RECENTLY, public interest has been ignited
at the “questionable” practice by Metro Manila’s water concessionaires
of passing on costs to their customers. Advocacy groups such as Water
for the People Network have framed the issue under a public interest
angle, juxtaposing “onerous charges” borne by consumers vis-à-vis the
profits enjoyed by water companies. No less than a key official of the
Metropolitan Waterworks and Sewerage System (MWSS) has called some of
these pass-on costs as “grossly unjust,” in the process hinting at a
possible reduction in water rates.
The root of the issue, however, lies in the
concession agreement between the MWSS and its private partners as the
actions of both sides governed by a contract. A proper understanding of
the matter, therefore, requires a close examination of the agreement and
the context under which it was drafted.
Against the backdrop of a bleak water supply situation, the National
Water Crisis Law or Republic Act 8041 was passed in 1997. The
legislation paved the way for private sector involvement in the
provision of water and wastewater services in Metro Manila, mirroring
the Ramos administration’s belief in privatization as the most
practicable means of improving the efficiency of public services while
cutting down government subsidies.
Specifically, R.A. 8041 established the legal basis for the
privatization of the MWSS, the government corporation mandated to ensure
continuous and sufficient potable water supply and distribution while
charging “just and equitable” water rates and sewerage service fees. In a
bid to improve water coverage and accessibility, the government
encouraged private companies to invest in the MWSS’s operations.
The MWSS was saddled with a myriad of problems: poor coverage,
inefficient service, and skyrocketing non-revenue water (NRW). Back
then, only 69% of total service area was supplied with water.
Availability was intermittent, averaging only 16 hours per day. The MWSS
had the highest proportion of NRW in Asia, double that of developed
nations, as a large amount of water was lost to leaks, meter tampering,
illegal connections and use of fire hydrants. All these problems led to
the privatization of MWSS.
The government commissioned the International Finance Corporation to
provide technical assistance in the privatization process, consolidating
pertinent data and analyses, designing contractual engagements, and
guaranteeing transparency in the bidding process. Upon their
recommendation, two 25-year concessions were auctioned to private
investors, demarcated as the West Zone and East Zone of the metropolis.
The concessions for the West and East zones were awarded to Maynilad
Water Services, Inc. and Manila Water Company, Inc., respectively. This
public-private partnership (PPP) engagement is administered by two
separate Concession Agreements (CA) signed by the MWSS with the winning
bidders.
Under the “Grant of Concession” clause of the CA, both Maynilad and
Manila Water are considered as contractors and agents of the MWSS. As
such, they are vested with certain functions, powers, and rights,
including that to manage, operate, repair, decommission, and refurbish
facilities located within their respective service areas, on top of the
right of billing and collection.
The two companies agreed to absorb the MWSS’s debt obligations valued at
$900 million at that time. Maynilad took responsibility for 90 percent
of the outstanding loans, while Manila Water assumed the residual. To
ensure the sustainability of the concessionaires’ operations, a
guaranteed rate of return was provided, dubbed as the “appropriate
discount rate” (ADR) based on operating expenses, capital investments,
Philippine business taxes, and servicing of MWSS’s debts. ADR is defined
as the “real (i.e., not inflation adjusted) weighted average cost of
capital (after taxes payable by the concession business).”
Article 11 of the Concession Agreement provides for the establishment of
the MWSS Regulatory Office (MWSS-RO). It is principally mandated to
implement the CA’s provisions--specifically, to ensure effective
regulation of the two concessionaires and guarantee equitable tariff
rates. In 2003, the use of key performance indicators (KPI) and business
efficiency measures (BEM) was introduced to improve the capability to
monitor and assess the performance of the two operators.
Maynilad and Manila Water are entitled to get back costs incurred in
operations and maintenance, investments, and concession fees
payment--over and above a market-based real rate of return. This forms
the foundation for the tariff-setting mechanism, undertaken every five
years as “rate rebasing” exercises. During the rate rebasing review, the
MWSS-RO evaluates the two companies based on KPI and BEM goals, taking
into consideration expenditures and investments to achieve such targets.
In the same vein, the concessionaire’s business plans, which lay the
framework for new service obligations and anticipated future
investments, are also assessed by the MWSS-RO. The tariff
adjustment--which yields the ADR--is then derived after comprehensive
deliberation and appraisal. The MWSS-RO’s recommended rates are subject
to approval by the MWSS Board of Trustees.
Other important features of the tariff-adjustment mechanism is the
quarterly foreign currency differential adjustment for the payment of
MWSS’s foreign-denominated debt taking into account changes in the
exchange rate, annual adjustments for inflation, and an annual
extraordinary price adjustment --conditional on MWSS approval-- for
events beyond the control of the concessionaires, e.g. natural
calamities.
The CA also specifies that disputes, disagreements, controversies, or
claims relating to the agreement that cannot be settled via negotiation
and consultation between the parties shall be resolved through
arbitration proceedings conforming with the arbitration rules of the
United Nations Commission on International Trade Law, except in
instances when these rules conflict with the stipulations of the CA.
Costs incurred for such proceedings are treated as expenditures on the
part of the concessionaire and thus can also be recovered through the
rate adjustment mechanism. The decision in such arbitration proceedings,
once issued, becomes binding on the parties involved.
These elements are key to understanding the controversy that water
industry stakeholders (MWSS, water concessionaires, consumers) find
themselves in. In a subsequent article, we will look into and try to
address the issues that have been called to public attention.
The Institute for Development and Econometric Analysis (IDEA), Inc.
is a non-stock, non-partisan institution dedicated to high-quality
economic research, instruction, and communication. The views and
opinions expressed herein are those of the author and do not necessarily
reflect those of the organization. For questions and inquiries, please
contact Remrick Patagan via ideainc.mail[@]gmail.com or telefax no.
920-6872.
source: Businessworld
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