Duterte and the gnomes of Makati

It was not the best of times for the business gnomes of Makati. They have faced difficult political leaders before, even helped send a dictator packing. But they didn’t quite know how to tackle a problem named Duterte.

Following an angry rant from President Duterte, MWSS announced cancellation of an extension of the water contracts due to expire on June 30, 2022. Shortly thereafter, Metro Pacific said the bank loan facility of Maynilad was suspended by creditors because of the water company’s business uncertainty.

Stocks of the water companies, already weakened, were sold off. Manila Water plunged to P5.01 per share or 82 percent below its 52-week high of 28.25. Metro Pacific dropped to 2.69 or 49 percent off its 5.28 high.

Confused and unable to think clearly, the gnomes circulated a draft statement of concern among several business organizations and chambers. Statements like that helped in the past but now, it was too little, too late.

The administration’s economic managers and even the justice secretary, have issued statements clarifying the bullying theats of an angry President Duterte. The President got carried away as he reacted to a significant multi billion peso loss of government in an arbitration court in Singapore.

No, the administration clarified, it was not unilaterally cancelling the contracts of the two water companies. The extension of the contract given by the Arroyo administration is up in the air, but negotiations will start shortly to handle that problem.

The business organizations were concerned President Duterte is scaring off foreign investors. The President threatened the cancellation of the water companies’ contracts or removal of some key but “onerous” provisions. The business groups think that goes against sanctity of contracts that investors expect government to uphold.

It is difficult to see what the Makati business groups want to achieve by issuing a statement of concern. If they were hoping to generate public support, they are living in a cave.

Most of the public are happy about the President’s outburst and threats. Many people think the private water companies are doing a good job, but they agree there are onerous provisions in the concession contracts.

If the Makati groups think they can influence the President in what he will say in a scheduled statement in the first week of January, they are badly mistaken. The President cannot be expected to back down beyond the Cabinet clarifications.

Indeed, the optics of Makati’s business elite ganging up on the administration on this issue will only fire up the people to support the President. That, in turn, will strengthen the President’s inclination to fight the business elites.

The President also already feels positively validated by the very favorable approval ratings he just received. He will take it to mean that a large majority of our people like what he is doing, taking the fight to its logical conclusion... cutting the business elite down to size.

Besides, the water companies themselves folded up the day after the President vented his ire. They said they will not collect the billions of pesos they won as awards from the arbitration court and will also not implement the rate increase they previously won approval to implement next month.

On the other hand, the business groups can’t help being unnerved by the sharp drop in stock market prices of the water companies and of the conglomerates that own them. But the stock prices of the water companies already recovered most of its losses. Manila Water rose 37 percent from its low, while Metro Pacific recouped 30 percent, but still way below their 52week highs.

What happens next will be dictated by Finance Secretary Sonny Dominguez who made it clear that the onerous conditions in the original concession contracts will just have to go.

Sec Sonny appears to have scored a strong point. According to him, Manila Water made a bid for the provision of water services to the New Clark City in Tarlac even if the terms of reference did not include the “onerous” provisions in their MWSS concession contracts.

Described in business circles as the English-speaking Duterte, the finance chief wants to reform the system in a way that makes contracts signed by government for similar services to follow uniform terms of reference. For water services, the New Clark City TOR is the accepted one in the same way that the Clark Airport TOR is the pattern for all airport proposals.

All past discussions in media about the legality of the water concession contracts are largely academic now. Those contracts may not have seemed onerous under conditions when those were awarded 23 years ago. But they are seen to be onerous now. We already know a whole lot more about the economics of the private water distribution business we didn’t know then.

It is not true as some people may think that the administration had no end-game in mind when Duterte threatened to cut the contracts. That was just the shock and awe technique of which Duterte is an expert. The fast capitulation of the water companies showed it worked.

The end game is to win a new water contract that the administration can defend at Plaza Miranda. The existing one may be seen as appropriate by the technocrats who drafted them but difficult to explain to the public.

As I have been pointing out in this column, treatment of income taxes is problematic. We all pay income taxes and no one can pass on those income taxes to consumers. Why are the water companies any different?

That’s one onerous provision that must go. No amount of technical explanation can wipe away the emotional block in the minds of people who see it as unfair.

The loss of government’s ability to control the water rates is also seen as onerous and unusual. We can understand why that provision was made as a means to counteract the tendency of government regulators to grant populist appeals to hold rate increases.

Government will not be government if it is helpless on rate setting. Can government even legally give up that power without a law specifically allowing it?

The New Clark contract fixes those and other “onerous” provisions. This template will definitely be imposed on the water companies.

In the Clark water TOR, BCDA keeps control over key management decisions and will also have a share in any financial upside. Price increases will also be capped and no extraordinary rate increses will be allowed. Corporate income tax will not be recoverable as it is clearly not an expenditure but an obligation assumed by all taxpayers. Water companies will also need approval of BCDA for any loan agreement.

Times have changed. The Makati bluebloods must accept the reality that Duterte’s approval rating has been atmospherically high because of his readiness to confront Big Business and win every time.

While I share the Makati folks’ worry about the impact of Duterte’s rants on investments, local and foreign, only the forthcoming reports of the credit ratings agency will tell us for sure what the impact really is. Political risk may have increased, but the past few years show the local economy has enough stability to withstand Duterte’s tantrums.

For now, let us focus on fixing and updating that concession contract. Let’s help Sec Sonny get that done quickly to remove a serious cloud of doubt that affects investors in other areas of the economy.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco