Get Real

Here’s why we are where we are

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If one recalls correctly, at the time the Metropolitan Waterworks and Sewerage System called for bids from the private sector to run its water (and almost nonexistent) sewerage operations, it was charging almost P11 per cubic meter of water, it was suffering tremendous nonrevenue water losses, water service was sporadic and of limited reach, and the water itself was of doubtful potability.

The Lopez group’s Maynilad and the Ayala group’s Manila Water turned in the winning (lowest) bids for the west and east zones of Metro Manila, respectively, at rates that were roughly 50 percent and 75 percent less, again respectively, than the prevailing MWSS rates (Manila Water’s bid was P2.32 per cubic meter). Naturally, there was much rejoicing from the 11-12 million Metro Manila water consumers, who were given to understand that the rates would not be changed except to account for inflation—the much vaunted efficiency of the private sector presumably at work that would reduce nonrevenue water (at the time, almost 70 percent of the water that was coming out of the MWSS was nonrevenue, meaning it was being stolen or leaked out) and allow the cheaper rates.

It was considered another feather in then President Fidel Ramos’ cap, the first one being the end of the power crisis (privatization of generation). Applause.

Fast forward to today, and the consumers are faced with water rates that are almost 15 times (for Manila Water clients) and about seven times (for Maynilad clients) what they had to pay 15 years ago. What happened?

Philip Medalla, an economist par excellence, has an answer: The rules of the game, the bidding rules and the concession agreement that the MWSS used—with the help of the World Bank and its subsidiary, the International Finance Corporation—encouraged the concessioners to “take a dive,” as it were, on the bid price, because the concession agreement provisions were in their favor.

I understand that Mark Dumol, chief of staff of the Department of Public Works and Highways, who was representing his principal in the bids and awards process, made his reservations known about what has to be this perverse incentive, but was ignored. Too bad.

In any case, water rates can now be changed—every quarter to account for foreign exchange fluctuations, at any time in case of some “extraordinary” event, and definitely every five years when negotiations take place as to what an allowable discount rate, or a rate of return on investment, would be.

And that is why we are where we are as far as water rates are concerned. The first increase in water rates was actually demanded by the concessionaires barely two years after the concession agreements were signed. They cited the Asian financial crisis, and if Jude Esguerra’s paper is accurate, exercised strong-arm tactics—maybe financial blackmail?—to get what they wanted.

On the other hand, we do have potable water, 24-hour service, 100-percent coverage. And as far as the small water consumers are concerned—those who, during the MWSS days, were paying informal suppliers up to P150 per cubic meter of their water—the private concessionaires have been a godsend. Philip Medalla relates that he attended a water rate increase hearing once, and observed that those opposed to the increase were well-dressed, while those who were supportive of the water concessionaires were clearly in the low-income category. And why not? “Lifeline” customers—those consuming 10 cubic meters a month or less—pay about P12 a cubic meter at present. I have said it once, and I will say it again: Between the MWSS and the concessionaires operating the system, the concessionaires win, hands down.

What about the income-taxes-are-being-passed-on-to-the-consumers brouhaha?  Again, here, the MWSS is clearly in the wrong, in the sense that the concession agreement clearly states that business taxes (which include income taxes) are to be treated as an expense. I read it myself, but won’t quote it. If the MWSS insists on its position that what the concessionaires are doing is illegal, it will have a fight on its hands, and the language in the agreement is specific enough. The matter will go to an Appeals Board, and the odds are not only that the MWSS will lose, but also that the legal fees are exorbitant (foreign lawyers at $350 AN HOUR, according to Philip Medalla, who was paid $1,000 a day for his expert testimony during one such contest). And guess who will ultimately pay the legal fees of the concessionaires? That’s nous, pardon the French. Thanks to a concession agreement that seems to have been written to protect the (foreign) private enterprise (please to remember that Maynilad had a French partner, and Manila Water had an American one), the domestic investors got a free ride.

Is the MWSS as incompetent as I seem to have made it out to be? No, not really. The concession agreement allows the concessionaires to pass on expenditures that are “efficiently and prudently incurred.” I have been informed that Maynilad, for example, was disallowed P9 billion of expenditures. In the interest of transparency, the MWSS Regulatory Office should report how much of Manila Water’s expenditures were disallowed.

Can anything be done to slow down the steeply rising water charges? The key is in the allowable discount rate. In 2007, one concessionaire was allowed a 9.4-percent rate of return, presumably because of the high cost of capital. But now that the Philippines is in the world’s good graces credit-wise, Philip Medalla, off the top of his head, thinks that a 6-percent rate sounds reasonable. The request is for 8.9 percent.

The negotiations bear close watching.

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  • EdgarEdgar

    There’s no business like water business. That’s the reason why the Ayala and Lopez family got into this business in the first place. Too bad for the Lopez family, they relied heavily on foreign-denominated loans to set up Maynilad and had to deleverage when the family went under water. If history is any guide, the Lopez acquisition of Meralco was also overleveraged, which is why the Marcos regime proceeded with the takeover in the most gingerly fashion. As it turns out, the Lopez family was found seriously lacking in business acumen and heavily reliant on political connections alone.

    As for the consumers, the buck will always stop with them and they will have to cough up more than their due. That’s how it’s always been in the Philippines, the land of opportunity for the God-chosen few. And that’s why PH is where PH is today.

  • southernsons

    Wala na bang matitino at honest na tao sa bansa natin? Lahat ay halos magnanakaw. Kahit senator at congressman na may mga pera naman, desperado pa rin at gustong dumami pa ang pera. Ang bigat na talaga ng loob ko sa mga nakawan sa ating gobyerno. How I wish I have power to change us all.

    • Troll_Ultimatum

      Sadly, greed conquers all.

  • http://www.yahoo.com JOSE RIZAL

    Long & short of it, Marcos (inspite of all his “evils”) had that (longterm)”plan”. Afterwards, the Filipinos have been brainwashed, dished out with good-to-be-true taglines, while the oligarchs have been salivating on government concessions, esp. with the public utilities. Taglines/telenovelas/soap operas/non-sense evening news/late night oligarch’s opinion TV have been dished out (day-in/day-out). The Bataan Nuclear Power Plant were discarded because of the “know-it-all” nonsense discussion at oligarchs OPINION TV.
    Hahahahaha, only in the Philippines.

  • http://www.yahoo.com JOSE RIZAL

    Ramos’ “privitization” of power generation was a “short-term” alleviation of the power shortage. Cory was overjoyed by her popularity that she did not mind the, or pretend to not mind, the imminent danger of power/water/basic services crises. Ramos took over, gave himself emergency power over the electric shortage, and bingo, the very expensive power generation rate. Bataan Nuclear Power Plant was discarded based on the merely political gossipy opinion (on its danger), brought about by TV opinion makers (the likes of Ricky Carandang’s sensationalization of things), instead of a scientific and objective report. Oligarchs rejoiced over the scenario, 60/40 provision of the Constitution was a done deal, making the legitimate and good foreign investors shun away, but the mafia-type investors make some Filipinos a dummy owners (like Pangilinan). Ayalas, Lopez, etc. flew with Noynoy to invite foreign investment, stating that, even though the Foreign
    Ownership consists only of 40% aggregate, the 60% Filipino ownership can be internally invested (dummy) and their investment (within the 60% will be safeguarded).
    Not really a potent imagination, eh. It, really, is happening.

  • mad_as_Hamlet

    * * * * * * *
    “By the pricking of my thumbs, something wicked this way comes.”

    And just 2 observations that
    made my eyes a bit watery:

    1. “On the other hand, we do have potable water, 24-hour service, 100-percent coverage.”

    I think that—-in the context that the good and learned professor made that statement—-that statement is neither fair nor appropriate in relation to the article’s subject matter, the same being a distraction to the point of being obsequious. While it does not openly exhort end-users to be thankful that the water concessionaires are discharging what they are legally bound to fulfill under a water service contract, its subtle message and effect are the same. Obviously, and in the first place, water concessionaires are obliged to provide “potable water, 24-hour service, [and] 100-percent coverage.” Precisely, that commitment is one of the reasons why they were awarded the concessions; and that’s what the consumers pay them for. Thus, the statement constitutes an emotive appeal designed to favor the position of the water concessionaires in the present controversy. Thus, it is but a distraction, a linguistic diversion and a logical fallacy; in short, propaganda. One might as well assuage an irate friend who was charged double the correct price, say, for a kilo of meat, by telling him to be thankful instead that at least it was fresh and edible. It does not assuage. It merely distracts from the source of the harm and the bone of contention—the price of the meat.

    2. “Again, here, the MWSS is clearly in the wrong, in the sense that the concession agreement clearly states that business taxes (which include income taxes) are to be treated as an expense.”

    I think “business taxes” are not the same as “income taxes,” and the former excludes the latter. And the Supreme Court has in several cases also thought so. Here’s one:

    “Business taxes imposed in the exercise of police power for regulatory purposes are paid for the privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the year as a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite to the conduct of business. Income tax, on the other hand, is a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits and the like. It is tax on income, whether net or gross realized in one taxable year. It is due on or before the 15th day of the 4th month following the close of the taxpayer’s taxable year and is generally regarded as an excise tax, levied upon the right of a person or entity to
    receive income or profits.” (“Mobil Philippines vs. The City Treasurer of Makati, et al.” G.R. No. 154092. July 14, 2005.)
    * * * * * * * * *

    Because they are still where they were, that’s why we are where we are.
    – – -

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