Wednesday, November 28, 2007

The Case for Associative Water Systems

The Case for Associative Water Systems

What is an associative water system

We define the associative economy as that section of the economy carried out by self help groups, associations, cooperatives, and other membership organisations. In the case of water provision, the forms of organizations can vary from informal self-help groups and people’s organizations (such as the water POs in Taguig) to large water utilities (such as the Sibonga Waterworks Cooperative in Cebu) owned by the water consumers themselves.

The common feature that distinguishes the organizations in the associative sector is that ownership and control of the water service rest with the consumers or users of the service in their capacity as users and consumers.

As users, they may capitalize the service fully on their own or contract financing to fully pay for the capital costs, or rent capital. They may also collectively perform the service of water provision on their own or contract a full time salaried staff or wage workers. They may own and/or operate their own water source or contract supply contract with water resource developers and/or suppliers. Aside from being consumers, they may also be equity contributors, workers (or volunteers), or suppliers. However, an associative water system is where consumers of water control and own the service in their capacity as consumers.

It has been estimated that almost half of the country is served by water utilities operated by local governments, rural and barangay water service associations (RWSAs and BWSAs), homeowners associations, subdivisions, cooperatives, and small private water providers. Any of these forms can be considered as associative to the extent that it involves consumer ownership and control. Water utilities run by associations as organized consumers can also be considered as pre-cooperatives. (Water districts were thought to be communal properties – hence owned by the water users themselves except that governance involves the appointment of the board by the municipal mayor – until the Supreme Court decided that they were in fact government owned and controlled corporations.)

Advantages of the associative form

Experiences in a number of urban poor communities in Metro Manila and outlying peri-urban areas show that domestic water can be viably supplied by service providers organized as consumer or customer-owned utilities. Most of these are today legally registered either as cooperatives or associations.

The organization of consumers facilitates and secures dependable water supply: (1) by reducing the cost of transactions either with third party bulk water supply providers or with sources of capital to build consumer-owned water supply capacity and distribution systems, and (2) by reducing the costs of managing the water system and enforcement of consumer subscription rules (thou shalt not steal water) through democratic control and peer monitoring that inhere in cooperative and associative organizations.

Moreover, cooperatives mitigate the costs of water tariff regulations as well as health and sanitation regulations through self-regulation by the co-op members themselves.

Such experiences are consistent with economic literature suggesting that for utilities as natural monopolies, the costs of ownership and market contracting are minimized if formal and/or effective ownership is assigned to the utility customers. A good material is Henry Hansmann’s “Ownership of the Firm” (in Journal of Law, Economics, and Organization vol. 4, no. 2 Fall 1988, Yale University). Lawrence B. Morse’s “A Case for Water Utilities as Cooperatives and the UK Experience” (Department of Economics, North Carolina A&T State University, Greensboro, NC) follows up Hansmann’s analysis.

In Morse, market power held by one class of patrons (investors) can cause another class of patrons (consumers) to incur considerable market contracting costs. Imperfect competition and monopoly in the output market imposes significant market transacting costs on the consumers unless they are the owners. Thus, government has to impose price regulation on investor-owned utilities. However, regulation is also a form of market contracting costs. These regulatory costs include not only the staffing, office, and so forth, expenses of the regulatory agency, but also the costs incurred by the utilities themselves in gathering information and making their price request cases. There is also the government and industry costs realized when pricing decisions are appealed.

Morse further notes that risk bearing is one form of ownership cost. One aspect of risk bearing is the risk that may be created when one, as opposed to another, class of patrons is the owner. Additional market contracting costs will be incurred in the future when a water utility inappropriately postpones long-term investments. To the extent that investor owners have shorter time horizons and base decisions on market rather than social costs and benefits, investor-owned utilities have a greater risk of long-term under-investing. This may partly explain the failure of investor-owned providers (if they are not to be called “utilities”) to provide to a number of waterless urban poor communities in Metro Manila.

In Binangonan, 21 barangay-level water co-ops took over the function of water distribution from the barangay government. Results so far: reliability of water supply, drastic reduction of non-revenue water, affordable water rates. The water co-ops have proven to be a more efficient form of enterprise in running water utilities. The water utility operated by the municipal government for the poblacion area is losing money. The water co-ops serving the outlying barangays are not losing money.

Urban poor resettlers in Penafrancia, Antipolo used to buy expensive water from delivery trucks. Organized as the Lungsod Silangan Resettlers Association, Inc. Multipurpose Cooperative (LUSRAI-MPC), they raised initially about P60,000 and took an investment of P1 million in 2002. This qualified them to take a total loan of P6 million from two NGOs to pay for water reticulation. The coop entered into a bulk supply contract with Manila Water and now provides reliable water to residents. All loans have been paid since.

In Bolivia, the policy for private sector participation has not attracted as much private investment as was once hoped for. Evidence indicates that cooperatives may provide an alternative way to meet the water and sanitation needs of poor urban communities. The Cooperativa de Servicios P├║blicos Santa Cruz or Saguapac, a water supply and sanitation (WSS) cooperative in Santa Cruz, Bolivia’s largest city, is the world’s biggest water cooperative. Established in 1979, Saguapac now provides water to over two thirds of the 1.25 million inhabitants of Santa Cruz and continuously provides good quality water through house connections. Some 97 percent of connections are metered and 95 percent of water charges are collected.

A case study on Saguapac (“Consumer Cooperatives: An Alternative Institutional Model for Delivery of Urban Water Supply and Sanitation Services?” by Fernando Ruiz-Mier and Meike van Ginneken, World Bank Water Supply & Sanitation Notes, Note No.5, World Bank: Washington DC, 2006) observes the following:

Owned and controlled by its customers, Saguapac is an enterprise based on honesty, discipline and efficiency. With the help of modern technology, it is trying to build a better-informed society that values water. The cooperative’s corporate culture embodies values of self-help, responsibility, democracy, equality and solidarity.

Saguapac provides its employees with competitive salaries, work stability and the possibility of promotion, and tries to treat everyone equally irrespective of rank. Recognizing that some members’ ability to pay their bills was affected by Bolivia’s economic crisis, Saguapac organized courses for housewives and young people to help them acquire a trade. This has not, however, distracted it from its main role.

Saguapac’s success is partly attributable to the characteristics that stem from its cooperative structure. Its organizational structure has enabled it to isolate decisions from political interference, adopt decisions unrestricted by awkward procedures, and maintain a strong focus on consumers’ needs.

The two-tiered electoral system of Saguapac’s Board contributes to strong member participation that helps maintain a strong customer orientation and encourages a high degree of integrity among elected officers. The continuity of its management has defined a corporate culture dedicated to improved service provision. The high degree of self-reliance and a strong sense of regional identity and the well-organized and powerful civic movement in the city of Santa Cruz are very favorable to cooperatives.

In the case of the Binangonan co-ops, the Lusrai co-op, and the Saguapac, the associated consumers own and control the water utility and appropriate the residual income or surplus. This control can be “intimate” in small communities or “formal” in larger co-ops. In any case, boards that set actual policies are elected from among members. Members receive earnings in proportion to their patronage, aside fro the normal rate paid on their share capital. Co-op members vote on the business plan, including all major decisions in investment, service coverage, and tariffs. In some co-ops, members set inefficiently low tariffs. In some others, members accept tariff levels higher than those faced by customers of surrounding MWSS concessions. Losses are borne by members. Surplus accrues to members.

In the case of bulk water supplied by central utlities, associative water systems have been able to actually reduce the costs of transactions and build a stable market, enabling MWSS concessionaires (Manila Water in particular) to supply to previously waterless urban poor communities at a cost lower than what consumers previously faced when supply was delivered by inefficient methods using delivery trucks and ground water pumps in critical watersheds.

Organized consumers can further realize efficiency gains, as should be reflected in lower water tariffs per cubic meters of household consumption, if the reduced cost of associatively managing and monitoring the water distribution system, leading to dramatic reductions in non-revenue water, is considered in the bulk water price setting of the MWSS concessionaires.

The problem of securing capital to build water supply capacity and distribution does not pose a particularly serious problem for consumer-owned water utilities in urban poor areas when we consider that (1) there is an efficient credit market that caters particularly to the poor, provided by financial service cooperatives and non-profit foundations, and (2) there are available public financing options, and that the attendant inefficiency and moral hazard issues of such public funds can be mitigated by making them available to the organized consumers based on performance (efficient operation for a period of time is rewarded by using public funds pay for a significant balance of the capital loan of the cooperative).

