The two utility companies have been servicing millions of customers in Metro Manila under contacts signed with the government in 1997.
Noel Celis/AFP/File

Water utilities' woes seen hurting investor confidence

Ian Nicolas Cigaral (Philstar.com) - December 12, 2019 - 2:09pm

MANILA, Philippines — The Philippine government’s actions against the country’s two biggest water companies could hurt investor confidence and may not complement the Duterte administration’s eagerness to tap private capital for infrastructure development.

President Rodrigo Duterte has berated both Manila Water Company Inc. and Maynilad Water Services Inc. and accused the two companies of forging contracts with “onerous” provisions that are disadvantageous to the public.

The presidential tongue-lashing came after a Singapore-based arbitration panel ordered the Philippine government to indemnify Manila Water and Maynilad for the losses they suffered from an unenforced rate hike.

At a congressional hearing, Manila Water and Maynilad said they have been informed that the Metropolitan Waterworks and Sewerage System Board has canceled the concession contract extension of both water firms until 2037. The existing concessions will expire in 2022.

Maynilad CEO Ramoncito Fernandez expressed concern over the regulator’s decision, arguing that “it’s not proper to unilaterally revoke an agreement.” Prices of shares of Manila Water and operators of Maynilad have been falling daily since last week.

“Stability and predictability or the regulatory environment are crucial factors for investors,” European Chamber of Commerce of the Philippines president Nabil Francis said.

“Changing the rules in the middle of the game will send a negative signal to potential and current investors. This will also significantly affect investor confidence as well as the attractiveness of the Philippines as an investment destination,” Nabil added.

'Many questions'

Honoring contracts has been one of the top concerns among investors.

Amid pressure from Duterte — who has repeatedly promised businessmen he will respect the sanctity of contracts — Maynilad and Manila Water agreed to drop more than P10 billion in compensation claims from the government as well as defer raising rates originally scheduled for early next year.

"Of course foreign investors are closely following the developments regarding the two water concessions," American Chamber of Commerce of the Philippines, Inc. Senior Adviser John Forbes said.

"There are serious implications for all investors in regards to how contractual disagreements are adjusted and on the future supply and cost of water in Metro Manila with the rescinding of the extension contracts," Forbes added.

Under their agreement with the state, both water providers can recover over the life of the concession period their operating, capital maintenance and investment expenditures. The two utility companies have been servicing millions of customers in Metro Manila under contacts signed with the government in 1997.

Top officials of Maynilad and Manila Water have warned that water rates could go “very high” should the government revoke the extension of concession deals as the move would shorten the period that they can recover their investments.

Sought for comment, UnionBank chief economist Ruben Carlo Asuncion said the revocation of the extended concession deals may have an impact on the concessionaires’ balance sheets.

“These are publicly-listed companies, and therefore, have various retail and institutional investors expecting a return on their investments and a clarity on how these companies will be financially viable in the coming years,” Asuncion said.

“Will they be able to re-negotiate the deal and altogether just continue until 2037? Will they have to re-bid and do things all over again that has definitely a huge impact moving forward? There are many questions that need to be answered at this point,” he added.

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