The water privatization contracts — respecting the rule of law

SPECIAL REPORT - Iris Gonzales - The Philippine Star

MANILA, Philippines — In a sprawling house in a posh and exclusive village in Metro Manila one recent cold December night, some tycoons gathered to discuss the biggest issue to knock out the business environment under the Duterte administration – the move to cancel the decision extending the existing 1997 water privatization contracts, touted as the world’s largest water privatization deal.

Servings of sumptuous food and the finest drinks were endless – and so were the expressions of frustration.  For sure, the powerful tycoons – or oligarchs as Duterte likes to call them – aren’t happy. It’ s not surprising, of course. Nothing could irk tycoons more than threats to their businesses.

The rule of law

Is President Duterte within the bounds of the law with his plan to cancel the extended contracts?

The STAR gathered insights from experts in different fields to look into the legal and economic implications of the Duterte administration’s moves.

‘A mortal sin’

One of the best legal minds in the Philippines, told The STAR that President Duterte is committing a “mortal sin” with his move to rescind the 15-year extension of water concession deals.

The existing 1997 concession contracts will expire in 2022. They were supposed to be extended to 2037.

Regulator Metropolitan Waterworks and Sewerage System (MWSS), acting on Duterte’s orders, had revoked the decision extending the water contracts.

“The government cannot just cancel a contract without filing a case in court,” said the legal luminary who declined to be named for now because he would also be publishing his position on the issue in early 2020.

Tough stance

Amid the water supply shortage that has been affecting Metro Manila, President Duterte has taken a tough stance against the country’s water concessionaires – east zone’s Ayala-led Manila Water and west zone provider Maynilad Water Services Inc., the company led by tycoon Manuel V. Pangilinan and the Consunji Group’s DMCI Holdings Inc.

The 1997 contract was signed during the administration of Fidel Ramos, while the extension was granted by former president Gloria Macapagal Arroyo.

Last month, the Singapore arbitral tribunal ordered the government to pay Manila Water P7.4 billion, and Maynilad P3.4 billion in indemnification supposedly for lost revenue from an unenforced rate hike.

Duterte said he would not honor the Singapore ruling and also moved to cancel the extension of the contract.

But the legal source said the proper way to do it is for the Office of the Solicitor General to file a case seeking to void the decision extending the contract.

Cancelling it outright is simply illegal, said the source.

“There should be due process,” the source added.

Turning off investors

The implications of Duterte’s move will also be far reaching.

“Who will now invest in the country? No investor will now invest in the Philippines because contracts are not honored by the government,” said the source.

Duterte’s move comes at a time when the government is trying to attract investors for its much touted Build Build Build infrastructure program.

“The BBB will be dead,” the source added.

Making investors jittery

Indeed, esteemed economist Raul Fabella said investors have become jittery over Duterte’s actions.

“In the last few weeks after the Singapore arbitral court ruling awarding P11 billion to the concessionaires Manila Water and Maynilad, the investment environment has just plunged like a brick. Before the ruling, the government implicitly accepted the legitimacy of the Singapore arbitral court and had the ruling been favorable, the same government would have hailed it as fair and based on the rule-of-law,” Fabella said in his paper Venezuela East A-borning.

But Fabella said that when the government lost in the Singapore tribunal, it suddenly stopped recognizing the legitimacy of the arbitral court.

“Now the government rhetoric is that the arbitral court is captured by the cabal of capitalists that include Metro-Pacific Group and the Ayala Group,” Fabella said.

But Fabella reminds the Duterte administration that even the Supreme Court recognized the Singapore tribunal in 2015 on the PIATCO case.

“Lest we forget, our own Supreme Court decided in 2015 with finality that the Philippine government pay PIATCO P24 billion (as of March 2016) for unlawful expropriation,” Fabella said.

Sanctity of contracts

“The concession contract that has served Metro Manilans well for two decades is now onerous and disadvantageous to the Filipino people. Onerous and disadvantageous, but only on the President’s say-so! And the same say-so has become the supine Department of Justice’s and the Department of Finance’s marching order. The sanctity of the contract is onerous to the government? Onerous to violators yes and it better be or there is no contract,” he added.

