Thursday, December 15, 2011

Pilipinas Forum 22: Maynilad Water Rate Hike, 2001

This is an exchange in more than 10 years ago, sometime in April and June, 2001. I cannot find Part 1 of the exchanges, but this one is good. This is 10 pages long, so as usual, get your popcorn and fave drinks :-)

Maynilad Water Rate Hike, Part 2

April 2001

Since 1998, Manila Water (Ayala) has asked for an increase in water rates - before Maynilad did. Since I have been studying the water sector, someone from Bechtel, the Ayala partner, invited me to a discussion wherein he presented the company's plans, such as the Laiban dam. The construction of this dam did not push through because of the very high social cost involved. This guy wants me to help him promote the plan as well as the need for the water rate increase because of negative profits. I was told (by a very reliable source) that the Ayala's underbid at P2/cu.m because they want to make it hard for the Aboitiz to enter the market here in NCR. The Aboitiz gave them a hard time in Cebu.

My study where I estimated the full cost of water (= private cost + user or depletion cost + external cost) was cited. I explained to him that the estimate is for the 'economic value' of water and the revenue from charging the full-cost price should go to the owner of the resource, which is the State as indicated in the constitution. The water distributor or the concessionaire should only get the return from the distribution cost, and the user and external costs of water should go to the State or its representative - the government. Dr. Solon, a consultant of MWSS also opposed the granting of the request of Manila Water.

There is really a need to increase water rates in order to reflect the opportunity cost or the social cost from using a scarce resource. Underestimation of the value of natural resources has resulted in over-exploitation and depletion. Just look at our forests, fisheries, groundwater, etc. The lack of valuation of the impact of water pollution – an external cost - has resulted in the use of water bodies as a free dumping ground of wastes. One issue is who should get the revenues if the full-cost price is charged. One can also argue from the equity aspect. Most of the households connected to the Level III service or piped water supply are middle to upper class who can very well afford a higher water rate. Most of the poor (based on the household survey conducted in 1997/98) buy water from peddlers at much higher rates compared to the concessionaires' rates or form a queue to get water from public faucets (very high opportunity cost of time). Before the privatization, the average price of water was P10/cu.m. The issue then was not the price, but the quality of service.

One issue against the concessionaires is that they were not able to bring down the non-revenue water. It was about 58% before privatization, and now it's 62%. How will they earn if they cannot collect? Improving collection effort will increase their revenues, and not just by asking for an increase in water rates. They were supposed to bring down non-revenue water to at least 25-30%. Moreover, they were supposed to get the return from the investment over the 25-year period, not now.

Another issue is the way that most BOT projects allocate the risk from currency changes to the government, or if there is a shortfall in their expected revenues or profits. I have seen this when I was asked to review the proposal on the construction of underwater pipe which would transport water from Bohol to Mactan to Cebu. Other firms accept fluctuations of foreign exchange rate, interest rate and inflation rate as part of the business risk.

-Maricor Ebarvia

From the explanation of Manila Water, it is apparent that they intentionally underbidded in the MWSS bidding. If that is so, why should the consumers pay for such a greedy blunder. All that the Ayala Group wanted was to take out Aboitiz from the bidding process. I guess, they got what they wanted, now they want to shift the burden of their acts to the consumers.

As I have said, they should either shape up or ship out. If they cannot take the heat for their actions, it is their own fault.

-Mel Velasco

There are experiences elsewhere which show that water managed by the public sector is still effectively working. The Stockholm Water is one of the top government corporations in Sweden where publicly managed water utilities could be modelled upon. I believe it does not really matter if it is public or private that manages the resource but rather it is the work ethic of the people and the managers. In the Philippines, Privatization seem to appeal to many people because of our frustration at how the utility companies have failed. The reason is simple, it happens when the choice for managers is based on political connections-when you have political appointees whose loyalty lies on the appointing authority and not to the company itself and its customers. And the old senior managers and other personnel who have become experts in theirfield are being by-passed in the promotions.

Another reason why Stockholm Water is successful is because its water supply system is integrated with the sewerage system. They are very efficient and their water treatment efficiency is almost 100% and they recycle water about 18 times with only a certain percentage of fresh water added. Which means that the available water from the natural source is protected and conserved (even as Sweden has more than 1000 freshwater lakes). They are able to recover some cost also from the by-products of their treatment facilities such as gas and even some gold from jewelries thrown down the drain. Yung MWSS natin at ang Privatised companies Metropolitan Water lang hindi pa kaya, yun pa kayang Sewerage System (laging nakakabit pero non-existent) na hindi maintegrate ang maraming pusali ng Maynila?

