AKBAYAN Rep. Mayong Aguja

Drowning in crisis : A look into the privatization of water services

Posted by tin on September 19, 2006

Drowning in crisis : A look into the privatization of water services

Nine years after the water distribution function of the Metropolitan Waterworks and Sewerage System (MWSS) was auctioned off to private corporations, the Philippine government and Metro Manila’s water concessionaires have nothing to show but skyrocketing rates, unmet service obligations and heavier debt burdens. The supposed model for private sector participations (PSP) or public-private partnership (PPP) in the global water industry has become a classic example of a water crisis solution that proves to be worse than the problem it claims to address.

Meant to address the country’s “looming water crisis,” the said privatization effort was carried out under the auspices of the World Bank with its own investment arm called the International Finance Corporation (IFC) serving as consultant of the Ramos administration. Promising greater efficiency and lower water rates under a privatized setup, the MWSS case became the most massive water privatization project in Asia.

Prior to 1997, the World Bank was already active in the Philippine government’s privatization efforts through various conditionalities that were supposedly part of its loan packages. As early as 1984 for instance, the Bank has granted the Philippines a loan assistance amounting to $300 million on the condition that a number of public enterprises will be restructured and that the state’s participation in the economy will gradually be limited. This shift in the WB’s paradigm was so successful that by the 1980s, it was already active in promoting the “privatization of banks, mining companies, telecommunications, transportation, electricity.” By the following decade, the “privatization of water was added to the World Bank’s policy prescription.”

Armed with a paradigm of free market economics, the World Bank sought to put it into practice and saw the privatization of the MWSS as the perfect opportunity to do so. Initially, the idea of privatizing the said water utility was an attractive proposition, especially since MWSS was perceived to be both corrupt and highly inefficient. Prior to privatization, for instance, the company had a non-revenue water (NRW) level of 58% which was caused by leakages and pilferage from its badly maintained piping system. This was further aggravated by the fact that MWSS was only able to provide water supply at an average of 16 hours a day to 67 % of its 11 million coverage-population in Metro Manila and the surrounding provinces. Furthermore, the water utility was heavily indebted, with an outstanding obligation of $800 million.

It is this last item that made privatization so attractive for the government since it could now pass on these liabilities to the private sector and ease itself of some of its debt obligations. What made it even more pressing was that by the mid-1990s, the government discovered that the country would face an imminent water crisis, and that water demand would increase by as much as 42%. To address this situation, the country would require $7.5 billion in investments to finance infrastructure repair and the improvement of the MWSS —an amount that the government simply did not have.

Privatizing MWSS

Republic Act 8041 or more commonly known as the National Water Crisis Act of 1995 was approved by the Philippine Congress. The said law called for the adoption of urgent and effective measures to address the water crisis. It also gave President Ramos emergency powers to facilitate the privatization of the MWSS at the soonest possible time.

The Philippine government contracted the IFC to design the privatization of the MWSS for a fee of $6.2 million. In return, the IFC designed a “concession-type model covering water treatment, distribution, tariff collection, facility improvement and overall management.” Apart from following the recommendations made by the IFC, the Philippine government also decided to follow the “Paris model” by dividing the MWSS service area into the East and West Zones in order to “break up the monopoly and allow regulators to check the performance of one concessionaire against that of the other.”

In January 1997, the Maynilad Water Services, Inc. (Maynilad/MWSI) and the Manila Water Company, Inc. (ManilaWater/MWCI) emerged as the winning bidders for the MWSS concession’s West and East Zones, respectively. Maynilad is a partnership between global giant Suezand local elite Benpres Holdings while Manila Water is owned by a group of investors that includes the transnational United Utilities and leading local firm Ayala Corporation. As designed by the IFC, the MWSS privatization took the form of a concession contract: private companies would manage and use existing facilities to provide water and wastewater services to Metro Manila residents, in exchange for revenues they would gain from users’ fees.

Water tariffs drastically fell after privatization — 43.5 percent in the West Zone and 73.6 percent in the East Zone. But public elation would not last long. Within two years, Maynilad and Manila Water got the first of many tariff hikes that would come in only seven years under the privatized setup. Other burdens have since multiplied for consumers while the concessionaires continue to enjoy risk-free business.

Manila Water Company Inc.

In 1998, Manila Water and the MWSS Regulatory Office (RO) came to an impasse because the firm wanted to change one of the bid parameters — the so-called market-based cost of capital (after taxes payable by the concession business). The RO refused, as this would have improved Manila Water’s original bid more than a year after the bidding had been finalized. Arbitration ensued, and eventually, the Appeals Panel ruled in favor of Manila Water. This decision cast doubt on the integrity of the whole bidding process in 1997. For East Zone customers, in particular, it laid the basis for retroactive increases in water rates, as well as increases to be granted to Manila Water in the years to come.

From the application of various cost adjustment mechanisms, Manila Water charged consumers in 2005 an additional PhP2.18/cubic meter (m3), bringing its rates up to PhP17.83 or close to a 670 percent increase from its original bid price of PhP2.32. The MWSS Board approved this rate despite questions over a rate of return that is far beyond the limit set by law on public utilities.

