Bom Lbc-111-Manual On The Setting Up and Operation of Local Economic Enterprises PDF
Bom Lbc-111-Manual On The Setting Up and Operation of Local Economic Enterprises PDF
Bom Lbc-111-Manual On The Setting Up and Operation of Local Economic Enterprises PDF
i
Message from the Secretary
Florencio B. Abad
Secretary
Manual on THE Setting up
and OperatiOn OF Local
Economic Enterprises
2016
Policy Defining an
Introduction p1 Framework p7 Effective LEE p8
PART PART PART
I II III
Appendices p41 A
ORWASA 40
42 45 46 47 48 60
BeGH 36
Business Plan SAFSSR Facility Fe
Outline Format Utilization Stud
PART
Audit
Effective LEE p36 VIII Documentary FSSE Format Facility Cost
Requirements Audit
7.3
Self-Sufficiency Not Achieved 30
7.2
Self-Sufficiency Achieved 30
7.1
Assessment of SAFSSR 29
PART
VII
Review and
Assessment p29
25 24 24 23 21
Planning and
Implementation
for New LEEs p9
PART
IV 9 12 14 15 16 17
Evaluate Conduct FS Assess Select Present FS Present
LGU Sources Finance Proposal
Source Prepare
5-Yr BP Enactment
64 67 69
easibility
FAQs
dy Outline
Formula for
Indicators PART Implementation for
V Existing LEEs p18
Budgeting p21 Continuation of LEE
18 with Necessary
PART Changes
VI
Staffing Plan/
19 Staffing Transition
P Strategy
21
Pre-Budget
Preparation 20 Presentation to LCE
Table of Contents
ACRONYMS AND ABBREVIATIONS viii
1. INTRODUCTION 1
1.1. Background............................................................................................................ 1
1.2. Objectives of the Manual..................................................................................... 2
1.3. Local Economic Enterprises (LEEs)................................................................... 2
2. POLICY FRAMEWORK 7
3. DEFINING AN EFFECTIVE LEE 8
4. PLANNING AND IMPLEMENTING PROCEDURES FOR
PROPOSED/NEW LEEs 9
4.1. Evaluate Whether the LGU Should Engage in LEE.......................................... 9
4.2. Conduct a Feasibility Study for the Proposed LEE......................................... 12
4.3 Assess Potential LEE Financing Sources.......................................................... 14
4.4 Select Financing Source..................................................................................... 15
4.5 Present the Feasibility Study Findings and
Recommended Financing Source to the LCE ............................................. 16
4.6 If the LCE decides to create the LEE: Prepare a 5-Year Business Plan ........ 16
4.7 Prepare and Present the Proposal for the Establishment
of the LEE (Feasibility Study and Business Plan) to the
Local Sanggunian as Basis for the Enactment of an
Ordinance Creating the LEE.......................................................................... 17
4.8 Enact the Ordinance Creating the LEE............................................................ 17
5. IMPLEMENTING PROCEDURES FOR EXISTING LEEs 18
5.1. Continue LEE Operations, but Make the Necessary
Changes to Comply with the Legal Provisions and
Other Requirements Governing LEEs.......................................................... 18
5.2. If Detailed Personnel are Assigned to the LEE: Prepare a
5-Year Staffing Plan and Staff Transition Strategy....................................... 19
5.3. Prepare a 5-Year Business Plan for Each LEE................................................. 19
5.4. Present to the Local Chief Executive the 5-Year Business
Plan for Each LEE............................................................................................ 20
6. BUDGETING FOR A LEE 21
6.1 Pre-Budget Preparation Activities.................................................................... 21
6.2 Budget Preparation Activities............................................................................ 21
6.3 Budget Authorization......................................................................................... 23
6.4 Budget Review..................................................................................................... 24
6.5 Budget Execution................................................................................................ 24
6.6 Budget Accountability........................................................................................ 25
7. REVIEW AND ASSESSMENT OF LEEs 29
7.1. At the End of Each 5-Year Period, Prepare the FSSE Report and
Decide Whether the LEE Should Continue its Operations........................ 29
7.2. Financial Self-Sufficiency is Achieved at the End of the 5-Year
Period (Situation of 100% Cost Recovery and/or Net Income) ............... 30
7.3. Financial Self-Sufficiency is Not Achieved at the End of the
5-Year Period (Less than 100% Cost Recovery or Net Loss)..................... 30
8. AN EFFECTIVE LEE IS ACHIEVABLE: BEST PRACTICES 36
8.1 Benguet General Hospital (BeGH)................................................................... 36
8.2 Ormoc City Waterworks and Sewerage Authority (ORWASA)................... 40
AO Appropriation Ordinance
AOB Annual Operating Budget
AIP Annual Investment Program
APP Annual Procurement Plan
ATP Ability to Pay
BOM Budget Operations Manual
BeGH Benguet General Hospital
BOT Build-Operate-Transfer
BLGF Bureau of Local Government Finance
BP Business Plan
CDP Comprehensive Development Plan
CO Capital Outlay
COA Commission on Audit
COE Current Operating Expenditures
CSC Civil Service Commission
CSO Civil Society Organization
DBM Department of Budget and Management
DCF Discounted Cash Flow
DENR Department of Environment and Natural Resources
DOH Department of Health
FS Feasibility Study
FSSE Financial Self-Sufficiency Evaluation
GSIS Government Service Insurance System
HDMF Home Development Mutual Fund
IAS Internal Audit System
IRA Internal Revenue Allotment
IRR Internal Rate of Return
JICA Japan International Cooperation Agency
LCE Local Chief Executive
LDIP Local Development Investment Program
LDRRMF Local Disaster Risk Reduction Management Fund
LEE Local Economic Enterprise
LEP Local Expenditure Program
LFC Local Finance Committee
LGC Local Government Code
LGIAM Local Government Internal Audit Manual
LGU Local Government Unit
LPDO Local Planning and Development Office
LWUA Local Water Utilities Administration
MOOE Maintenance and Other Operating Expenses
NAWASA National Waterworks and Sewerage Authority
NEDA National Economic and Development Authority
NGAS New Government Accounting System
NGOs Non-Governmental Organizations
NPV Net Present Value
OB Operating Budget
OEE Other Economic Enterprises
ORWASA Ormoc City Waterworks and Sewerage Authority
O&M Operating and Maintenance
PED Project Evaluation and Development
PDPFP Provincial Development and Physical Framework Plan
PFM Public Financial Management
PFMAT Public Financial Management Assessment Tool
PHIC Philippine Health Insurance Corporation
PPAs Programs, Projects and Activities
PPP Public-Private Partnership
PPMP Project Procurement Management Plan
PS Personal Services
PSA Philippine Statistics Authority
PU Public Utility
RA Republic Act
RO Regional Office
SAFSSR Semi Annual Financial Self-Sufficiency Review
SOB Supplemental Operating Budget
SSS Social Security System
WTP Willingness to Pay
MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
1. INTRODUCTION
1.1. Background
Republic Act No. 7160, otherwise known as the Local Government Code of 1991 (LGC), mandates, as a
primary operative principle of decentralization, the establishment of an accountable, efficient, and dynamic
organizational structure and operating mechanism in the local government units (LGUs) that will meet the
priority needs and service requirements of its communities.
As sanctioned by the LGC, the structure and operating mechanism may include the establishment and operation
of local economic enterprises (LEEs). Many LGUs, however, fail to optimize this modality of service delivery.
Further, a review1 of the performance of existing LEEs reveals that most operate at a loss and require heavy
subsidies from LGUs since:
a. most are established for administrative and political reasons, e.g., accommodate a bloated LGU
labor force and still remain within statutory budget ceilings; and
b. most operate on inappropriate systems and practices that fail to consider new know-how, local
development priorities, and changing customer demands resulting in substandard quality and
improperly priced public services.
Cognizant of the importance of LEEs in local development, the financial self-reliance of LEEs is a principal
indicator for policy-based budgeting in the Public Financial Management Assessment Tool (PFMAT) for
LGUs.2 After all, well-planned and efficiently run LEEs can contribute to good local governance since they:
a. ensure that local public utilities and services meet constituency needs;
b. publish annual financial performance reports that provide transparency and accountability;
c. provide opportunities for citizen involvement; and
d. contribute to LGU revenue and resource mobilization because they could even generate modest
financial surpluses through judicious control and tracking of LEE revenues and expenditures if
properly set up and operated.
Given the LEEs critical role in the LGU development and its effect to good local governance, the LGU public
financial management (PFM) roadmap and its implementing strategy identified the development of a detailed
LGU guide for the setting up, operations, and divestment of LEEs and rollout with inter-agency support as
a key implementing strategy to effect the linkage of budget planning to policy priorities, thus, this manual.
1 Manasan, Rosario and Castel, Cynthia, Improving the Financial Management of Local Economic Enterprises, Philippine Institute for Development Studies
Discussion Paper Series No. 2010-25 (Makati: October 2010). The study states that the less than business-like approach to local enterprise management has
resulted in large arrearages and low collection efficiency and that the less-than-transparent reporting of the actual financial condition and profitability of these
enterprises may have some adverse effect on decisions taken by LGU officials.