Now I am worried that the privatization of MWSS will fail because of the so called optimism made in the calculation for their diving bids. I'm much more worried because they have now started to integrate the outlying suburbs into their system. I live in Taytay and I see a lot of diggings now being done to integrate our systems to the privatized MWSS. For a long time the water coops in many places have been working. If they will expand and enlarge their operations to the MegaManila concept, the problem for them will become bigger and harder to solve. If they can not run their current level of operations to the optimum profitable level without passing on to the customers their inefficiency, I am affraid the issue will only worsen not get better locally and globally.

I use to be a member of the Public Services International Committee on Water and Energy (PSI is the international federation of public sector workers unions). We have made an in-depth study of the privatization issue on the water and energy sector. While many of us seem to agree on the concept of privatization, let me warm you my friends about its globalizing effects. We found out that in the world today there are only three MNCs controlling water and just like their counterparts in our oil companies, they work like a monopoly. These big three include Lyonaise d esau, General d esau (not sure about spelling, left my files in my old house) both of France and Thames Water which I think later was renamed Northern Utilities of UK. They have hundreds of subsidiaries that tender bids for privatization of water utilites all over the world (The list of this subsidiaries is being compiled and updated by PSI and in early 1990 I sent notes on these to MWSS and NAPOCOR but it was ignored). They also have subsidiaries offering Consulting Services. In some countries the big 3 compete with one another and in some they join together and form consortiums. They are not only controlling water in the developing world but have already a foothold in some states in the US, Canada, Australia and Europe. They also own banks and now are in the process of working on joint ventures and mergers with big multinational construction companies such as Bechtel who are building dams for hydropower and irrigation. Most of the new executives in these companies were former personnel of the International Finance Corporation (which if I remember right is a subsidiary of the WB). IFC is being contracted by many governments as consultants to study privatization schemes- in short naigigisa sa sariling mantika ang clients. I think we also used them in both MWSS and NAPOCOR. If these groups will control water and electricity then the world is not far from Orwells predictions. Mind you it is already happening locally with the Lopezes and Ayalas thru the banking, electricity, water, communications, entertainments, land development, etc. which they control. Big is not always synonymous to good and efficient. Big is closer to consolidation of control and power.

Part of the reports in this study refers to the scheme of corruption employed by these companies to obtain the winning bid. It contains reports on how government officals (especially those involved in the evaluation and decision-making) are being bribed. The study is continuing but I was not able to follow it since I moved to my new job. If anyone is interested on this study I can refer you to the PSI. I also would like to refer you to books written by Brendan Martin if you wish to learn more about the failures of Privatization and perhaps a second look on Public sector management.

-Floro Francisco

June 2001

For Jude Esguerra and friends,

Behold the darkness. Curses!

Yes, it's about Maynilad. Last Monday, I could not help but feel savaged when I caught the news that:
1. Maynilad was given an auto-CERA; part of the 72% price increase;
2. MWSS was going to assume some of the loan obligations of Maynilad;
3. Maynilad was given a facility for accelerated recovery of "prospective losses"; and
4. Maynilad was batting for reduced regulatory oversight over its operations.

I stopped processing after these four. Call it sensory overload.

My questions were:
1. What change in conditions allowed MWSS to grant Maynilad such a generous bail-out package?
2. What did Maynilad do to deserve the above?
3. What did the government get in exchange for such a generous bail-out package?
4. How can MWSS and Maynilad justify "anticipatory loss recovery" under this set-up?

My first instinct was to cry, "contract disadvantageous to government". But I know little of the facts save for those items in the news. Are these true?

Then, I watched you and Cong. Rosales at the tail-end of "Point Blank" on Monday night. From what little I caught, I thought that you made a brilliant presentation, though I must admit that, not knowing the full background, I could not appreciate everything you guys said.

Please light a candle for us. I'm getting tired of cursing the darkness.

-Gina L.

Gina and PhilForum friends,

Here are quick answers to some of Gina L's curses in the dark.

1. Yes, the Memorandum of cooperation signed by Mr. Mabanta of MWSS and Maynilad's Raffy Alunan grants Maynilad an auto -CERA covering both the loans it inherited from MWSS and new loans it took on since its began operations in 1998. The original concession agreement says that Maynilad may recover capital investments and forex losses over the remaining twenty two years of the contract's life, but with this agreement they will now be able to recover these losses in one and a half years.