Although investor-owned banks are not considered an option at this point, the dependability and stability of a consumer water utility’s customer base would make it qualified even for commercial loans.

Regulating associative water systems

NWRB is responsible for issuing water permits and certificates of public convenience to water utilities. CDA is responsible for registering and regulating co-ops. The Cooperative Code (R.A. No. 6938, 1990) defines the broad principles that differentiate the roles of CDA and NWRB in regulating water utilities as cooperatives under Section 96 to 98.

Section 96 of the Cooperative Code defines public service co-ops as those “organized to render public service as authorized under a franchise or certificate of public convenience and necessity duly issued by the appropriate government agency.” Such co-ops may include: (1) power generation, transmission, and/or distribution; (2) ice plants and cold storage services and electric cooperatives qualified as cooperatives under the Code; (3) communications services including telephone, telegraph, and telecommunications; (4) land, sea, and air transportation cooperative for passenger and/or cargo; (5) public markets, slaughterhouses and other similar services; and (6) such other types of public services as may be engaged in by any cooperative.
Under Section 97, no public service cooperative shall be registered unless it satisfies the following requirements: (1) it has the favorable endorsement of the proper government agency authorized to issue the franchise or certificates of public convenience and necessity; (2) its articles of cooperation and by-laws provide for the membership of the users and/or producers of the service of such cooperatives; and (3) it satisfies such other requirements as may be imposed by the other pertinent government agencies concerned. The Code provide provides that “In case there are two (2) or more applicants for the same public service franchise or certificate of public convenience and necessity, all things being equal, preference shall be given to a public service cooperative.”

Under Section 98, “(1) Internal affairs such as the rights and privileges of members, the rules and procedures for meetings of the general assembly, board of directors and committees; for the election and qualifications of officers, directors, and committee members, allocation and distribution of surpluses; and all other matters relating to their internal affairs shall be governed by the Co-op Code. (2) All matters relating to the franchise or certificate of public convenience and necessity of public service cooperatives such as capitalization and investment requirements, equipment and facilities, frequencies, rate-fixing, and such other matters affecting their public service operations shall be governed by the proper government agency concerned. (3) The Cooperative Development Authority and the proper government agency concerned shall jointly issue the necessary rules and regulations to implement this Chapter.

Section 98-C provides a much-needed opening to improve the regulation of associative water systems. The associative character of water systems run by consumers calls for the following recommended features of CDA-NWRB Joint Rules and Regulations:

1. Water co-ops are self-regulating since members vote on tariffs and service qualities. Therefore tariff regulations applied to MWSS concessionaires and other private utilities should not apply to associative water. Although the CDA is concerned only about water co-ops, joint CDA-NWRB guidelines can also extend to water associations in so far as their members regulate their own water tariffs.
2. Regulation is not merely to protect one set of stakeholders against the opportunistic behavior of another. NWRB-CDA joint regulatory rules should promote standards that generate trust. Water co-ops that are certified as complying with CDA and NWRB standards (including NWRB’s recommended service levels and quality) would enjoy more trust from other users who are not yet members, from financing organizations, and other stakeholders.
3. NWRB-CDA joint regulations should promote customer and community ownership of water systems. It is the mode with the most chance to work and become sustainable.
4. Deputization of CDA by NWRB, such that Section 97(1) is mitigated, especially for cooperative sub-distribution in areas covered by existing concessions and water districts (that already have their CPCs).

Transformation to associative forms

About one-fifth of the country is served by government-owned water districts supervised by LWUA and by stand-alone water delivery systems operated by cities, municipalities, and the barangay. Metro Manila is served by investor-owned water providers acting as concessionaires of the MWSS, the government water utility.

Operational issues have given rise to proposals in Congress allowing for the conversion of the water districts into either stock cooperatives or stock corporations, thereby further extending the possibilities for direct consumer control, even as they also would open water districts to private investor takeover. At the same time, existing laws actually already provide for preferential treatment to cooperatives in the operation and management of public services including water supply. Local governments are also mandated under the law to support the promotion, organization, and development of cooperatives.

