00
ADCOM 10,260.00
RA 34,547.40
TA 34,547.40
Cash gift 8,550.00
Year-end bonus 16,180.66
Life and retirement insurance contribution 23,300.15
Pag-Ibig contribution 3,888.36
PhilHealth contribution 2,386.50
ECC contribution 684.00
Other personnel benefits 3,420.00
Travelling 6,275.87
Office supplies 3,810.00
Accountable forms 1,647.25
Electricity 6,486.30
Fidelity bond premiums 6,933.75
Repairs and maintenance 17,154.45
Miscellaneous expense 429.45
Subsidy from other funds 532,229.46
To record shared expenses

108 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

JEV # 8
Loans payable - Domestic 1,988,039.64
Interest expense 2,264,874.13
Other financing charges 113,243.71
Subsidy from other funds 4,366,157.48
To record loan repayments

JEV # 9
Construction in progress - Artesian wells, reservoirs,
pumping stations and conduits 10,658,277.98
Due to BIR 746,079.46
Advances to contractors 2,326,006.35
Other payables 1,065,827.80
Cash in bank 6,520,364.37
To record contract payments

JEV # 10
Due to BIR 746,079.46
Cash in bank 746,079.46
To record BIR remittances

JEV # 11
Office equipment 98,000.00
Cash in bank 98,000.00
To record purchase of office equipment

JEV # 12
Bad debts expense 39,025.00
Allowance for doubtful accounts 39,025.00
To record bad debts for the year

JEV # 13
Depreciation expense - FF 2,464.37
Depreciation expense - OME 9,900.00
Depreciation expense - Artesian wells, reservoirs, etc 303,546.21
Accumulated depreciation - Furniture and fixtures 2,464.37
Accumulated depreciation - Other machineries and equipment 9,900.00
Accumulated depreciation - Artesian wells, reservoirs, pumping
Stations and conduits 303,546.21
To record depreciation expenses for the year

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 109

 D. TRIAL BALANCE WORKSHEET

110
TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
Account titles
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash in bank 4,280,535.34 4,280,535.34
Accounts receivable 2,844,131.56 2,844,131.56
Allowance for doubtful accounts 56,882.63 56,882.63
Office equipment 117,474.00 117,474.00
Accumulated depreciation - Office equipment 17,526.60 17,526.60
Furniture and fixtures 44,876.45 44,876.45
Accumulated depreciation - Furniture and
33,833.97 33,833.97
fixtures
Other machinery and equipment 55,000.00 55,000.00
Accumulated depreciation - Other machinery
9,900.00 9,900.00
and equipment

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

Artesian wells, reservoir, pumping stations and
7,714,558.00 7,714,558.00
conduits
Accumulated depreciation - Artesian wells,
2,681,759.15 2,681,759.15
reservoirs, pumping stations and conduits
Construction in progress - Artesian wells,
25,844,514.99 25,844,514.99
reservoirs, pumping stations and conduits
Guaranty deposits payable 119,500.00 119,500.00
Loans payable - Domestic 22,365,445.64 22,365,445.64
Other payables 2,584,451.50 2,584,451.50
Government equity 9,163,582.90 9,163,582.90
Water sales revenue 4,504,367.00 4,504,367.00
Other business income 458,844.45 458,844.45
Salaries and wages - Permanent 1,169,815.92 1,169,815.92
Salaries and wages - Casual 308,400.00 308,400.00
PERA 86,360.00 86,360.00
ADCOM 154,260.00 154,260.00
RA 34,547.40 34,547.40
TA 34,547.40 34,547.40
 Cash gift 128,550.00 128,550.00
Year end bonus 97,484.66 97,484.66
Life and retirement insurance contribution 140,377.91 140,377.91
Pag-ibig contribution 23,460.36 23,460.36
PhilHealth contribution 14,086.50 14,086.50
ECC contribution 9,155.40 9,155.40
Other personnel benefits 75,920.00 75,920.00
Travelling 6,275.87 6,275.87
Office supplies 3,810.00 3,810.00
Accountable forms 1,647.25 1,647.25
Electricity 485,120.30 485,120.30
Fidelity bond premiums 6,933.75 6,933.75
Repairs and maintenance 319,737.85 319,737.85
Miscellaneous expense 159,846.45 159,846.45
Interest expense 2,264,874.13 2,264,874.13
Other financing charges 113,243.71 113,243.71
Bad debts expense 39,025.00 39,025.00
Depreciation expense - FF 2,464.37 2,464.37
Depreciation expense - OME 9,900.00 9,900.00
Depreciation expense - Artesian wells, reser-
303,546.21 303,546.21
voirs, pumping stations and conduits
Subsidy from other funds 4,898,386.94 4,898,386.94
TOTALS 46,894,480.78 46,894,480.78 5,993,390.44 9,861,598.39 40,901,090.34 37,032,882.39
Net surplus 3,868,207.95 3,868,207.95
9,861,598.39 9,861,598.39 40,901,090.34 40,901,090.34