That section of the agreement was written as if Maynilad had no obligation to set up a risk mitigation strategy of any sort i.e., it assumed that Maynilad's could not have been expected to insure against and weather a devaluation, say, from P29 to P36. In other words, even forex losses that should have been anticipated and reasonably within the range of medium probability scenarios are being recovered within one and a half years instead of the longer period stipulated in the contract.

2. The memorandum of cooperation also grants Maynilad the right to recover forex losses beyond the first three post-Asian crisis years in an accelerated manner. Again this accelerated recovery also covers dollar loans that Maynilad will be incurring.

3. Maynilad has stopped paying its loan obligations months ago, this has forced the MWSS to draw down its own funds that are used for developing water supply sources. This fund will run out by July and the DoF will then have to take on the cost of servicing debts that Maynilad inherited from MWSS as part of the contract it won. There was a performance bond of $250 million dollars that should have been tapped by MWSS as provided in the concession agreement, but Maynilad filed an injunction that prevented the MWSS board from using this money to service Maynilad's debt obligations. I don't know what the MWSS board did about that legal maneuver. What is clear is that the government had this perverse incentive for granting Maynilad whatever it said it needed to be able to subsequently resume debt servicing. Somebody surnamed Reynoso at NEDA was part of the team that drew up these provisions.

What is exasperating is that even after the grant of an auto-CERA, Maynilad still wants to get bridge financing of up to P3 billion from government financial institutions. This too is in the memorandum of cooperation. The Lopezes don't want to put in any new equity, even only to secure bridge financing from commercial banks. The French partners, it is said, were ready to provide additional equity, even to the point of making an auto-CERA unnecessary, but if the Lopezes don't raise their equity in Maynilad, this would violate constitutional limitations.

4. As I see it it is basically a case of hostage taking and the government ended up compelling consumers to pay the ransom. The government got nothing except the assurance that Maynilad will not walk away from the contract, and this supposedly means that there will be no disruption of service. The bargaining situation would have changed radically if the MWSS board had scouted around for a qualified replacement operator; this is provided in the concession agreement in cases like these where the concessionaire fails to comply with contractual obligations . There is also no assurance of loan repayment by Maynilad, unless GFI's provide bridge loans. There is nothing about accelerated expansion of services. But there is something about addressing non-revenue water or technical efficiency issues in Maynilad, but surely it is in the self-interest of Maynilad to make sure that water going through its pipes is billed.

Raffy Alunan's past columns in Business World best articulate his company's position on these matters, I'll post them too when I find them.

I recall having read somewhere that no company goes bankrupt because it has too much debt, rather, it is because it is unable to raise money. The question then is why Maynilad is unable to raise money from the capital markets. Is it because of the shaky balance sheet of Benpres companies? The inefficiency of Maynilad operations as shown by the rise of non-revenue water to 65 percent in contrast to their target of 36? The unwillingness of Benpres to dilute their ownership in the company.

-Jude Esguerra

Jude, Gina, and the others,

Just a thing i got from today's issue of Manila Bulletin that seems to run contrary to what Jude & Gina posted re the MoC.

According to the news article, the tariff increase granted was through an accelerated extraordinary price adjustment (EPA) rather than through the automatic currency exchange rate adjustment (auto CERA). The auto CERA was as orignally requested by MWSI but was i guess denied by the MWSS-RO because this would entail amending the original concession agreement and would therefore elicit negative reaction from certain quarters like the original bidders who lost the bid for the concession. hope Jude can light another candle in this regard.

On the other aspects, i am quite alarmed by the fact that regardless of whether they use EPA or Auto CERA, Maynilad is now going to recover in 18 months what they ought to recover in 22 years. Alunan is saying that the recovery thru the EPA does not violate any provision in the concession agreement since the NPV daw of what consumers have to pay in 18 months is the same as what they/we would pay in 22 years. Amazing economic reasoning this fellow is trying to use.

This as MWSS shoulders some loan obligatons of MWSI. I am afraid the language in the MoC is open-ended, that is, MWSS will continue making payments to WB and ADB untl MWSI's financial standing improves. Sabi pa ni Alunan, "if there s a certain period that we will not be able to serve the public because we have no money, then it behooves the public partner to help us find those funds".

