Guide to ring-fencing of local government-run water utilities

Ring-fencing is a legal or financial arrangement of separating the activities, assets and liabilities, revenues and costs, and so on, generated by a specific business from the general business of an entity. In the context of these Guidelines, the water supply operation of the local government is being isolated or ‘fenced-off’ from its other activities. It includes the separation of financial accounts, the consolidation of financial accounts across different products and services within the company and its subsidiaries, the physical and procedural internal divisions (known as Chinese walls) to contain certain information and activities, the protocols for the disclosure and exchange of information between internal entities, and the consistent application of rules for cost/revenue attribution and for an appropriate allocation of common or joint costs, including overhead costs. Ring-fencing often denotes that funds set aside for an activity are not spent on anything else, and that revenues generated by those activities are invested back. It can be achieved using a range of strategies and techniques, including the creation of a new entity (corporatization). These Guidelines relate to the technique that is focused on the separation of financial accounts through the use of a subsidiary accounting system.[authors abstract]