Republic of the Philippines

COMMISSION ON AUDIT
Local Government Sector
Nueva Ecija B & Aurora - Team No. 27
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AOM No. 2019-002
Date: January 10, 2019

AUDIT OBSERVATION MEMORANDUM (AOM)

For: HON. ALEXANDER A. DAUS

Municipal Mayor
Municipality of Laur, Nueva Ecija

Attention : Solid Waste Management Board

Municipality of Laur, Nueva Ecija

We have audited the compliance of the Municipality on the Republic Act No. 9003 or the
Solid Waste Management Act of 2000 and noted the following deficiencies:

Collection efforts of the Local Water System (LWS) were inadequate which yielded to large
amount of accounts receivables from concessionaries accumulating to ₱3,929,949.24 as of
December 31, 2017 due to failure to strictly implement the (a) collection policy and
procedure over uncollectible/inactive accounts; and (b) disconnection policy of the LWS,
thus the LGU was deprived of cash to finance other priority projects. Moreover, there were
no safety nets in the concession agreement that would address breach of any provision in
the contract, to the disadvantage of LWS.

Republic Act 7160 or the Local Government Code of 1991 (Code) mandates municipal and city
governments to provide water supply and sanitation services in the absence of water districts in
their areas. Specifically, Section 17 of the Code directs LGUs to address communities’ basic
needs, such as water supply and sanitation services, through the establishment of public utilities.

Further, the Code grants LGUs the power to create and broaden their own sources of revenues. It
encourages LGUs to be self-reliant in exercising their powers and discharging the duties and
functions vested upon them. Section 290 of the Code grants LGUs the authority to establish self-
liquidating economic enterprises, which are entities created by a local government to undertake
commercial activities on its behalf. Thus, an LGU-run water utility can be established as an
economic enterprise.

In CY 2017, the audit team started to inquire into the operation of Laur Local Water System,
which the team look on with desirable results. Fortunately, records show that the LWS was able
to earn a higher net income amounting to ₱ as compared to last year’s income of ₱1,796,987.09,
as shown in the table below:

2017 2018
REVENUE FROM OPERATIONS ₱ 6,346,565.65

PERSONNEL SERVICES
Salaries and Wages - Regular 455,496.00
Salaries and Wages - Casual Contractual 772,900.00
Personal Economic -Relief Allowance (PERA) 24,000.00
Representation Allowance (RA) 48,000.00
Transportation Allowance (TA) 48,000.00
Clothing/Uniform Allowance 5,000.00
Productivity Incentive Allowance 7,000.00
Cash Gift 5,000.00
Year End Bonus 75,916.00
Retirement and Life Insurance Premiums 54,659.52
PAG_IBIG Contributions 1,200.00
PHILHEALTH Contributions 5,250.00
Employees Compensation Insurance Premiums 1,200.00
Total PS 1,503,621.52

MAINTENANCE & OPERATING EXPENSES

Office Supplies Expenses 43,520.50
Fuel, Oil and Lubricants Expenses 544,402.00
Electricity Expenses 1,722,506.62
Telephone Expenses 8,298.27
Repair and Maintenance - Infrastructure Assets 350,229.65
Other Maintenance and Operating Expenses 32,000.00
Printing and Publication Expenses 10,000.00
Total MOOE 2,710,957.04

CAPITAL OUTLAY
Furniture, Fixtures & Equipment Outlay 335,000.00
Total CO 335,000.00

NET INCOME FROM OPERATIONS ₱ 1,796,987.09

Review and reevaluation of the current year’s LWS performance disclosed that, of the reported
revenue from operations amounting to ₱7,006,616.05 plus the uncollectibles, only ₱, or were
collected, leaving an uncollected balance of ₱5,535,297.24 as of year-end.

All in all, the uncollected balance of receivables from concessionaires as of December 31, 2017
amounted to ₱3,929,949.24, broken down as follows:

Uncollectible balances
Concessionaires
2013 2014 2015 2016 2017 2018 Total
Barangay I 28,455.00 51,790.00 54,290.00 63,541.00 158,539.00 594,873.00 951,488.00
Barangay II 44,102.00 24,650.00 19,663.00 15,339.00 168,409.00 456,095.00 728,258.00
Barangay III 8,091.00 9,439.24 18,416.00 27,234.00 72,345.00 280,299.00 415,824.24
Barangay IV 18,252.00 18,572.00 42,259.00 74,127.00 165,571.00 583,620.00 902,401.00
Pinagbayanan 33,999.00 26,296.00 77,020.00 116,291.00 172,207.00 436,017.00 861,830.00
San Felipe 1,476.00 8,202.00 49,542.00 108,220.00 167,440.00
San Fernando 4,895.00 350.00 1,795.00 7,336.00 49,668.00 111,859.00 175,903.00
San Juan 28,797.00 53,134.00 58,778.00 59,666.00 58,971.00 152,582.00 411,928.00
San Vicente 575.00 3,362.00 2,974.00 8,019.00 36,512.00 276,819.00 328,261.00
Siclong 16,668.00 3,337.00 11,670.00 30,513.00 122,744.00 407,032.00 591,964.00
TOTAL 1,004,966.0 3,299,196.0 5,535,297.2
185,310.00 199,132.24 336,407.00 510,286.00 0 0 4

Based on the foregoing, the audit team carried out an update to establish the extent to which
municipality had implemented the recommendations in 2017 annual audit report to address low
collection of the Municipality’s Local Water System Revenue throughout the year. With the
objective of improving the latter’s’ efficiency in their operation, the following recommendations
were offered:

a. exert efforts to collect from concessionaires and send demand letters to concessionaires
especially those inactive concessionaires and those with large amount of indebtedness.
b. start collecting guaranty deposits from concessionaires upon connection which could be
used to offset against any unpaid balances for active accounts of more than 60 days or
any unpaid balance from inactive accounts.
c. strictly observe the disconnection policy of the LWS and avoid granting additional grace
period or by collecting through installments.
d. And lastly, consider promulgating Operational Manual/Policy for Local Water System or
update the Agreement for Water Services between the LWS and the concessionaires

The progress of implementation on each recommendation is further discussed below:

Unlike other public utility company, LGU-run water utilities do not have a prescribed
organizational structure; as such each LGU utility is organized differently, thus, the structure and
management of the Laur’s LWS was organized as follows:

1. The Local Chief Executive sets policy direction and directly supervises the Waterworks
Superintendent who performs the role of general manager.
2. The Waterworks superintendent manages the utility’s operations, direct and supervise the
staff comprising contractual or job-order employees for technical support and bill
collection.
3. Other tasks in relation to maintenance, support services and the like are often added on to
the workload of the municipal engineer, accountant and treasurer on top of their regular
duties.

In addition, the operating budget of the LWS was included in the LGU’s overall budget for the
said year while revenue earned from its operations were returned to the General Fund.
Strategic planning works best in a setup where there are clear lines of oversight and executive
authority. Hence to successfully carry out the preparation of a strategic business plan, this Guide
recommends delineating the roles of the legislative council, local chief executive and utility
management for a functional governance structure. The governance structure shall consist of
three distinct entities responsible for regulation, policy making, and operations.

These systems are basically self-regulated by the LGU’s executive and legislative units. LGU-
run water utilities face strong political pressure to keep water tariffs low, often below
costrecovery levels, and the absence of commercial practices such as “ring-fencing” likely masks
the indirect material subsidies they receive for water supply.

Further, the Code grants LGUs the power to create and broaden their own sources of revenues. It
encourages LGUs to be self-reliant in exercising their powers and discharging the duties and
functions vested upon them. Section 290 of the Code grants LGUs the authority to establish self-
liquidating economic enterprises, which are entities created by a local government to undertake
commercial activities on its behalf.

Further review and evaluation of the current year’s LWS performance disclosed that, of the
reported revenues of ₱6,346,565.65, only ₱3,952,628.65 or 62.28% were collected, leaving an
uncollected balance of ₱2,393,937.00 as at end of the year.

All in all, the uncollected balance of receivables from concessionaires as of December 31, 2017
amounted to ₱3,929,949.24, broken down as follows:

Uncollected balances
Concessionaires
2013 2014 2015 2016 2017 TOTAL
Barangay I 17,385.00 51,845.00 65,840.00 86,840.00 509,027.00 730,937.00
Barangay II 25,197.00 24,650.00 21,026.00 32,771.00 327,276.00 430,920.00
Barangay III 7,156.00 13,527.24 24,536.00 17,659.00 173,614.00 236,492.24
Barangay IV 18,288.00 18,572.00 43,774.00 68,037.00 396,732.00 545,403.00
Pinagbayanan 22,421.00 31,411.00 71,239.00 85,343.00 328,800.00 539,214.00
San Felipe 1,476.00 8,202.00 49,542.00 108,220.00 - 167,440.00
San Fernando 14,840.00 65,268.00 49,642.00 14,846.00 102,659.00 247,255.00
San Juan 15,842.00 51,649.00 50,162.00 34,720.00 99,970.00 252,343.00
San Vicente - - 9,903.00 11,597.00 169,540.00 191,040.00
Siclong 92,938.00 60,485.00 61,257.00 87,906.00 286,319.00 588,905.00
TOTAL 215,543.00 325,609.24 446,921.00 547,939.00 2,393,937.00 3,929,949.24