2 The PFMAT for LGUs is a self-assessment evidence-based instrument which describes the characteristics of an open and orderly PFM system. It is a diagnostic
tool which establishes the indicators that will help the LGUs identify the strengths and weakness in their PFM system as bases for improvement measures.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
3 The LGC defines income as referring to all revenues and receipts collected or received, forming the gross accretions of funds of the LGU
[Section 306(i)] and revenue as referring to income derived from the regular system of taxation enforced under authority of law or ordinance,
and, as such, accrue more or less regularly every year [(Section 306(m)]. This Manual, however uses revenue and income interchangeably to
mean all types of income realized from the operations and activities of the LGU, or are received by it in the exercise of its corporate functions.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
In Section 17(b) (2) (ix) of the LGC, note the words and other in the phrase public markets,
slaughterhouses, and other municipal enterprises. Also, Section 17(j) allows costs to be charged
for the delivery of these services and facilities. These connote that all other LGU services and
facilities in the list under Section 17(b) can be considered as economic enterprises, provided they
generate income or revenues.4
On the other hand, Sections 313 and 325(a) of the LGC mention public utilities (PUs) separately
from economic enterprises/other economic enterprises, but both are given the same treatment
in these sections. This indicates that public utilities are classified as economic enterprises insofar
as accounting and budgeting for these entities are concerned. However, the fact that public
utilities are named differently and not lumped altogether with the other economic enterprises
connotes that the former shall be given a different treatment in areas where such differentiation
is warranted. This implies that PUs, due to their nature as discussed in item 1.3.2 of this manual,
may be allowed to operate even if they may not earn enough income to cover their operations.
This is in contrast to other LEEs that are expected to earn profits or at least recover costs.
To quote pertinent portions of Sections 313 and 325 of the LGC:
Section 313. Special Accounts to be Maintained in the General Fund. Local government units
shall maintain special accounts in the general fund for the following:
a. Public utilities and other economic enterprises;
b. xxx xxx xxx
Section 325. General Limitations. - The use of the provincial, city, and municipal funds shall be
subject to the following limitations:
a. The total appropriations, whether annual or supplemental, for personal services of
a local government unit for one (1) fiscal year shall not exceed forty-five percent
(45%) in the case of first to third class provinces, cities and municipalities, and fifty-
five percent (55%) in the case of fourth class or lower, of the total annual income
from regular sources realized in the next preceding fiscal year. The appropriations
for salaries, wages, representation and transportation allowances of officials and
employees of the public utilities and economic enterprises owned, operated, and
maintained by the local government unit concerned shall not be included in the
annual budget or in the computation of the maximum amount for personal services.
The appropriations for the personal services of such economic enterprises shall be
charged to their respective budgets.
Thus, in the Philippine context, LEEs are classified into two kinds: public utilities (PUs) and
other economic enterprises (OEEs). As LEEs, both are modes of delivery of the goods and
services to LGU constituents.
c. telecommunications;
d. sanitation (local drainage, sewerage, solid waste collection and disposal); and
e. public transportation and transport terminals (bus, jeepney, parking, pier).
Unlike other economic enterprises, PUs by their very nature, may continue to be operated by LGUs
even if the income they may generate may not be enough to sustain their operations. The provision
of an everyday basic need of constituents that cannot be adequately provided by the private sector is
a responsibility and an obligation of the LGU. However, PUs can be financially self-sufficient (100%
cost recovery) or even earn net income when managed effectively.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
2. POLICY FRAMEWORK
The policy framework that serves as basis for the creation and operation of LEEs is primarily the LGC including
related circulars intended to strengthen compliance to the relevant provisions of the LGC and related national
laws.
The policies that guide the creation and operation of LEEs are Sections 3(b), 3(f), 3(l), 15, 17(a), 17(j),17(g),
and 22(d) of the LGC.
Section 3(b) emphasizes the responsibilities of LGUs to set up appropriate service delivery structures and
mechanisms to meet the basic needs of its constituents, to quote:
Section 3(b). There shall be established in every local government unit an accountable, efficient, and dynamic
organizational structure and operating mechanism that will meet the priority needs and service requirements
of its communities.
Section 3(f) provides for inter-LGU partnerships in the provision of services and facilities including joint
ventures in LEEs, to quote:
Section 3(f). Local government units may group themselves, consolidate or coordinate their efforts, services,
and resources commonly beneficial to them.
The importance of private sector participation in LGU service delivery structures and mechanisms including
LEEs is underscored in Section 3(l), to quote:
Section 3(l). The participation of the private sector in local governance, particularly in the delivery of basic
services, shall be encouraged to ensure the viability of local autonomy as an alternative strategy for sustainable
development.
Section 15 lays down the basic functions of LGUs, to wit: (i) political subdivision of the national government
of the Republic of the Philippines; and (ii) as a corporate body representing its constituency. As a corporate
body, it can undertake business enterprises as a mode of production and delivery of goods and services to its
constituents.
Section 15. Political and Corporate Nature of Local Government Units. Every local government unit created
or recognized under this Code is a body politic and corporate endowed with powers to be exercised by it in
conformity with law. As such, it shall exercise powers as a political subdivision of the national government and
as a corporate entity representing the inhabitants of its territory.
Pursuant to the above-quoted Section 17(a), the creation of LEEs can be considered as part of the exercise of
LGU powers incidental to the efficient and effective provision of basic services and facilities. Under the basic
operating principle of self-reliance, said Section also lays down basic LGU performance requisites for service
delivery efficiency and effectiveness.
Section 17(a). Local government units shall endeavor to be self-reliant and shall continue exercising the
powers and discharging the duties and functions currently vested upon them. xxx xxx xxx Local government
units shall likewise exercise such other powers and discharge such other functions and responsibilities as
are necessary, appropriate, or incidental to efficient and effective provision of the basic services and facilities
enumerated herein.
Section 17(j) further empowers the LGU to sell, lease, encumber, or dispose of economic enterprises to the
private sector. It also provides for various forms of private sector participation in LEEs as creditor, investor,
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lessor/operator, property buyer, etc. At the same time, it allows LGU divestment of LEEs. The section also
allows service or facility cost recovery via fees and charges for LEEs. Thus, both capital (including financing
cost) and operating costs may be recovered through user charges.
Section 17(j). To ensure the active participation of the private sector in local governance, local government
units may, by ordinance, sell, lease, encumber, or otherwise dispose of public economic enterprises owned by
them in their proprietary capacity.
Section 17(g) coupled with Section 17(j) implies that the LGU can subsidize LEEs as long as the services and
facilities provided are covered under Section 17(b) and the LGU opts not to charge for the delivery for basic
services and facilities.
Section 17(g) xxx xxx xxx Any fund or resource available for the use of local government units shall be first
allocated for the provision of basic services or facilities enumerated in subsection (b) hereof before applying
the same for other purposes, unless otherwise provided in this Code.
Section 17(j) xxx xxx xxx Costs may also be charged for the delivery of basic services or facilities enumerated
in this section.
Section 22(d). Local government units shall enjoy full autonomy in the exercise of their proprietary functions
and in the limitations provided in this Code and other applicable laws.
The policy framework defines an effective LEE to be one that contributes to the quality service delivery goals
of the LGU. As such, an effective LEE must be designed, set up, operated, and managed in accordance with a
well-prepared feasibility study and a detailed business plan that ensures the proposed LEE:
a. has clear vision, mission, goals, and objectives that fully respond to a particular constituency
need;
b. supports the LGU development goals and objectives embodied in its Provincial Development and
Physical Framework Plan (PDPFP) if it is a province or Comprehensive Development Plan (CDP)
if it is a city/ municipality, and its corresponding Local Development Investment Program (LDIP)
and Annual Investment Program (AIP);
c. augments and does not compete with goods and services provided by the private sector;
d. operates under the basic principle of financial self-sufficiency via cost recovery;
e. uses a performance-based approach with efficiency and effectiveness in service delivery as
requisites; and
f. publishes annual performance reports that will provide accountability and transparency.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
This chapter will guide the LGU in deciding whether to use an LEE as a mode of production and/or delivery of
goods and services to its constituents. It also provides the alternative modes of service delivery should an LEE
be not feasible. This chapter provides the steps on how to plan and set up a new LEE.
The Local Chief Executive (LCE) may assign or designate the relevant local officials who will be responsible for
planning for and implementing the new LEEs.
The steps are shown below:
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b. (Criterion 2) fill gaps and services not adequately provided by the private sector and shall not
compete with the private sector. The following points shall be clearly established:
1. The LGU needs to play a primary role in the provision of the output proposed to be
provided by the LEE; and
2. The output of the LEE cannot be provided wholly or partly by the private sector.
To illustrate, an LEE may be a public-private partnership wherein the LGU owns the enterprise
although the operations are privatized. Since the LGU owns the LEE, it continues to play a
primary role in the provision of the output.
c. (Criterion 3) operate as a business enterprise with its own Business Plan (BP) and budget. The
provision of the LEE output shall be financially feasible to set up and operate given the existing
budgetary and political realities within the LGU.
d. (Criterion 4) operate with appropriate staffing complement to satisfy its operating objectives.
Human resources shall be in accordance with existing Civil Service Commission (CSC) rules
and regulations. All personnel shall be hired on a contractual, casual and/or job-order basis.
However, LGUs may assign regular staff on detail to the LEE during start-up operations.
The LGU has the flexibility to create a unit (e.g., Economic Enterprise Unit) to be headed by
a permanent staff that will supervise the operations and management of all LEEs, or place all
LEEs under the Office of the Mayor, or other variants thereof.
It is vital that each LEE be headed by a full-time manager responsible for the operations and
management of the LEE. He/she will liaise closely with the LGU in obtaining the necessary
regulatory permits and licenses during the pre-operation stage, and in providing the necessary
feedback and reports during operations. A cashier properly deputized by the local treasurer and
bonded by the Bureau of the Treasury shall take custody of the LEE finances.
