History lessons

A Singapore arbitral tribunal just recently ordered the Philippine government to pay Ayala Corp.-led Manila Water Co. (MWC) P7.39 billion representing losses suffered by the company on account of the Philippine government’s breach of its contractual obligation under the concession agreement (CA) between MWC and the government.

This was after MWC took the government to the arbitral court when the water concessionaire’s petition to increase water rates in its concession areas was denied. Under the concession agreement, rate rebasing, which is a process that determines the level of rates for water and sewerage services and that allows the concessionaires to recover their expenditures, is mandatory every five years.  

Earlier, the arbitral court also ordered the government to reimburse Maynilad Water Services of the Metro Pacific Group around P3.4 billion in revenue losses.

But both MWC and Maynilad have said that they are willing to come up with a workable solution with the Duterte administration that is beneficial to all the parties concerned.  

Upon receiving information about the arbitral award, Manila Water chairman Fernando Zobel de Ayala together with other officers sought guidance and met with Finance Secretary Carlos Dominguez, informing him that they are willing to come up with a mutually acceptable manner of implementation of the arbitral award considering that this case was filed due to a violation incurred not during this administration. In fact, the provisions in the concession agreements of the two firms which the Department of Justice said were disadvantageous to the government and the consumers were drawn up during the previous Ramos administration. 

Unfortunately, the Duterte administration was left bearing the financial burden.

 It will be recalled that it was FVR who turned over the water supply delivery and sewerage service from the Metropolitan Waterworks and Sewerage System (MWSS) to private contractors under the 1997 privatization program. MWC said the government at that time unilaterally determined the terms of the agreements that were on a take it or leave it basis, but of course these terms were aimed at attracting big-time investors. 

At that time, the water distribution system in the country was in an extremely decrepit state that no businessman would be crazy enough to help the Philippine government solve the water crisis unless the provisions in the CAs were good enough to ensure that they would be able to recoup the huge investments needed to reverse the then-worsening problem gripping the metropolis.   

The herculean task of improving  the water distribution system and setting up wastewater treatment facilities to ensure the delivery of clean, adequate and 24/7 water to Metro Manila consumers required hundreds of billions of pesos in investments by the would-be concessionaires.  

Maynilad has spent P46.7 billion on wastewater treatment facilities alone since 1997 even if it has collected only P38.07 billion in sewage fees from its West Zone customers over same period.  

It is also setting aside P200 billion to build 26 new sewage treatment facilities (STPs) and install 425 kilometers of new sewer lines from 2019 to 2037.  

Without a proportionate adjustment in their rates, how are these private companies expected to recoup their investments?

As for the extension of the agreements to 2037, MWC has explained that in 2009, the administration of then President Gloria Macapagal Arroyo extended these upon recognizing the compelling need for more water and wastewater investments. 

It said that the Clean Water Act and, subsequently, the Supreme Court decision expanded to 100 percent the 50 percent sewer coverage contained in the original agreement. The extension required the company’s commitment to spend an additional P458 billion to comply with the new water supply and wastewater requirements all the way to 2037. 

To recall, water service was in such an awful state in the 1990s that Congress then saw the need to bestow special emergency powers upon FVR to solve the crisis. At that time, MWSS was drowning in $1 billion in debt and was only servicing selected portions of Metro Manila. Water service before privatization was erratic with the MWSS often resorting to rationing to accommodate the needs of Metro Manila users.  

MWSS’ debt was absorbed by Maynilad and MWC when they took over as concessionaires of the West and East zones, respectively, in 1997.   

The World Bank had, in fact, called the takeover by Maynilad and MWC of the water distribution system as a model in privatization.

Even MWSS chairman Reynaldo Velasco has described the water privatization as a successful legal framework in public-private partnership (PPP) ventures.  He said that privatization has expanded water delivery to 96 percent of the metropolis and has eased the government’s financial burden of filling MWSS’ fund shortfall and capex requirement. 

The Supreme Court said in one of its rulings that businesses are entitled to reasonable profits to ensure a fair return on their investments. 

An abrupt review of the concession agreements or adverse government action against the concessionaires will send the wrong signals to the business community at this time when the Duterte administration is starting to attract more investors who want to take part  in the  Philippines’ emergence as  one of the world’s fastest-growing economies.

Bloomberg’s who’s who

For the third annual Bloomberg 50, Bloomberg reporters and editors from around the world identified people in business, entertainment, finance, ­politics, and science and technology whose 2019 accomplishments merit recognition and applause.

And guess what? Our very own, San Miguel Corp. president Ramon Ang made it to the list, joining the likes of 16-year-old Swedish environmental activist Greta Thunberg, the US women’s national soccer team, pop star Rihanna, Warner Media chairman and CNN president Jeff Zucker, Occidental Petroleum president Vicki Hollub, Warner Bros Entertainment CEO Ann Sarnoff, European Commission director general for trade Sabine Weyand, Glaxosmithkline CEO Emma Walmsley, to name a few.

Here is Bloomberg’s report on SMC’s Ang:

“Ten years ago, San Miguel was primarily a food and beer conglomerate. (It’s named after its original 1890 brewery, opened when the Philippines was still a Spanish colony.) Ramon Ang, who’s run the company since 2002, has expanded into the electricity, oil, and construction industries. San Miguel still makes plenty of beer, but the $2.15 billion purchase for 86 percent of Holcim likely allows it to capitalize on President Rodrigo Duterte’s pledge to spend $170 billion on infrastructure. San Miguel is building a light-rail system and will soon break ground on the airport in Bulacan province, not far from the capital. It will have three times the capacity of Manila’s current one, which is 71 years old and regularly ranks among the world’s worst.”

For comments, e-mail at [email protected]