SPECIAL REPORT: The water waiting game: Who’s to blame? (Conclusion)

The 1997 contract

A water crisis some 23 years ago prompted the then Ramos administration to undertake the privatization of the country’s water distribution system after the MWSS failed in its mandate to ensure sufficient supply for Metro Manila and nearby areas.

Former president Fidel V. Ramos solicited bids for concession agreements with the MWSS to address the water crisis that existed due to the inability of the MWSS to maintain viable operations due to technical inefficiencies and financial debts.

The government unilaterally determined the terms of the agreements, which were bidded out on a take it or leave it basis. The 1997 privatization of MWSS was considered as one of the first and the biggest globally at that time.

In an interview with The STAR, MWSS chief regulator Patrick Ty admitted that the government had no choice but to include the existing provisions in order to lure interest and investments from the private sector.

“The contract was a product of its time, that you need to put in the sweeteners in order to attract the bidders. If you did not include all those provisions, nobody would have bid for it,” Ty said.

True enough, the Ayalas took the risk for the east zone and the then Benpres Holdings Corp. of the Lopezes took charge of the west zone. The latter, however, was not able to manage the operations well and Manny Pangilinan decided to enter the picture in 2007.

“The government got a consultant, prepared it, admitted that it was the first time that government privatized so the government had no basis yet, no template or experience,” Ty said.

“Now that we are in 2020, times have changed and the contracts should also change to reflect the current situation. If we are going to do a public bidding at this time, we will not includie those provisions that we included in 1997,” he said.

Maynilad unfortunately had to enter rehabilitation, and was forced to return the concession agreement to the government which temporarily took over in 2005 to 2006 while it looked for another willing contractor to take charge.

The supposed onerous terms of the contract.

While Duterte was furious during the water shortage which started in March and lasted until the early part of the third quarter last year as Manila Water’s supply was almost depleted, prompting rationing in several areas in Metro Manila and Rizal, it was not exactly the major factor that earned the President’s ire.

The last straw was the arbitral award of Manila Water which would have forced the State to pay the firm P7.4 billion in losses incurred from non-implementation of rate hikes.

Duterte was firm in saying he will never shell out any centavo to pay the water firm as the award was due to one of the onerous provision under the contract.

“The MWSS was the first one to fire the first shot and removed the corporate income tax as early as the third rate rebasing. That caused all of this and why the President is mad. We fired the first salvo, we started it and we are thankful to the President, he ended it and now the interests of the public is protected,” Ty said.

Ty was referring to the 2013 mandatory five-year rate rebasing wfor which Manila Water requested a rate hike. MWSS decided against granting the rate had and disallowed the recovery of corporate income tax, arguing the CIT is not supposed to be recoverable because the concessionaire is a public utility.

The disallowance of the CIT recovery translated to a P2.77 per cubic meter downward adjustment.

“That is why they had to file a case and the judgment caused the President to get mad and to react that way and I am glad that he did,” Ty said.

“To be honest, I was not surprised that he refused to pay. MWSS Regulatory Office already refused to pay before. We have been challenging that and we refuse to allow it,” he said.

As the government works on the new contract, Justice Secretary Menardo Guevarra said the government is removing the indemnification clause as well as the inclusion of certain business taxes, concession fees, cost of appealing which are part of expenditures and would then be passed on to the consumers.

“Also, the water concessionaires being mere contractors of the MWSS. There is no character of a public utility which means that the water concessionaires can argue that CIT (corporate income tax) can be considered as an expenditure,” Guevarra said.

“We will make it very clear to the extent that CIT cannot be made a factor in setting of water rates chargeable to consumers,” Ty said.

Not enough power

The existing contracts are said to be in favor of the concessionaires leaving MWSS with not much hand, prompting the Department of Justice to insert provisions that would give the MWSS more power.

“At present, much of the decision making is in the hands of the concessionaires, RO is just more on the consultative side,” Guevarra said.

As the chief regulator, Ty said the RO actually requested for that provision and asked that they be given the authority to impose fines and penalties to the water concessionaires.

“I won’t say that they did not also look at it, during the meetings it was one of the things we recommended and they also did. I was pushing for that and they also had the same findings, majority of the people had the same position,” Ty said.

Currently, MWSS has no power to impose administrative fines and penalties. For example, and the MWSS request for a certain document or information, the water firms can technically ignore the request  and there wouldbe no consequence

“We cannot go beyond the concession agreement even if we don’t want it, even if we feel that it’s unfair, we don’t have a choice. You cannot just arbitrarily fine them,” Ty said.

