Gov’t amends water contracts

(Third of five parts)

BEFORE 1997, when the Manila Waterworks and Sewerage System (MWSS) was a mess, only about 50 percent of Metro Manila residents were connected to its network, of which only 26 percent had 24/7 water service. System losses stood at an incredible 63-67 percent of total water supply. You can’t do worse than that.

Today, two private companies are managing the system—Manila Water and Maynilad. They have expanded water coverage to 93 percent and 100 percent of their respective service areas, which are experiencing 24/7 water service. You can’t do better than that.

The privatization of water supply to Metro Manila has been one of the very few public-private partnership successes in the country. The World Bank’s International Finance Corporation in a report noted that Manila Water’s “water for the poor program” allowed residents in the poorest neighborhoods to pay just $1.50 a month for clean water—“a fraction of what they paid before.”

So you’d think the government would be fully supportive of the operations of Manila Water and Maynilad. To the contrary, the government is treating them abominably.

Prior to privatization, informal settlers would buy commercially vended water at P30 per drum. Today, the comparable prices are P1.70-P4 per drum for the East Zone (Manila Water), and P2-P5 per drum for the West Zone (Maynilad).

10 times cheaper

Considering that a cubic meter is equivalent to five drums, the rates now are 10 times cheaper for connected, potable water. Compared to those of other big cities in the country, Metro Manila water rates are among the lowest.

There has been a vast reduction in system losses after privatization. From a 63-percent system loss in 1997 under the MWSS, Manila Water cut its nonrevenue water to 11.25 percent by end-2014. Maynilad has managed to bring its nonrevenue water down to 33 percent last year from 67 percent in 1997 with its effort continuing.

Recently, the water in Alabang had a strange taste. Maynilad moved quickly to check, find and correct the problem. Laguna Lake where the water comes from had developed excessive levels of algae. This occurred from time to time, according to Maynilad, especially during a prolonged dry spell.

To get rid of the water’s strange odor and taste, Maynilad installed an advanced water filtration system.

Can you imagine MWSS taking extra steps to solve the problem and acting that fast, if it would act at all? The sheer bureaucracy and lack of budget would result in no action.

From disaster to success

Maynilad and Manila Water have totally reversed the system from a disaster to a huge success at huge cost. They have spent over P100 billion that they have every right to expect will be repaid to them.

On top of that, the money that will be generated now will also be used to ensure better and assured supply in the future. The delivery systems have to be maintained, replaced, improved and upgraded on a regular basis. This all costs money and the only person who should shell out that money is us, the user.

Yet users are complaining. If the user won’t pay the full amount needed, the company eventually goes out of business, unless government subsidizes it. That is not a sensible solution, as users can afford the current water rates. A rough analysis shows that for a poor household consuming 30 cubic meters a month, the cost is about 8 percent of the family’s monthly income.

The contract between the MWSS and the water firms had been implemented faithfully for 16 years until the MWSS changed the formula in computing the water firms’ rate adjustment in January 2013.

The MWSS said that corporate income tax must be excluded from the computation of the firms’ expenditures, citing a 2003 Meralco case as an excuse. However, the 2003 Meralco case applies only to public utilities under an asset-based rate-setting system.

Applying the ruling

The Meralco ruling doesn’t apply to the water firms for two reasons.

Maynilad and Manila Water are not public utilities but are agents and contractors of the MWSS that operate and manage the system not on their own behalf, but on behalf of the MWSS. The MWSS is clearly the public utility having retained its franchise.

Concessionaires (Maynilad and Manila Water) are not under an asset-based rate of return base system but a rate-setting system based on cash flow.

So the Meralco case applies, if at all, to the MWSS as the public utility which cannot pass on its corporate income tax. It does not apply to Maynilad and Manila Water which, like all businesses, can and should be able to factor in their income taxes as part of the price of their goods and services.

In 2004 a group composed of officials from the MWSS and the concessionaires, in order to avoid arbitration on the issue of public utility and the applicability of the Supreme Court decision in the Meralco case to the water concessionaires, confirmed that the original intent of the concession agreements was that the concessionaires are mere agents and contractors of MWSS, which remained the public utility.

Review of contract

Thus, the Meralco decision does not apply to the water concessionaires. The National Water Resources Board—the quasi-judicial regulator of the water sector—confirmed this through an act of its own board. That was 11 years ago.

Does it take 11 years for the MWSS to review a contract it had agreed with the concessionaires was correct and decide they were wrong, in their new definition of “wrong.” That time frame alone makes the decision suspicious—one made for political reasons, not based on interpretation of the law, or adherence to a signed, agreed contract.

Whether you include income tax in the pricing calculation, the net effect must be the same. The investor must get a certain percent return after tax. That’s what investment is all about, you take money out of your pocket to put money into an investment to (hopefully) get more money back—into your pocket.

If you remove tax from the calculation, then you must increase the rate of return so that after tax the amount the proponent needs to make the project viable is still achieved.

The MWSS does not seem to have understood this simple fact. Worse, it violates the contract, which the MWSS itself drafted and imposed on the concessionaires, and decided that income tax can’t be recovered despite what the contract clearly stipulates.