Sources of information in determining whether the criteria are satisfied shall be included in the FS.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
N
CR1 & CR2 LGU should not provide the Private sector
satisfied? proposed good or service
Hurdle
Can the proposed LEE be operated as a
Criterion 3
business enterprise with its own BP and budget?
(CR3)
N
CR3 & CR4 PPP or partnership
satisfied? with other LGUs
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An FS shall be conducted by the responsible officials in order to determine the viability of the proposed LEE.
The FS will help in determining whether the proposed LEE is able to hurdle the criteria in determining if an
LEE is the appropriate facility to deliver goods/services as set out in Section 4.1.3.
The LGU may opt to tap an external consultant for the study. Also, it may ask the services of a state university/
college or another government agency that has the expertise in conducting FS in the area of business of the
LEE. An FS shall be conducted for each proposed LEE.5
Generally, an FS has five (5) major components:
a. Market Situation Analysis Establish the volume of demand and what the user-beneficiaries can
and are willing to pay in terms of a combination of user fees and charges and taxes (the two
cost recovery mechanisms for LGU projects and LEEs); identify competing products and services
as well as potential target markets and customers; and position the LEE products or services
against its competitors (or find a niche for the LEE products or services).
b. Technical Analysis Based on the magnitude and nature of the demand for the LEE output,
properly align the project scope, design, and specifications with the market situation; ensure that
the project scope, design, and specifications have no adverse environmental impact; in cases where
there are potential negative environmental effects, provide for mitigation (or compensation) in
the project design and costs.
c. Financial (Economic) Sustainability Analysis Establish financial viability in terms of adequate
funds flow for the project cost and the subsequent annual operating and maintenance (O&M)
costs since there is adequate cost recovery and sufficient financial (economic) incentives for the
LEE; can also perform a formal but optional social benefit-cost analysis to establish the social
desirability of the LEE.
d. Organizational Analysis - Identify the organizational structure and manpower requirements
needed to operate the LEE, including positions, qualifications, and job descriptions.
e. Regulatory and Other Pre-Operational Requirements List down the necessary permits, leases,
licenses, insurance, and other pre-operating requirements.
Figure 2 shows the process flowchart in conducting a feasibility study.
5 A good reference in the conduct of a project feasibility study is the Project Evaluation and Development Manual by the National Economic and Development
Authority (NEDA).
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
START
Technical
Market volume Analysis Pricing
Optimum Technology,
Design & Cost for
the LEE output
Financial &
Economic
Sustainability
Analysis
LEE
Sustainability
- Sufficient
demand volume
- Affordable Pricing
- Adequate cost
recovery
- Sufficient financial
incentives
END
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This section will help guide responsible LGU personnel in recommending which funding source will be tapped
for the LEE. A reference that discusses financing sources that the LGUs may tap is the Resource Mobilization
Manual by the Bureau of Local Government Finance (BLGF).
4.3.2 Borrowings
Borrowings include direct loans from government financial institutions and other government
lending windows, local private and international lending institutions, and bond proceeds.
6 Funds provided to the LEE by the LGU cannot be treated as a loan since the LGU cannot provide a loan to itself.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
4.3.8 Donations
Donations from public and private entities are also another source of funding LEEs.
4.4.2 Impact
What is the impact of the funding source or scheme on the community, including economic impact
such as necessary belt-tightening measures and the deferment or even cancellation of other
projects?
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4.4.4 Legality
Is the use of the funding source within the authority of the LGU?
4.5 Present the Feasibility Study Findings and Recommended Financing Source to the LCE
The responsible LGU personnel shall present to the LCE the FS results as well as the suggested funding source
for the proposed LEE. The LCE has the prerogative to decide whether or not to create the proposed LEE based
on the FS findings.
Should the LCE decide to proceed with the creation of the LEE, a business plan (BP) shall be prepared by the
designated LGU personnel for the LEE. In case of two or more proposed LEEs to be created, each LEE shall
have its own BP. The BP will spell out the implementing details of the LEE within a 5-year period.
4.6 If the LCE decides to create the LEE: Prepare a 5-Year Business Plan
A 5-Year BP for each LEE to be created shall be prepared by the designated LGU personnel or a duly hired
external consultant. For new LEEs, the BP shall serve as a blueprint on how to make the operations of the LEE
financially self-sufficient and eventually profitable.
The BP is the heart and soul of the operation of an LEE and the most important document that will be required
by any lending institution or potential investor. It is a powerful management tool that details how the LEE is
going to reach its objectives and where it plans to go in relation to where it is.
Moreover, some portions of the BP can be used to communicate to the LGU leadership, staff, and constituents
the agenda for reaching the enterprises goals; in training the staff and clarifying their roles and accountabilities
in making the enterprise function successfully; and to attract capital and other resources.7
The initial BP for an existing LEE shall cover 5 years of operation. However, the BP is a dynamic plan and, as
such, shall be reviewed and revised whenever needed, i.e., when market demand declines substantially due
to unforeseen circumstances or when the technology used in the LEE becomes obsolescent and needs to be
upgraded.
The sections found in the BP are as follows:
The LEE personnel hired specifically for the LEE shall be on contractual status and/or on casual
or job-order status. The performance of these personnel shall be evaluated periodically. If their
performance falls below standards, these personnel can be replaced as practised in privately-owned
ventures.
The LEEs shall follow the local regulations governing businesses but may be exempted from paying
local regulatory fees if so desired by the LGU. However, in the course of LEE operations, the LGU
and its personnel, in their official and personal capacities, shall not be exempted from paying user
fees and charges due to the LEE facility in keeping with its economic nature.
Appendix A presents a detailed outline of a BP compliant with the usual requirements of commercial
bank and development finance institutions.
4.7 Prepare and Present the Proposal for the Establishment of the LEE (Feasibility Study and Business
Plan) to the Local Sanggunian as Basis for the Enactment of an Ordinance Creating the LEE
The LCE shall propose to the local Sanggunian the creation of the LEE. All the necessary documents particularly
the FS and BP shall support the proposal. The LCE may present a draft bill for consideration of the local
Sanggunian.
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Figure 3. Process Flow Diagram for Planning and Implementing Proposed/New LEEs
5.1. Continue LEE Operations, but Make the Necessary Changes to Comply with the Legal Provisions
and Other Requirements Governing LEEs
Existing LEEs shall be allowed to continue operating provided they comply with the legal provisions governing
LEEs. These are discussed next.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
5.2. If Detailed Personnel are Assigned to the LEE: Prepare a 5-Year Staffing Plan and Staff Transition
Strategy
Prepare a staffing plan featuring a transition strategy such that LGU personnel detailed (either full-time or
part-time) to the LEE and concurrently working in other LGU departments would gradually be weaned out.
The plan shall include the hiring of full-time staff in the management and operations of the LEE.
At the end of the 5-year period, the LEE shall be staffed by full-time personnel charged against the LEE budget.
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5.4. Present to the Local Chief Executive the 5-Year Business Plan for Each LEE
The designated staff or external consultant shall present the 5-Year BP to the LCE and stress on the importance
of directing the LEE operations towards financial self-sufficiency.
Figure 4 shows the process flow diagram of implementing procedures for existing LEEs.
If detailed
personnel are
assigned to
the LEE
If no detailed
personnel are
assigned to LEE
(or all LEE
personnel are
Prepare a 5-year staffing plan and hired out of LEE
staff transition strategy budget and
working full-time
on the LEE)
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
The operations of a LEE shall be based on an annual operating budget (AOB) that is approved pursuant to
the budget process provided for in the LGC and the Budget Operations Manual (BOM). The AOB, whether
annual or supplemental shall, therefore, be covered by an approved appropriations ordinance, pursuant to
the fundamental principle that, No money shall be paid out of the local treasury except in pursuance of an
appropriation ordinance or law. (Section 305(a) of the LGC)
In the case of the AOB, the same shall be included in the GFAB, and shall be authorized by the appropriation
ordinance authorizing the latter.
6.2.1 Include in the Budget Call of the General Fund Annual Budget the Specific Guidelines
for the Preparation of the AOB of LEEs
These specific guidelines shall include:
a. Objectives for the budget year, major thrusts, policy directions and strategies;
b. Major assumptions used in estimating the revenue/income and expenditures for the budget
year;
c. Estimated revenue/income and expenditure ceiling per LEE;
d. Expected output/results; and
e. Budget calendar and budget preparation forms as prescribed in the BOM.
6.2.3 Conduct Budget Hearings and Evaluate AOB Proposals of Each LEE
a. A separate budget hearing may be conducted for the LEE AOB.
b. The LFC shall initially evaluate the AOB of each LEE proposal as to its consistency with policies
and priorities set forth in the budget call and its alignment with the BP.
c. The LFC shall spearhead the conduct of the budget hearing. Primarily, the budget hearing shall
be undertaken for the purpose of:
i. Rationalizing the existence of the LEE;
ii. Determining the LEEs contribution to the development goals of the LGU as embodied
in the CDP, LDIP, and AIP;
iii. Validating the committed outputs and performance targets; and
iv. Recomputing the estimates for current operating expenditures (COE) and capital outlay
(CO).
6.2.4 Include the OB of each LEE in the Local Expenditure Program (LEP) that will be
submitted to the LCE for Approval
The LEP shall be prepared in accordance with the guidelines and forms as prescribed in the BOM.