Konting digress lang: Jude said that somebody surnamed Reynoso at NEDA was part of the team that drew up these provisions. Now in fairness naman to that NEDA guy, who happens to have been a technical fellow for so long a time, it was a technical working group composed of NEDA, DOF, DPWH, MWSS and MWSS-RO that inked that MoC. Why give special mention to NEDA at this stage, baka sobra silang sisikat niyan :).

According to sources, one of the main reasons why the government side acceded to an MoC is that the Maynilad, who is currently negotiating a $350 bridge financing, needs to prove its stability to its prospective lenders daw. It's a lame excuse.

I really hope Jude or anybody who has access, can post the MoC soon just so we can scrutinize it further as we did before.

-Ozone Azanza

Oz,Ibig bang sabihin nito ay ang publikong hindi saklaw ng raket ng Maynilad ay dalawang beses sabit dito? Sa iba na sila kumukuha ng tubig, samantalang kasama sila sa pagbabayad ng ilan, ngunit mabibigat na pagkaka-utang ng taga-igib na ito.

-Lardy Caparas

Never nakasama ang NEDA at ICC sa crafting at approval ng contract. Although umuupo ang NEDA sa MWSS Board di naman yan naikonsulta sa mga pencil pushers dito. Biruin mo nag-privatize ka di mo man lang na-maximize ang buong expertise ng gobyerno.

Hindi gusto ng mga direct amo namin na sumawsaw pa diyan kase in the first place kagagawan rin naman ng MWSS yan e minadali ang mga preparation at di pa kumonsulta sa mga ibang "nakakaalam". Pangalawa mapulitika na e, losing proposition ang maging arbiter sa maraming diverse interests. Kaso PGMA and Canlas insisted na pumapel ang NEDA dahil nga saklaw pa rin naman ng trabaho nya yan e. Tsaka kailangan rin talaga ng referee lalo pa't may kumakalat na balita na pati MWSS-RO hati-hati ang posisyon nila sa Maynilad issue.

Ang pinagawa lang sa team e mag-simulate ng bagong financial runs tingnan yung samut-saring options na posible. Ang discussion namin talagang sa EPA track lang dapat ang pagtataas kaya yung lumalabas na pumayag sa auto-CERA ang gobyerno medyo gulat din ako. Sa pagka-scan ko naman ng financial worksheets mukhang di naiconsider sa calculation nila ang forex losses (parang nai-fix ang exchange rate). Ang malungkot pa nagbreakdown daw yung gumawa ng worksheet (na porendyer) kaya di ma-debug yung ibang numero. In short, parang gumawa lang ng maraming runs ang team para maipakita kung magkano sisingilin sa kung anong appropriate "recovery" period.

Yun lang naman. Ang ipinagtataka ko pa din na kung paano nakasama sa hit-list ang NEDA ng civil society (baka naman FDC lang at Akbayan). kasi kasama rin kaming mga technical people na naapektuhan (in terms of negotiating ability at credibility sa mga client institutions namin) sa mga innuendos na yan e. Hindi lang yun paano pa yung mga posibleng coalition forming in the future say ng Akbayan, FDC at NEDA sa mga parating na issues kung ngayon pa lang burat na sila sa isa't isa. Come to think of it karamihan pala ng mga major away namin e (tulad ng mga dams ng Casecnan at San Roque, Power Bill, at pagrereview ng lahat ng government contracts above P 50 M) nabibigyang kulay ang involvement ng NEDA.

-Erick Planta

Kasama ba ang NEDA sa "hit list" ng civil society? Hindi naman yata. Sinasabi lang namin na importante si Director Reinoso sa naging trabaho ng technical working group at nagkataon pa na ang ginawang simulations at recommendations ng technicians ay hindi naman din nasunod. Wag naman sanang maging balat-sibuyas ang mga kaibigan sa NEDA.

Tingin ko ang NEDA na ang isa sa pinaka-reliable na agency na taga-bantay. Paki-sabi na lang kay Director Reinoso that we have nothing against him. We can meet with him if he wants. Pero importante na panindigan na lang siguro ng niya at ng iba pang drafters ng MoC ang ginawa nila instead of changing the topic.

Hindi din namin sinasabi na puro mali ang nasa MoC pero definitely nagkulang ang trabaho -- maraming contractual violations at hindi yata nagawang ma-check na ang bid parameters (ADR etc) ay respetado.


