About Philippine Water Revolving Fund (PWRF) Support … to Establishing LGU-Run... · About...

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 Program’s 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-SP’s 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 USAID’s 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

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.

Utilities as Economic Enterprises

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 step—that of segregating the water utility accounts—in 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 Baños 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.

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAMvi

viiGUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

GUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

contents

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

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAMviii

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 utility’s 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 2008–2009 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

ixGUIDE TO ESTABLISHING LGU-RUN WATER UTILITIES AS ECONOMIC ENTERPRISES

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

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAMx

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

ADCOM Additional compensationAIP Annual Investment PlanAve AverageBOM Budget Operations ManualCO Capital outlayCoops CooperativesDILG Department of the Interior

and Local GovernmentECC Employees compensation

contributionFF Furniture and fixturesFMG Financial management

guidelinesGFI Government financing

institutionsIEC Information, education and

communicationIRA Internal Revenue AllotmentJEV Journal entry voucherKPI Key performance indicatorsLCE Local Chief ExecutiveLDC Local Development CouncilLDIP Local Development

Investment PlanLFC Local Finance CommitteeLGC Local Government CodeLGOO Local Government Operations

OfficerLGU Local government unitLPDC Local Planning and

Development OfficerLWUA Local Water Utilities

AdministrationMandE Monitoring and evaluation

MDFO Municipal Development Fund Office

MOOE Maintenance and other operating expenses

MPC Multipurpose cooperativeNGAS New Government Accounting

SystemNRW Non-revenue waterNWRB National Water Resources

BoardOandM Operations and maintenanceOME Other machineries and

equipmentOR Official receiptsPERA Personal Expenses Relief

Allowance PFI Private financing institutionsPGB Policy Governing BodyPI Public infrastructuresPS Personal servicesPWRF-SP Philippine Water Revolving

Fund Support ProgramRA Representation allowanceRWSAs Rural Waterworks Systems

AssociationsSB Sangguniang BayanTA Transportation allowanceUSAID United States Agency for

International DevelopmentWATSAN Water and sanitationWD Water districtsWSP Water and Sanitation ProgramWSPs Water service providers

Abbreviations and Acronyms

PHILIPPINE WATER REVOLVING FUND SUPPORT PROGRAM2

3

SECTION ONE

Many 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 LGU’s 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

KPI/utility modelIdeal/

industrystandard

Benchmarking results

LGURWSAs/

CoopsWD Private Ave

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

Average tariff (P/m3) - 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


The process of establishing a water utility as 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

operates as a business concern. On 4 May 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 utility’s 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 utility’s resources primarily for operations and maintenance, as well as capital investments.

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.


1.2 RING-FENCING TOWARDS 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,

Figure 1. Water utility economic enterprise program

Full ring-fencing

At least 12 months after accounts reconstruction

Ring-fencing transition period activities:• Parallel books of accounts

maintained• Revenues recorded when realized• All costs accounted for, including

shared costs• Separate record of property, plant

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

Full-blown economic enterprise

Water utility operating as a self-sustaining public utility and economic enterprise

• Retains excess income for operations and improvements

• Implements performance contracting

Accounts reconstruction

Within 3 months

Reconstruction of water utility accounts

Income statement adjusted based on accrual and full costing

Balance sheet beginning balances set-up

involves the preparatory activities for ring-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


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 utilities—Alburquerque and Jagna in Bohol, Magallanes in Sorsogon, and Mahayag and Margosatubig in Zamboanga del Sur—and three water multipurpose cooperatives: Matanao Waterworks and Sanitation MPC in Matanao, Davao del Sur; Lamac MPC in Pinamungajan, Cebu; and O’Donnell 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

Exhibit 2. Comparative analysis of performance of ring-fenced water utilities for 2008–2009

and to prepare the water utility’s 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-à-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)

KPIs

LWUA / DILG

industry ave

Jagna Alburquerque Margosatubig Antequera Mahayag

2008 2009 2008 2009 2008 2009 2008 2009 2008 2009

Return on total assets (%)

6 2.60 7 -5 -6 -1 3 -5 -4 -5 -3

Average cost per cubic meter

11.44 4.74 3.79 15.9 15.19 12.45 13.13** 13.33 14.87 6.1 8.81

Collection period (months)

2.3 1.3 0.57 1.9 1.7 7.6 8.1** 2 2.3 9.8 13.2

Collection efficiency (%)

91 95 78* 86 88 37 51 90 84 37 51

Average tariff (pesos per cubic meter )

7.22 2.94 3.45 5.68 5.68 6.78 12.64 5.7 6.31 4.31 6.18

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 water (%)

26No

data34

No data

No data

63 42 56 35 61 59

* 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 MDFOSource: “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


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 LGU’s 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.

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


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 guideTaking 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 reconstructionThis 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 accountsThis 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

ring-fenced accounts alongside the LGU’s General Fund books of accounts.

Section 4 Evaluation of water utility performanceBenchmarking 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 utilityThis 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 utilityOne 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 enterpriseThis 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.

9

SECTION TWO

This 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

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-fencingFirst 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 LGU’s key financial management officers, such as the accountant, treasurer, budget officer, and chairman on appropriations.


The office to which the water utility unit is attached should also be involved, whether this be the engineering or planning and

Exhibit 3. Executive order creating a ring-fencing team

development office. The DILG Local Government Operations Officer may also be involved in monitoring and coordination.

Source: LGU Jagna, Bohol


2.1.2 Basic information gatheringThe 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 profileAs 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)

Water utility documents, forms, records and reportsDocuments, 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 functionsAnother 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 organization’s systems and procedures. Understanding the different processes in water service provision, through


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 utility’s 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 balancesAfter 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.

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,

Example 1. Example of determining the beginning balance of Cash in Bank 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 accounts2% of unpaid water bills = P892,881.60 x 2% = P17,857.63

Exhibit 4. Inventory count sheet

Inventory Count Sheet

Sheet no.: Counted by:

Item no. Description Location Quantity Acquisition cost Total cost

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

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

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.


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9.15


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.

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

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

Guarantee deposits payable2009 total deposits from water customers (Note 5) - P 119,500.00Less: 2009 collections on guarantee deposits - 27,600.002009 beginning balance - P 91,900.00

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

Other payables10% Retention money on contracts 1st progress billing - P 877,162.84 2nd progress billing - 641,460.86Total - P1,518,623.70

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

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.

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


Government equityASSETS 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

Example 6. Government equity

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 utilities—the 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.


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 2009’s 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

officer of Matubig Waterworks System, the total Other Business Income of the utility is composed of the following:

Application fee = P110,400.00Reconnection fee = 150.00Other service fee = 348,294.45Other 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 yearBasically, 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.

Example 7. Other Business Income


Dedicated expensesDedicated 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.

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

Dedicated maintenance and other operating expensesMOOE Electricity 478,634.00Repairs and maintenance 302,583.40Miscellaneous expense 159,417.00Total 940,634.40

Shared expensesShared 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 utility’s 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.

Example 8. Dedicated expenses


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 – 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

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

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 utility’s share in the PS and MOOE of LGU offices providing support services are as follows:


Step 5. Determine the depreciation expenseIn 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 NWRB’s 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


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


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

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


In determining the depreciation expense for the year, simply add more columns to the schedule of depreciation shown in Example 3—one 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 System’s PPEs, the depreciation for the year 2009 is as follows:

Asset descriptionAcquisition

cost

Estd useful

life

Annual depreciation

Years in use as of 12/31/09

Depreciation expense for

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 - Brgy Silang

210,000.00 10 18,900.00 5 18,900.00

Deep well 120 ft w/ 1.5HP submersible pump - Brgy Oslao

75,000.00 10 6,750.00 10Fully

depreciated

Deep well 180 ft w/ 1.5HP submersible pump - Brgy Ponong

170,000.00 10 15,300.00 10Fully

depreciated

Deep well 60 ft w/ 1.5 HP submersible pump - Brgy Banbanon

63,000.00 10 5,670.00 10Fully

depreciated

Deep well 160 ft w/ 2HP submersible pump - Brgy Magtangale

120,000.00 10 10,800.00 8 10,800.00

Deep well 200 ft w/ 1HP submersible pump - Brgy Linongganan

175,000.00 10 15,750.00 7 15,750.00

Deep well 250 ft w/ 1.5 HP submersible pump - Brgy Jubgan

325,000.00 10 29,250.00 4 29,250.00

Deep well 200 ft w/ 1.5HP submersible pump - Brgy Amontay

220,000.00 10 19,800.00 8 19,800.00

Deep well 200 ft w/ 1.5HP submersible pump - Brgy Baybay

177,545.00 10 15,979.05 4 15,979.05

Deep well 100 ft w/ 1.5 HP submersible pump - Brgy Diaz

83,000.00 10 7,470.00 6 7,470.00

Submersible pump 3HP - Brgy Honrado Spring

254,000.00 10 22,860.00 7 22,860.00

Deep well w/ 1HP submersible pump - Brgy Brazil

28,000.00 10 2,520.00 10Fully

depreciated

Sub-total 1,900,545.00 171,049.05 140,809.05


Asset descriptionAcquisition

cost

Estd useful

life

Annual depreciation

Years in use as of 12/31/09

Depreciation expense for

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

Office tables (5 units) 24,250.00 5 4,365.00 5Fully

depreciated

Filing cabinet 6,935.50 5 1,248.39 5Fully

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

Typewriter 19,474.00 5 3,505.32 5Fully

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 expenseCommensurate 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.


Customer name

Customer type

Total accounts receivable

Current

PAST DUE

1–30 days

31–60 days

61–90 days

Over 90 days

Total

% Uncollectible

Allowance for doubtful accounts

Exhibit 6. Schedule of aging of receivables

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

AgeAccounts receivable

Uncollectible (%)Allowance for doubtful

accounts

1–30 days past due 1,422,065.78 0.0 -

31–60 days past due 711,032.89 2.0 14,220.66

61–90 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

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

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.

