Water woes

Recent rate rebasing discussions have ignited heated debates and public outrage over “questionable” charges of private water concessionaires. Various NGOs led by Water for the People Network (WPN) claim that the two concessionaires — Maynilad and Manila Water — have been passing on their income tax payables to consumers through water rate hikes. This, WPN estimated, has amounted to over P15 billion from 2008 to 2012.

In fact, aside from income taxes, there are allegations that “donations, advertising and promotion, entertainment, travel, and even flowers” are also included in our water bill. Indeed, the MWSS regulatory office (RO) has questioned this as well. “Not only are they recovering charitable donations from customers, they are even earning a return on it,” the RO succinctly quips. 

For Maynilad and Manila Water, however, they have deemed these charges as necessary and integral to their business. According to Maynilad, “donations to schools where we do our recruitment — that’s important for image-building with the schools to get the best engineers… Donations to local governments are important for getting permits.”

Expectedly, the justifications given by the water companies have fallen on unsympathetic ears. Militant groups have not only sought the refund of the charges but are also calling for the abrogation of the contracts themselves. On the other side of the pipes, several prominent Philippine business groups have called for caution and full adherence to contracts, including the mode for settling dispute. To better understand the nuances surrounding this issue, let us first examine its history.

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Background: To help solve the worsening water situation in the metropolis, the Water Crisis Act was passed in 1995. And pursuant to such law, two concession contracts for the Eastern and Western portions of Metro Manila were bidded out in 1997 and awarded to Manila Water and Maynilad, respectively. Prior to the privatization, the MWSS provided water to only two-thirds of Metro Manila for merely 16 hours a day on average. The system was admittedly run down and the bureaucracy ruinously overstaffed and inefficient resulting in more than 65 percent of water supplied being “lost” due to leakage and illegal connections. The latter is known as non-revenue water or NRW and, comparatively, Manila was on the same level as Jakarta which at that time was not something to be proud of.

From 1997 to 2009, Metro Manilans with access to piped water in the East Concession increased from the original 49 percent to 94 percent while in the West Concession, the coverage increased from 67 percent to 86 percent. Furthermore, in the Eastern portion, the amount of NRW losses decreased from 63 percent to 16 percent while in the West, it was cut from 64 percent to 47 percent. These figures manifest considerable success. In fact, the World Bank had once described concession agreements as the “world’s biggest water privatization” project and one of the few success stories in attracting private capital in water distribution in developing countries. However, this success has come at a quite literal price. Water tariffs in Manila have steadily increased over the years on the basis of four factors: first, exchange rate fluctuations applied to the concessionaire’s debt; second, tariff adjustments on the basis of inflation; third, rate rebasing every five years to guarantee a certain rate of return to the private concession holder; and fourth, extraordinary price adjustments which may be granted under specific circumstances.

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This brings us to the current situation. In 2004, an MWSS technical working group took the position that concessionaires are not public utilities but mere agents of MWSS. As a result, the MWSS RO issued a resolution which effectively allowed Maynilad and Manila Water to pass on their income tax payment to their consumers. That RO decision seems to be a contravention of the 2002 Supreme Court ruling against Meralco’s practice of forwarding income taxes to consumers. The ruling stated that “[The income tax] is inconsistent with the nature of operating expenses. In general, operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. ... Income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility.”

Pursuant to the Court decision, in a resolution promulgated last June 7, 2013, the new RO executive committee declared that income taxes are no longer among the expenses the 1997 Concession Agreement allows the concessionaires to recover. In support of this stance, they point to the fact that income taxes are not included in the term “Philippine business taxes” listed in the 1997 Concession Agreement as recoverable expenses. Second, they should be borne by concessionaires as taxpayers considering the fact that income tax is a tax on the privilege of earning income. Third, they claim that although concessionaires are not public utilities they are still acting as agents so that the same laws and rules applicable to their principal, MWSS, should bind them as well. The Office of the Government Corporate Counsel (OGCC) had come out with a June 4, 2013 opinion in support of this position.

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Balancing Act: Perhaps the move to rescind the Concession Agreements may be too drastic an action and could have “far-reaching implications” on the administration’s public-private partnership program. Indeed, investors may be less inclined to venture into agreements with government if they feel there is a significant risk of their contracts being impaired several years down the road. These are potent and real harms to be avoided. To my mind, the issue is not about whether the Concession Agreements should be followed but which seemingly unconscionable charges should be allowed to be passed on.

And while it is MWSS’s responsibility to protect the sanctity of the Concessionaire Agreements, at the same time, it has to ensure that the public interest is served and consumers not taken undue advantage of.

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“Fairness does not mean everyone gets the same.

Fairness means everyone gets what they need.”          

                            — Rick Riordan, The Red Pyramid

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