Gov’t told to pay Maynilad for losses

AN ARBITRAL TRIBUNAL has ordered the Philippine government to reimburse Maynilad Water Services, Inc. at least P3.4 billion for losses incurred by Metro Manila’s west zone water concessionaire from delayed implementation of its rebased water rates.

“The Tribunal ordered the Republic to reimburse Maynilad the amount of P3,424,690,000 for losses from 11 March 2015 to 31 August 2016, without prejudice to any rights that Maynilad may have to seek recourse against MWSS for losses incurred from 1 January 2013 to 10 March 2015,” Maynilad’s parent firm, Metro Pacific Investments Corp. (MPIC), told the Philippine Stock Exchange on Tuesday, referring to the Metropolitan Waterworks and Sewerage System (MWSS).

“Further, the Tribunal ruled that Maynilad is entitled to recover from the Republic its losses from 1 September 2016 onwards. In case a disagreement on the amount of such losses arises, Maynilad may revert to the Tribunal for further determination.”

Maynilad holds the exclusive concession granted by the MWSS to provide water and sewerage services in Metro Manila’s west service area.

MPIC -- which owns 52.8% of Maynilad -- is one of three key Philippine units of Hong Kong-based First Pacific Company Ltd., the others being Philex Mining Corp. and PLDT, Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has interest in BusinessWorld through the Philippine Star Group, which it controls.

In an interview, Randolph T. Estrellado, Maynilad chief operating officer, said the company has received a copy of the ruling and has given its approval to have it posted at the Permanent Court of Arbitration at the Hague, although it withheld announcement pending government clearance.

Mr. Estrellado said he was confident that the government would honor the decision, although he could not give the possible next step for Maynilad given that the arbitral ruling is the first of its kind for the company.

“It’s our first time to go through this process,” he said.

Sought for comment, Finance Secretary Carlos G. Dominguez III told reporters: “[We] will check if there is budget space for this.”

In its July 24 decision, the three-man tribunal upheld the validity of Maynilad’s claim against the undertaking letter issued by the Republic of the Philippines -- through the Department of Finance (DoF) -- to compensate the company for the delayed implementation of tariffs for the 2013-2017 rebasing period.

The letter provides, among other things, that the government will indemnify Maynilad for losses caused by delay attributable to any state agency in implementing any increase in the standard water rates, beyond the date of its implementation in accordance with the concession agreement dated Feb. 21, 1997.

Ramoncito S. Fernandez, Maynilad president and chief executive officer, said in a statement that the tribunal’s decision “is an affirmation of the trust and confidence” that the company had placed in the concession agreement (CA), which he said had been responsible “for the significantly improved water and wastewater services in its concession area.”

“We will continue to honor our commitments under the CA and pursue the capital expenditure projects that will improve further the quality of service to our customers, as well as support the government’s initiative in ensuring the sustainability of our country’s water resources,” Mr. Fernandez said.

Maynilad said in the coming days, it would coordinate and cooperate with the government “in finding the most efficient way to implement the judgment.”

MWSS Chief Regulator Joel C. Yu said he was not in a position to comment on the arbitral decision, saying the entities involved on the government side are the DoF and the Office of the Solicitor General, while MWSS Administrator Reynaldo V. Velasco said in a mobile phone message that his office had yet to receive a copy of the decision.

MATERIAL EFFECT
Under its concession agreement with the government, Maynilad may apply for tariff rate adjustments based on movements in the inflation rate, foreign exchange currency differentials, a rate rebasing process scheduled every five years and certain extraordinary events.

Any rate adjustment needs the approval of MWSS and the agency’s regulatory office.

“Any tariff adjustment that is not granted, in a timely manner, in full or at all, could have a material adverse effect on Maynilad’s results of operations and financial condition as well as MPIC,” the listed infrastructure conglomerate said in its 2016 annual report.

Water and sewerage service revenues contributed the biggest chunk at P20.224 billion, or 45%, to MPIC’s P44.82-billion operating revenues last year, with toll, health care and railway businesses accounting for smaller shares.

“There was a first arbitration because we disagreed with the MWSS on the rate rebasing of 2012,” Mr. Estrellado recalled, referring to its application for rates covering the next five-year regulatory period.

The approved rate adjustment of Maynilad for the 2013-2017 period consists of a 9.8% hike in the 2013 average basic water charge of P31.28 per cubic meter (/cu.m.), inclusive of the P1 currency exchange rate adjustment that MWSS has included in the basic charge.

The increase translates to an average P3.06/cu.m. hike.

“MWSS changed the rules and said income taxes were not recoverable even though for the last 17 years, the return was computed post-tax. We disagreed with them and we brought that to arbitration. That was a local arbitration and we won,” Mr. Estrellado said.

In 2014, Maynilad won the arbitration for its 2013-2017 water tariff, which centered on corporate income taxes being a recoverable expense.

MWSS has not implemented the award while awaiting clarification from the Supreme Court.

“December 2014, we got the result of the first arbitration saying that the panel agreed with our number and it should be executed,” Mr. Estrellado said.

“MWSS, even though it was a final, binding judgment and unappealable, they decided not to implement the tariff.”

As a result, Maynilad notified the government that it was calling on the written undertaking to compensate the company for losses arising from the delay.

On March 27, 2015, Maynilad served a notice of arbitration against the government. Hearings were completed in December last year in Singapore.

“They decided that government’s liability started March 2015 when we, I guess, went after the undertaking letter,” Mr. Estrellado said.

“Because the hearings happened last December, we submitted all our documentations [in] September. So only up to August 2016 ang data namin,” he added.

“It’s easy to compute the claim. It’s just what should be tariffed [sic] minus what is the actual tariff times the billed volume,” he explained.

“Part of the ruling also was… Maynilad and the government can talk among themselves on the treatment of September [2016] onwards, but if you don’t get to an agreement then go back to us if you need to and we will determine that amount.”

“Because of the undertaking letter, it’s government that is taking care of it.”

He said the three-man tribunal was comprised by a separate nominee from Maynilad and the Philippine government, and a chairman, which the two agreed to select from a list presented by the court.

“We don’t know exactly how the government will pay,” Mr. Estrellado said.

For losses incurred from September 1, 2016 onwards, he quantified the amount at roughly P200 million a month or around P2 billion for the 10-month period ending in July 2017.

“Roughly every month that rebasing tariff is not implemented, we have forgone revenues of P200 million,” he said.

Maynilad serves most of Manila, parts of Quezon and Makati cities, as well as the cities of Caloocan, Pasay, Parañaque, Las Piñas, Valenzuela, Navotas and Malabon. Its franchise area includes the cities of Bacoor and Imus and the municipalities of Kawit, Noveleta and Rosario in Cavite.

MPIC shares went up by as much as 4.18% yesterday before paring gains to increase 2.09% to P6.84 apiece at the end of trading.

“I believe this decision could help Maynilad use its claims to further improve its service through its capex projects,” said Katrine Eunice L. Dolatre, investment analyst-equity research, F. Yap Securities, Inc.

Maynilad has set aside around P11 billion for its 2017 capital expenditure, up from P9 billion last year.

source:  Businessworld