Example 11. Ledger balance


Step 7. Determine the financing expenseSome 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.

Step 8. Prepare the trial balanceThe 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.

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

Example 13. Common Financing Costs

Step 9. Prepare the reconstructed financial statementsThe 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 utility’s 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 utility’s 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.

Example 12. Bad debts expense

Allowance for doubtful accounts - P56,882.63Less: Allowance, beginning - 17,857.63Bad debts expense - P39,025.00


Acc

ount

titl

esT

RIA

L BA

LAN

CE

INC

OM

E ST

AT

EMEN

TBA

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CE

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T

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EDIT

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IT

Cas

h in

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k

4,2

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,535

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4,2

80

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.34

Acc

ount

s re

ceiv

able

2,8

44

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2

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r do

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5

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63

Off

ice

equi

pmen

t

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7,4

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0

117,

474

.00

Acc

umul

ated

dep

reci

atio

n -

offic

e eq

uipm

ent

17,

526.

60

17,

526.

60

Furn

iture

and

fixt

ures

4

4,8

76.4

5

4

4,8

76.4

5

Acc

umul

ated

dep

reci

atio

n -

Furn

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and

fixtu

res

33,

833

.97

33,

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.97

Oth

er m

achi

nery

and

equ

ipm

ent

55,

00

0.0

0

55,

00

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0

Acc

umul

ated

dep

reci

atio

n -

Oth

er m

achi

nery

and

equi

pmen

t

9,9

00

.00

9

,90

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esia

n w

ells

, res

ervo

ir, p

umpi

ng s

tatio

ns

and

cond

uits

7

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umul

ated

dep

reci

atio

n -

Art

esia

n w

ells

,

rese

rvoi

rs, p

umpi

ng s

tatio

ns a

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its

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stru

ctio

n in

pro

gres

s -

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n w

ells

,

rese

rvoi

rs, p

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ng s

tatio

ns a

nd c

ondu

its

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9

25,8

44

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rant

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posi

ts p

ayab

le

119,

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.00

11

9,50

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s pa

yabl

e -

Dom

estic

22,3

65,4

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4

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er p

ayab

les

2

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ernm

ent e

quity

9,

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909,

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582.

90

Wat

er s

ales

reve

nue

4

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ess

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me

458

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5

458

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5

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ries

and

wag

es -

Per

man

ent

1

,169,

815

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15.9

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ries

and

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es -

Cas

ual

308

,40

0.0

0

3

08

,40

0.0

0

PERA

8

6,36

0.0

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8

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AD

CO

M

154

,260

.00

154

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RA

34

,54

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0

3

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40

Exam

ple

14. T

rial

Bal

ance

Wor

kshe

et


Acc

ount

titl

esT

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L BA

LAN

CE

INC

OM

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IT

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Cas

h gi

ft

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.00

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r-en

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nus

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and

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emen

t ins

uran

ce c

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ibut

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1

40

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-Ibi

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n

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lHea

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ibut

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C c

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ibut

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erso

nnel

ben

efits

7

5,92

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7

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Tra

velli

ng

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7

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87

Off

ice

supp

lies

3,8

10.0

0

3,8

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ount

able

form

s

1

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7.25

1,6

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25

Ele

ctri

city

4

85,

120

.30

48

5,12

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0

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elity

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d pr

emiu

ms

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airs

and

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nten

ance

31

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cella

neou

s ex

pens

e

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rest

exp

ense

2,2

64

,874

.13

2,

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,874

.13

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er fi

nanc

ing

char

ges

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243.

71

1

13,2

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71

Bad

deb

ts e

xpen

se

39,

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.00

39,

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.00

Dep

reci

atio

n ex

pens

e -

FF

2,4

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Dep

reci

atio

n ex

pens

e -

OM

E

9

,90

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reci

atio

n ex

pens

e -

Art

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n w

ells

,

rese

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rs, p

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ng s

tatio

ns a

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ondu

its

303,

546.

21

3

03,

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21

Sub

sidy

from

oth

er fu

nds

4

,898

,38

6.94

4

,898

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TO

TALS

4

6,8

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80

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4

6,8

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80

.78

5

,993

,390

.44

9

,861

,598

.39

40

,90

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90.3

4

37,

032

,88

2.39

Net

sur

plus

3

,868

,20

7.95

3

,868

,20

7.95

9,8

61,5

98.3

9 9

,861

,598

.39

40

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1,0

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4

40

,90

1,0

90.3

4


Reconstructed income statement

MATUBIG WATERWORKS SYSTEMMatubig, Surigao del Norte

INCOME STATEMENTFor 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

Example 15 Reconstructed Financial Statements



BALANCE SHEETAs 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.

