Here’s why we are where we are

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.