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Take it, take it

It is interesting to see how San Miguel Corporation will handle the challenge hurled at it by detractors of its proposal to build the Laiban Dam.

I’m talking about the former beer magnate’s shift in focus from alcohol to something a bit more healthy – drinking water. SMC has proposed to spend more than a billion dollars to build the dam, so it can then divert water from Rizal to Metro Manila.

The studies show that Manila will be parched in a few years, given the projected increase in population, and the expected strain in the resources required by the nation’s capital. This is where SMC enters the picture, with its proposal to ensure that all Manilans are moisturized and hydrated.

However, Ralph Recto, our Socioeconomic Planning Secretary and NEDA head, has questioned SMC’s proposal, saying that SMC’s offer seems to be disadvantageous to the government. His principal objection is the normal ‘take-or-pay’ clause so prevalent in utility contracts.

What kind of animal exactly is this clause? For those not in the legal loop, this means, simply, take it or pay for it. Whether or not Metro Manila takes the water being delivered from the dam, the government would still be bound to pay a certain minimum fee. In essence, it assures SMC that its billion dollar investment would not go wasted if there are no buyers of its water, since it’s still getting paid anyway.

According to NEDA, (and I’m not acting as mouthpiece for NEDA here, even though I have a sibling within this department) the take-or-pay clause amounts to a guarantee by the government of the market risks that’re normally faced by an investor.

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Where NEDA is coming from are the old BOT contracts for power plants in the 1990s. If you recall, that’s when the Philippine government practically spread open its legs to invite foreign investors to come in and build their electricity farms. To attract these foreign firms, the Philippine government guaranteed them an offtake quantity, a minimum it would always pay for, whether or not the electricity was actually taken and used by the country.

As a result, according to NEDA, the electricity rates paid by consumers were higher than they should have been under normal circumstances. (That’s the allegation, I don’t have the numbers to compare, although I do recall that with the every day black-outs during the 90s, we were pretty desperate. Or at least, employers were, since what we employees did every afternoon when the lights went out was to go to the mall.)

So, Recto is saying, this is going to be the same scenario for water rates. Consumers are going to pay not only for the water they’re consuming, but also all the water that they didn’t consume but were supposed to. If the government predicted wrong in Manila’s expected consumption (which is, sad to say, already what my cynical mind-set is expecting) then tough. So his beef is, why should the government swallow the risks? Why gulp down the uncertainty? (Sorry about the water puns, they just came out naturally.)

The defense aired by those put on the spot is that this is not a guarantee, because it doesn’t require the government to pay whoever is going to lend SMC. (Natch, not all the funds are going to be coming from SMC’s pockets. The way these things work, for sure, SMC will look for others to bankroll it.) According to the defenders, the government’s payments for water will go to SMC, not the lenders.

This is a fine distinction, because for sure, SMC’s lenders will require protection, and the best protection they can have is to capture its revenue streams.

I would bet that, like in all other project financing, they will force SMC to divert all its income to a bank account controlled by the lenders. These lenders will then always have access to SMC’s cash at any time, and will only allow specific, controlled releases to fund operational costs. The rest of the time, the cash is trapped, ready to be seized by the lenders.

Whether this structure is, essentially, a government guarantee, should be the question answered by SMC. And if it is, then hopefully SMC will waive this clause. Otherwise, Manila’s thirst might just have to be quenched with beer.

(Come to think of it, still not a bad deal for SMC, right?)

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