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10:36 PM July 10th, 2013

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By: Peter Wallace, July 10th, 2013 10:36 PM

Whenever public utility has to raise its rates, an outcry immediately arises opposing it. No thought is given to the opposition, no research done to see if it’s justified or not. It’s just “I don’t want to pay more so it must be stopped.”

Oil firms face an almost weekly barrage of these mindless outcries, which completely ignore the fact that the pump price of gas and diesel is dictated by the cost of oil on the world market, over which no one has control. If you think the oil firms are gouging the public, look at their public record of financial performance. In 2010, Petron, Pilipinas Shell and Chevron Philippines recorded an average net profit margin of 3 percent. Compare that with a fast-food giant that everyone accepts sells at fair price, and that made 13 percent.

But today there’s a new hobbyhorse to ride. The water concessionaires have requested an increase in rates from the Metropolitan Waterworks and Sewerage System (MWSS) under the “rate rebasing” scheme. This rebasing is done every five years and is meant to “reset” rates at a level that will permit the concessionaires to recover over the life of their respective concessions the expenditures incurred and to earn reasonable returns on these expenditures. It also reviews the previous years to see how the concessionaires performed compared to target.

Opposition has been strong, but I wonder if those who are crying out have read the contracts, which have been in force and accepted for 16 years now.

The situation before 1997 was disastrous: Only 67 percent of the population was connected to the MWSS system (of which only 26 percent had 24/7 water service), and system losses stood at an incredible 63 percent of total water production.

Today, Manila Water and Maynilad have expanded water coverage to 89 percent and 86 percent of their respective service areas, 99 percent and 96 percent, respectively, of which are experiencing 24/7 water service. They have proven what we’ve always known: The private sector does it better. The privatization of water supply to Manila has been one of the very few PPP successes.

This alone is sufficient justification, as far as I’m concerned, for a higher fee. I’m happy to pay it. I turn on the tap, and drink the water.

But the opposition has focused on what it calls the unconscionable action of the concessionaires to charge their income tax to the consumer. “How dare they?” Well, it’s quite simple, really: The contracts allow it. The contracts are based on an allowed profit after tax. If tax was not to be passed on, then the contracts would have specified a higher profit before tax.

Actually, it’s not profit that’s the measure but the recovery rate on their investments. In other words, the government said, “If you invest in this service we’ll assure you a fair return on the money you’ve put in.” It’s called an appropriate discount rate. It amounts to a return on investment determined every five years.

As to collecting money in advance to pay for the construction of Laiban Dam and some irrigation, this is reasonable given that it is a public service that the government should be providing, but can’t. A reading of the contract will show that mechanisms are in place, particularly the rate rebasing exercise, to ensure that if the projects are deferred, tariffs will be adjusted to reflect the deferment.

While considering the companies as public utilities is in contradiction to the contracts stating that the MWSS remained the public utility providing water, the companies were only operators of the system. This was clearly spelled out in Article 2.1—Grant of Concession of the Concession Agreement, which states:

On the terms and subject to the conditions set forth herein, MWSS hereby grants to the Concessionaire, as contractor to perform certain functions and as agent for the exercise of certain rights and powers under the [MWSS] Charter, the sole right to manage, operate, repair, decommission and refurbish the Facilities in the Service Area, including the right to bill and collect for water and sewerage services supplied in the Service Area (“the Concession”).

There is no mention in the MWSS Grant of Concession that the concessionaires were envisioned to become the public utilities. They are mere contractors and agents of the public utility (MWSS). And neither Manila Water nor Maynilad has a legislative franchise—a requisite for all public utilities. The legislative franchise remains with the MWSS through Republic Act 6234—the law that created the MWSS and that remains in effect to this day.

On the “disallowances” being considered by the MWSS for being imprudent and inefficient, this is precisely why rate rebasing is in place. From what I’ve gathered, most of the expenses cited for possible disallowance are normal business costs that any normal business would incorporate into the prices it charges customers for its products and services. Let’s respect this process and trust that it will yield a result that balances the interests of the general public as well as the concessionaires.  We’ve trusted this process for the past 16 years and it has served us well.

The government is committed to it by a sovereign contract. It must meet that obligation, and not be pressured into change by noisy opposition. That’s the way to turn off investors. The contracts provide Maynilad and Manila Water a recovery rate on their investment. The increases will just bring the companies back to that agreed level.

It’s not what you can afford to pay, it’s what it costs. That’s the reality of an open economy. The alternative is subsidy by taxpayers—an alternative that I as a taxpayer hope the government will reject. Whichever it is, the providers must be fairly recompensed.

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