Reconstructed balance sheet


Statement of cash flows

MATUBIG WATERWORKS SYSTEMMatubig, Surigao del NorteCASH 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 accountsClosing 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.

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

Example 16. Sample closing journal entries


Particulars Debit Credit

JEV # 15


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





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


Retained earnings 3,868,207.95

To close net income to retained earnings


Summary StepsAccounts Reconstruction

1 Set up the books of accounts

2 Establish the balance sheet accounts’ 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

35

SECTION THREE

This 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

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 utility’s 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.

Ring-fencing system NGAS

Books of accounts Books of accounts

Journals1. Cash receipts journal2. Cash disbursements journal3. Check disbursements journal4. General journal5. Bill register

Ledgers6. General ledger7. Subsidiary ledger

Journals1. Cash receipts journal2. Cash disbursements journal3. Check disbursements journal4. General journal

Ledgers5. Subsidiary ledger

Box 2. Books of accounts and chart of accounts under the ring-fencing system and the NGAS


Ring-fencing system NGAS

Chart of accounts Chart of accounts

Asset accounts1. Accounts receivable2. Allowance for doubtful accounts3. Artesian wells, reservoirs, pumping stations and

conduits4. Accumulated depreciation - Artesian wells, reservoirs,

pumping stations and conduits5. Other assets

1. Accounts receivable2. Allowance for doubtful accounts3. Public infrastructures - Artesian wells, reservoirs,

pumping stations and conduits4. Other assets

Liability accounts1. Guaranty deposits payable2. Other payables

1. Guaranty deposits payable2. Other payables

Income accounts1. Water sales revenue2. Other business income3. Fines and penalties

1. Income from waterworks system

Expense accountsPersonal servicesa. Salaries and wages - Dedicated1. Salaries and wages - Regular2. Salaries and wages - Casual3. Salaries and wages - Contractualb. Salaries and wages - Shared4. Salaries and wages - Part-time

MOOE1. Chemicals2. Electricity expense - Dedicated3. Electricity expense - Shared4. Bad Debts expenses5. Depreciation expense - Artesian wells, reservoirs,

pumping stations and conduits

1. Salaries and wages - Regular2. Salaries and wages - Casual3. Salaries and wages - Contractual4. Salaries and wages - Part-time

1. Supplies and materials expenses2. Electricity expenses3. Bad debts expenses

Other items1. Subsidy from LGU funds 1. Subsidy from other funds

3.2 BOOKKEEPING

The officer in charge of the parallel books of accounts must be specifically identified. This assignment should be supported by an executive order or a Sangguniang Bayan resolution, especially when unit heads such as the local accountant are involved.

In the case of ring-fencing starters, LGUs may employ any of the three scenarios to maintain ring-fenced water utility books of accounts.

Scenario 1. The ring-fenced water utility accounts are maintained by the utility’s own bookkeeper, who is under the supervision of the local accountant. The ring-fencing system encourages the creation of a separate water-works unit with its own bookkeeper.

Scenario 2. The ring-fenced water utility accounts are maintained by the accounting staff member who is under the supervision of the local accountant.


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 rateThe 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 proportionThe 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

3. Count man-hoursThe 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 utility’s 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 accountsThe waterworks system unit’s 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.


b. Cash Disbursements Journal. This is the monthly special journal used to record cash payments, primarily payments of salaries and wages of the waterworks system’s 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.

General ledger accountsSubsidiary 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 feesb. Reconnection feesc. Other service fees

(specify)

Box 3. Subsidiary ledgers for major controlling accounts in the general ledger

3.4.2 Set up parallel cash booksAll 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 revenuesThe 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 system’s obligations paid for by LGU funds.


3.4.4 Provide separate official receiptsSeparate 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 utilityAll 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 documentsThe 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

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 vouchersJournal 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.


3.4.8 Reconcile accounts monthly The reconciliation of the water utility’s 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 utility’s separate bank accounts.

3.4.9 Prepare periodic ring-fenced financial reportsThe 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,

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 utility’s 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 utility’s 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.

41

SECTION FOUR

This 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-à-vis other service providers within the same industry. Internal benchmarking on the other hand looks into meaningful compari-sons between the utility’s current and prior period performances.

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.

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

Step 3. Benchmark the KPI values. Having computed for the KPI values, a com-parison of the utility’s 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,

compare the results with the previous year’s 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

the current year’s 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

KPI Formula

Current RatioCurrent Assets

Current Liabilities

Operating Ratio (in %)Total Operating ExpensesTotal Operating Revenues

Return on Assets (in %)Net IncomeTotal Assets

Collection Period (in months)Accounts Receivables, end

Water Revenues ÷ 12 months

Collection Efficiency (in %)Total Annual Collections

Total Annual Billings

Average Tariff / m3Water Sales Revenues

Total Volume Billed

Cost Recovery Ratio (in %)Cash Operating Expenses

Operating Revenues

Subsidy Level (in %) 100% - Cost Recovery Ratio

Average Cost / m3Total Operating Expenses

Total Volume Billed

Service Coverage Ratio (in %)No. of connections x No. of persons per hh

Population in Administrative Area

Staffing RatioNo. of Staff

No. of connections ÷ 1000

Monthly Average Consumption (in m3)Total Volume Billed ÷ 12 months

No. of connections

Non-Revenue Water (in %)Total Volume Produced – Total Volume Billed

Total Volume Billed


results are used—whether as performance management tool or as motivator—the 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

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.