The estimated receipts of the LEEs shall be presented in the receipts program of the LGU, net of the
subsidy from the GF. The expenditures of the LEE for the budget year shall likewise be presented in
the expenditure program of the LGU, exclusive of the amount corresponding to the subsidy from
the GF. The AOB shall provide the details of the receipts and expenditure programs of the LEE. It
shall be annexed to the LEP, and shall form an integral part thereof.
6.2.5 Provide inputs pertinent to the AOB of LEEs for the Budget Message
The highlights, priorities and other necessary data and information pertaining to the LEE AOB
shall be incorporated in the budget message for the GFAB.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
6.4.1 Check the Appropriation Ordinance with the Appended Budget Documents
Using the checklist on documentary and signature requirements for the LEE annual and
supplemental operating budgets for existing and proposed/new LEEs (Appendix B), the DBM
Regional Office (RO) or Sangguniang Panlalawigan shall check the budget documents (with the
required signatures) submitted together with the appropriation ordinance.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
6.5.2 Prepare Cash and Summary of Financial and Physical Performance Targets using the
Prescribed Forms in the BOM
a. Prepare the cash program.
b. Prepare the Summary of Financial and Physical Performance Targets.
c. Prepare the detailed financial and performance targets.
d. Prepare the annual procurement plan (APP).
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
Each LEE shall maintain its own book of accounts. The book of accounts will serve as a major
source of information during the SAFSSR for each LEE, to be conducted by the designated LGU
staff or duly hired external consultant.
6.6.2 Prepare and Submit Physical and Financial Reports to the LCE and Local Sanggunian
through the LFC
The LEE Manager shall prepare the following reports to the LFC, who in turn, shall review the
documents and submit these to the LCE and local Sanggunian. These LEE reports shall form part
of the physical and financial reports of the LGU.
a. Physical Report: Physical Report of Operations
b. Financial Reports:
i. Statement of Income and Expenses;
ii. Cash Flow Statement;
iii. Schedule/Aging of Accounts Payable;
iv. Schedule/Aging of Accounts Receivable; and
v. Other financial reports that may be required by oversight agencies.
6.6.3 Conduct Semi-Annual Financial Self-Sufficiency Review (SAFSSR) of each LEE and
prepare SAFSSR Report
The SAFSSR is in compliance with Section 316(h) of the LGC which requires the LFC to conduct
semi-annual review and general examination of cost and accomplishments against performance
standards.
For existing/old LEEs, the first SAFSSR shall be conducted six months after instituting the necessary
changes to comply with legal provisions and other requirements as discussed in Section 5.1.
In the case of a newly created LEE, the first SAFSSR shall be conducted six months after the start of
its operation.
The objective of the SAFSSR is to determine whether the LEE is proceeding towards financial self-
sufficiency (or 100% cost recovery) and according to the BP. The operations of a financially self-
sufficient LEE shall be funded out of its sources rather than from the GF.
An LEE is considered self-sufficient if all the costs of operating the LEE are recovered 100%. The
costs of operating the LEE include personnel services (PS), MOOE, and finance charges (interest
expense).
The following shows the steps involved in performing the SAFSSR.
a. Collect from the LEE all supporting materials pertinent to the review. These include:
i. Physical Report of Operations
ii. Statement of Income and Expenses sourced from the local accounting office
iii. 5-Year BP covering the period under review
b. Compute the true cost of operating the LEE. This involves a careful and thorough examination
of costs in order to identify which costs shall be properly attributed to the LEE and which costs
shall be attributed to the GF.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
All resources required to produce the LEE good or service must be included in the cost. To identify
all resources used to provide a good or service, all areas of local government activity must be
examined to determine which are used in some way to provide the LEE goods or services.
In cases where the LEE officers and staff are detailed personnel who are also doing concurrent work
in an LGU unit, proper attribution of costs shall be done depending on the time spent between at
the LEE and at his/her LGU unit.
For example, if a staff of the Treasurers Office divides his time between the public market (which
has been classified as an LEE) such that he spends three days per week in the public market and two
days a week in the Treasurers Office, then his salary can be attributed as follows:
a. Charged against the LEE: monthly salary multiplied by 60% (or 3 out of 5 days per week) and
b. Charged against the GF: monthly salary multiplied by 40% (or 2 out of 5 days per week).
The other costs shall also be properly computed in order to come up with the true cost of operating
the LEE.
c. Compute the revenues generated by the LEE.
d. Compute the net profit or net loss.
Appendix C shows the format for the SAFSSR report that shall be prepared by for each semi-annual
period. The SAFSSR report shows total income, total expenses, net income, financial self sufficiency
ratio (derived by dividing total income by total expenses multiplied by 100), and a textual analysis
including the reasons for the financial results. The analysis may include the results of the physical
report of operations, trends in income and expenses, and pertinent provisions in the BP. To the
SAFSSR report shall be attached a copy of the Statement of Income and Expenses from the local
accounting office for easy reference of detailed financial data.
The SAFSSR reports shall be compiled since these will be summarized at the end of the 5th year
(since instituting the necessary changes to comply with legal requirements in the case of existing
LEE or since the start of operations in the case of new LEE). The reports will be used to evaluate
whether the LEE shall be allowed to continue its operations.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
PRE-BUDGET PREPARATION:
Include LEE in the AIP. Use findings of appended PRE-BUDGET PREPARATION:
BP & after the first year, semi-annual financial self- Include LEE in the AIP. Use findings of appended
sufficiency review (SAFSSR) report to support budget FS & BP to support budget request for new LEE.
request for continuous operations of the LEE
BUDGET PREPARATION:
1. Include in the budget call of the general fund annual budget the
specific guidelines for preparation of LEE AOB
2. Prepare and submit LEE AOB
3. Conduct budget hearings and evaluate LEE AOB proposal
4. Include the LEE AOB in the LEP that will be submitted to the LCE for approval
5. Provide inputs pertinent to the LEE AOB for budget message
6. Submit the LEE AOB to the local Sanggunian
BUDGET AUTHORIZATION:
1. Enact the appropriation ordinance
2. Approve the appropriation ordinance for LEE
3. Submit the appropriation ordinance for review
BUDGET REVIEW:
1. Check the appropriation ordinance with the appended budget documents
2. Review the appropriation ordinance
BUDGET EXECUTION:
1. Record the approved appropriation in LEEs books of accounts
2. Prepare cash & summary of financial & physical performance targets using prescribed forms in the BOM
3. Obligate & disburse funds
4. Adjust cash program for shortages and overages
5. Provide corrective measures for negative deviations
BUDGET ACCOUNTABILITY:
1. Monitor income & expenses
2. Prepare & submit physical & financial reports to the LCE & local
Sanggunian through the Local Finance Committee (LFC)
3. Conduct SAFSSR of each LEE and prepare SAFSSR report
4. Present SAFSSR report to the LCE & local Sanggunian
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
A review and assessment of LEEs shall be done every five years. In the case of existing LEEs, the review will
start five years after instituting changes to comply with the legal provisions governing LEEs. In the case of
new LEEs, the review and assessment will commence five years after the start of its operations. Review and
assessment activities shall help the LGU determine whether to continue, modify, expand, scale down, or close
the LEE operations.
The following are the steps:
7.1. At the End of Each 5-Year Period, Prepare the FSSE Report and Decide Whether the LEE Should
Continue its Operations
At the end of each 5-year period,10 a decision shall be made whether the LEE has achieved financial self-
sufficiency (or 100% cost recovery) and shall be allowed to continue operating. The preparation of the FSSE
will signal the start of the review and assessment process. The FSSE shall use the 10 SAFSSR reports for the
5-year period, statement of income and expenses (with detailed income and expense items) from the local
accounting office, and the relevant BP.
The designated LGU staff or consultant shall be responsible for preparing the FSSE Report and coming up with
an analysis on the financial self sufficiency situation of the LEE as well as recommendation on whether or not
the LEE shall continue to operate and other related actions. The FSSE findings shall be submitted and presented
to the LCE and local Sanggunian to serve as basis in coming up with a decision on whether to continue LEE
operations.
Appendix D shows the format for the financial self sufficiency evaluation (FSSE) report. The FSSE report:
summarizes side by side the SAFSSR findings for the past 10 semi-annual periods (period of five
years covered by 10 SAFSSR Reports);
computes the cumulative totals of income and expenses for the past 10 semi-annual periods;
determines the financial self sufficiency ratio of the LEE (Total Income divided by Total Expenses
multiplied by 100);
provides an explanation or analysis of the LEEs financial self-sufficiency situation; and
recommends whether the LEE shall continue to operate and related actions.
The FSSE results shall yield either one of two alternative findings:
10 Five years correspond to half the usual 10-year LGU loan repayment period granted by creditor banks. It is envisioned that by halfway along the 10-year
period, the LEEs should already be self-supporting to be able to repay its operating expenses including debt service.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
a. Financial self-sufficiency or situation of 100% cost recovery and/or net income is achieved at the
end of the 5-year period (see 7.2 of this manual); and
b. Financial self-sufficiency is not achieved at the end of the 5-year period or situation of less than
100% cost recovery and net loss (see 7.3 of this manual).
7.2. Financial Self-Sufficiency is Achieved at the End of the 5-Year Period (Situation of 100% Cost
Recovery and/or Net Income)
If at the end of the 5-year period, the LEE registers 100% cost recovery and/or net income, the following steps
shall be undertaken:
a. Continue LEE operations.
b. Continue to prepare SAFSSR Reports as discussed in 6.6.3 of this manual.
c. At the end of the 5-year period, prepare the FSSE Report in accordance with 7.1 of this manual.
