On changing the rules

Let us not be surprised when our country further slips down the ladder in terms of attractiveness as an investment destination.

The fact that the Philippines has reached investment grade level has no meaning if our very own government and its officials cannot even respect and observe the sanctity of contracts. No investor in his right mind will enter into a long-term contract with our government, pour in huge amounts of money based on certain assumptions based on the contract, and then find out later on that his investment is at risk because his partner decides to change the rules of the game.

One of our neighboring countries, in its bid to attract more investments, came out with this rule that if  there is any change in government policy, including judicial decisions, that would affect or threaten to affect investments, then the government would compensate affected investments.

That is how sacred contracts are, which is why even our very own Constitution provides that “no law impairing the obligation of contracts shall be passed.”

Not even a change of leaders would warrant a change in the rules, unless of course a particular contract is contrary to law, morals, customs, and public policy.

Now let us take a look at the water concession agreements entered into by the Philippine government, in particular the Metropolitan Waterworks and Sewerage System (MWSS) with the private sector.

To privatize water distribution in Metro Manila, the government, under then President Fidel Ramos entered into two contracts for the eastern and western halves of the metropolis to prevent a looming crisis.

The Maynilad Water Services Inc., a joint venture between the French Suez and Benpres Holdings of the Lopez group was awarded the concession contract for the West Zone while the Manila Water Co. Inc., consisting of Ayala Corp. with the British United Utilities, the US company Bechtel, and Japanese Mitsubishi was awarded the East Zone.

The two winning companies submitted bids with very low tariffs. These tariffs proved to be too low to finance the investments needed to improve performance, especially after the East Asian financial crisis and the devaluation of the peso. Maynilad expanded access, but was unable to reduce water losses. It ultimately stopped paying concession fees to the government and went bankrupt in 2003. It was temporarily taken over by the government and sold to new investors in 2007. It was at this time that the Metro Pacific, headed by businessman Manuel V. Pangilinan, came into the picture.

Prior to privatization, the MWSS provided water for on average 16 hours every day to two thirds of Metro Manila. It was also inefficient, overstaffed, and suffering from very high water losses.

According to the Asian Development Bank, the amount of non-revenue water (NRW or water supplied but not billable due to leakage and illegal connections) was more than 60 percent. MWSS was also dependent on subsidies and saddled with debts of $800 million owed to the Asian Development Bank, the World Bank and the Japan Bank for International Cooperation.

In 1995, the Water Crisis Act was passed, providing the legal framework for a public-private partnership, which was to take the form of concession contracts. The two concession contracts were for 25 years and included targets concerning coverage and service quality. The concessions were awarded through international competitive bidding, with the International Finance Corp. (IFC) of the World Bank Group advising the government on the design and bidding of the two concession contracts. The concessionaires were to be regulated by the then newly created MWSS Regulatory Office.

To date, Maynilad under the Metro Pacific group which took over in 2007, and Manila Water, still controlled by the Ayala group, have invested a total of P105 billion and have been paying off MWSS’ foreign loans by way of concession dues.

The investments required are huge, and there was no way, given the controls as to how much returns the concessionaires can get, that the latter can recover their investments until the end of the concession agreement in 2037.

Take for instance Maynilad’s P9-billion capital expenditure in 2012. Maynilad president and chief executive Victorico Vargas explains that they do not apply this in full the following year and instead spread it over the life of the concession agreement, which has been extended to 2037 to give the two concessionaires more time to recover their investments.

What is clear is that any investments made are made on the assumption that recovery can be made over a certain period of time. Which is why it is important to keep the concession agreements, prepared by the MWSS with the help of foreign experts, intact.

Just recently, certain groups, including the acting head of the MWSS regulatory office, questioned these concession agreements, citing issues like “inappropriate” corporate expenses being passed on by the two concessionaires to their customers. These groups are now asking for a full refund of these added charges totaling P15 billion which they claimed are illegally being passed on to consumers.

It is being claimed that Manila Water for instance has been passing on the corporate income taxes it has been paying to its customers (Maynilad is still on income tax holiday) while Maynilad has been charging its customers for sports development programs for its employees. Other charges which the concessionaires have allegedly made include foreign trips, flowers, etc.

We no longer want to delve on the issue of whether or not the concession agreements are valid. Even the MWSS regulatory office would admit that they are legal.

We also do not want to discuss allegations that some of these supposed NGOs batting for consumer rights are just sourgraping, because of failed to attempts to secure contracts from the concessionaires.

We just want to find out how services have improved since water distribution has been privatized.

From 3.6 million customers in 1997, the number of customers being served by Maynilad has increased to 8.3 million as of the first quarter of 2013. This means that more Filipinos now have access to potable water when they need it.

During the same comparable period, from a measly 23 percent, the percentage of time in any given 24 hours that water is available has increased to 97 percent. Water pressure has also gone up from only 30 percent to 99.8 percent while non-revenue water has declined from 67 percent to only 41 percent.

From 2007 to the first quarter of 2013, the Metro Pacific group has invested P39 billion into Maynilad, compared to the P4.8 billion poured in by the Lopez group from 1997 t0 2004 and the P2.9 billion spent by MWSS when it temporarily took over Maynilad in 2005-2006.

Maynilad only hires the best employees and according to Vargas, this is one of the reasons why the company performs very well, with its performance already having received numerous awards here and abroad.

If it is true that the MWSS regulatory office pushes through with plans to have the concession agreements amended and provide for new rules in terms of the applicable discount rate (ADR), income tax, and disallowances, then our government better prepare for the serious repercussions, not only in terms of Maynilad and Manila Water possibly rethinking their investment plans, but also in terms of other investors who now have to decide whether or not going into a partnership with government is worth it. If our government can do this to two of our biggest and most reliable private sector groups, then what more with the others?

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