There is a need however to push the existing proposals towards associative systems.
Senate Bill 2595, filed in the last Congress, amends PD 198 or the Provincial Water Utilities Act. It raises the authorized capital stock of LWUA from P2.5 billion to P50 billion, authorizes LWUA to take foreign loans up to USD 1 billion, and mandates water districts to convert into either stock cooperatives or stock corporations within 5 years. Assets of water districts will be converted into government contributions represented by LGUs to the water cooperatives or corporations. Government shall maintain at least 40 percent of the shares of stocks in a water cooperative or corporations. No single member (of the cooperative or corporation) shall own more than 20 percent of the capital stock.

The problem with this proposal is that as a primary cooperative, water cooperatives can be composed of natural persons only, which means that government (LGU) will only be an associate member holding preferred shares. There are no provisions in existing laws allowing government regular membership in any cooperative at any level or tier. To avoid these issues, government can simply adopt the case of Binangonan in which the assets of local government water systems were transferred to the consumer-owned cooperatives free of charge. Such a move can be justified since the consumers have paid for the assets already by way of the water tariffs or charges. There is also an almost perfect one-to-one correspondence between the public or the community and the consumers in any particular locality.

Consequently, unlike the cases of natural gas and telephone utilities where there is only a partial correspondence between consumers and the public, it would be politically feasible for a government to hand over a water utility to consumers. Such a handover removes the weighty practical problem of how water utility customers might organize themselves so as to raise the capital to purchase the utility. It is reasonable for government authorities to turn over a publicly owned water utility to its consumers because water utility assets have been paid for out of water rates and taxes, when public funds have been invested. Public utilities are, in effect, held by the state in trust for the public.

Members exercise control but the following limitations maybe imposed, as suggested by the paper by Morse: (1) members cannot sell, bequeath or otherwise transfer their ownership or membership; (2) when consumers leave a water utility’s jurisdiction, they automatically forfeit their ownership without any compensation and, correspondingly, when consumers move into a water utility’s jurisdiction, they automatically become members without any initiation fee. Domestic, commercial, and industrial users are classified as consumers. The feasibility of any or all of these proposals can be weighed against the actual needs in Philippine localities.

Water providers organized as non-profits may object to the provisions requiring water districts to convert into stock coop or stock corporations. Some water providers should definitely be allowed to remain as non-stock, non-profit organizations. However, the option to become a stock co-op or a stock corporation means that the water service entity may legally raise capital from members. This is a critical step in making water service self-reliant and sustainable.
Stocks are simply the capital raised by an enterprise. Stocks are divided into shares issued to different people who become shareholders or stockholders. This makes possible the undertaking of economic activities that require large capital that no single entity can afford to shell out. In a cooperative, stocks are also divided into shares. Owners of shares or stocks are also called shareholders or members (but they are seldom called stockholders in common usage). However, control and ownership of the cooperative by the members are exercised by virtue of other characteristics aside from being capital contributors. In user cooperatives, the member-users control the co-op in their capacity as users or consumers of the service.

The word “stock cooperative” may not be found in the Cooperative Code (RA 6938). However, cooperatives are meant to issue common or preferred shares to members, who can either be regular or associate members. The exception is that in primary cooperatives “No member.... shall own or hold more than twenty per cent (20%) of the share capital of the cooperative.” (Section 74).

In water cooperatives, consumers control the water utility in the sense that they divide the surplus among themselves and they elect the board that appoint the managers of the firms (which can be equivalent to specifiying the quality of the product (water service). The subscribers may opt to source their capital from every imaginable way but control remains in them in their capacity as subscribers. Even if the option of being a stock corporation is adopted by a particular water district or public water provider, control should remain with the actual subscribers.

A proposed law that aims to open alternative ownership forms for water districts should definitely include the cooperative option at the very least. However, it must also observe the spirit of existing laws -- the Cooperative Code and the Local Government Code -- preferring the cooperative option in public services.

Sustaining the associative water sector

Further gains can be realized if water utilities as consumer-owned co-ops are integrated horizontally and vertically in terms of technical, financial, and management cooperation. Another dimension is policy cooperation.

