EXPLAINER: Why LWUA’s taking over MCWD: Cebu water district declared ‘in default’ on obligations tied to P33M grant-loan. Irregularity or inefficiency suspected in 3 bulk water supply contracts, 7 uncompleted P235.8M infra projects, and increasing non-revenue-water losses.

EXPLAINER: Why LWUA’s taking over MCWD: Cebu water district declared ‘in default’ on obligations tied to P33M grant-loan. Irregularity or inefficiency suspected in 3 bulk water supply contracts, 7 uncompleted P235.8M infra projects, and increasing non-revenue-water losses.

[] LWUA uses Resolution #35 of 2023 which was ‘hijacked” last year and implemented only on Friday, March 15 under a new LWUA administrator.

[] LWUA bases its decision to replace all incumbent MCWD board members on findings provided by COA, Office of Government Corporate Counsel (OGCC), and Cebu City Government. And LWUA says it heard both sides of the dispute, including the MCWD board.

[] Jose Daluz III and two directors -- whom Mayor Mike Rama had unsuccessfully tried to dismiss -- may step down this time as he’d been saying he’d follow LWUA order. Daluz would need a court TRO to stay on.

[] All incumbent directors are ordered to ‘cease and desist’ from their functions, not just Daluz III and two other holdouts but also the three Rama appointees and two others from the old board. MCWD board’s PIO is silent about what happened since last Friday.

INTERIM BOARD. Three directors, designated by LWUA or Local Water Utilities Administration, to comprise the interim board, will serve for six months, effective March 15, 2024. The order -- addressed to Jose Daluz III, board chairman, and Edgar Donoso, general manager -- was received by MCWD (Metro Cebu Water District) GM’s office on the same day.

A request for an update on the takeover was belatedly answered by MCWD’s public information office with a copy of Donoso’s assurance of “continuity of services” and “no disruption in delivery of water” -- a standard example of not answering what was asked and what the public wants to know, whether Daluz and his co-directors complied with the LWUA order and the interim board already started its work.

Resolution No. 35, series of 2023, approved last September 28, 2023, was used by LWUA Administrator Jose Moises Salonga as his authority to implement the national agency’s “partial intervention” in Metro Cebu’s water district.

The five-month-old resolution being enforced only now must put to rest any doubt that there was such a resolution but its implementation was blocked when an official pulled the resolution routed for the trustees’ signatures. Resolution No. 35 was officially released and enforced only last Friday. And only after Salonga took over as LWUA administrator from Homer Revil, last February on President Marcos Jr.’s order.

Administrator Salonga signed the March 15 order, telling all incumbent MCWD directors to “cease and desist” from their functions to give way to three out-of-town interim directors, namely Maria Rosan Perez, Engr. Noel Samonte and Engr. Annabelle Gravador.

NOW THAT 2023 RESOLUTION IS IMPLEMENTED, this has been confirmed: What principally prompted the LWUA intervention was the state of “default” declared against borrower MCWD. On August 11, 2015, MCWD contracted a “financial assistance contract” (FAC) with LWUA over a P33 million loan-grant. Fifty percent or P16.5 million is a loan while the other half, also P16.5 million, is a grant.

The loan will mature in 2044 and as of August 2023, the loan balance was P13.805 million, with MCWD paying P55,000 a month. Apparently, it was not failure to pay the installments that made LWUA declare MCWD in default.

WHAT THE FAC, IT’S ABOUT IRREGULARITIES, INEFFICIENCY. The financial assistance contract doesn’t cover just failure to pay amortization to constitute default. It also includes “failure to perform, or its violation of any term, covenant, promise or condition of the FAC, or any rule, regulation, or standard promulgated by LWUA.”

Among the cases cited in the LWUA board resolution: [1] P117.759 M ANNUAL LOSS ON NRW. Failures and violations of MCWD, which led to the declaration of default, are topped by the COA finding on the water district’s high non-revenue water (NRW) “without marked improvement” from 2020 to 2022. MCWD incurred an annual loss of revenue by an average of P117.759 million a year, steadily increasing: from 25.26 percent in 2020; 29.04 percent in 2021; to 32.67 percent in 2022.

[2] DELAYS IN P235.8M SEVEN PROJECTS. There’s also COA’s audit for 2022 showing that seven infrastructure projects totaling P235.880 million were not completed within the contract period and would require collection of liquidated damages for the delay.

[3] VIOLATIONS IN THREE BULK WATER SUPPLY PROJECTS. Documents were not submitted. In addition, the legal opinion of the Office of Corporate Government Counsel (OCGC), which reviewed the JVA preparatory to their respective memorandum of agreement, found the proceedings MCWD conducted under LWUA’S 2013 Revised Guidelines were “highly irregular, grossly inexcusable, tantamount to bad faith, and constitute a violation of the law on graft and corruption.” MCWD, the OCGC said, should’ve conducted public hearings since they were purchase agreements that required compliance with the Procurement Law.

QUARREL OVER FIRING, HIRING appeared not to be the principal reason for the takeover. It must be the acts and omissions of the MCWD board that might lead to a situation in which the water district could not pay its debt to LWUA.

LWUA is a government-owned and -controlled corporation “with a specialized lending function mandated by law to promote and oversee the development of water supply systems” in the cities and towns outside Metro Manila. A five-person board of trustees “guides” an administrator, also a trustee, and his four deputy administrators.

Basically, LWUA is a money lender with “financial, technical and institutional development competence to enable a water district to generate return on investments.” Whatever other assistance LWUA gives MCWD, it still wants to collect the loan granted to the water district. The partial intervention is part of the collection mechanism under the law, Presidential Decree #198 of 1973.

MISSION OF INTERIM DIRECTORS. Protecting “all the interests of LWUA under the Financial Assistance Contract” is #2 in a list of nine instructions to the interim board.

But the #1 order -- to “operate the entire facilities, systems or properties of MCWD in an efficient manner” -- may as well be lumped with #1 as it is essential to protecting LWUA’s interests. Keeping MCWD in good corporate health would enable LWUA to collect the loan and fulfill its mandate to help MCWD survive the alleged inefficiency and corruption and even grow.

CEBU CITY-MCWD FEUD: #6 IN PRIORITY. LWUA in its takeover of MCWD recognizes the “strained relations” between MCWD and the local government unit (LGU), yet LWUA Resolution No. 35 of 2023, placed that only as No. 6 in the marching order to its interim board: “Mitigate, if not completely address the hostile environment between MCWD and Cebu City LGU.”

The interim board may try to do that by adopting a solution, even if temporary, to the legal quarrel over the mayor’s right to dismiss an MCWD director. Only the Supreme Court ruling on a pending appeal of former MCWD directors, or an amendment of the law, can definitively settle the dispute.

The Regional Trial Court ruled that the mayor has that power to fire, as a consequence of the power to hire. However, the directors dismissed by Mayor Rama’s predecessor, the late Edgardo Labella, appealed to the high court. Could the RTC ruling be adopted until the issue is finally settled by the high court?

POLITICS IN WATER DISTRICT. Influence of local officials over local water districts is clearly reduced to the minimum by Presidential Decree (PD) 198 but even limited participation of politicians could derail the well-intentioned purpose of autonomy for the water district.

The mayor is expressly given the right to hire MCWD directors but the right to dismiss any director has led to the protracted dispute, as the law does not expressly say who or which office has the right to fire a director.

The limit on the mayor’s meddling into MCWD affairs is purportedly to avoid politicking. But what if the board chairman -- as in Joey Daluz’s case at MCWD -- were also himself into politics and would run or campaign against Mayor Rama in 2025? That would undermine the noble intent of making the water district autonomous and its corporate structure apolitical.

EXTENT OF INTERIM BOARD’S CONTROL. Causes of default, involving alleged violations of law or inefficiency by members of the Daluz-led MCWD board, are supposed to be corrected or stopped by the interim board.

While stressing on “partial intervention,” the LWUA resolution apparently covers all aspects of MCWD operations (“entire facilities, systems or properties”) as well as “all public biddings, non-revenue water projects and other negotiations,” to ensure they’re “above board or compliant with laws and regulations.”

The instructions tend to assume that something rotten has been going on, which could endanger “LWUA’s financial interest” and “MCWD’s viability.”


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