Figure 2. Discussion points in conference with local officials

Overview of ring-fencing systemWalk through the ring-fencing process flow, the steps in

accounts reconstruction, and the water utility profile

Next steps

Key performance indicators and values

Ring-fenced financial statements

Open forum: Discussion on next steps, opening of bank account, formulation and adoption of financial

management guidelines, business planning

Key performance indicators used and their definitions, KPI formulas and results, benchmarking with industry average

and ideal values, discussion on current performance

Major assumptions, system of allocation of shared expenses, reconstructed income statement, balance sheet,

and cash flow statement


The discussion should include a focused review of ring-fenced information translated into KPI results that reflect your utility’s per-formance—defining the utility’s current status and revealing the utility’s 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 utility’s 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

performance of the water utility, and at the same time discover the utility’s 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.


Summary StepsEvaluation of Water Utility Performance

1

2

3

4

Choose your KPIs

Compute your KPI results

Benchmark your KPI values with industry average and/or budget

Communicate your KPI results to authorities and stakeholders

47

SECTION FIVE

The 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 utility’s financial management—from 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.

The drafting of the financial management guidelines governing the water utility’s 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 utility’s 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 RationaleThis section of the guideline presents the ultimate goal of ring-fencing—the 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 utility’s 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 LGU’s commitment to adopt ring-fencing as a reform measure and consequently providing for the formation of the ring-fencing team.

5.1.2 ObjectiveBriefly 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 utility’s operations.

5.1.3 PrinciplesThe 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 utility’s operations and financial condition.

5.1.4 Definition of termsFor 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 methodologiesThe 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


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

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 LGU’s 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 utility’s performance. This may be under consensual agreement with the NWRB, the local Sanggunian or its committee on public utilities, or other equivalent.


Exhibit 7. Sample ring-fencing financial management guidelines

Ring-Fencing Financial Management GuidelinesMabuhay Waterworks System

Municipality of Mabuhay

I. RationaleAs 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 utility’s 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 LGU’s commitment to adopt ring-fencing as a utility reform measure and organize the ring-fencing team.

II. ObjectiveThe 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. PrinciplesThe 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 termsRing-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.


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 utility’s operational and financial performance that reflect its critical success or failure factors.

V. Processes, procedures, and methodologies

A. Billing1. 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


• 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. Collection1. 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 treasurer’s 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 equipment1. 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


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. Budgeting1. 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 year’s budget shall be used as a tentative budget for the first quarter of the

current year pending the approval of the current year’s annual budget by the Sangguniang Bayan.

E. Accounting and reporting1. 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:


• 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 evaluation1. 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.


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 shouldn’t 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.

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 utility’s 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 LGU’s leg-islative body. A local administrative ordinance transcends the terms of office of local officials.


Exhibit 8. SB resolution adopting the financial management guidelines

Source: LGU Alburquerque, Bohol


5.4 IMPLEMENTATION

The release of the signed SB resolution or local ordinance signals the execution of the guidelines, and the local chief executive may then issue a separate executive order instruct-ing the water utility and other concerned LGU

officers and employees on the implementation of the guidelines. The EO may detail the tasks and responsibilities of concerned local officers and employees, thus helping assure effective implementation of stipulations in the financial management guidelines.

Financial Management Guidelines

Ring-Fencing Team

Consultations with water utility and other LGU staff

First Draft

Second Draft

Third Draft

Final Draft

Local Sanggunian

Sanggunian Resolution

Local Chief Executive

Signed and Approved Guidelines

Local Finance Committee

Discussions With Policy Governing Board / Local

Chief Executive

Endorsement Letter

Administrative Ordinance

Executive Order on Implementation

Final Draft and Endorsement Letter

Review/Comment

Figure 3. FMG review and adoption process


59

SECTION SIX

The 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 utility’s 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 utility’s operational needs are given priority in the use of funds. It is also a potent tool in monitoring LGU subsidy.

The next important step is for the LGU to use the separate bank account exclusively for water utility transactions. The utility’s 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 related to water service provisions.

The cashbooks to maintain are:1. Cashbook – Cash in Bank (Exhibit 9).

This is used to record cash deposits to and withdrawals from the waterworks system’s bank account.

2. Cashbook – Cash in Treasury (Exhibit 10). This is used to record collections of water bills and other water services and corre-sponding deposits of collections.

Exhibit 9. Cashbook - Cash in Bank


Exhibit 10. Cashbook - Cash in Treasury


63

SECTION SEVEN

The 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 LGU’s 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).