The following is a proposal for sustaining the associative water sector:

1. Existing water co-ops and associations to convene an “associative water center.” The center will serve as a surrogate federation of these water consumers acting as providers/utilities themselves until the eventual formalization of the center as an industry/sectoral federation registered with the CDA.
2. Technical, organizational, management, and financing modules of the convenors will be “franchised” as a package that can be appropriately adapted to localities in need of water systems (immediate targets: Bagong Silang, resettlement areas in Bulacan, Laguna, and Cavite)
3. Experienced community organizers will supply the needed social preparation and organizing skills.
4. The center may also include technical and financial partners as associates, including possibly the PCWS, the FSSI, IPD, and others.
5. The center will eventually develop itself as a financial institution and as a BOT center for associative water systems.

The purposes of the center must include implementing and operating replicable and sustainable models of water supply systems in rural and urban poor communities based on consumer ownership and control; establishing a system for the management of knowledge on associative/ self-help water supply systems (research, documentation, communication, coaching and consultancy); developing partnerships with people’s organizations, governments, financing institutions, and the private sector, for the replication of such models in poor communities elsewhere and anywhere in the country; assist the institution of reforms in local and national rules to improve the regulation of and promote co-production on water supply and water resource management.

Bagong Silang as a target area for associative water systems

Bagong Silang, or Barangay 176 of the City of Kalookan, is a resettlement area now hosting 360,000 residents who face inadequate and irregular water at inordinately high costs due to both poor supply and demand conditions. Maynilad’s piped distribution covers only a fraction of the residential sprawl, through which only 2 drums (targeted to increase to 5 drums) of water per family per day can be delivered. The MWSS concessionaire appears reluctant and unable to extend pipe connections to more households and sites anytime soon due to unfavorable cost-benefit prospects brought about by inherent higher costs of supplying to Bagong Silang as an elevated area, high ratio of non-revenue water (70%), the lack of social mechanisms that elsewhere made possible the reduction of non-revenue water from 65% to 35%, as for instance in Taguig covered by MCWI’s, and the existence of city-provided deep wells providing water to other residents. Yet the 17 deep wells provided by the government of Kalookan City under its Lokal na Patubig do not have enough capacity to adequately supply their respective service areas. Many sites do not have pipe connections and about five percent of residents have to rely on water delivered by trucks thanks to President Arroyo and Mayor Echeverri.

However, there is a chance to improve the distribution of existing supply. This would involve cooperative consumer investment in installing facilities to collect water at nighttime when water pressure is relatively high so that water can be made available on demand during daytime. Residents can also be encouraged to efficiently collect rain water to mitigate the demand on the already overstretched supply capacity. Supply from an already installed deep well of Maynilad can also be diverted to sites most in need of water, particularly Phase 9 wherein residents rely on trucked water deliveries.

All these engineering measures can be helped if consumers voluntarily cooperate through a consumer cooperative or a network of such co-ops from many sites in the barangay. Supply can be further improved if Maynilad adopts the strategy of bulk water sales to the consumers’ water service co-ops. This transaction can be realized if such co-ops can ensure dramatic reductions in non-revenue water, which is a very likely possibility. With bulk sales, Maynilad charges the cooperative for water supplied through a mother meter, which must provide an incentive for the co-op to minimize as possible the water losses along the distribution lines from the mother meter. Moreover, since the co-op will undertake pipe-laying, individual metering, maintenance, monitoring, enforcement and administration, the co-op should be able to negotiate better bulk water tariffs from Maynilad.

The varieties of the existing supply and distribution may affect the course of action consumers have to take in forming their cooperatives. Households with pipe connections with Maynilad may find it appropriate to form co-ops that will manage Maynilad’s bulk water supply. Such co-ops will be formed if (1) dramatic reduction in non-revenue water, (2) proper price setting for Maynilad’s bulk water, (3) consumer tariffs lower than current inefficient prices, and (4) increased water supply from Maynilad can all be realized as a set of interconnected outcomes. For its part, the city government would have an incentive to turnover the operation of the city-provided wells to consumer co-ops if supply and distribution can be improved leading to lower water consumed per cubic meter. Unconnected areas would have greater incentives to organize their co-ops but would face the highest set up requirements.

Residents have organized the Bagong Silang Community Water Service Cooperative, with the technical assistance of IPD. The ongoing work in Bagong Silang is being informed by the experiences of the water Pos in Taguig and the cooperatives in Antipolo and Binangonan. Extending the associative water movement to the resettlement areas of Bulacan, Cavite, and Laguna is an immediate possibility through the cooperation of urban poor groups with groups oriented to associative water.


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