Moderating the ‘greed’

About a decade ago, the line “Moderate their greed” became famous in the botched NBN-ZTE deal during the Arroyo administration. Unfortunately, all the cases filed in connection with the cancelled contract, believed to be onerous and prejudicial to the government, were dismissed by the Sandiganbayan due to insufficiency of evidence. Perhaps among the controversial transactions that went unnoticed during that time would include the premature extension of the MWSS concession agreements with Maynilad and Manila Water only half-way through the agreed 25-year term. Unusual as it was, there must have been a very extra-ordinary reason or consideration for this extension. With the recent revocation of the MWSS resolution granting the 15-year extension from 2022 to 2037, which was announced after the water concessionaires declared having waived the Singapore arbitral award in their favor, a lot of space has been devoted discussing the propriety of the concessionaire agreement prepared by the top legal minds in the country.

The president has accused the powerful businessmen behind the two firms of “economic plunder.” Amidst allegations of provisions very burdensome to the government that must be declared void, some quarters posit that Maynilad and Manila Water deserve utmost understanding because no businessman would have gambled to operate the water utilities considering the uncertainties prevailing in 1997. They also caution that the unilateral cancelation would have an adverse effect on the business climate by scaring away investors. It is given that the participation of the private sector in the operation of public utilities must be properly rewarded, but up to what extent should this be permissible?

Undeniably, Maynilad and Manila Water invested so much in improving our water system, yet, from my limited view, it appears that these water concessionaires did not gamble at all because they were given a deal that guaranteed them no loss, whatever happens. Thus, the popular phrase may be modified to now state that “nothing is certain but death, taxes and income for Maynilad and Manila Water.”  

The agreements stipulate that “the rates for water and sewerage services provided by the Concessionaire shall be set at a level that will permit the Concessionaire to recover over the 25-year term of the concession operating, capital maintenance and investment expenditures efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on the MWSS loans and concessionaire loans incurred to finance such expenditures, and to earn a rate of return (referred to as the “Appropriate Discount Rate”) on these expenditures for the remaining term of the concession in line with the rates of return being allowed from time to time to operators of long-term infrastructure concession arrangements in other countries…”

The fixing of rates guarantees a return on top of the full recovery of the concessionaire’s investments, operating expenses, debt servicing and even income taxes. While Meralco cannot pass on its income tax payments to its customers, the all-inclusive provision favors Maynilad and Manila Water this privilege. Worse, the agreements contain a non-interference clause prohibiting the government from interfering in the setting of rates and connection charges for water and sewerage services, and consequently the government shall be liable to indemnify the water concessionaires for unrealized income resulting from such interference.

With the number of onerous provisions mentioned by the spokesman of the Department of Justice, the last two years of the original term ending in 2022 may be tolerated as an inevitable result of government inefficiency in the past, but the extension of 15 years more is very disturbing. If it is true, as the Secretary of Justice announced, that the contracts were extended 12 or 13 years before expiry dates without changing the terms of the original contracts, the revocation of the extension appears to be a heroic act. It is assumed that in fixing the original term at 25 years, the water concessionaires have already considered full recovery plus a decent income from the deal within the said period. If there were no additional impositions on them that would have required the infusion of more investment not contemplated in the original agreement, the purpose of the extension in 2009 or 2010 was obviously to guarantee Maynilad and Manila Water more years of income without a corresponding premium or benefit in favor of the government for the additional 15 years.

But may the government simply revoke its contract? On the strict legal point, the government, in entering into a proprietary contract, sheds its immunity and binds itself as an ordinary contracting party to perform in good faith its obligations. This explains the results of the arbitration proceedings in favor of Maynilad and Manila Water. Yet, no less than the Supreme Court has held that – “Under our form of government the use of property and the making of contracts are normally matters of private and not of public concern. The general rule is that both shall be free of governmental interference. But neither property rights nor contract rights are absolute; for government cannot exist if the citizen may at will use his property to the detriment of his fellows, or exercise his freedom of contract to work them harm. Equally fundamental with the private right is that of the public to regulate it in the common interest.” This pronouncement is especially relevant here because the controversy involves not an ordinary but an essential commodity that impacts on the constitutionally enshrined right to life, right to health and the promotion of the general welfare. This may be the reason for the stance of the government not to honor the arbitral award.  

With a declared 2018 net income of P7.7 billion for Maynilad and P6.5 billion for Manila Water, the reported waiver of the Singapore arbitral awards amounting to P3.4 billion and P7.4 billion, respectively, may be considered a voluntary way of moderating “greed” for which they must be commended. Although the fact that they have been earning billions notwithstanding the disapproval of their proposed increased rates only shows that the said adjustments were not at all necessary in the first place. The revocation of the 15-year extension may be the government’s way of moderating “greed” even further. As we hope for better bids from these two water concessionaires after 2022, we should also be vigilant to prevent China from taking over our water system.