Privatized

The Commission on Audit (COA) raised red flags on the bidding process leading to the award of the Kaliwa dam project to a Chinese contracting company with no track record for dam construction.

In COA’s view, the bidding was staged. Two other companies participated in the bidding process merely to satisfy the requirements of our procurement law.

The MWSS has not commented on the COA observation. In the meantime, more serious questions have been raised over whether the approach taken in this particular project is the best one possible.

For instance, a Japanese company has tendered an offer to undertake the Kaliwa River project at no cost to the Philippine government. This offer was ignored because the Japanese engineering team proposes to build a weir to impound water rather than a tall dam. The MWSS seems to have set its mind to build a dam.

Too, a Credit Loan Agreement was signed November last year between the MWSS and the Export-Import Bank of China. This is a tied loan, meaning we are obligated to hire a Chinese company to undertake the project.

While the loan provides about P11 billion for the project, the contract with the winning Chinese bidder was for P12.189 billion. This raises the question: How will the MWSS fund the difference, to include possible cost overruns and project administration expenses?

Right of way acquisitions, environmental mitigation measures and other expenses will surely raise the total cost of the project. Since the project will produce water above what the concessionaires can currently sell, water tariffs might have to be raised to cover costs.

The MWSS no longer sells water. It supports itself from concession fees from Maynilad and Manila Water amounting to P200 million annually. That amount is hardly enough to cover the MWSS’ operating costs.

The Philippine government, as a matter of course, guarantees the loan taken from the Export-Import Bank of China. Should something go terribly wrong with this project, the Philippine government will take loan repayments from taxpayer money.

Otherwise, the MWSS may choose to raise concession fees on the two water concessions. That will be passed on to the consumers. The regulatory agency does not have a plan to sell the water to the Southern Tagalog and Central Luzon regions to improve water sales.

The Kaliwa River project accounts for only 25 percent of the estimated water to be collected from the entire Laiban dam complex. The Kanan River project, to be undertaken later, will produce 75 percent of the total raw water to be generated.

This entire project could be lucrative in the long run, especially if property development around the area comes into play. Several local corporations, including San Miguel, have earlier offered bids to undertake the project (including building a new city for communities that the dams might displace) at no cost to government.

If so, why did government choose to take out a tied Chinese loan and have a Chinese company with no track record in dam construction to undertake the project?

Bulk water

When water supply fell critically low last April, someone from the MWSS took responsibility on behalf of government for the water shortages. That is not true.

Section 3.9 of the concession agreement approved by the MWSS Board of Trustees Dec. 2, 1996 acknowledges the letter sent by the regulatory body to the winning concessionaires. That letter, dated Nov. 27, 1996, reads: “The concessionaires, as agents or representatives of MWSS…shall be authorized to exercise the water rights of MWSS under the water permits issued, or to be subsequently issued by the NWRB.”

The Privatization Strategy Report approved by the MWSS board months before that was even more explicit: “The concessionaires…will be responsible for the supply of their respective future bulk water requirements. It is they who will be best positioned to identify the most efficient means of securing additional raw water.”

That quote could not be clearer. If water rights have been conceded to the concessionaires, why is the MWSS now insisting that the responsibility for the development of raw water resources remains with the agency?

If the MWSS had ceded water rights to the concessionaires, why was the construction of the Kaliwa River dam suddenly a government undertaking, funded by a tied loan and contracted out (possibly through anomalous bidding) to a Chinese company with no record in dam building?

The water privatization program undertaken by the Ramos administration was a resounding success. It became the textbook model for many other countries. It dramatically increased the volume of water supplied urban consumers, brought down non-revenue water levels and brought investments in new water distribution technologies.

Although this program required the concessionaires to put in humongous amounts of capital, they make no more than bond rates in profit. This means that if they put their capital in bonds, they will be making the same amount of money without the heartaches.

Why then did government take over the projects that would bring more bulk water to consumers?

It could be that the concessionaires were not interested in putting in more capital to a business venture that brings only bond rate returns. But then, it is widely known that Ayala Corporation (that controls Manila Water) has banked a tremendous amount of land in the Laiban area.

This could, in all probability, be a failure in project design. Properly framed, this project could attract private investments taking advantage of the prospects for property development to supplement water revenues.

That said, the Kaliwa River project now seems destined for trouble.