Myopic

Last week, the MWSS regulatory board, responding to a petition for a rate hike, issued an order to the concessionaires to lower the rates over a five-year period.

Consumers cheered — although very likely not for long. The MWSS decision might imply cheaper water, but we may end up with no water at all. The reason for this is the concessionaries may fail to make the vital investments necessary to meet the rising water needs of a rapidly growing metropolis.

Immediately after the MWSS announced its decision, the stock market fell, pulled down by massive selling of stocks of corporations linked to the concessionaires. The fall in stock prices was driven by negative assessments of the viability of the concessionaries issued by the world’s major investment banks.

Deutsche Bank, for instance, estimated as much as an 8% reduction in the net asset value of the concessionaires and a dramatic -59% reduction in the opening cash position of Manila Water in particular. The other global investment banks issued similar unwholesome advisories. The attitude of the investment banks means they might be hesitant to lend money to the two concessionaires for much needed capital expenditures.

Billions of pesos in new investments are required to assure the metropolitan area adequate potable water supplies in the next few decades. That includes investment in new fresh water sources and improvements in the distribution infrastructure. The decrease in the consumer rate ordered by the MWSS is myopic, to say the least. It undermines the financial attractiveness of the concessionaires, making financing more difficult or more expensive.

If the investments are not made, water supply will remain constant. If demand continues to grow, there will be shortages. The new high-rise condominium complexes might not have adequate water supply. Life will return to the miserable state we were in before water privatization, when hardy residents of the city had to line up for water in the wee hours of the morning.

The economic damage to be wrought by the MWSS’ myopic decision will be much wider than simply the hobbled companies directly engaged in the water business. The regulatory decision takes away concessions offered by government itself to entice private investors to put their money in modernizing our water supply and distribution. These concessions were vital considerations in the business decision to invest billions in upgrading the city’s water supply.

Among the principal reasons our economy is among the least attractive for direct investments in the region is the concern over the reliability of contracts with government. A shifting policy environment imperils long-term investments. Without long-term investments, our manufacturing sector hollowed out over the years, creating the frightening unemployment rate we now endure.

The water concession agreements, including the incentives government offered, is a contract that made the earlier investments possible. Those investments liberated us from the water shortages that made life miserable for all of us, if the populist agitators care to remember. Now that we enjoy relative water adequacy at commercial rates that impoverish no one, the MWSS unilaterally cancel the incentives. That is never a good signal to other investors.

After the latest MWSS decision, how can we attract private capital to the much-vaunted but pathetically flagging PPP program? Who will invest in new rail lines and new airports, the sort of infrastructure with long rates of return?

The most urgent infrastructure investments we need — in transport and in power generation — are all subject to possibly whimsical regulatory and political decisions. If those investments are not made soon enough, our economic growth will be reined in. Our rapidly growing population will force up the poverty rates.

It is not an exaggeration to say that with cheap water, we might have poorer people. Regulatory decisions ought to be made not only on the single factor of making consumers happy. The dynamic of business decisions, with its wider consequences, needs to be considered as well.

The latest MWSS rate decision caught everybody by surprise, not the least the concessionaires whose business viability rested on their petition for a rate hike. Just weeks before, the Palace was assuring the business community the contracts with the water concessionaries will be respected. Then the MWSS so casually defied what was taken as policy from the top.

After this event, how can our government credibly convince investors articulated policy will hold and contracts will be enforced? The MWSS so cavalierly defied the President’s stated policy.

The MWSS may defy the President’s policy but they cannot defy business logic enshrined in the legal framework. All the assessments made by the international investment banks are confident the MWSS decision will be reversed on arbitration.

Arbitration is a costly process. The two water concessionaires have no choice but to resort to that. The investors want the terms of the contracts they hold properly enforced.

Until the arbitration process is completed, the two concessionaires will not bring down water rates. They have the legal framework on their side. They have their own viability as businesses at stake.

All the money to be spent on arbitration proceedings might have been better used improving our water distribution systems. The wayward MWSS decision on the matter, however, made such waste necessary.

The business community, domestic and global, will observe the arbitration proceedings keenly. The credibility of contracts with the Philippine government is on the line. Many investments will be postponed until the arbitration produces reassurance about the sanctity of contracts in our economy.

The poor are already paying a huge price for an errant regulatory decision. The lesson for the day: what is popular is not always what it right.