Particulars Amount % to Total

Personal services (PS)Maintenance and other operating expenses (MOOE)Capital outlay (CO)Transfer to general fundDebt servicingReserve (5%)Unappropriated balance

xxxx.xxxxxx.xxxxxx.xxxxxx.xxxxxx.xxxxxx.xxxxxx.xx

xxxxxxxxxxxxxx

TOTAL xxxx.xx 100%

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


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 year’s budget estimates. The amounts and estimates used in the utility’s 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

Step Budget process Fixed budget calendar

1 LDIP/AIP Preparation January 1 to June 15

2Issuance of budget call June 16 to June 30 or 1st week of

July

3 Preparation and submission of budget proposals July 15

4Conduct of technical budget hearings on budget proposals submitted by department heads

July 16 to August 31

5Consolidation of budget proposals into local expenditure program (LEP) and preparation of the budget of expenditures and sources of financing (BESF)

September 16 to 30

6Preparation of the budget message and submission of executive budget to the Sanggunian

Not later than October 16

7Enactment of the annual budget of the ensuing fiscal year by the local Sanggunian

October 17 onwards

8Submission of the annual or supplemental budgets to proper reviewing authority

Within three days from approval by the LCE of annual or supplemental budgets

9Review of the annual or supplemental budgets Within 90 days from receipt of

submitted annual or supplemental budgets for review

10Implementation/execution of annual or supplemental budgets/performance monitored and evaluated

January 1 to December 31 of the following year

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

Source: 2008 Budget Operations Manual for Local Government Units


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 Sanggunian’s 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 LGU’s 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

water utility should be conscientious about the utility’s 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 utility’s annual income to utility personnel themselves is a way of setting the unit’s 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 utility’s 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 unit’s performance is evaluated. Responsible for monitoring the implementation of the utility’s programs and projects, the water unit head is tasked to ensure adherence to plans,


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 treasurer’s 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).

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).


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71

SECTION EIGHT

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. Corporatization—which is the creation of new entity—can 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

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 concernedb. It fills in service gaps not adequately

provided by the private sectorc. 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 prerequisitesThe DBM’s 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

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 organizationStaffing 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 ratesAnother 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 utility’s 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 budgetAs 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

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 authoritiesThe 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.


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 accountsWith 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 DBMAfter 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 council’s resolution approving the establishment of water utility as an economic enterprise

• Local Sanggunian’s enacted ordinance approving the tariff rates

• Local Sanggunian’s enacted ordinance appropriating the separate budget

• Local Sanggunian’s enacted ordinance approving the creation of the water utility as economic enterprise

• Local chief executive’s request letter to DBM

Step 8. Continue operation and maintenance of the ring-fenced water utilityThe 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 utility’s financial performance will also require zero-subsidy or even exhibit positive surplus that can support other LGU’s social services.

8.3 RESTRUCTURING THE WATER UTILITY’S 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).

RegulatorThe 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 bodyIt 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.

ManagementThe 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 sectionsFor LGU-run water utilities, the three key sections are (1) operations and maintenance, (2) customer account management, and (3) general administration and finance.

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.


LOCAL CHIEF EXECUTIVE LEGISLATIVE COUNCIL

REGULATOR

WATER SUPERVISOR

POLICY GOVERNINGBOARD

LOCAL DEVELOPMENT & PLANNING COORDINATOR

GENERAL ADMIN & FINANCE

LOCAL BUDGET OFFICER

LOCAL TREASURER

LOCAL ACCOUNTANT

HUMAN RESOURCEOFFICER

OPERATION AND MAINTENANCE

PUMP OPERATOR

ELECTRICIAN

PLUMBER

CUSTOMER ACCOUNTSMANAGEMENT

METER READER

BILL COLLECTOR

CUSTOMER ACCOUNTSCLERK

Legend:Orange Boxes : Waterworks UnitsBlue Boxes : Other LGU officers

performing support functions for the water utility

Figure 4. Organization chart of a typical LGU-run water utility

8.4 ZERO-SUBSIDY AND/OR POSITIVE 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 utility’s operations and maintenance costs, so financial assistance from LGUs in the form of cash subsidies help keep the utility’s operations running.

Zero-subsidy is a measure of full cost recovery. 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.


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 don’t 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.

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.


Summary StepsCreation of LGU-Run Water Utility as Economic Enterprise

12345678

Comply with the prerequisites: Feasibility Study and/or Strategic Business Plan

Structure the new water unit organization

Set the new tariff rates

Set the separate budget

Obtain approval from authorities and stakeholders through Sanggunian Resolutions and Minutes of Public Hearings

Carry forward the ring-fenced books of accounts

Submit to Department of Budget and Management (DBM) the complete proposal

Continue the operation and maintenance of the ring-fenced water utility

79

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 people’s 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

costs for a Level III type water system were funded from the LGU’s 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. Escatron’s 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 municipality’s 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.

