The current tussle between the concessionaires and President Rodrigo R. Duterte (PRRD) stems from two arbitration awards by separate arbitration panels in favor of Maynilad Water (P7.4 Billion) and Manila Water (P3.4 Billion), in July 2017 and November 2018. The claimed amounts allegedly represent their accumulated losses after the Regulatory Office under the Metropolitan Waterworks and Sewerage System (MWSS) refused to grant their petitions to raise their tariffs from 2014 to 2018.
The arbitration was allegedly kept secret by the Aquino administration with the consent of then President Noynoy Aquino and Solicitor-General Florin Hilbay. When it came to light recently, President Duterte hit the roof considering that both water companies were suspected of hoarding water earlier in the year. According to PRRD, his suspicions mounted when water flowed again immediately after he cursed the water companies and its owners. He refused to pay and threatened the abrogation of the concession agreements as those were inimical to public interest.
Human security was the basis for MWSS’ privatization in 1997 after the passage two years earlier of R.A. 8041, or the National Water Crisis Act of 1995, because the MWSS was unable to fulfill its mandate, which resulted in poor service to the public characterized by water loss of around 65%; decades of underinvestment in water, sanitation, and sewerage; mounting government debt in excess of $1 billion, and continuing to generate insufficient earnings to settle its financial obligations on account of unabated inefficiency, corruption, negligence, and incompetence.
The primary objectives of MWSS’ privatization, therefore, were to transfer the financial burden of providing water to the private sector, improve service standards, increase operational efficiency, and minimize tariff impact. The government then entered into separate 25-year concession agreements with two private consortia comprised of local and international partners. The government, through the MWSS, continues to own the system. The private sector, through the two winning bidders, took over the operations, maintenance, expansion, and improvement of the system.
Ayala’s Manila Water took over the East Zone, while Maynilad Water took over the West Zone, originally operated by the Lopez group which, on account of political risk, returned the concession to MWSS in 2006. In 2008, MWSS re-privatized the West Zone. The Pangilinan-Consunji consortium won that bid. Both concessionaires have specific targets to meet for water, sanitation, and sewerage. The concession period was for 25 years after which it would be returned to MWSS with all the improvements and, hopefully, to a transformed government. During the latter years of the Arroyo administration, a MOA extended the life of the service contracts by another 15 years causing another legal controversy.
On orders of PRRD, MWSS cancelled the MOA based on a Department of Justice recommendation. Justice Secretary Menardo Guevarra found that the extension had no legal basis. Furthermore, he said that the concessionaires have not denied to this day the existence of inequitable provisions in the contracts and have, in fact, expressed their willingness to renegotiate. He noted that the proper time to renew the contracts was upon their expiration in 2022 as provided for in the agreements. There’s no provision that allows for their extension before the original expiry date.
On a sobering note that signals government’s evenhandedness, the authorities are now discussing matters with the concessionaires, making it clear that government’s intent is not to reject the concession agreements in their entirety but to merely repudiate the onerous provisions that violate the law. The original concession agreement has undergone changes, so what’s the current contract like? The agreements allow for periodic contract reviews to include rate rebasing. So that would be a valid exercise of duty and responsibility on government’s part.
In a Dec. 4 letter to President Duterte, former President Fidel V. Ramos defended the integrity of the concession agreements. He said that privatization brought in much needed capital to expand, extend and modernize water, sewerage, and sanitation services that benefited end-users. Over 18 million people (from 10 million in 1997) now have access to sustainable water supply. Funding mobilized by the private sector, from foreign and local sources, was due to the Philippine government’s guarantee that adherence to the sanctity of contracts and rule of law would be observed. “Our word must be our bond.”
PRRD reacted to alleged threats by the two companies to raise water rates “by 100%” after the MWSS decided on Dec. 5 to revoke the extension of their concession deals, from 2022 to 2037. He rose in defense of social welfare. The concessionaires later issued separate letters that they would no longer collect on their arbitral awards. But even without the rate increases they demanded, the MWSS says that their income during those years under litigation totaled P67 billion, averaging P13.4 billion, higher than the P10.5 billion of the previous five years.
Consequently, the brawl between the President and the water companies resulted in collateral damage last week of up to P127 billion in the stock market. Metro Pacific Investments Corp. (MPIC), parent conglomerate of Maynilad, lost P53 billion as stock prices tumbled 38.4%. Manila Water’s share price slid 41.8% while its parent company, Ayala Corp., slid by 7.5% equivalent to P39.52 billion. DMCI Holdings suffered a 21% drop in value, shaving off P17.93 billion in its market capitalization. The collateral damage extended to the equity positions of state-run pension funds SSS and GSIS by almost P4 billion.
There’s a crying need for prudence and circumspection in the utterances and acts of all parties concerned. Business continuity of PPPs are contingent on all parties doing their part to fulfill their contractual obligations. Inertia, opportunism, corruption, and profiteering are not part of it. That’s why the contracts allow for a periodic review of performance, the policy and operating environment, and the rates to be charged. Everyone wants clarity, stability, and certainty, especially the funders. Without them, no money no honey.
From a policy perspective, the sanctity of contracts is imperative. The lack of it impacts on the funding for future long-term projects and on foreign direct investment; and raises political risk.
Rafael M. Alunan III is a former Secretary of Interior and Local Government and chairs the Philippine Council for Foreign Relations.
