Public interest, private hands: How Manila Water, Maynilad got the deal

 AT A GLANCE

MANILA, Philippines – President Rodrigo Duterte was outraged when the government was ordered to pay P7.4 billion to Manila Water over a bitter spat involving water rates that started way before his presidency.

"If Ayala and Pangilinan are your friends, kindly tell them, hindi naman ako lumabas, kung may magyaya sa akin...'pag mag-abutan tayo maski ilang bodyguard, 'yung mukha mo, putang ina, kaya ko gawin 'yan," said Duterte on Tuesday, December 3, in Malacañang.

(I don't go out but if someone invites me out...if we see each other, no matter how many bodyguards you have, I can ruin your face, son of a bitch.)

Duterte's frustration over the matter is nothing new, as it has been echoed by various stakeholders in civil society and lawmakers since water was privatized. 

To understand the intricacies of the issue, we go all the way back to the '90s, when the government used to handle water – and failed miserably.

Water crisis

In the mid-1990s under the Ramos administration, Metro Manila had rotational water shortages. The Metropolitan Waterworks and Sewerage System (MWSS) simply could not keep up with the demand of an overpopulated Metro Manila.

The MWSS was only able to cover less than 70% of the entire Metro Manila. Non-revenue water or the volume of water lost due to leakages was very high. Supply was intermittent and lasted less than 16 hours a day.

Illegal connection and use of fire hydrants, meter tampering, and a deluge of other problems hounded the government agency.

Then-president Fidel Ramos believed that privatization of the MWSS was the best way to improve services and at the same time ease pressure on the government to handle the daunting task.

As early as 1994, Ramos already floated the idea. He met with Malaysian and British officials to push for the privatization, but talks eventually fell through.

Mark Dumol, a former official of the Department of Public Works and Highways who was key in the negotiations for the privatization, said early talks did not prosper due to issues on ownership and possibly onerous provisions in the proposals.

In a book published by the World Bank, Dumol also cited the culture of mediocrity within the MWSS as a factor in why it was hard to put water supply in private hands.

Money was also a big problem for the MWSS. It had incurred around $900 million in obligations.

With all these problems, Ramos eventually signed Republic Act No. 8041 or the National Water Crisis Act in 1997.

The law did specifically want water to be privatized, but focused on the reorganization of the MWSS.

"In fact, the MWSS privatization consisted of only one sentence in the Act," Dumol said.

Nevertheless, the legislation paved the way for the private sector to come in and take over the construction and operations of water utilities.

Rates and tariffs

The International Finance Corporation (IFC), which is part of the World Bank Group, was commissioned by the government to provide technical assistance for what would become the largest water privatization effort in the world.

The IFC, together with government officials, needed to resolve issues on tariffs, as well as help determine which companies would cover which areas in Metro Manila. It also needed to determine capital expenditures, ownership of assets, as well as consequences in case winning concessionaires would fail to live up to their promises.

For the privatization to push through, a formula for tariffs had to be created. However, Dumol noted that there were so many variables that needed to be considered, including population growth, average income of individuals, and inflation. Moreover, potential bidders at that time did not know exactly what they were going to build and how many projects would be done during the concession period.

Dumol said an economist from the then-National Economic Research Associates (NERA) introduced the concept of rate rebasing – a matter that is still being discussed until now.

Rate rebasing is based on the performance, expenses, earnings, unrecovered investments, and service improvement plans of water concessionaires.

Through cash analysis, the government ensures that water concessionaires are not over-accumulating profits and losses. Rates would be adjusted upward once every 5 years.

Basically, the economist wanted companies to be assured that they would fully recover their expenses once their concession agreements end.

"When NERA first proposed the rate rebasing procedure, we seriously questioned this, particularly the fact that it appeared to practically guarantee the return of the concessionaire. NERA said that it was not appropriate to allow the concessionaire to go bankrupt. We thought that this violated the very concept of bidding, and this all the more reinforced my belief that their concept was wrong," Dumol said.

Rate rebasing seemed to remove the risks from bidding since it guarantees profits. Officials also found that the scheme would allow companies to bid low and just recover losses during the rebasing period. They were concerned that a company would bid with the intention of "monkeying around later" with the increases.

However, executives were later convinced of the scheme as the way to go about the rate adjustments.

