Strengthening Economic Regulation of Water and Sanitation Services in the Philippines

Annex C. Enabling regulation, policies and principles for aggregation

The role of regulation and successful aggregation

The OECD has observed a trend in many countries of establishing dedicated water regulators accompanied by reforms that consolidate service provision around fewer, larger providers, which in turn makes regulation more effective (OECD, 2024[36]).

The presence or absence of a clear regulatory framework has been a decisive factor in the success or failure of water sector aggregation across international case studies. Where strong, coherent frameworks existed, such as in England and Wales, France and parts of Australia, aggregation was implemented more efficiently and produced greater benefits. For example, in England and Wales, the 1973 Water Act established clear regional authorities with well-defined boundaries and responsibilities, enabling rapid consolidation and integrated river basin management, though some issues with regulatory conflicts of interest persisted. In France, longstanding laws provided accepted models for aggregation, governance and entry and exit rules, supporting the creation and stability of thousands of aggregated structures (World Bank, 2005[29]).

Conversely, the absence or weakness of regulatory frameworks often led to stalled or problematic aggregation. In Brazil, during the PLANASA era, financial incentives drove aggregation, but the lack of powerful regulatory mechanisms in later reforms resulted in fragmentation and uneven progress, as seen in states like Mato Grosso (Carvalho and van Tulder, 2022[69]).

Indeed, in the Philippines itself, the voluntary aggregation of water services among local government units (LGUs) in Laguna stalled due to conflicts over the valuation of the water right as an asset within the LGU grouping, undermining trust and co-operation. This regulatory uncertainty, combined with governance disputes ultimately caused the aggregation effort to fail, illustrating how the absence of a coherent and transparent regulatory framework can derail even well-intentioned reform initiatives (World Bank, 2005[29])

International case studies and literature consistently highlight that a strong, independent regulator is fundamental to the success of water sector aggregation and overall sector performance (OECD, 2015[12]). The role of the regulator is discussed further in Chapter 2. A robust regulatory framework ensures that service providers, often natural monopolies, are held accountable for delivering quality, affordable and reliable services, while also protecting consumer interests and enabling long-term investment.

For the Philippines, embracing integration now, particularly through emerging investment opportunities and the establishment of the Water Regulatory Commission, offers a timely entry point. These efforts can be aligned with ongoing national investment planning, including implementation of the Philippine Water Supply and Sanitation Master Plan (PWSSMP) and related infrastructure programmes. As partnerships deliver results, they can build momentum and public trust for deeper reform over time.

Implementation principles and sequencing for aggregation

Aggregation is a complex, multi-year reform process that requires careful design, sequencing and sustained institutional support. International experience demonstrates that outcomes depend less on the specific aggregation model chosen than on the clarity of objectives, the strength of the enabling environment and the way implementation is managed over time. In a decentralised and diverse sector such as that of the Philippines, aggregation should therefore be approached as a gradual and adaptive process rather than as a one-off structural reform.

A first critical step is clarifying the objectives of aggregation. Aggregation should be framed as a means to achieve specific outcomes, such as improved service quality, financial sustainability, regulatory compliance, resilience or service expansion, rather than as an institutional end in and of itself. Clear objectives help guide decisions on scale, scope, governance arrangements and sequencing and reduce the risk of misaligned expectations among stakeholders.

Designing appropriate governance and legal arrangements is central to successful implementation. Aggregation can take many forms, including voluntary co-operation, incentivised clustering, shared governance or full consolidation. The choice of model should reflect local political realities, institutional capacity and investment needs. Governance structures must clearly define roles and responsibilities, decision-making authority, asset ownership, cost- and revenue-sharing mechanisms and accountability to users. Legal clarity around asset transfers, liabilities and entry and exit rules is essential to avoid disputes that can stall or derail aggregation efforts.

Stakeholder engagement and change management are critical success factors. Aggregation affects LGUs, utility staff, communities and customers and often raises concerns about loss of autonomy, employment conditions and tariff impacts. Early and continuous engagement with affected stakeholders is essential to build trust and legitimacy. Communication strategies should clearly articulate the rationale for aggregation, expected benefits, transitional arrangements and safeguards for vulnerable groups. Workforce integration, including clarity on staffing, roles and career paths, should be addressed explicitly to minimise resistance and operational disruption.

Sequencing and incentives play a decisive role, particularly where aggregation is voluntary. Experience shows that step-by-step approaches are often more effective, starting with lower-risk forms of co-operation, such as shared infrastructure, bulk water supply or sanitation services and progressing towards deeper integration as capacity, trust and demonstrated benefits grow. Financial, regulatory and technical incentives can help overcome collective action problems and encourage participation, especially among smaller or weaker providers (World Bank, 2017[70]).

Finally, regulatory coherence and predictability are essential enabling conditions. Clear and consistent regulation reduces uncertainty, supports investment and protects consumers during and after aggregation. In the Philippine context, aggregation and regulatory reform should be pursued in parallel, with the WRC playing a central role in setting common standards, supporting benchmarking and coordinating aggregation initiatives with national investment planning.

Evidence from international experience suggests that aggregation does not automatically deliver economies of scale. While unit costs often fall as single-town utilities grow, multi-town arrangements can face more complex and variable cost dynamics, particularly when network density declines and labour costs do not adjust. Cost savings are more likely in limited or incremental aggregation processes, or where utilities already operate across multiple jurisdictions and efficiency gains may be reinvested into service improvements rather than lower costs (World Bank, 2017[70]).

Box A C.1 below sets out key factors of success in the aggregation process.

Box A C.1. Success factors for the aggregation of Water Supply and Sanitation Utilities

Leadership

The presence of a local stakeholder acting as a leader among the aggregating service providers can contribute to the success of an aggregation process. In Colombia, the successful regional aggregation “Mercado Regional del Atlántico” was facilitated by a political leader who helped negotiate with mayors and ensure timely resource transfers. This support enabled the operator, Triple A, to maintain strong backing from successive governors over 12 years, contributing to the aggregation’s long-term success.

Consultations

Building ownership and aligning interests of stakeholders at all levels is essential: when aggregation is mandated at the national level, early and structured consultations with local stakeholders remain essential. This engagement helps align national and local interests, builds stakeholder ownership and allows implementers to anticipate and address potential challenges of resistance, increasing the likelihood of successful reform. For example, in Romania, the rapid, centrally driven regionalisation of water services – pushed through to meet EU funding requirements – failed to properly involve local authorities or citizens. Lacking adequate consultation and local data, the reform was widely viewed as a top-down takeover. This misalignment of national and local interests led to strong resistance, which intensified when tariffs rose.

Flexibility

Combining clear guiding principles with flexible implementation is essential for securing local ownership. In Hungary, the 2011 Water Utility Services Act links water service licences to providers achieving a required scale of aggregation, measured in consumer equivalents, but it does not impose any specific administrative or geographic boundaries for how that aggregation must occur. The Kiskun-Víz utility completed its aggregation rapidly, reaching full scale by 2013 – four years ahead of schedule – while Alföldvíz utility expanded its service area by 70% in three years, achieving a consumer-equivalent market four times above the regulatory threshold.

Step-by-step approach

Gradual improvement strategies with a focus on results are particularly successful: a gradual, step-by-step approach to aggregation is effective as it distributes the required changes over time, prevents overwhelming utilities and enables closer monitoring and achievement of concrete results. In Hungary, the Water Utility Services Act sets progressively increasing aggregation thresholds for issuing water service licences: 50,000 consumer equivalents in 2013–2014, rising to 100,000 in 2015–2016 and 150,000 in 2017.

Source: (World Bank, 2017[70])

Using financial incentives to accelerate aggregation

Aggregation can be incentivised as part of broader water supply and sanitation investment and reform programmes, rather than treated as an isolated objective. In practical terms, this means that funding strategies, government subsidies and donor programmes can incorporate support for aggregation efforts while primarily targeting PWSSMP objectives such as improved service delivery, efficiency and expansion of access.

• Embedding aggregation in water supply and sanitation improvement programmes: any programme aimed at improving or expanding water and sanitation services, whether funded by national government or by development partners, could consider how service provider aggregation or clustering can enhance the programme’s outcomes. For example, if a national initiative provides capital for new water infrastructure in municipalities, it could encourage those municipalities to aggregate demand and submit a joint proposal. This has been recently adopted in the newly issued URAF Guidelines. This approach can be operationalised by adding criteria in funding programmes: for instance, a grant facility could explicitly have an allocation for multi-LGU projects, or a performance-based loan could have a trigger condition that a utility covers a minimum population or number of barangays (encouraging mergers of smaller units). Greater scale and capacity can support improved creditworthiness and financial sustainability.

• Incentivising scale and collaboration through financing instruments: beyond public funds, the design of specific financing instruments can actively reward water supply and sanitation initiatives that achieve scale or multi-jurisdictional reach. A range of financing modalities are increasingly available in the Philippines, from public-private partnerships to climate finance facilities and results-based financing schemes and each can be used to support consolidation efforts.

• Results-based financing (RBF) and performance incentives (such as output-based aid or results-based loans) disburse funds against verified achievements (e.g. number of households given access to water, or reduction in open defecation rates). To integrate aggregation, RBF schemes could include scale and collaboration as part of the results matrix. On the national level, performance-based grants can be instituted via the Department of Interior and Local Government (DILG) or Department of Budget and Management (DBM) to encourage aggregation. For instance, the DBM’s Growth Equity Fund, intended to assist poorer LGUs, could tie larger grant allocations to LGUs that have created a joint utility or that meet key financial viability metrics as a group (DMB, 2024). This way, even domestic intergovernmental transfers contain an embedded incentive for scale.

Box A C.2 presents some examples of financial support and incentives used in different countries to support aggregation.

Box A C.2. Financial support and other incentives for aggregation

To enhance the success of aggregation reforms, national and external actors can offer financial or technical support to utilities, often through subsidies, external funding or technical assistance. In Colombia, the operator Triple A received up to USD 50 million in investment funding from central and regional governments to expand supply capacity. External partners can provide long-term financial support and tying these funds to the implementation of aggregation at the local level creates a strong incentive that helps align national and local interests. In Portugal, eligibility for EU Cohesion funds required utilities to operate at a regional or supra-municipal level, promoting aggregation. For example, Águas do Alentejo received USD 70 million in EU subsidies, covering up to 58% of its investment programs from 2009 to 2015. In Hungary, municipalities that applied for water and sanitation funding jointly, rather than on their own, were offered larger grants (10% raise) – a financial incentive designed to encourage the aggregation of services across local governments.

Tax exemptions can also act as incentives for aggregation. In Colombia, additional financial support came through a tax relief for public service companies, which could represent up to 40% of the investment amount.

By forming an association, municipalities can additionally substantially boost their collective borrowing capacity and become more eligible for concessional financing from international donors. In Italy, the “hydrobond” mechanism was launched to help small, fragmented water utilities in the Veneto region raise capital more efficiently and enabled aggregation. In 2014, eight local water companies formed a consortium (Viveracqua) and pooled their individual “mini‑bonds” into a common special‑purpose vehicle (SPV)1. This joint issuance enabled access to the capital market rather than relying on traditional bank loans. The European Investment Bank (EIB) and other financial institutions bought the bonds, allowing the utilities to raise about EUR 500 million for infrastructure investment. This mechanism allowed the small-scale needs of multiple players to be aggregated and marketed collectively.

Independent economic regulation, transparency and clear institutional roles can provide incentives for aggregation by improving performance and creditworthiness. An OECD 2022 study on Estonia delineated how setting up clear legal and regulatory provisions could enable aggregation. This included setting legal provisions to cover the transfer of assets and liabilities, define who governs merged entities, regulate contractual models and establish clear rules for joining or leaving consolidated utilities.

In the Estonian water supply and sanitation context, incentives for consolidation are especially critical because the preferred path is voluntary (rather than mandatory) mergers. In this context, a 2022 OECD study recommended exploring financial incentives for consolidation – such as allowing accelerated depreciation of assets and granting rewards to utilities that submit particularly ambitious development plans, including those involving consolidation.

Source: (World Bank, 2005[29]; World Bank, 2017[70]; OECD, 2022[67]; OECD, 2022[66])

References

[3] Carvalho, D. and R. van Tulder (2022), “Water and Sanitation as a Wicked Governance Problem in Brazil: An Institutional Approach”, Frontiers in Water, Vol. 4, https://doi.org/10.3389/frwa.2022.781638.

[1] OECD (2024), A Handbook of What Works: Solutions for the Local Implementation of the OECD Principles on Water Governance, https://www.oecd.org/termsandconditions.

[6] OECD (2022), Financing a Water Secure Future, OECD Studies on Water, OECD Publishing, Paris, https://doi.org/10.1787/a2ecb261-en.

[7] OECD (2022), Towards Sustainable Water Services in Estonia: Analyses and Action Plan, OECD Publishing, Paris, https://doi.org/10.1787/b82d71c6-en.

[4] OECD (2015), The Governance of Water Regulators, OECD Studies on Water, OECD Publishing, Paris, https://doi.org/10.1787/9789264231092-en.

[5] World Bank (2017), Joining Forces for Better Services?: When, Why, and How Water and Sanitation Utilities Can Benefit from Working Together, https://documents.banquemondiale.org/fr/publication/documents-reports/documentdetail/744661504112818630.

[2] World Bank (2005), “Models of Aggregation for Water and Sanitation Provision”, Water Supply & Sanitaiton Working Notes, https://ppp.worldbank.org/sites/default/files/2024-09/WSSWorkingNote1aggregation.pdf.

Note

← 1.  An SPV is created as a separate enterprise with its own balance sheet as a holding company for the securitization of debt, assuring repayment for investors.