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

111
E. RECONSTRUCTED INCOME STATEMENT

MATUBIG WATERWORKS SYSTEM

Matubig, Surigao del Norte
INCOME STATEMENT
For the year ended December 31, 2009

Water sales revenue 4,504,367.00

Other business income 458,844.45
Total operating revenues 4,963,211.45
Less: Operating expenses:
Personal services:
Salaries and wages - Permanent 1,169,815.92
Salaries and wages - Casual 308,400.00
PERA 86,360.00
ADCOM 154,260.00
RA 34,547.40
TA 34,547.40
Cash gift 128,550.00
Year-end bonus 97,484.66
Life and retirement insurance contribution 140,377.91
Pag-Ibig contribution 23,460.36
PhilHealth contribution 14,086.50
ECC contribution 9,155.40
Other personnel benefits 75,920.00
Total personal services 2,276,965.55
Maintenance and other operating expenses:
Travelling 6,275.87
Office supplies 3,810.00
Accountable forms 1,647.25
Electricity 485,120.30
Fidelity bond premiums 6,933.75
Repairs and maintenance 319,737.85
Miscellaneous expense 159,846.45
Total MOOEs 983,371.47
Total cash operating expenses 3,260,337.02
Net operating income before non-cash expenses 1,702,874.43
Less: Non-cash expenses
Bad debts expense 39,025.00
Depreciation expense - FF 2,464.37
Depreciation expense - OME 9,900.00
Depreciation expense - Artesian wells,
reservoirs, pumping stations and conduits 303,546.21
Total non-cash expenses 354,935.58
Net operating income 1,347,938.85
Less: Financing costs
Interest expense 2,264,874.13
Other financing charges 113,243.71 2,378,117.84
Net income/loss before other items (1,030,178.99)
Add: Subsidy from other funds 4,898,386.94
Net income 3,868,207.95

112 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

F. RECONSTRUCTED BALANCE SHEET

MATUBIG WATERWORKS SYSTEM

Matubig, Surigao del Norte
BALANCE SHEET
As of December 31, 2009

ASSETS
Current assets:
Cash in bank 4,280,535.34
Accounts receivable 2,844,131.56
Less: Allowance for doubtful accounts (56,882.63)
Net receivables 2,787,248.93
Total current assets 7,067,784.27

Property, plant and equipment:

Office equipment 117,474.00
Less: Accumulated depreciation - Office equipment (17,526.60) 99,947.40
Furniture and fixtures 44,876.45
Less: Accumulated depreciation - Furniture and fixtures (33,833.97) 11,042.48
Other machinery and equipment 55,000.00
Less: Accumulated depreciation - Other machinery
and equipment (9,900.00) 45,100.00
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Less: Accumulated depreciation - Artesian wells,
reservoirs, pumping stations and conduits (2,681,759.15) 5,032,798.85
Construction in progress - Artesian wells, reservoirs,
pumping stations and conduits 25,844,514.99
Total property, plant and equipment 31,033,403.72
TOTAL ASSETS 38,101,187.99

LIABILITIES and GOVERNMENT EQUITY

Liabilities
Guaranty deposits payable 119,500.00
Loans payable - Domestic 22,365,445.64
Other payables 2,584,451.50
Total liabilities 25,069,397.14

Government equity
Government equity 9,163,582.90
Add: Retained earnings 3,868,207.95*
Total government equity 13,031,790.85
TOTAL LIABILITIES and GOVERNMENT EQUITY 38,101,187.99

* The balance of retained earnings is equal to the amount of net income since this is the first year of the ring-fenced financial statements
for Matubig Waterworks System.