Pareng Jude,

Hindi pala kasama ang NEDA sa MWSS Board. May meeting ang boss ngayon e kaya mayamaya pa magliliwanag ng kaunti. Pero ang alam namin hanggang sa level ng Assistant Director e hindi kami kasama ang NEDA (tsaka yung working team siguro) sa drafting ng MoC. Hanggang sa simulations lang kami na ang resulta nai-present ni DG Canlas sa Cabinet o si Popo Lotilla sa MWSS Board. Obviously recommendatory lang ang papel namin.

So I'm guessing na burat ang amo namin kasi nakaladkad yung pangalan niya sa MoC na wala namang siyang kinalaman. Tsaka unlikely of him to stake his reputasyon (whatever it is) or pumirma sa MoC without a strong backing sa mga Generals namin at matinding staff work from the rank and file.


Dear Jude, Ozone, Erick, Lardy, and friends,

I did not think that Maynilad was going to be such a big issue (again!). During the past two days, it did not only hit the front pages, it was making headlines. So hindi naman pala baseless ang aking sama ng loob noong Lunes.

A summary of the news:
1- President GMA calls for a review of the MoC.
2- Secretary Tiglao advises the public that the rate increase is not approved by the Cabinet and President; the latter prefers to implement a step or gradual increase over a reasonable period as opposed to an abrupt 72% increase effective July 1.
3- NEDA Chief Canlas says the MoC is not really the definitive agreement as it still calls for the resolution and agreement among parties on the actual numbers and details.
4- SSS Chief Nanagas strongly opposes the use of SSS as a funding vehicle for the P3 billion required by Maynilad; further says that SSS will not take Maynilad risk; if at all it will consider funding the project, SSS will require a full sovereign guaranty and take RoP risk instead.
5-DPWH Secretary & MWSS Board of Trustees Chairman Datumanong defends the Maynilad deal; not on economic or financial grounds, but on the fact that "it is a signed agreement" and therefore cannot be rescinded. (Is it legal and binding without the necessary governmental approvals? Refer to 2)

Among the core arguments in favor of privatizing public services have been (1) accountability and transparency; (2) efficiency of private sector (financial and operating); and (3) efficiency of public sector. It appears that MWSS/Maynilad is failing on all three.

Accountability & Transparency -- The recent experience documents how the relevant parties were nearly marginalized in the decision making process involving the bail-out of Maynilad. If news were true, then no less than the Cabinet and the President were somewhat kept in the dark on the deal that was hatched and dodumented into this MoC, the latter intervening to overrule the decisions a bit late. According to Erick, agencies like NEDA were likewise eased out, only to be called to active duty after the controversy stirred more public opinion. Privatizations are supposed to enhance accountability and transparency.

Efficiency of Private Sector -- The theory is that private is more efficient than public sector, both from a financial and operating standpoint. Such efficiency should translate into reduction of prices and improvement of quality of service to the consumers and end-users. Further, it should free up resources for the state to use in other development projects. Maynilad had not achieved these. In fact, it appears that this privatization is on the opposite side of the spectrum. What we are seeing are: (1) prices increasing by as much as 72%; (2) a condonation of the operating inefficiences of Maynilad arising from unchecked system or water losses (see Jude's post); (3) threat on the continuous provision of service; (4) burden of debt service of Maynilad loans; (5) burden of obtaining new loans for Maynilad via the use of GFI's and/or provision of sovereign guarantees; (6) crowding out on state funds for other projects; (7) poor project risk management, particularly, forex risk, etc.

Efficiency of Public Sector -- The complementary argument is that by freeing the public sector from the task of providing the service itself, it can efficiently and effectively monitor and regulate the sector. Previously, it was difficult for the government (as the regulator) to audit itself (government as the service provider) but now, that inherent conflict of interest is dismissed. The extent of regulations and manipulative mechanisms though, is slowing becoming another source of controversy these days.

I think that if the benefits of privatization are not at all achieved, whether fully or even partially, then why offer a bail-out? Maybe, the more credible solution involves calling the bluff of Maynilad and invoke the provision to seek for a replacement concessionaire. We may not avoid some short-term costs but maybe, the second time around, we can craft a more effective long-term solution.

Dito na lang muna. We raise the red flags and try to be/stay informed. Hindi pa naman white flag.


See also:
Pilipinas Forum 18: On Minimum Wage Law, November 08, 2011
Pilipinas Forum 19: The CPP-NPA, Sison and Maoism, November 09, 2011
Pilipinas Forum 20: Turbulence, Chaos Theory and the Stockmarket, November 13, 2011
Pilipinas Forum 21: On Ayn Rand and Keynes, November 29, 2011

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