7.3. Financial Self-Sufficiency is Not Achieved at the End of the 5-Year Period (Less than 100% Cost
Recovery or Net Loss)
If at the end of the 5-year period, the LEE registers less than 100% cost recovery or a net loss, the designated
LGU staff or duly hired consultant shall undertake the following steps:
a. Conduct a facility utilization audit [including a willingness-to-pay (WTP) study] to see whether
the LEEs facilities and services can be improved to increase facility patronage and how it can be
done. Appendix E shows the important considerations in doing a facility utilization audit.
b. Conduct a facility cost audit to determine the true cost of running the LEE (Appendix F).
c. Use the results of the facility utilization and facility cost audits to determine if the LEE shall
continue its operations. The LEE shall continue operating if all of the following three (3) conditions
are present:
i. LEE services/products and facility patronage can be improved;
ii. Facility users are willing and able to pay higher user fees that will cover the true cost of
running the LEE; and
iii. Increase in rates to recover the true cost of operating the LEE is socially and politically
acceptable.
d. If all of these three (3) conditions for continued LEE operations are present, the LGU staff or
duly hired consultant shall recommend the continued operations of the LEE and undertake the
following:
i. Prepare a 5-Year BP including sustainability strategies covering the next five (5) years.
The BP can include the following strategies:
(a) Improving facilities and services;
(b) Intensifying information dissemination or promotions;
(c) Increasing user fees that will cover the true cost of LEE operations and which amount
customers are willing and able to pay based on the results of the WTP study;
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
11 The Philippine Statistical Authority determines and releases the official national and regional inflation rates. The automatic indexation of rates to the official
regional inflation rate after a given number of years should be stipulated in the relevant Ordinance.
12 Code of Conduct and Ethical Standards for Public Officials and Employees.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
Shown as Figure 6 is the process flow diagram for the review and assessment of LEEs.
At the end of each 5-year period, prepare FSSE report & decide whether the LEE should continue its operations
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
Figure 7. Overall Process Flow Diagram for Existing and Proposed/New LEEs
If detailed If no detailed
2 Conduct a Feasibility Study (FS)
for the proposed/new LEE
personnel personnel
are are assigned
assigned to the LEE
to the (or all LEE 3 Assess potential LEE financing sources
LEE personnel
are hired
out of LEE
budget &
working
4 Propose financing sources for the LEE
full time on
2 Prepare a 5-year
the LEE)
staffing plan &
transition strategy
5 Present the FS findings & recommended
funding source to the LCE
If LCE decides to
create the LEE
3 Prepare a 5-year Business 6
Plan (BP) for each LEE Prepare a 5-year Business
Plan (BP) for each LEE
4 7
Present the 5-year BP to LCE for each LEE Present to LCE the 5-year BP for each LEE
9
Enact the ordinance creating the LEE
continued continued
EXISTING LEEs PROPOSED/NEW LEEs
1. Include in the budget call of the general 1. Include in the budget call of the general
fund annual budget the specific fund annual budget the specific
guidelines for preparation of LEE AOB guidelines for preparation of LEE AOB
2. Prepare & submit LEE AOB 2. Prepare & submit LEE AOB
3. Conduct budget hearing & 3. Conduct budget hearing &
evaluate LEE AOB proposal evaluate LEE AOB proposal
4. Include the LEE AOB in the LEP that will 4. Include the LEE AOB in the LEP that will
be submitted to the LCE for approval be submitted to the LCE for approval
5. Provide inputs pertinent to the LEE 5. Provide inputs pertinent to the LEE
AOB for the budget message AOB for the budget message
6. Submit the LEE AOB to the 6. Submit the LEE AOB to the
local Sanggunian local Sanggunian
8 Budget Review:
13 Budget Review:
9 Budget Execution:
14 Budget Execution:
continued continued
EXISTING LEEs PROPOSED/NEW LEEs
10 from previous
15 from previous
11 16
Review & Assessment
At the end of each 5-year period, prepare FSSE report & decide
whether the LEE should continue its operations
If not all 3
1. Prepare a 5-year BP including conditions
sustainability strategies for
2. Prepare, submit & present the audit reports continued
LEE
& 5-year BP to the LCE & local Sanggunian operations
3. Continue LEE operations are present
An effective LEE one that contributes to the quality service delivery goals of the LGU is achievable under
the existing policy framework. An effective LEE can be realized if it is designed, set up, operated, and managed
in accordance with a well-prepared FS and a detailed BP as envisioned in this LEE manual.
Discussed below are cases of two LEEs which indicate that LEEs can contribute to the quality service goals of
the LGU and at the same time achieve financial self-sufficiency.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
1. The province will be able to create and hire additional personnel to beef up the personnel
requirements of the hospital without violating the restrictions fixed under Section 325 of the
LGC;
2. Income generated from the operations of the hospital will be treated as trust funds to be plowed
back solely for the operations of the hospital, thereby promoting self-sustenance and proper
maintenance of its facilities and equipment;
3. There will be fiscal autonomy which will reduce bureaucratic hassle which hinders the expeditious
acquisition of critical medicines and hospital requirements necessary for hospital operations; and
4. It will provide sufficient flexibility to the province in the structuring of its personnel staff for the
efficient and economical management of its operations.
In CY 2004 (four years after the proposal was submitted to the Sanggunian Panlalawigan), the province,
under Provincial Ordinance No. 04-90, series of 2004, declared the said new hospital complex as an economic
enterprise.
The ordinance creating the LEE also laid down the following:
1. The terms of reference for the management and operation of the hospital created a Board of
Directors to oversee the issuance of policies and guidelines governing the day-to-day management
and operations of the hospital as an economic enterprise; and
2. A declared annual subsidy of Php 40,000,000 with additional allocation if needed to start the
operations of the upgraded hospital with the condition that the subsidy ceases when the hospital
becomes financially viable.
In 2007, to set the path towards long-term sustainability for BeGH, a business development plan covering the
period 2007-2016 was prepared. The business development plan charted a path seeking to maintain the delicate
balance between providing access to quality medical services to all the LGU constituents, particularly the poor,
and generating revenues sufficient to sustain its operating requirements.
The business development plan provided for a system of cross subsidy wherein revenues from the operations
of its pharmacy and diagnostics services, the use of its private rooms, operating rooms, and special units
subsidized the cost of providing free services to indigent patients.
Guided by this business development plan, BeGH has been able to reduce its dependence on LGU subsidy
despite increases in operating costs as shown in Table 1.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
Table 1. Benguet General Hospital: Operating Budget and LGU Subsidy, 2007-2016
Despite operating costs increasing on the average by 7.4% annually (from Php 91 million in 2007 to an estimated
Php 173 million in 2016), the subsidy received by BeGH from the provincial government declined annually by
5.1% from Php 40 million in 2007 to an estimated Php 25 million in 2016. Thus, the dependence of BeGH on
LGU subsidy declined from 44 % in 2007 to only 14% by 2016. This clearly shows that BeGH was proceeding
towards financial self-sufficiency despite rising operating costs.
The contributing success factors were identified as follows:
1. Good governance
a. Strong leadership/political will and support from local officials, the LCE, the management
committee, and the hospital board;
b. Prompt amendment/updating of the provincial revenue code as basis for the collection
of hospital fees;
c. Active partnership with the private sector; and
d. Compliance with accounting, auditing rules and regulations, and the Procurement Law.
2. Delivery of quality health services (physical and human infrastructure)
a. Utilization of income to improve and upgrade equipment and hiring of additional
personnel (casual, contract of services) to augment existing personnel in accordance
with the staffing pattern;
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
39
EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
ORWASA
TOTAL INCOME AND EXPENDITURES
FYs 2011-2015
2011 2012 2013 2014 2015
TOTAL INCOME 34,367,973.22 45,843,901.95 27,505,838.96 33,584,352.33 37,320,684.51
TOTAL EXPENDITURES 39,246,196.86 49,905,722.47 35,581,238.43 26,783,832.76 33,908,449.15
NET INCOME (4,878,223.64) (4,061,820.52) (8,075,399.47) 6,800,519.57 3,412,235.36
* ORWASA received transfers from the General Fund only in FYs 2011 and 2012
** Expenditures for FYs 2011, 2012, 2013 and 2015 included Capital Outlays
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Appendix
EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
I. Cover Sheet
Use a cover sheet if the LGU is trying to attract investors or planning to avail of bank financing.
A. LEE Information
1. Full official name of LEE as stated in the appropriation ordinance
2. Complete address of the LEE
3. Main contact person and his/her designation
4. Contact numbers
B. Brief paragraph describing the LEE goals, potentials, and outlook
C. Amount of capital required by the LEE for its current and future needs
13 Adapted from Covello, Joseph A and Hazelgren, Brian J., The Complete Book of Business Plans (Illinois: 2006).
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
4. References to the LEE during public speeches, meetings, conventions attended by LGU officials and
staff
5. Posters, billboards in strategic locations
G. Marketing objectives can be expressed in terms of increasing revenues by a certain percentage over
a certain time frame.
5. Other ratios Assets to Sales, Debt to Assets, Current Debt to Total Assets, Acid Test, Asset Turnover
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
2. Existing LEEs
2.1. LCE-approved business plan submitted to the local Sanggunian
2.2. After the first year, SAFSSR reports
2.3. Actual LEE income statement for the past three (3) years and the projected income statement for the
coming budget year.
2.4. If the LEE fails to cover 100% of the operating requirements of the LEE by the end of the 5th year,
then the LGU must submit the following reports:
2.4.1. Facility utilization audit report findings providing the following information:
a. Current year gross revenue vs. full capacity revenue; and
b. Proposed measures to increase gross revenues of full capacity.
2.4.2. Facility cost audit report findings providing the following information:
a. Actual cost of operating the LEE including financial cost vs. true full cost of running the LEE.
Annual operating and financial costs shall be broken down as follows:
1. Direct costs like direct material cost, labor, and utility costs;
2. Management costs;
3. Other overhead costs;
4. Capital costs exclusive to the operation of the LEE; and
5. Joint capital and related operating costs that it shares with the rest of the LGU organization
like shared offices, computers, and telecommunication facilities.
b. If actual total cost is either lower or higher than the true total cost, cost items that contributed
to the variance shall be identified with their respective contributions and the reasons for the
variances.
c. Proposed measures to reduce the variance.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
A. Total Income
B. Expenses
B.1. Personnel Services
B.2. MOOE
B.3. Finance Charges - Interest Expense
Total Expenses
C. Net Income (Loss)
D. % Financial Self-Sufficiency
(Tot Income / Tot Expenses x 100)
Analysis:
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
Name of LEE:____________________________________________________________
For the 5-Year Period Covering: ____________________________________________
Year 1: 2016 Year 2: 2017 Year 3: 2018 Year 4: 2019 Year 5: 2020 5-Year
Item Cumulative
Jan-June Jul-Dec Jan-June Jul-Dec Jan-June Jul-Dec Jan-June Jul-Dec Jan-June Jul-Dec
Total
A. Total Income
B. Expenses
B.1. Personnel Services
B.2. MOOE
B.3. Finance Charges -
Interest Expense
Total Expenses
C. Net Income (Loss)
D. % Financial Self Sufficiency
(Tot Income / Tot Expenses x 100)
Analysis :
Recommendations:
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
I. Technical Studies
A. Coverage and service levels
i. Coverage is the share in percentage terms of the LGU population that is actually served by the LEE.
ii. Service levels refer to the quality of the LEE-provided good or service received.
iii. This study component needs to establish the following:
1. What are the technical methods for delivering the LEE-provided good or service?
2. What percentage of the population has access to the good or service? In other words, what is the
level of coverage?
3. What are the service levels for different types of users?
4. What are the social, environmental, and/or economic costs of any shortcomings in coverage or
service levels?
iv. Assessment approach - Using secondary sources, key informant interviews, and field visits, the
study team can gain a basic understanding of the technical nature of the system, the share of the
population that receives services, the quality of those services, and the effects of shortcomings on
residents, businesses, and the natural environment.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
B. Delivery Performance
i. This study component needs to establish the following:
1. What is the condition of the physical assets used to deliver the LEE-provided good or service?
2. What maintenance activities are undertaken for the LEE facilities?
3. What is the level of LEE facility revenue leakages, and the factors behind such leakages or
foregone revenues?
ii. Assessment Approach
1. Use secondary sources and interviews to approximately establish the physical condition of the
LEEs productive assets.
a. Determine whether the overall system is in good, fair, poor, or very poor condition.
b. Then put particular attention on any parts of the system that are in poor or very poor
condition, such as leaking roofs, clogged toilets, busted water lines, etc.
2. Use expenditure records and programs of work as well as interviews to identify and evaluate the
maintenance programs in place for the LEE facilities.
3. Calculate estimates of revenue leakages by comparing actual revenues from LEE financial
statements with potentially collectible revenues based on design capacities. Supplement results
from secondary data with field observations, surveillance and interviews.
iii. Investment Planning
Capital investment is one standard way to address technical deficiencies in LEE service systems.
When service levels or coverage are too low, LEEs can upgrade facilities to improve services or
extend their coverage areas to previously unserved neighborhoods in the LGU.
i. This study component needs to establish the following:
1. What types of capital investments are needed to improve LEE service coverage and/or service
levels?
2. What types of capital investments are needed to reduce revenue leakages?
ii. Assessment Approach
1. Develop a list of the service level and coverage deficiencies using the assessment carried out in
the Coverage and Service Levels assessment.
2. Develop a list of factors contributing to major technical losses in the system using the assessment
carried out under the Delivery Performance assessment.
3. For each noted deficiency, identify the necessary capital investments.
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EU TA SUPPORT TO THE LOCAL GOVERNMENT UNITS FOR MORE EFFECTIVE AND ACCOUNTABLE PUBLIC FINANCE MANAGEMENT
will vary from place to place and type of good/service, depending on the ability and willingness to pay
of customers and the LGU commitment to sound financial management.
i. This component needs to establish the following:
1. Are LEE-provided goods or services delivered on a cost recovery basis? That is, do the LEE
revenues cover or exceed expenditures?
2. Are LEE-provided goods or services affordable to customers, and are customers willing to pay
for such goods and services?
3. Does the LEE pricing structure equitably allocate costs to customers?
ii. Assessment Approach
1. Financial sustainability of LEE
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
Affordability and Willingness to Pay (WTP): Methodology, Data Needs and Data Sources
Consult existing secondary sources, LEE staff, Household income by Existing reports on
and local key informants to gain a qualitative and, population segment (e.g., household income
where possible, quantitative understanding of the by income class) and expenditures or
extent to which the LEE-provided goods or services affordability studies
are affordable to customers/end users. Household expenditure
data, including Key informant interviews
a. Consider residential users first, and then expenditures on the with accounting staff of
other users, such as commercial firms and expenditure type to which LEE, LGU officials, CSOs,
industrial companies. the LEE-provided good or local key informants
service belongs.
b. For residential users, review existing WTP survey for LEE-
comparisons of user charges to household Existing LEE pricing provided goods or
income. structure services
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3. Equity
Consult existing secondary sources, LEE staff, and local key Domestic user tariff LEE accounting
informants to ascertain the pricing structure and the way it office
allocates costs among customers. This issue has a number of Industrial user tariff
different aspects: Existing reports on
Institutional and LEE pricing
Allocation of costs among user groups Are other user tariff
industrial and institutional users charged different Key informant
Unit charges by interviews with LGU
rates than residential users? What is the rationale for
ranges of quantity officials, CSOs, local
this? Is it fair for households to pay less for a given
consumed for key informants
unit of service delivered than say, a commercial
different types of
establishment?
users
Pricing by level of good or service consumption Do
Connection or access
prices vary by level of consumption? Do customers
fees for LEE services
that consume less pay less for the first few units
consumed? [Rationale: to increase affordability for Other user charges
low-income groups.] Or do customers that consume
large amounts pay less for unit? [Rationale: quantity
discount for large industrial and other users.] Are
these pricing policies equitable?
1. What sources of finance are currently being used to cover the cost of LEE good or service
provision?
2. What additional financing sources could the LEE mobilize to pay its debts, including
advances from the LGU general fund or improve/expand its facilities?
ii. Assessment approach
1. Existing sources of LEE finance
Existing Sources of LEE Finance: Methodology, Data Needs, and Data Sources
Consult existing secondary sources, LEE staff, and Sources of finance for Existing reports
local experts to gain a qualitative understanding of O&M
the sources of finance for service delivery Key informant interviews
Source of finance for with manager and senior
Consider separately: (a) O&M and (b) capital capital investment finance staff of LEE, LGU
investment officials, CSOs, local key
informants
Identify sources of financing for operation
and maintenance, including user charges and
subsidies from local governments
Additional Sources of LEE Finance: Methodology, Data Needs, and Data Sources
Consult with LEE management, LGU officials, Features of government Existing reports
and/or local finance experts to gain a qualitative bank lending to LGUs in
understanding of the potential for expanding the the Philippines Key informant
existing sources of finance to include: interviews with manager
Features of LGU bond of LEE, LGU officials,
Bank loans issues in the Philippines bankers, private
LGU bonds providers of municipal
Possibilities for private services, local finance
Private investment investment in LEEs experts
Other non-traditional instruments for LEE via PPP in LEEs in the
financing Philippines
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LEE Receivables from Customers: Methodology, Data Needs, and Data Sources
Determine the total amount of receivables from LEE customers Total amount of receivables from
LEE customers
Compare it to annual LEE revenues to get an idea on the order of
magnitude Total LEE annual revenues
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
Analyze the modalities for payment by LEE customers Payment modalities Billing and
and evaluate qualitatively how easy it is for customers to available to collection section of
pay. customers LEE
Does the LEE billing and collection system have a Customer payment
customer follow-up system to remind customers when follow-up system
payments are due and follow up on delinquent customers?
What measures are taken in case of non-payment, e.g.,
denial of service?
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Assess the organizational arrangements of the LEE. The Organizational chart Interviews with LEE
key aspects to look into include: of LEE management and staff
Does the LEE have a clear management structure Set operating systems Existing manuals,
or organization chart, which shows who reports to and procedures systems, and
whom? for organizational procedures
coordination
Are lines of responsibility well documented and Existing internal and
transparent? Actual organizational external reports
coordination practices
Do the various parts of the organization
communicate with each other effectively? Staffing pattern
Assess the performance monitoring and planning systems Business Plan of LEE Interviews with
used by the LEE. The key aspects to look into include: LEE management
Annual performance and staff
Does the LEE have a business or strategic plan in reports of LEE
place? If so, does it conduct operations and make Existing manuals,
investments in accordance with the plan? systems, and
procedures
Does the LEE have an ongoing performance
monitoring system in place? Existing internal
and external
- If so, how were the goals established? How often reports
do they evaluate performance against goals? How is
the LEE doing overall in terms of meeting its goals/
targets?