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 113

G. STATEMENT OF CASH FLOWS

MATUBIG WATERWORKS SYSTEM

Matubig, Surigao del Norte
CASH FLOW STATEMENT
December 31, 2009

CASH INFLOWS
Collection of receivables 2,485,076.04
Receipt of guarantee deposits 27,600.00
Receipt of other business income 458,844.45
Subsidy from other funds 4,898,386.94
Recoupment of mobilization fee 2,326,006.35
Collection of retention money 1,065,827.80
Total cash inflows 11,261,741.58

CASH OUTFLOWS
Payment of cash expenses 3,260,337.02
Payment of loans 1,988,039.64
Payment of financing charges 2,378,117.84
Payment to contractors 10,658,277.98
Purchase of equipment 98,000.00
Total cash outflows 18,382,772.48

NET CASH INFLOWS (7,121,030.90)

Add: Cash balance beginning 11,401,566.24

CASH BALANCE, end 4,280,535.34

114 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

H. CLOSING ENTRIES

Particulars Debit Credit

JEV # 14
Water sales revenue 4,504,367.00
Other business income 458,844.45
Subsidy from other funds 4,898,386.94
Income and expense summary 9,861,598.39
To close the income accounts

JEV # 15
Income and expense summary 5,993,390.44
Salaries and wages - Permanent 1,169,815.92
Salaries and wages - Casual 308,400.00
PERA 86,360.00
ADCOM 154,260.00
RA 34,547.40
TA 34,547.40
Cash gift 128,550.00
Year-end bonus 97,484.66
Life and retirement insurance contribution 140,377.91
Pag-Ibig contribution 23,460.36
PhilHealth contribution 14,086.50
ECC contribution 9,155.40
Other personnel benefits 75,920.00
Travelling 6,275.87
Office supplies 3,810.00
Accountable forms 1,647.25
Electricity 485,120.30
Fidelity bond premiums 6,933.75
Repairs and maintenance 319,737.85
Miscellaneous expense 159,846.45
Bad debts expense 39,025.00
Depreciation expense - FF 2,464.37
Depreciation expense - OME 9,900.00
Depreciation expense - Artesian wells, reservoirs,
pumping stations and conduits 303,546.21
Interest Expense 2,264,874.13
Other financing charges 113,243.71
To close the expense accounts

JEV # 16
Income and expense summary 3,868,207.95
Retained earnings 3,868,207.95
To close net income to retained earnings

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES 115

I. POST CLOSING TRIAL BALANCE

MATUBIG WATERWORKS SYSTEM

Matubig, Surigao del Norte
POST-CLOSING TRIAL BALANCE
December 31, 2009

Account titles DEBIT CREDIT

Cash in bank 4,280,535.34
Accounts receivable 2,844,131.56
Allowance for doubtful accounts 56,882.63
Office equipment 117,474.00
Accumulated depreciation - Office equipment 17,526.60
Furniture and fixtures 44,876.45
Accumulated depreciation - Furniture and fixtures 33,833.97
Other machinery and equipment 55,000.00
Accumulated depreciation - Other machinery and equipment 9,900.00
Artesian wells, reservoir, pumping stations and conduits 7,714,558.00
Accumulated depreciation - Artesian wells, reservoirs,
pumping stations and conduits 2,681,759.15
Construction in progress - Artesian wells, reservoirs,
pumping stations and conduits 25,844,514.99
Guaranty deposits payable 119,500.00
Loans payable - Domestic 23,856,475.36
Other payables 2,584,451.50
Government equity 7,672,553.18
Retained earnings 3,868,207.95
TOTALS 40,901,090.34 40,901,090.34

116 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM

DILG MEMORANDUM CIRCULAR 2011-65

117
118 PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM