Concession extension plan splits water firms, puts regulators in a fix
ROEL LANDINGIN, Newsbreak | 01/12/2009 9:53 AM
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It’s almost like having your cake and eating it too, except, in this case, it’s all about water. Still, that is probably why many members of President Gloria Arroyo’s Cabinet are backing what is being touted as a timely trade-off that could ease an imminent water rate increase in Metro Manila.
The idea is simple. In return for extending the 25-year concession granted to Manila Water Co. and Maynilad Water Service Inc. by another ten year from 2022 to 2032, the two water companies are to moderate planned water rate hikes early this year and boost capital expenditures.
“The proposal would avert a water rate increase and increase investments amid the downturn,” said Economic Planning Secretary Ralph Recto, who pushed for the idea during a Cabinet meeting in mid-December. “It will work like a stimulus package, except it’s being done by the private sector rather than the government.”
The modest rate increases would help consumers cope with falling incomes, while higher capital expenditures for expanding or upgrading water mains and sewers will create jobs, provide piped water to more households and improve sanitation in Metro Manila, Recto explained.
He said Arroyo and the Cabinet found the proposal meritorious in principle, but left the Metropolitan Waterworks and Sewerage System (MWSS), the government agency in charge of the water system in the national capital region, to decide how to best implement it.
MWSS is also the counter-party of both Manila Water and Maynilad in the 25-year (1997-2022) concession agreement that heralded what the World Bank then called the “world’s biggest water privatization.”
No unanimous support
But in spite of Cabinet-level endorsement, the proposal has not won unanimous support among MWSS officials and the water concessionaires -- the parties that will eventually have to negotiate and agree on extending the concession agreement.
Water regulators point out the process of extending the concession agreement is a lengthy and complicated process that would probably need public consultations. They said there is not enough time to follow the proper procedure if Cabinet members want the extension soon to avert the planned basic water rate hike, originally planned to take effect on January 1.
“We’re likely be hauled off before the Ombudsman to face graft and corruption charges if we failed to follow due process in extending the concession agreement,” said an official of the MWSS regulatory office.
The MWSS regulatory office had written a memorandum to the agency’s board of trustees outlining their position. “Ultimately, it’s the board of the trustees’ call not ours,” said a regulator.
The proposal has also split the two water concessionaries. While Manila Water is enthusiastic in its support and is willing to drastically cut a planned rate hike this year, Maynilad is rather lukewarm in its attitude. It is keener to go ahead with the rate increase, which it badly needs to raise funds for capital expenditures. Maynilad, which just came out of financial distress and rehabilitation in 2007, prefers to postpone talk of extending the concession agreement until after it has stabilized a bit.
Rogelio Singson, Maynilad president, said the company is also interested in extending the concession agreement but lamented the timing and short-term considerations behind the proposal, which mainly have to do with averting an impending water rate hike.
Indeed, the company asked the MWSS to open talks on extending the concession agreement last year, when it was about to begin rate rebasing negotiations which resets basic rates once every five years.
Untimely
However, MWSS officials then considered the matter untimely because Maynilad’s new owners – a consortium composed of DMCI and Metro Pacific Investment Co. – had just taken over the company from the Lopez family. Maynilad sought financial rehabilitation in 2003, was temporarily taken over by the government in 2005 and resold to new owners the following year. “The MWSS then felt we first needed to prove ourselves before any there was to be talk of extending the concession, and we agreed,” said Singson.
MWSS regulators, after lengthy rate rebasing evaluation process that happens once every five years, had initially agreed in December to allow Maynilad to raise basic rates by P8.54 per cubic meter from January 1, 2009. This would bring up the basic rate by more than a third to around P31 per cubic meter. (The average rates that consumers actually pay are a little bit higher, however, because other components such as adjustments for inflation and the currency exchange rate are also included.)
The water regulators were about to firm up and announce the final rate hike for Maynilad in mid-December when the Cabinet discussed the idea of extending the concession agreement in exchange for modest water rate increases. The timetable – publication in newspapers on December 15 and implementation of the water rate increase on January 1 – was upset. There is talk MWSS will make a public announcement by around January 15 but regulators refused to confirm that.
Singson said Maynilad was willing to implement the rate hike in installment over the next four years to soften the impact on consumers. But he stressed that the company needed to increase water rates soon to raise the money needed for an ambitious catch-up plan to cover more customers and reduce water lost to leaks and theft.
The company wants to boost capital spending to P40 billion between 2008 and 2012 to install new pipes and replace old ones that lose up to two-thirds of water produced, the same level as more than a decade ago. Maynilad plans to increase piped water connection to 75 per cent of its 6.2 million customers in the western half of Metro Manila to over 90 per cent by 2012, and to cut water losses to 40 per cent.
Manila Water welcomes proposal
In sharp contrast, Manila Water not only welcomes the proposal to extend the concession in exchange for modest rate hikes but is also actively pushing for it.
Jeric Sevilla, the company spokesman, said Manila Water is willing to settle for a fifth of a basic water rate hike planned to take effect January 1 in return for 10 more years to recover past and future investments. The company is also keen to increase planned capital expenditures of P7 billion a year to P9-10 billion a year, he added.
To be sure, Manila Water’s stand reflects its much stronger financial position and its ability to source funds from a wider variety of sources.
But it also has implemented a big part of its rate rebasing adjustment last year, when its basic rates went up by P4.47 per cubic meter. Maynilad, fresh from financial rehabilitation, was not able to begin the rate rebasing process in 2007 as Manila Water had done. This year, Manila Water was due to increase basic water rates by only P2.42 per cubic meter.
Caught somewhat in the middle of the simmering debate are the MWSS directors who must break the policy impasse soon rather than later. Through the Christmas and New Year holidays, they were meeting to think of ways to accommodate the Cabinet-backed proposal for a longer water concession and modest rate hikes while keeping in mind the regulators’ warnings about the proper procedure.
“I don’t envy them” said a former member of the MWSS trustees.