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Assess the staffing levels and the ability to deal with human Human resources Interviews with
resources needs at the LEE. The key aspects to look into include: plan or manual LEE management
and staff
Does the LEE have a human resources plan or manual? Number of staff
Existing manuals,
Does the LEE have staff support to handle human resources Tasks required of systems, and
development (hiring, firing, benefits, etc.)? staff procedures
Are the staffing levels at the LEE perceived as adequate Existing internal
by staff and leadership? Can they accomplish day-to-day and external
operations adequately? Can they respond in a timely manner reports
to problems as they arise?
2. Staff Competence
Assess the technical capacity or skills levels of the LEE. LEE annual reports Interviews with LEE
The key aspects to look into include: management and staff
LEE budget proposals
Does the LEE have staff who are able to prepare Existing manuals,
annual and 5-year budgets? Do they do so? Personnel files of LEE systems, and procedures
Does the LEE have staff who are able to conduct Existing internal and
projections of demand? Do they do so? external reports
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Assess the LEEs human resources development or training Training plans and Interviews with LEE
programs. The key aspects to look into include: requirements management and
staff
Does the LEE conduct regular training of its Records of actual
employees? In what format (formal, classroom trainings Existing manuals,
instruction, more informal and ongoing workshops, systems, and
on- the-job training)? Records of degrees procedures
and certifications
Does the LEE require that its employees receive Existing internal
training on an ongoing basis? Does it provide and external reports
incentives for staff who receive training?
4. Community aspects
a. This component needs to establish the following:
i. Are there any local cultural or social factors that inhibit demand for the
LEE-provided good or service?
ii. To what extent are LEE-provided good or service users aware of the
need to make sufficient and timely payments to the LEE in order to keep
receiving the good or service from the LEE?
b. Assessment approach
i. Demand Inhibitors
Review secondary sources and consult local experts to Determinants of Focus groups
ascertain the social and cultural factors that prevent local demand for
the use of the LEE-provided good or service or inhibit the LEE good or Surveys
demand for it. Determine any culturally mandated service
Interviews with community
practices relating to use of the good or service. Break
members, service provider
down the customer base or user population by segment
staff, and local experts (e.g.,
or sub-group where appropriate.
CSO officers, academics) on
Also consider existing social and cultural factors that social and cultural factors
increase demand for services.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
Review secondary sources and consult local experts User payment Focus groups
to ascertain customer attitudes toward the service compliance data
provider. The key aspects to look into include: Surveys
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Costs that can be readily and Capital Depreciation or lease costs of specific
unequivocally attributed to a service purpose buildings like hospitals; vehicles;
or activity because they are incurred computers; and other equipment used
exclusively for that particular directly in delivering services
product/activity
Administrative Transport; accommodation; and meal
expenses for service delivery staff; service-
related publications
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
Costs that are not directly Capital Depreciation or lease of main city hall
attributable to an activity often building
referred to as overheads
Depreciation and computer software
license; maintenance fees of computers in
the City Mayors office
3. There is no single correct way to categorize a cost as direct or indirect. What is important is to:
Set reasonable guidelines to decide if a cost is direct or indirect.
Be consistent in categorizing costs as direct or indirect.
Count every cost, but only count it once.
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6.2. Information is also contained in budgets and non-financial records such as equipment purchase
and maintenance records, building records, mileage reports, and payroll and personnel records.
6.3. Costing requires that the expenses incurred to provide a good or service be calculated for the
time period in which the good or service is provided, regardless of when the expenditures
necessary to purchase these resources take place.
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How much money can be saved if a particular service is reduced? How much will it cost to
increase the provision of a good or service?
10. Set LEE pricing
In order to determine the appropriate pricing for an LEE-provided good or service, LGU officials need
to know the amount of good or service provided and the cost of one unit of the good or service. For
example, the rental rates for public markets are based on average unit costs per sq. m. or the user fee
for LGU swimming pools are based on average cost per user.
11. Choose among alternative methods of providing a good or service
Avoidable and new costs are important factors in choosing among alternative methods of providing
goods or services being provided by an LEE. For example, in considering privatization of the provision
of an LEE-provided good or service, officials need to determine which costs the LGU or its private
constituents will avoid and what new costs will be incurred if the contract is accepted. If avoidable
costs are greater than new costs, then the contract offers financial savings to the town. If, on the other
hand, avoidable costs are less than new costs, the change in service delivery does not offer financial
savings.
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I. The Proponent
This section gives a description of the proponent local government unit.
A. The Local Government Unit (LGU)
1. Brief history
2. Brief socio-economic profile population, economic base
3. Development trends and directions
4. Organizational chart of the LGU
B. Management and Organization
1. Organizational chart of the proposed LEE
2. Organizational linkages and arrangements if applicable
1. Location of the LEE (approximate distance from Metro Manila or city center or other notable
landmarks)
2. Land area
3. Building site
4. Vicinity map
B. Overall LEE Design
1. Conceptual design / artists perspective / drawing
2. Facility design and layout
3. Production or service provision process and capacity
C. Input Requirements
Detailed cost of input requirements, e.g., raw material, labor, power and utilities
D. Project Timetable
Time frame/schedule of project implementation (date of start-up to start of operations) through a
Gantt chart
E. Environmental Consideration
1. Measures/steps to be taken to minimize environmental damage
2. Sewage/waste disposal and management system
3. Approval by the Department of Environment and Natural Resources (DENR)
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V. Financial Feasibility
This section provides information on the financial viability of the LEE.
A. Financial Assumptions
B. Projected Financial Statements (Income Statement, Balance Sheet, Cash Flow Statement)
C. Amortization Schedule in case of credit financing
D. Financial Viability Analysis
1. Discounted Cash Flow (DCF) Measures
a. Net present value (NPV)
b. Internal rate of return (IRR)
c. Benefit/Cost (B/C) ratio
2. Non-DCF Measures
a. Payback period
b. Accounting rate of return
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
1. Key Concepts
a. Discount Rate interest rate that measures the trade-off between the present and the future
the so-called time preference rate.
b. Financial Discount Rate: financial rate of return foregone from the best alternative use of funds
invested in the project. In practice this is measured by what is considered as the risk-free financial
rate of return measured by the Treasury Bill rate (usually) the 182-day rate + a margin to cover
the costs of lending (usually 2.5 to 3%).
c. Time value of money is a critical consideration in financial and investment decisions. Money has
a time value because of the opportunities for investing money at some interest rate.
i. Future value (FV)
A peso in hand today is worth more than a peso to be received tomorrow because of the interest
it could earn from putting it in a savings account or placing it in an investment.
The FV of an investment (P) compounded annually at rate i for n years is:
FV = P x (1 + r)n
Example: PhP 1,000 placed in a deposit account earning 8% compounded annually will be
1,000(1+0.08) 4 = 1,000(1.3605) = PhP 1,360.50 at the end of 4 years.
ii. Present value (PV) discounting
PV is the present worth of future sums of money
The process of calculating PVs or discounting is the opposite of finding the FV with the interest
i called the discount rate.
FV
PV = (1 + i)n
Example: The PV of PhP 20,000 received 6 years from now at i = 10%
20,000
PV = = 20,000 (0.5645) = PhP 11,290
(1 + 0.10)6
This means that receiving PhP 20,000 6 years from now is equivalent to receiving PhP 11,290
now at an annual discount rate of 10%.
2. Discounted cash flow (DCF) project financial feasibility indicators considers the time value of money
a. Net Present Value (NPV)
Bt Ct
NPV = t=0
N
(1 + r)t
-
(1 + r)t
b. Internal Rate of Return (IRR)
r at which NPV = 0
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(1 + r)t
Where:
Bt and Ct are the annual cash inflows and outflows at market prices for the financial analysis and
the annual economic benefit and cost streams for the economic analysis.
The discount rate r is the opportunity cost of the funds used in the project. For financial feasibility
analyses of projects, the rate that is used is usually based on the risk-free 182-day Treasury Bill
rate plus a 2.5 to 3% margin to cover the risk and costs of lending. As of end-December 2015, the
182-day Treasury Bill rate stood at 1.92%. Thus, the discount rate for LGU loans was set between
4.5 and 5.0% by banks lending to LGUs. The IRR is also referred to as the Financial Internal Rate
of Return (FIRR) in financial analysis.
d. Decision Rule: Accept all projects meeting the following financial feasibility criteria.
i. NPV zero
ii. IRR r
iii. BCR 1
If a projectthe benefits and costs of which are expressed in market pricesmeets these
feasibility criteria, then the project is said to be financially viable.
1. Q: What local government unit (LGU) services qualify as local economic enterprises (LEEs)?
A: Section 17 of the Local Government Code (LGC) treats public utilities and economic enterprises
separately. Economic enterprises are primarily concerned with public markets and slaughterhouses
[See Section 17 (b)(2)(ix)]. The rest are treated as utilities and services. However, in the same Section,
apart from markets and slaughterhouses, the phrase and other enterprises is added, which connotes
that any other utilities or services can be considered as economic enterprise, provided they generate
income or revenues. Given this legal ambiguity, any LGU service or utility may be considered as an LEE
as long as they meet the qualification criteria in the case of proposed LEEs and comply with the legal
provisions and other requirements governing LEEs.
7. Q: Who prepares the FS and corresponding BP for a proposed LEE and the BP for an existing LEE?
A: The LCE may assign or designate the appropriate personnel in the case of small-scale projects or hire an
external consultant in the case of large-scale projects.
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9. Q: What will serve as the legal basis for the creation of a new LEE?
A: A duly enacted ordinance creating the LEE based on the FS and BP approved by the LCE and presented
to the local Sanggunian.
10. Q: Aside from the ordinance creating a new LEE, is a charter for the LEE needed?
A: There is no need for a separate charter. A duly enacted ordinance creating the LEE serves as the charter
of the LEE.
11. Q: Can the ordinance creating a new LEE contain a provision specifying the term within which it should
attain 100% financial self-sufficiency?
A: Yes, the ordinance can contain a provision which specifies a time period within which the LEE should
achieve 100% financial self-sufficiency. Failure to achieve this within the specified time period will
trigger proceedings implementing the exit strategies for the LEE, such as the enactment of an ordinance
closing the LEE.
12. Q: Does an enterprise regarded by the LGU as an LEE need to be backed by an ordinance creating it as
such?
A: Yes, the enterprise cannot be treated as an LEE unless legally created by an ordinance.
13. Q: What is the role of the local Sanggunian in the LEE start-up stage?
A: The Sanggunian enacts the ordinance creating the LEE. In the case of component LGUs, the ordinance
will have to be reviewed by the appropriate provincial Sanggunian.
14. Q: What is a possible funding source for the preparation of the FS and BP?
A: The general fund budget.
15. Q: What reference materials are available to LGUs in the preparation of the FS and BP?
A: The Project Evaluation and Development (PED) Manual of the National Economic and Development
Authority (NEDA) provides a good reference material.
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16. Q: Who decides whether to engage in the direct provision of marketable goods/services, and how it can be
set up to operate an effective LEE?
A: The LCE, based on the policy framework that will contribute to the quality service delivery goals of the
LGU, may decide to set up, operate, and manage the LEE in accordance with a well-prepared FS and BP,
with the authorization of the Sanggunian.
17. Q: What is the role of civil society in the LEE planning process?
A: Civil society forms a vital part of the Local Development Council which deliberates on the LDIP, which
includes the LEE.
19. Q: What is the proper accounting treatment of the funds provided to the LEE for its operations?
A: Based on the Revised Chart of Accounts for LGUs prescribed under Commission on Audit Circular
No. 2015-009 dated December 1, 2015, transfers to LEEs may be treated as advances or subsidies. The
account due from LEEs is used to record the amount granted to LEEs maintained as special accounts
in the general fund of the LGU, and is credited upon liquidation of the advance. The account subsidy
to LEEs, on the other hand, is used to record fund transfers to economic enterprises from the general
fund proper or other economic enterprises of the same LGU.
21. Q: Does the local Sanggunian need to approve the prices of products and services of an LEE?
A: Yes. The prices of the LEEs product or services (or facility charges or users fees) shall form part of the
Ordinance creating the LEE.
22. Q: Are the LEE facility charges or users fees part of the LGUs Local Revenue Code?
A: Yes. Under Section 5.3(j) of the LGC, LEE facility charges must be included in the LGUs Local Revenue
Code as basis for collection. In case the LGU does not have a codified revenue code (legal document
which comprehensively lists all LGU taxes, fees, and charges), an ordinance specifying the LEE fees and
charges is sufficient.
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23. Q: Who collects the users fees and charges of LEEs the local treasurer, or an LEE staff?
A: The local treasurer or his/her duly deputized and adequately bonded staff.
Pre-Budget Preparation
24. Q: Is it required that the LEE budget be linked with the LGUs Local Development Investment Program
(LDIP) and Annual Investment Program (AIP)?
A: Yes. The setting up and operation of LEEs should be part of the LGUs development planning and
investment programming. Thus, the LEE budget should be necessarily linked with the AIP and LDIP.
Moreover, it should be noted that the LEEs are maintained as special accounts in the general fund.
Thus, the LEE budgets are part of the general fund budget. As a matter of policy, the general fund
budget should be based on the duly approved AIP.
Budget Preparation
25. Q: If the LGU has three (3) LEEs, how many budgets shall be prepared only one for the LGU General
Fund Budget including the three (3) LEEs, or a separate budget for the general fund and for each LEE?
A: LEEs are maintained as a special account in the general fund budget. Thus, while each LEE will have
its own operating budget, the same forms part of the general fund budget which is authorized by one
appropriation ordinance. In effect, regardless of the number of LEEs operated by the LGU, it will only
prepare one general fund budget to be authorized under one appropriation ordinance.
26. Q: Is the LEE budget subject to the provision for Local Disaster Risk Reduction and Management Fund
(LDRRMF)?
A: No. The budgetary requirement under Section 324(d) of the LGC, as amended by RA No. 10121 will
not apply to the LEE budget because the LEE income is specific for LEE operations and not for regular
LGU operations.
27. Q: Are budget calls for LEEs issued separately from the Budget Call for the General Fund Annual Budget?
A: No. The LCE may just issue one Budget Call to signal the preparation of the general fund annual budget
and annual operating budget for each LEE, which forms part of the former.
Budget Authorization
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Budget Execution
29. Q: Who will maintain the Registries for each of the LEEs the LGU accountant, or the budget officer, or
an assigned staff of each LEE?
A: Since LEEs are maintained as special accounts in the General Fund, the Offices of the Local Budget
Officer and Local Accountant shall be responsible for maintaining the books of accounts for the LEEs.
Budget Accountability
30. Q: Is the LGU required to prepare and submit separate Financial Reports for each LEE?
A: Yes, each LEE shall have its own Financial Reports separate and distinct from the general fund.
32.
Q: What is the Semi-Annual Financial Self-Sufficiency Review (SAFSSR) and why should it be
undertaken?
A: The SAFSSR is the semi-annual review and general examination of the costs incurred and the
accomplishments attained vis--vis performance standards of an LEE.
It is undertaken to establish whether or not the LEE is proceeding towards financial self-sufficiency (or
100% cost recovery) and according to the Business Plan.
33. Q: When should the Semi-Annual Financial Self-Sufficiency Review (SAFSSR) be undertaken?
A: The SAFSSR will be undertaken six months after the start of operations for proposed/new LEEs. For
existing LEEs, six months after the LEE has instituted necessary changes to comply with the legal
requirements governing LEEs, as indicated under items 5.1.a to 5.1.i of this Manual.
34. Q: When does the LGU have to make a decision whether or not to continue LEE operations?
A: The LGU will decide whether or not to continue operating the LEE at the end of every 5-year period
based on the Financial Self-Sufficiency Evaluation (FSSE) conducted at this time.
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36. Q: What will happen to LEEs which are able to attain 100% cost recovery or even net income?
A: If at the end of the 5-year period (covered by 10 SAFSSR reports) the LEE has attained 100% cost
recovery or even net income, the LEE will be allowed to continue its operations.
37. Q: What will happen to LEEs which are not able to attain 100% cost recovery or have registered net loss?
A: If at the end of the 5-year period (covered by 10 SAFSSR reports) the LEEs cost recovery level is below
100%, a facility utilization audit and a facility cost audit shall be conducted by the designated LGU staff
or consultant to see if the following three conditions for continued LEE operations are present: a) LEE
services/products and facility patronage can be improved; b) facility users are willing and able to pay
higher user fees that would cover the true cost of running the LEE; and c) increase in rates to recover
the true cost of operating the LEE is socially and politically acceptable. As long as all of these conditions
are met, the LEE shall be allowed to operate. A revised 5-Year business plan shall then be required to
include measures to effect improved services/products and patronage and sustainability strategies. If
not all of the three (3) conditions for continued LEE operations are present, the designated LGU staff
or external consultant shall recommend an exit strategy for the LEE.
The LGU staff concerned may also recommend the suspension of operations for a specific period
pending evaluation which exit strategy to undertake.
38. Q: What are the exit strategies which the LGU may consider?
A: Exit strategies include service shedding, closure, or divestment.
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
42. Q: What is the role of the Internal Audit Service/Unit (IAS/U) in LEEs?
A: The IAS/U may be tasked by the LCE to conduct a management audit of an LEE based on the SAFSSR
findings of the LFC.
REFERENCES
Commission on Audit (COA). 2002. Manual on the New Government Accounting System (LGAS)
for Local Government Units. Quezon City: Commission on Audit.
Covello, Joseph A and Hazelgren, Brian J. 2006. The Complete Book of Business Plans. Illinois:
Sourcebooks Inc.
Department of Budget and Management (DBM). 2005. Updated Budget Operations Manual. Manila:
Department of Budget and Management.
Manasan, Rosario and Castel, Cynthia (PIDS). 2010. Improving the Financial Management of Local
Economic Enterprises. Makati: Philippine Institute for Development Studies (PIDS).
National Economic and Development Authority. Project Evaluation and Development Manual
Republic Act 7160. Local Government Code of 1991.
BIBLIOGRAPHY
European Commission (2010) Communication and Visibility Manual for European Union External
Actions
Financing Agreement between the Republic of Philippines and the European Union Support to Local
Governments Units for more effective and accountable Public Financial Management signed 03
July 2012
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TWG/Secretariat:
DBM RO VI: Assistant Director Mae L. Chua
Ms. Leah P. Deslate
TRAINERS OF THE MANUAL ON SETTING-UP AND OPERATING THE LOCAL ECONOMIC ENTERPRISE (LEE)
RO NAME POSITION
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MANUAL ON THE SETTING UP AND OPERATION OF LOCAL ECONOMIC ENTERPIRSES
DILG
Ms. Jenifer G. Galorport
Mr. Arce Fajardo
Ms. Evelyn Castro
Ms. Anna Victoria C. Quibot
NEDA
Ms. Hazel de Chavez
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