SAMPLE PROBLEM


Construction commenced in January 2008 and was completed in May 2009. The system began operation in July of the same year.

As of the ring-fencing mentoring visit date, the LGU-run water utility catered to 2,012 households.

MUNICIPALITY PROFILE

Matubig was once a part of the municipality of Mailog (now a city), province of Surigao del Norte. As the population increased, the people of Matubig resolved that it be made a separate town. On 13 June 1950, the late President Elpidio C. Quirino signed RA507 that created the Municipality of Matubig.

Matubig is a third class municipality with a population of 42,462 people in 8,026 house-holds (2007). Its average family nuclei is five persons and the average annual family income is P30,000.00.

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.

WATERWORKS ORGANIZATION

Presently, the MWS operates under the Office of the Municipal Engineer. It is managed by a supervisor who is a civil engineer by profes-sion. There are 14 staff members under him, 7 of whom are casual employees.

The following information has been provided by the supervisor:

VISION STATEMENT

An ecologically balanced water and sanitation system that ensures quality service to a healthy and progressive community.

MISSION STATEMENT

The Matubig Water System shall provide potable and sustainable water to healthy and progressive community through a dynamic effort of committed personnel and Local Government Unit as a whole.

KEY RESULTS AREAS

• 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


Municipal Mayor

Municipal Budget Officer

Mun. Planning and Dev’r Coordinator

Pump Operators/ Water Tenders



Municipal Accountant

Municipal Engineer

Municipal Treasurer

Waterworks Supervisor

Sangguniang Bayan

Plumbers

Plumbers

Pipe Fitters Meter Readers

Meter Readers

Meter Readers

Meter Readers

Clerks Bill CollectorElectrician

Clerk

MWS Organization Chart

TASKS AND RESPONSIBILITIES

WATER SUPERVISOR - Supervises skilled and technical personnel in the production, treatment of water and in maintenance and other operations

BILL COLLECTOR - Receives payments from water consumers, conducts field collections and remits collections to the Treasurer

CLERK - Assists the bill collector, maintains customer records, encodes monthly readings and prepares statements of accounts and notices of disconnection

PLUMBER - Assembles transmission and distribution pipes, valves and hydrants, and performs routine repairs and plumbing works

PIPE FITTER - Measures, cuts, threads, and fastens pipes, repairs leaks in the transmission and distribution lines and other accessories of the entire water system

METER READER – Conducts monthly reading and delivery of bills, receives complaints from consumers and prepares corresponding maintenance orders or service requests, and disconnects delinquent consumers

ELECTRICIAN - Monitors electrical writings of water system facilities and pumps

WATER TENDER/PUMP OPERATOR - Oversees and maintains intake boxes, reser-voirs, calibrating machines, transmission lines, chlorinator, water pumps and other structures of water system


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 system’s 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

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 IndustrialFirst 10 m3 1 00 200Excess of 10 m3 to 20 m3 20 30Excess of 20 m3 to 30 m3 25 40Excess 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• In case the deposit is no longer sufficient

to cover water fees and surcharges, the water connection shall be disconnected after failure to settle the difference after a period of 10 days from receipt disconnec-tion notice

Reconnection• The reconnection fee is P50.00

• Disconnected subscribers may be recon-nected upon full payment of fees due and required on their outstanding account and within 72 hours upon completion of an orientation seminar

RING-FENCING TEAM FIELD WORK

Executive Order No. 088 formalized the creation of the ring-fencing team composed of the municipal accountant as the lead member, and the municipal engineer, waterworks supervisor, municipal planning and develop-ment officer, municipal treasurer, budget 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%Mayor’s Office - 1%

They further declared that for maintenance and other operating expenses (MOOE), the following shall be the basis for computing the water utility’s share:

Accounting - 10% of traveling and office supplies expenses

Treasury - 25% of traveling, fidelity bond premiums and accountable forms expenses

Budget - 1% of office supplies expenses

MPDC - 1% of traveling and office supplies expenses

Engineering - 15% of traveling, repairs and maintenance, electricity, office supplies and miscel-laneous expenses

Mayor’s Office - 1% of traveling expenses

Municipal accounting officeThe municipal accountant furnished copies of audited municipal financial reports for the calendar year 2009, as follows:


STATEMENT OF INCOME AND EXPENSESFor 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:


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


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



ASSETSCURRENT 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


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 EQUITYLIABILITIES 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.


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


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 municipality’s quarterly internal revenue allotment (IRA) and other revenues including but not limited to the income to be derived from the municipality’s 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 year’s adjustment (2007)

MUNICIPAL TREASURER’S 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:


Official Receipt of the Republic of the Philippines

No. 0054201

Date

Agency LGU Matubig Fund

Payor Ruby Cedeño

Nature of Collection

Account Code

Amount

Water Service for Jul-09 100 - TOTAL 100 - Amount in Words One hundred pesos only

Cash Drawee Bank

Number Date

Check

Money Order

Received in the amount stated above. Collecting Officer

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

Official Receipt of the Republic of the Philippines

No. 0054211

Date

Agency LGU Matubig Fund

Payor Ferdinand Abraham

Nature of Collection

Account Code

Amount

Water Service for Jun-09 814 - Jul-09 814 - TOTAL 1,628 - Amount in Words One thousand six hundred twenty eight pesos only

Cash Drawee Bank

Number Date

Check

Money Order

Received in the amount stated above. Collecting Officer

NOTE: Write the number and date of this receipt on the back of the 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.


