New gov't deal clips Manila Water options to recoup losses
MANILA, Philippines — Ayala-led Manila Water Company Inc. will service a portion of Metro Manila longer, but would have limited options and fewer avenues to recover losses from its operations under a new contract signed with government last week.
At the Palace, presidential spokesperson Harry Roque on Monday dangled the new agreement as a win for consumers, which he said would have lower cost burdens in the water firm as rate hikes are highly prevented in the near future.
“We are confident that because of the new agreement with Manila Water, the government and consumers are now protected,” Roque said in a briefing.
But for Manila Water, this may mean additional costs to be completely borne out by the firm even as it won a reinstatement of the 15-year extension of its old contract that Duterte unilaterally revoked last year. The concession period will now run until July 31, 2037, from the original expiration of 2022.
At the onset, a “tariff freeze” will be in effect until end-2022, meaning Manila Water cannot seek rate increases from water regulators during that period.
The revised deal retained the “undertaking letter” that mandates government to indemnify the company against unintended losses caused by any state action. However, the “non-interference clause” was deleted, meaning that apart from regulators, any government office may object in rate-setting decisions without the risk of paying damages to the company.
Manila Water is also restricted from passing on costs from corporate taxes to consumers, as well as unintended charges from foreign exchange swings that increases import costs. The former may be offset by a lower corporate income tax rate of 25% under the Corporate Recovery and Tax Incentives for Enterprises Act, but the latter may mean costly capital shipments for investments will have to be absorbed by the company.
The discount rate, another mechanism to earn a rate of return from company expenditures, was also fixed at 12% instead of using a “market-driven” rate that makes it susceptible to future rate hikes, Manila Water said.
The company’s debt levels and expenses will also be under constant monitoring by the Metropolitan Waterworks and Sewerage System, the water regulator.
“In the short-term, the tariff freeze may have more impact on the capital expenditure deployments over revenues,” Luis Limlingan, managing director at Regina Capital Development Corp., a brokerage, said in a Viber message when sought for comment.
Investors’ reaction to the news was mostly muted. Shares in Manila Water inched up 0.12% to close at P16.10 apiece against a 0.81% gain in the main index.
In any case, the agreement punctuated a bitter road to renegotiation triggered by Duterte’s attacks to the water distribution firms in Metro Manila during the water shortage in 2019. At the time, Duterte blamed Manila Water and Maynilad Water Services Inc., the other player, for the water interruptions even if they were mainly because little water is flowing down from state-owned dams.
From there, Duterte refused to honor an P11 billion international ruling for Manila Water and Maynilad, prompting both companies to waive their claims. The claims supposedly represented costs of rate hikes which were not enforced.
Negotiations with Maynilad will now proceed next.
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