Now, last year’s more than P1 billion penalty imposed on Manila Water is a different story.

“The only penalty provision is 10.4 [of the concession agreement] which allows for a rebate, but that’s not what we are asking for. We want coercive powers, that 10.4 was a big event,” Ty said.

“But simple events like the delay in the resumption of water supply, we have to wait 15 days until [we can impose] 10.4, if they’re not able to do it, there’s a 25 percent cost of that which will be rebated. However, as long as they do it in 15 days, no penalties,” he said.

The chief regulator admitted that the concessionaires would have paid a lot of penalties to the government if only the MWSS was allowed to impose the penalties.

“There are a lot of issues and complaints before. That’s why as early as 2011, we have been pushing for a Water Regulatory Commission because it would be explicit that they can be subject to fines and penalties. There would have been a stick that the regulators can use,” Ty said.

“The RO was unable to penalize the two concessionaires properly at that time and we are hoping to rectify that. We have been pushing for that even before this problem. With the review, we are pushing to be given more authority,” he said.

Maynilad president and CEO Ramoncito Fernandez, however, does not agree that the RO lacks power.

“That is why during the previous administration, no tariffs were implemented, that is how powerful the RO is. They did not implement a tariff increase that’s why we had to go to arbitration,” Fernandez told The STAR.

Fernandez

“If they don’t want to implement a tariff, they have the power to do so, they can disallow expenses, capex, tariff increases. It is within their powers but they have to be reasonable and if they are not reasonable then we go to dispute but only if they are unreasonable,” he added.

The government agreed to the current contracts out of necessity, out of the need to address a problem some 20 years ago, but is that the only lapse they had over time?

With its thrust towards crafting a new contract, will the concessionaires give in?

The perfect time and the waiting game

The MWSS has maintained that now is the perfect time to review and amend the contract as the original one is expected to end by 2022.

“We need to fix it and strengthen it to make sure that the interest of the public will be protected. Those terms were created for 1997 and we are now in 2020,” Ty said.

The RO dismissed claims that the latest move of the government would affect business sentiments in the country and worse, drive away future investors.

“I believe the President knows what he is doing and I think both the concessionaires have agreed to renegotiate anyway. So as of now, there is an ongoing negotiation and since both parties have agreed, I don’t think they should have any adverse impact,” Ty said.

“They have the choice not to renegotiate, they can choose not to and maintain their position, but I think they also realize that this is a public issue and this concerns interests of the public and they also want to protect their reputation,” he said.

As it continues to cooperate with the administration, Maynilad is hoping for a quicker resolution on the new contract that the government wants implement.

Fernandez is hoping for a faster conclusion on what the government actually wants from the water concessionaire.

“The sooner the contracts are finalized, the better for the country. The quicker the contract is finalized and agreed upon, the better for Metro Manila and the consumers,” he said.

Guevarra said the new contracts that would replace the existing contract would be ready in the next six months.

“We have yet to see how it’s worded. We cannot comment piece meal, we have to see the entire package before we can say this is not good, this is good. We have to see the entire draft before making comments,” Fernandez said.

He added that Maynilad is currently moving in a “calibrated” mode given the current situation.

“There is still uncertainty in the air so we are taking the risks that we know we can actually take,” Fernandez said.

“We are moving, but not too risky, but we are also not afraid to take risks. Everything is just really calibrated right now,” he said.

Should worse come to worse and the concessionaires decide to forego the revised contracts, Duterte said the government would take over and nationalize the water distribution system.

Ty admitted that there is no move right now to take over as the government is optimistic that the parties wwould arrive at an agreement. However, MWSS is ready to step up should the need arise.

“I am not saying we cannot [take over], it’s more of it would be difficul,t but if need be, we will step up and we will find ways. It’s going to be problematic and it will not be a walk in the park, but we will do what is necessary to protect the interest of the public,” Ty said.

“But we have not done any steps because we don’t feel it’s needed yet. We are still in negotiation so why would I assume that they will not agree or we will not have an agreement?” he said.

MWSS just wants to cross the bridge when it gets there so as not to preempt anything on the table right now.

“We are in negotiation and we are waiting for an outcome of this negotiation. Once that is resolved, whether positively or negatively, then we will act accordingly,” Ty said.

Now, the six-month waiting period begins and only then will everyone get a clearer idea of who isto blame for what really happened and what will likely happen in the future.