8 glasses a day (1)

I am writing on the water deal for a third time because I think this is a “watershed” in the PPP (public-private partnership) program. (And this opinion piece will be in two or three parts because of space limitation). Here is a success story being threatened by changes that, if upheld, could do the general economy great harm because of the negative signal it will send to potential investors. These changes will put private sector participation in the PPP at risk.

I’m sympathetic with those who have to struggle to pay for their water bills and everything else, but I also realize we must have water, and providing it costs money. And sadly, whether you like it or not, we must pay what something costs, not what we can afford.

Focusing on cash savings today is a simplistic failure too many fall into. (Just look at the long lines of motorists without an e-Pass at the tollgates. The cost over a year is far higher in terms of gas and lost time than the cost of a pass). The cost savings achieved derived from the reduction of water tariff are more than outweighed by the negative ramifications on the greater economy.  As the European Chamber said, “What NGOs have to understand is that making a profit is not a sin.” The profit motive has driven the world’s economies into creating a quality of life unheard of in previous millennia.

With the MWSS (Metropolitan Waterworks and Sewerage System) decision to exclude tax (let alone the other charges), coupled with the inexplicable Supreme Court decision that required Meralco to refund consumers the tax it paid, private investors will rethink their interest in the much-needed public services. The loss would be huge.

And it’s not just a simple matter of looking at the cost today, but also tomorrow, future supply is just as important as today’s supply. That means you must build a capital base to pay for new, better and bigger facilities to meet the needs of the future. It’s no good arguing what the concessionaires should pay, they are just the people chosen to do the job for us. It’s we who are paying, through them. We can build up funds now, or take out loans later. The first option is financially more attractive; that’s why it’s being done. The money goes into capital expense that a growing population and a continuing need demand.

Consumers should easily be able to understand the concept of paying for future benefits by relating the idea to cell phones. The great bulk of them prepay for the use of their cell phones. The prepayments help fund the growth of the phone companies. No one complains.

When it comes to taxes, whether you include them in the pricing calculation or not, the net effect is the same. The investor must get a certain percent of the returns on investment 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 achieved. The  MWSS does not seem to have understood this simple fact. Worse, it has decided that income tax can’t be recovered despite what the contract stipulates.

And let me quote directly from the contract signed by the MWSS so there would be no misunderstanding on this: “The rates for water and sewerage services provided by the Concessionaire shall be set at a level that will permit the Concessionaire to recover over the 25-year term of the Concession (net of any grants from third parties and any possible Expiration Payment) operating, capital maintenance and investment expenditures efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on the MWSS Loans and Concessionaires Loans incurred to finance such expenditures, and to earn a rate of return (referred to herein as the ‘Appropriate Discount Rate’) on these expenditures for the remaining term of the Concession in line with the rates of return being allowed from time to time to operators of long-term infrastructure concession arrangements in other countries having a credit standing similar to that of the Philippines.” This is an internationally-accepted practice. This stipulation allowing this was in the MWSS’ request for proposals; it was not the concessionaires that asked for it. Now the MWSS is saying taxes shouldn’t be included in complete contradiction to the contract? I’ll repeat it: You invest money from your pocket to get a bit more money back into your pocket. That’s what business is all about. That’s what has driven the huge success of the open markets of the world.

When you buy a hamburger from Jollibee, or McDonald’s, or Burger King, or from anyone else, you pay taxes; in fact, when you buy anything, you pay the taxes. Why should public services be different? If you can’t recoup your taxes, you lose money, so you don’t enter the business. Or government subsidizes it, but the subsidy still comes from our tax payments. The MWSS has created a risk investors won’t accept.

Something I’ve only learned since studying this case is that not only do the concessionaires pay taxes, they pay the MWSS directly a whopping P800 million yearly for its regulatory role and whatever residual role it has left since privatization. Why is no one complaining about that? What are we paying for? What is the MWSS doing with all that money?

In Rey Arcilla’s column this week he said the executives of the MWSS paid themselves P74.36 million in bonuses last year. If true, for doing what? I think we would all like to know. That amount dwarfs the cost of flowers by a long mile.

Continued next week