Management confirmed the above observation of the Audit Team. However, they explained that
the seeming low collection efficiency in CY 2017 and the significant increase in the uncollected
balance as at year end stemmed from the application of collections from CY 2017 billing to prior
years’ balances, in the total amount of ₱2,355,118.50 which resulted in the overstatement of CY
2017 accounts and reciprocal understatement of prior years’ accounts both by said amount.
Meanwhile, further inquiry revealed some lapses in the operation of the Local Water System, to
wit:

a. Inadequate Billing and Collection Policy/Procedure

The Audit Team sent a letter to the Waterworks Superintendent requesting for a copy of their
duly approved Operations Manual/Policy/Guidelines, particularly on their billing/collection.
He admitted that they do not have approved Operations Manual/Policy/Guidelines and
merely continued what the previous administration had practiced.

Further inquiry and verification of records disclosed that the LWS was not able to send
formal demand/collection letters to some of their concessionaires due to cost constraints.

Had the Management regularly sent demand letters to delinquent/inactive concessionaires,

possible collections could have been made and the collected funds channeled into the
expansion of projects and improvement of the Municipality’s water system and operations.
Meanwhile, non-imposition of guaranty deposits left Management without a safety net in
case of delinquencies in payment.

b. Disconnection Policy Not Strictly Followed

Inquiry disclosed that it has been a policy of the LWS that notice of disconnection shall be
made upon non-payment on due date and disconnection shall be made anytime for unpaid
water bills of more than sixty days. Also, the account shall be considered past due upon non-
payment within the current period of sixty days.

However, inquiry confirmed that a total of 947 concessionaires with unpaid accounts aged
more than sixty days had remained active and not disconnected.

Management explained that they were giving consideration especially to small households,
by granting additional grace period or by collecting through installments. However, upon
review of the agreement for water services such practice was not embodied therein; thus
according to the LWS Superintendent, the grant of additional period was sometimes a
political practice of accommodation. After all, they believe that it is the better option than to
have no collection at all.

Be that as it may, the continuous supply of water to these delinquent concessionaires only
contributed in the further accumulation of uncollected fees which may balloon into
uncontrollable proportions to the prejudice of the LWS.

c. Absence of any safety net in the concession agreement in case of breach of any provision
thereof and/or delinquencies
 Review of sample agreement drawn between the LWS and the concessionaire revealed the
absence of any safety net that would uphold the interest of the Municipality, as indicated in
the following:

i. There was no required guaranty deposit upon entering into the concession agreement.

ii. There was no express provision in the agreement that would address delayed payments or
delinquencies such as reconnection fee.

iii. There were also no guidelines on penalties in cases of tampering, destruction of LWS
property and other related cases, all contrary to best practices in the industry;

It could be drawn from the foregoing the inadequacy of controls in the billing/collection system
which resulted in low collection efficiency while the laxity in the implementation of the terms in
case of delinquencies may only add up to operating costs without the corresponding cash inflows
thus unfavorably affecting its financial liquidity.

We recommend that the Local Chief Executive to

a. exert efforts to collect from concessionaires and send demand letters to

concessionaires especially those inactive concessionaires and those with large
amount of indebtedness.
b. Likewise, start collecting guaranty deposits from concessionaires upon connection
which could be used to offset against any unpaid balances for active accounts of
more than 60 days or any unpaid balance from inactive accounts.
c. Further, strictly observe the disconnection policy of the LWS and avoid granting
additional grace period or by collecting through installments.
d. And lastly, consider promulgating Operational Manual/Policy for Local Water
System or update the Agreement for Water Services between the LWS and the
concessionaires

May we have your comments on the foregoing observation within fifteen (15) calendar
days from receipt hereof.

HADIYAH A. ALIÑO
OIC-Audit Team Leader
 VIRGINIA A. YACAT
OIC-Supervising Auditor

PROOF OF SERVICE OF COPIES OF AOM

Received by
Name Position/Office Date
(Signature )
Alexander A. Daus Municipal Mayor
Roland Corpuz OIC-MPDC