Maynilad Water Services Inc.

Despite exclusive distribution rights to the provision of full waterworks services in the West Zone, Maynilad was already financially bleeding in 2000 with losses estimated at PhP3 billion. Maynilad did not want the contract mechanism that spread out the recovery of forex losses over the life of the contract, so it pushed for a new mechanism to automatically recover forex losses from consumers in just 15 months through the Accelerated Extraordinary Price Adjustment (AEPA). Foreign Currency Differential Adjustment (FCDA) authorizing the recovery of current and future forex losses arising from debt servicing of dollar-denominated loans of MWSS and Maynilad’s was also included in the contract.

As a result of the contract amendment, rates rose by more than 60 percent. Even after the 15-month period (which should have ended in December 2002), Maynilad continued to charge consumers for the AEPA. It also persisted in collecting the FCDA, despite failure to remit concession fees since March 2001. These unauthorized collections by which the concessionaires continue to overcharge consumers amounted to a hefty PhP10 billion during the first quarter of 2004. This issue remains unresolved to this day. Maynilad has even, in 2005 raised its water rates to PhP30.19/m3. This redounds to a 51.6 percent increase from the current average of PhP19.92/m3 or a more than 500 percent rise from its original bid of PhP4.96/m3 in 1997.

Because of Maynilad’s refusal to pay concession fees, the government has been incurring new loans to avoid defaulting on maturing loans of the MWSS. For even as the utility’s old debts have been assumed by the concessionaires, they remain in government’s name. Payments are supposed to be sourced from the concession fees. All told, Maynilad’s non-payment of its long overdue concession fees, now amounting to more than PhP10 billion, has forced MWSS to incur more debts from bridge financiers to finance maturing obligations, in its attempt to avoid default.

A continuing tradition of subsidizing private business risks

At no point (at least to public knowledge), has government through the MWSS Board significantly questioned the wrong assumptions and projections of the concessionaires, nor put them to task for their corporate mismanagement and inefficient operations.

Actual billed water volumes and revenues of Manila Water from 1997 to 2000 fell short of projections by PhP586 million or 12 percent below expectations. IFC’s consultants knew but chose to ignore the firm’s unrealistic targets for reducing non-revenue water and generating revenues. These included demand projections that were 45 percent higher than what earlier studies indicated and overly optimistic targets of halving Non-Revenue Water (NRW) within five years. Despite the huge capital investment that the latter target would have required, Manila Water also committed itself to operating at a cumulative loss of US$ 496 million or a negative cash flow in the first ten years of operations.

As for Maynilad, it should be recalled that in 2001, government simply accepted Maynilad’s only argument for its heavy foreign exchange losses: the Asian financial crisis. Maynilad instead got a quick and ill-deserved breather from the AEPA, skirting contract provisions that unexpected foreign exchange losses be collected (with interest) from consumers on a staggered basis, over the life of the contract.

The firm was never put to task for overestimating revenues, underestimating costs and failing to cushion itself for some fall in the dollar-peso exchange rate, considering the events brewing in the region. Maynilad was way off its projected operating expenses of PhP5745 million for 1997 – 2000, and actually spent PhP8629 million for this period. One explanation surfaces in the high costs of production and operations from the dollar-denominated expenses for foreign consultants and management contracts. A consultancy report from Thames Water revealed that Maynilad allocated 60 percent of its capital expenditures to paying for consultancy fees of its affiliate companies such as First Philippine Balfour Beatty and Meralco Industrial Engineering Services Corp. More basic errors have emerged. Maynilad has admitted that it miscalculated the length of water pipes in the West Zone by 1,200 kilometers; this turned out to be 3,700 kilometers instead of the MWSS estimate of 2,500 kilometers.

Additional taxpayers’ burdens and the “public utility” issue

Both Manila Water and Maynilad concessionaires are currently on a tax holiday and will only begin remitting taxes to government in 2006 and 2007, respectively. Nonetheless, payments for tax remittance are already being collected from consumers because these are factored in when determining water rates. Further, a Supreme Court decision early last year against public utilities charging their income tax payments to consumers would have provided relief to taxpayers, along with the ruling’s stress on the existing law setting a maximum of 12 percent rate of return of the book value of public utilities’ assets. But the concessionaires found a way out of this too.

Government and the concessionaires went into a debate on what public utilities are. Relying merely on opinions presented by framers of the MWSS privatization, the Technical Working Group created to resolve the issue persuaded the MWSS Board and RO to issue resolutions formally identifying the concessionaires as mere agents and contractors and not as public utilities. This must have been cause for celebration, particularly for Manila Water whose rate of return for 1999 was revealed by a Commission on Audit report to have reached 40.92 percent, or 28.92 percent higher than the allowable 12 percent. This translates to profits of about PhP281 million.

