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What next for the Maynilad and Manila Water Company?

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Andrew J. Masigan

Numbers Don’t Lie

Contrary to what many believe, the concession agreement between the government and the two water concessionaires, Maynilad and Manila Water Company (MWC), will not be amended despite threats from Malacañang to do so. It will stay the way it is until its expiration in 2022, said Emmanuel Salamat, the Administrator of the Metropolitan Waterworks and Sewerage System (MWSS). For the water consumers of Metro Manila, this means no significant changes in water services or rates for at least two years.

What has changed is the automatic extension of the concession agreement from 2022 to 2037. Said extension has been revoked and made subject to re-negotiation. Both the government (through the Department of Justice) and the water concessionaires are set to start the process of re-negotiation this March.

With luck, a new concession agreement for the years 2022 to 2037 will be agreed upon before the end of the year. If so, the investment programs of both water concessionaires to build more sewer treatment plants and other water-related infrastructure will not be interrupted. A long-drawn-out negotiation could delay, if not terminate, these investment plans.

The contentious provision of concession agreement is what is called a “rebasing mechanism.” It is a provision that allows the adjustment of water rates every five years to enable the water concessionaires to recoup their investments and realize a reasonable rate of return. This is the provision that President Duterte referred to as “onerous.” It is foreseen to be the main point of contention when both parties face each other at the negotiation table.

We should all understand the context of this rebasing mechanism.

It was former President Fidel Ramos who purposely included the rebasing mechanism in the concession agreement to make the privatization of MWSS worthwhile for the would-be concessionaires. It will be recalled that back in the ’90s, the MWSS was so inefficient and so corrupt that it distributed water to only 69% of the metropolis despite amassing close to a billion dollars in debts. Water rationing was the rule, rather than the exception, such that taps would flow for only two hours a day. Making matters worse was that the MWSS was plagued with massive water leakage and theft.

Privatization was the only way out for the MWSS but finding an investor proved difficult. See, whoever was to take over the water distribution business of MWSS needed to invest some P374 billion to connect Metro Manila’s 12 million population to the water supply grid. It had to invest in sewerage treatment plants because the MWSS had none. It had to solve the water leakage and theft problem by replacing the aging water pipes throughout the metropolis. On top of it all, It had to absorb MWSS’ debts.

Remember, this was the era when time deposits fetched interest rates of 11% per annum. The rate of return of the would-be concessionaires needed to match this, at the very least.

FVR’s rebasing mechanism addressed the risks the concessionaires would have to face. It was deemed fair not only by the government and the concessionaires, but also by third-party observers such as the Asian Development Bank and foreign governments who observed the privatization process. In fact, the privatization of the MWSS was lauded by the World Bank as a success and used as a model by which other privatization endeavors were to be based.

Alas, in 1997, the distribution business of the MWSS was successfully privatized to Maynilad and MWC. Both concessionaires absorbed its debts and worked swiftly to provide the city with running water. The concessionaire agreement was so well crafted that both Maynilad and MWC were able to offer lower-than-expected bids for their water rates.

Today, 96% of Metro Manila is connected to the water supply grid and 47% of the city will have wastewater treatment plants by 2021. If the water concessionaires are able to agree on the terms for the 2022–2037 term, water treatment plants will be in place for 68% of the metropolis by 2026, 87% by 2032 and 100% by 2037.

As a consumer, would I like to change anything in the concession agreement?

Other than lowering water rates even further, I would not change a thing. Why should I when my home and businesses enjoy reliable water supply with rates that are among the lowest in the country? Best of all, I consume water with a clear conscience knowing that the waste is treated before it is expelled back to Manila Bay. This is a world of difference when compared to the dark days in the hands of government through the MWSS.

Comparative figures of the state-run Local Water Utilities Administration (LWUA) shows that Metro Manila residents who consume 10 cubic meters (cu.m.) of water per month pay only P104, which is the lowest among 12 metropolitan cities in the country. In contrast, consumers in Baguio pay the highest monthly rate of P370 for the same 10 cu.m. of water.

Consumers in San Jose Del Monte pay the second-highest rate at P280 for 10 cu.m. per month. Other urban centers with higher water rates than Metro Manila include Angeles, Bacolod, Batangas, Cabanatuan, Cagayan de Oro, Dasmariñas, Davao, Cebu and Iloilo.

For commercial and industrial consumers, or those that consume more than 20 cu.m. per month, LWUA records show that Metro Manila has the second lowest rate at P306, bested only by Davao that charges P281. Again, Baguio is the most expensive in this category at P775.

For context, Metro Manila’s water rates are but one-fifth of what is charged in Sydney and 2.5 times more expensive than in Kuala Lumpur.

We hope that the Department of Justice does not monkey around too much with a perfectly good concession agreement in the name revenge or political posturing. The last thing we want is to end up with more expensive water rates and/or a derailed water infrastructure investment program.

 

Andrew J. Masigan is an economist.









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