No sweetheart deals

Romeo Bernardo, finance undersecretary during the Cory Aquino and Fidel Ramos administrations, also maintained that the original 1997 contracts weren’t “sweetheart deals” and reviewed by many agencies and individuals in both the government and the private sectors.

“The concessionaires were asked to bid on this contract competitively in both 1996 (there were four highly qualified consortia involving the best names locally, and the leading global water companies which bid) and then again in 2007 when the original west zone concessionaire, the Benpres-Lyonnaise des Eaux consortium, went bankrupt and the contract for Maynilad had to be re-bid. The fact that 50 percent of the original proponents failed is the best demonstration that there was absolutely no guarantee of returns, no sweetheart deal as contended,” Bernardo said in a paper sent to The STAR.

Bernardo also asserted that the extension of the original contract is allowed under the concession agreement and by law.

“This has been the subject of analysis and review in government for over a year in 2008 to 2009: at MWSS all the way to the board; by the Department of Finance under former secretary Margarito Teves, assisted by then undersecretary Jeremiah Paul and director Soledad Cruz; by the Department of Justice under then secretary Raul Gonzales and government corporate counsel  Al Agra. It was also presented to the full cabinet and went through public consultations before final approval by former president Gloria Macapagal-Arroyo,” Bernardo said.

He said the rationale for the extension was compelling at the time.

There were new waste water requirements set by the Clean Water Act and later by Supreme Court mandamus requiring 100 percent or full sewarage coverage for the concessions, and thus more investments for these were needed.

Furthermore, he said the tariff rate impacts had to be mitigated.

“By extending the contract through 2037, there is a longer period of recovery of these long life investments, and thus lower annual tariff adjustments,” Bernardo said.


On the original 1997 contract, the Department of Justice has reported that these agreements contained provisions disadvantageous to the government and the public.

No gov’t interference

One particular provision in the original contract deemed onerous is the “prohibition against government interference in rate-setting, and the provision on indemnity for possible losses in the event of such government interference,” Justice Secretary Menardo Guevarra.

“Due to these twin provisions, the government was ordered by the Singapore arbitration court to pay Maynilad about P3.6 billion and, recently, Manila Water, P7.4 billion as compensation for losses or damages,” the Justice Secretary said.

Furthermore, he said the extension of the contracts to 2037 is  irregular, considering that the extension was granted 12 to 13 years the expiration of the original 25-year agreement.

“The original sin”

The legal luminary mentioned in the early part of this piece said the “no government interference” provision is indeed wrong.

“That’s the original sin,” said the source.

He said it was a provision that violated the Philippine Constitution particularly Article VII Section 17 which states that “The President shall have control of all the executive departments, bureaus, and offices. He shall ensure that the laws be faithfully executed.”

The legal source said the MWSS is counted as one such office.

Furthermore, the source added the government should have created a quasi-judicial body similar to the Energy Regulatory Commission to regulate the water sector. The MWSS is not a quasi-judicial body, the source said.

However, the source said the government could easily remedy the no interference provision in accordance with due process as what succeeding administrations should have done.

FVR speaks

Former president Fidel V. Ramos, the brains behind the privatization of water services in the country, has also expressed concern over the Duterte administration’s issues against the water concession contracts.

He also believes that the contract gave government enough control over tariffs.

In a Dec. 4 letter to President Duterte, Ramos essentially said the government should honor the MWSS Concession contract.

“The MWSS Concession Agreement, as with all projects and agreements entered into by government during my administration was anchored on complete staff work, review and consultation with various government agencies, organizations and the concerned public which resulted in complete transparency all the while negotiating terms most favorable to government,” Ramos said.

The former president added that the private sector mobilized funding from both foreign and local sources depending on the word of the Philippine government that the essential conditions of adherence to the sanctity of contracts and rule of law would be observed.

“These are the pillars that hold together any agreement be it between governments and/or the government and the private sector. Our word must be our bond,” said the former president.

Duterte, experts said, is clearly setting a dangerous precedent in its move not to honor the sanctity of government contracts.

It’s a move that could give him his wish -- “to destroy the oligarchs.”

But the collateral damage is huge, experts said, because it could also very well destroy the country’s investment environment.





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