"In order to avoid someone's submitting an unreasonably low bid, we established that the first rate rebasing (after 5 years) could be canceled at the sole option of the government. This meant that if a bidder bid too low, he or she would have to live with that bid for 10 years and suffer all the consequent losses during that period. We felt that this was sufficient to dissuade anyone from bidding too low," Dumol said.

Taking on utilities was already a risk in itself for the bidders, as they would be taking over MWSS projects without fully knowing their intricacies and problems.

"For each capital project, they would take on a construction risk. They also took on the risk that the [MWSS] Regulatory Office would disallow some of their expenses. All of this was aside from political risk," Dumol said.

Meanwhile, a former official of the Department of Finance who was familiar with the negotiations told Rappler that companies taking on concession agreements would think twice about raising rates too high.

"They would get flak if they raised it too high. As you know, water is a need and therefore is very, very political," the official said.

The rates would then be checked and judged by a third-party regulatory office. But Dumol said the creation of such an office needed legislation.

"Given our tight timetable, there was no time for this. As an intermediate step, therefore, we decided to create a semiautonomous regulatory office within the MWSS," he added.

Bidding

On January 23, 1997, the competition to win the concession agreements began with 4 bidders. They were:

Ayala and Lopez-led Benpres both won the bidding and formed Manila Water and Maynilad Water Services, respectively. They not only got contracts, they also absorbed the MWSS' debts.

Manila Water took the East Zone, which covers 23 cities and municipalities. They are Makati, Mandaluyong, Pasig, Pateros, San Juan, Taguig, Marikina, most parts of Quezon City, portions of Manila, and 14 areas in the province of Rizal.

Maynilad got hold of the West Zone, which covers 17 cities and municipalities. It covers most of Manila, areas in Quezon City, areas in Makati, Caloocan, Pasay, Parañaque, Las Piñas, Muntinlupa, Valenzuela, Navotas, and Malabon, as well as Bacoor, Imus, Kawit, Noveleta, and Rosario, which are in Cavite province.

In January 2007, DMCI-MPIC Water Company, a joint venture between Metro Pacific Investments Corporation and DMCI Holdings, took over Maynilad from the Lopezes and acquired 84% of its shares.

Achievements

To date, the Ayala-led Manila Water has spent P166 billion to improve water and wastewater services.

"We have installed over 5,500 kilometers of pipes and built 2 new filter plants, 32 new reservoirs, 113 pumping and booster stations, 40 additional wastewater treatment facilities, and 5 times more sewer network capacity to improve the MWSS facilities in the East Zone," the company said in a recent disclosure.

Water coverage in the East Zone is now at 93%, with over 7 million people being served. Water loss was significantly reduced from 63% to 12%, saving 700 million liters per day.

Over in the West Zone, Maynilad has spent over P181 billion. It caters to around 9.5 million customers.

Non-revenue water was reduced to 27% in 2018 from around 67% before privatization.

The privatization of water in the Philippines is considered one of the most successful public-private partnerships in the world by various organizations.

The concession agreements were supposed to end by 2022, but were extended by the Arroyo administration to 2037.

Water crisis 2.0 and more

Despite stellar achievements, the issue of how the companies increased their rates continued to haunt them over the years.

At one point, former MWSS acting chief regulator Emmanuel Caparas accused the companies of being overly extravagant.

"Marami pong expenses [ng mga water companies] dito na nakita namin na hindi dapat ma-allow. For example, mga donations...charitable contributions, ang mga gastos para pampa-basketball, pampa-sports clinic, mga bagay na ganoon," Caparas said in a GMA News Online article in 2013.

(There are a lot of expenses by these water companies that we should not allow. For example, donations, charitable contributions, expenses for basketball, sports clinics, things like that.)

These allegations eventually led to a bitter spat between the companies and regulators, leading all the way to international arbitration.

To make matters worse, the same water crisis that Manila Water and Maynilad pledged to resolve more than two decades ago is back once more.

The Angat Dam, their main water source, is no longer enough to supply the needs of over 12 million Metro Manila residents.

Did the companies lack foresight, or did the government fail to plan for new water sources?

As key people in the boardrooms and the government continue to battle it out and seek remedies, and potential new players scour for an opening, mounting public pressure has reached its boiling point. – Rappler.com

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.

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