Income tax recovery from tariffs in water deal allowable – ex-DOF exec

MANILA, Philippines — The recoverability of corporate income taxes from tariffs in the country’s water concession agreements (CA) is allowed and is not onerous.

This is the position of former finance undersecretary Romeo Bernardo who explained why the CAs should not be dismissed as grossly disadvantageous to the government.

Bernardo served as finance undersecretary during the terms of former presidents Cory Aquino and Fidel Ramos.

A director in Ayala-led BPI and Globe Telecom,  Bernardo said the framers of the CA allowed investors to “explicitly recover business taxes, as well as capital maintenance and investment expenditures efficiently and prudently incurred, and payments corresponding to debt service on the MWSS loans and concessionaire loans as part of its expenditures.”

The CA also allowed the companies to earn a rate of return after tax that is comparable to those of operators of long-term infrastructure concession arrangements in other countries having a credit standing similar to that of the Philippines. 

“This rate of return, called “appropriate discount rate” or ADR under the concession agreement, is a weighted average of the cost of borrowing and the return to equity, is reviewed and reset every five years and arrived at using internationally accepted methodologies,” Bernardo said.

Bernardo argued that the 1997 water privatization contract with the Metropolitan Waterworks and Sewerage System (MWSS) and the water concessionaires as well as its extension has been thoroughly reviewed by government and has been deemed legal. 

“The extension of the original contract is allowed under the CA and by law. This has been the subject of analysis and review in government for over a year in 2008 to 2009: at MWSS all the way to the board; by the Department  of Finance under former secretary Margarito Teves, assisted by then undersecretary Jeremiah Paul and director Soledad Cruz; by the Department of Justice under  former secretary Raul Gonzales and government corporate counsel  Al Agra.

It was also presented to the full Cabinet and went through public consultations before final approval by then president Gloria Macapagal Arroyo,” Bernardo said in a paper sent to The STAR last month.

He said the rationale for the extension was compelling because of new waste water requirements set by the Clean Water Act and later by Supreme Court mandamus which  required 100 percent or full sewerage coverage for the concessions.

Water concessionaires needed to make more investments because of the new requirements.

Furthermore, tariff rate impacts had to be mitigated at the time.

“By extending the contract through 2037, there is a longer period of recovery of these long life investments,  and thus lower annual tariff adjustments,” he said. 

Bernardo said if the government disregards its obligations under the CA, banks would need to protect deposits by suspending disbursements of loans to the water concessionaires.  

“This will inevitably disrupt construction of  projects meant to address  looming  water shortage. Down the road, it will compound the burden on the tax paying public of future snowballing arbitration awards. And much worse, it will devalue the worth of government’s contractual commitments,” he said.

President Duterte has been criticizing water concessionaires Manila Water and Pangilinan-led Maynilad Water Services Inc. for the onerous provisions in their contracts with the government. 

In a speech before quake victims in Digos City, Duterte renewed his attack on the two utility firms and their owners, saying their contracts violated Philippine anti-corruption laws.