Continuing inefficiencies affecting water rates and water quality

The lowering of water rates is heavily premised on the concessionaires’ capacity and efficiency to bring down Non-Revenue Water levels. This has not happened. Supposedly more efficient than Maynilad, Manila Water has been unable to solve rising NRW percentages. Manila Water’s target was to bring down NRW in the East Zone to 16 percent by 2001 from 45.2 percent in 1997, but this only rose to 48 percent in 1997 and again climbed to 52.66 percent in 2002.

The same can be said for the West Zone. While it can be argued that the 1997 crash did cost Maynilad large foreign exchange losses and affected its ability to repair leaking pipes, this does not totally explain why its Non-Revenue Water percentages rose from 57.4 percent in 1997 to 67 percent in 2000. Had Maynilad addressed what is largely causing its high NRW levels – pilferage and billing problems – this would have reduced its losses from 1997-2000.

Problems with expansion of service and access

The MWSS prides itself with a progressive tariff structure. In a situation, however, where the majority is not connected to the piped network, only those with water connections can claim benefits. Meanwhile, connection charges of about more than PhP4,000 remain prohibitive for large numbers of poor households. Aside from cash flow problems, a continuing disincentive to connect to the network is the poor quality of water and service itself (e.g., intermittent water supply, heavily silted water, etc.) being experienced by Maynilad and Manila Water customers. Consumers with already limited incomes are forced to buy bottled water or spend more on fuel costs from constantly boiling supposedly safe piped water.

Proffered as the solution to Metro Manila’s water problem and to the ballooning liabilities of the MWSS, water privatization has proven to be just the opposite, turning out to be a medication that is far worse than the disease. Since 1997 for example, water rates have increased by 500% to 700%, with Maynilad pegging it at Php32.93 per cubic meter and their East Zone counterpart setting it at Php19.73 per cubic meter. Such increases, however, were made without significant improvements in their service delivery and without even accomplishing some of their major commitments when they entered into the Concession Agreement.

Furthermore, water supply targets remain unmet since the two concessionaires’ service areas are only able to supply water for less than 21 hours a day. Maynilad, moreover, is only able to supply water to 5.2 million people, which is way below their original target of 6.7 million. Manila Water, on the other hand, pledged to deliver water to 4.3 million people, but their actual operations can only provide water supply for 3.2 million residents. And neither were they able to address water pilferage and leakages, with NRW levels as high as 52.66% in 2002.

Neither was privatization able to address the health concerns surrounding water service delivery, as indicated in the cholera outbreak that occurred in October 2003 in the service areas of Maynilad. The said incident affected 800 people from Tondo, Malabon and Caloocan, killing eight (8) of their residents.

Maynilad placed the blame on the residents themselves, stressing the number of illegal connections and the “unsanitary habits” of their supposed customers. Further scrutiny, however, revealed that the outbreak was brought about by the sheer inefficiency by West Zone concessionaire, which allocated a mere Php8.96 billion for the maintenance and rehabilitation of their piping system instead of their targeted Php23 billion. It was also discovered that the water pressure in the affected areas was relatively low, making the entry of contaminants even more probable.

Government has also been at the losing end of this arrangement, since it now has to shoulder the debts of Maynilad apart from addressing its own maturing liabilities. Moreover, MWSS also had to spend Php230 million for the legal services that it requested during its early termination dispute with Maynilad. As a result, the ailing government agency is now in an even worse situation, posting a budget deficit of Php5.6 billion in 2002 and an estimated Php4.5 billion budget deficit in 2004.

Surprisingly, the World Bank has not put the concessionaires to task for all their failures and unfulfilled promises. Rather, it still nurtures the belief that privatization is the answer and that the private sector will be able, sooner or later, to get its act together through the Invisible yet magnanimous Hand of the market. Yet, nine years into the privatization of MWSS, the Hand of the World Bank has yet to extend its saving grace and salvage Metro Manila from the scourge of rising prices and deteriorating services.

I now ask this body to review our public utilities law, primarily through an investigation and inquiry on the government’s effort to privatize Metro Manila’s water. Water is basic human right supposedly protected by international treaties and domestic laws. But nine years of having private corporations at the helm of the water distribution system has only resulted in abuses and dehumanizing conditions wherein people have to resort to trade-offs between other basic needs and the rising cost of water services. This automatically excludes the poor majority and thus, defeats the very reason why the government and international finance institutions placed water services in private corporations’ hands.

Let me end this speech by expressing our disgust and strong condemnation over the way the IMF-WB treated our fellow Filipinos in their on-going high level talks in Singapore. Social activists Prof. Walden Bello and Princess Nemenzo were earlier issued accreditation by the IMF-WB to join their meeting only to be given a hasty notice that they are no longer allowed to attend such talks. The IMF-WB cannot just show its utter disrespect to our countrymen, much less remain unaccountable for their failure to reconstruct an honest-to-goodness water delivery system in Metro Manila.



5 Responses to “Drowning in crisis : A look into the privatization of water services”

  1. Rodolfo Jardiolin, private citizen said

    Privatization is based in the premise that there is a government that is impartial, or a very high degree of impartiality, there is a regulatory body composed of incorruptible people over it.

    Apply it in a country where political power leans heavily to the business sector and a country known internationally as one higly corrupt infested, what have we got?

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