Endgame
FIRST PERSON - Alex Magno (The Philippine Star) - December 21, 2019 - 12:00am

When President Duterte launched into that brutal rant against the water concessionaires, people assumed that he had a clear endgame in mind. Presidents, after all, must always have that.

We know from what happened subsequent to his rant that this unusual exercise has been costly. The stock prices of the water concessionaires shed about a third of their value. Among the biggest losers are the pension funds that are heavily invested in what, after all, were blue chip companies. Boomers like me worry about the actuarial lives of the two main pension funds.

The rant pulled down investor confidence in the sanctity of contracts in our economy. That confidence has already been low, given our unsavory history of politicizing contracts entered into with government. It is the single most important reason why we receive a disproportionately low share of direct investment flows into the region. Now that confidence is shattered.

The rant, and then the drop in stock prices, has made banks hesitant to lend money to the concessionaires – whether to invest in new technologies or simply as working capital to keep the quality of their service going. That can only mean a greater probability of deterioration in the quality of water distribution in an already water-starved metropolis.

One major investor in a water concession has even raised the possibility of bankruptcy. That should be a sobering thought.

By March next year, it is nearly certain that water will be tightly rationed. The single dam that supplies nearly all the raw water to the dense population of the national capital region did not fill up because the rains fell in all the wrong places this year.

Let’s not even hope the water concessionaires will invest in new raw water sources or in expanding sewerage services. After all that has happened, they will not have the capital to do that – especially since their contracts were recently shortened.

What is sure is that water distribution has become an unattractive business. Return on investment is long and the political risks are high.

If the contracts end in 2022, no one might want to bid for them. The business has been burned.

The President has threatened to deploy the military to distribute water. Good luck with that. Wait for the sergeants to come and read the water meters.

Objectives

If the objective of the President’s rant was to avoid the nearly P11 billion awarded the two water concessions because government did not raise water rates as specified in the contracts, that has been achieved. Reeling in horror, the two concessions gave up the claims awarded them through international arbitration.

If the objective was to freeze water rates, that has been achieved. Appropriately terrified, the two water concessions declared they were not raising rates next month even as they have approval to do so. The MWSS sets the rates.

Water rates in the National Capital Region are reasonable by comparison. Baguio City charges P1,237 per 30 cubic meters of water delivered. San Jose del Monte charges P930 for the same volume consumed. Cagayan de Oro charges P842. Maynilad charges P745 while Manila Water charges only P540.

For 15 cubic meters, Singapore charges US$1.42. Tokyo charges $1.05. Beijing charges $0.55 while Jakarta charges $0.43. Maynilad charges $0.41 while Manila Water charges $0.27 – cheaper than Hanoi and a cent higher than Bangkok.

If the President wanted the two concessionaires to renegotiate the contracts written by experts from the International Finance Corporation in 1996, the two water concessionaires have already indicated their willingness to do so.

In 1996, if we recall, water service was available to only two-thirds of households in Mega Manila. The rest bought water from peddlers at 500 percent the tap price. It was painful but they had no choice. Through privatization, water service in now available to 100 percent of households – although rationed during the hot months.

In 1996, well over half of the water was lost to thieves and to leaks. Non-revenue water had been reduced to close to international standards because of privatization.

We were desperate for better water service. When the door to privatization was opened by way of a bidding process awarding the concessions to those who will charge the lowest rates, we pleaded with the corporations to come in and save us with expertise and access to capital. Our privatization process became a textbook case for other cities with the same water problems that used to plague us.

Today, after the water concessions succeeded in achieving 100 percent service coverage and deliveries around the clock (when raw water is available), we treat the investors shabbily. The investment community watches as this curious case unfolds.

Political profit

If the President’s objective is to score popularity points, the rampage against the water concessions is brilliant.

It is always easy to vilify big corporations. It is even easier to bully them by disrespecting contracts. Populism is a no-brainer.

After all the horrendous ranting, it will be easy to use the concessionaires as scapegoats when water runs short by March next year. Government could be spared from blame.

After this episode, it will not be surprising if President Duterte gains 90 percent approval ratings in the next round of surveys. That will strengthen his endorsement power as the time comes for choosing a successor. 

But that will be at the cost of global perception that contracts in this country are not worth the paper they are written on and policies affecting long-term investments are constantly shifting.

MWSS RODRIGO ROA DUTERTE
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