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

Type (Form No.)Official Receipt/Serial No.

AmountFrom 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:


Month Water bills Arrears Guarantee Application fee Reconnection Metering fee deposits feeJan-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 year’s 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 - QuarterlyYear Date Principal Interest

Bankcharge

Total interest and financial charges

Total Balance

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


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 CostOffice 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 SYSTEMPersonal services

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

MOOE Electricity 478,634.00Repairs and maintenance 302,584.00Miscellaneous expense 159,417.00

Capital outlay 350,000.00


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 budget’s blue book:

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





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.

2009 Annual municipal budget


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 NWRB’s recommendation found in the ring-fencing guide.


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 costs—no extra works or any variation order—and that the LGU has not provided any counterpart on the project


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 Audit’s 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

DateDV no.

Check no. ParticularsProgress

(%)Billed

amountRecoupment Retention

Withholding tax

Net amount

12/22/2007 81 6988302

15% mobilization 3,876,677.25 3,876,677.25

5/24/2008 579 6988306

1st partial payment 33.94 8,771,628.39

775,335.45

877,162.84

614,013.99 6,505,116.11

10/23/2008 1658 6988310

2nd partial payment 58.76 6,414,608.62

775,335.45

641,460.86

449,022.60 4,548,789.71

3/8/2009 363 6988313

3rd partial payment 71.65 3,331,357.98

775,335.45

333,135.80

233,195.06 1,989,691.68

5/31/2009 994 6988316

Final payment 100.00 7,326,920.00

1,550,670.90

732,692.00

512,884.40 4,530,672.70

5/31/2010 888 6988412

Release of 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 unit’s 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


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


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 entries3. Post in the ledger4. Prepare trial balance worksheet5. Prepare financial statements at December 31, 20096. Journalize closing entries7. Post in the ledger8. Prepare post-closing trial balance9. Prepare interim financial statements for the period ended July 31, 2010

101

SUGGESTED SOLUTIONS

A. ESTABLISHMENT OF BEGINNING BALANCES

Cash in bankCash 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 accounts2% of unpaid water bill = P892,881.60 x 2% = P17,857.63

Property, plant and equipment

Date acquired

Cost Salvage value

Depreciable cost

Estd useful

life

Annual depreciation

Years in use up to 12/31/08

Accumulated depreciation as

of 12/31/08OFFICE 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 -


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05


Construction in progressFirst billing at 33.94% - P 8,771,628.39Second billing at 58.76% - 6,414,608.62Total 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 payable2009 total deposits from water customers (Note 5) - P 119,500.00Less: 2009 collections on guarantee deposits - 27,600.002009 beginning balance - P 91,900.00

Due to BIRAs 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 - domesticTotal 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 - 1,491,029.73Loan balance as of Dec. 31, 2008 - P24,353,485.28

Other payables10% Retention money on contracts 1st progress billing - P 877,162.84 2nd progress billing - 641,460.86Total - 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


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


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

4. Shared personal servicesFrom the municipal budget

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 expensesFrom 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


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 CreditJEV # 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


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


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


D. T

RIA

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Acc

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titl

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140

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75

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75

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87

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supp

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3,

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3,

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form

s 1,6

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4

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31

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71

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39,0

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0

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0

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2,4

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n ex

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9,90

0.0

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9,90

0.0

0

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n ex

pens

e -

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n w

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, res

er-

voirs

, pum

ping

sta

tions

and

con

duits

30

3,54

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30

3,54

6.21

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sidy

from

oth

er fu

nds

4,8

98,3

86.

94

4

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4

6,8

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80

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4

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5

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9

,861

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.39

40

,90

1,0

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4

37,

032

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2.39

Net

sur

plus

3

,868

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7.95

3,8

68,2

07.

95

9,8

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98.3

9 9

,861

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40

,90

1,0

90.3

4

40

,90

1,0

90.3

4


E. RECONSTRUCTED INCOME STATEMENT


INCOME STATEMENTFor 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


F. RECONSTRUCTED BALANCE SHEET



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.


G. STATEMENT OF CASH FLOWS

MATUBIG WATERWORKS SYSTEMMatubig, Surigao del NorteCASH 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


H. CLOSING ENTRIES

Particulars Debit CreditJEV # 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


I. POST CLOSING TRIAL BALANCE


POST-CLOSING TRIAL BALANCEDecember 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

117

DILG MEMORANDUM CIRCULAR 2011-65


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