Manila Water and Maynilad are not only charging consumers the costs of unimplemented and future projects. They are also passing on the costs of their income tax to us, including those that they will have to pay for in the future. Worse, the water firms are even profiting from such practice because they are allowed to apply a certain rate of return on their operating expenses (Opex), which include income tax.
This unconscionable practice of Manila Water and Maynilad was disclosed by the Water for the People Network (WPN). According to the group, from 2008 to 2012, the amount of income tax being passed on to us by the concessionaires of the Metropolitan Waterworks and Sewerage System (MWSS) could reach P3.1 billion a year. We paid for it through our monthly water bills. Out of the P3.1 billion, Manila Water customers shouldered P1.5 billion; and Maynilad customers, P1.6 billion.
(Read the WPN statement here.)
Incidentally, Maynilad enjoyed an income tax holiday during the period. Thus, its collected income tax from consumers had been retained by the company as extra profits. Add to this the approved rate of return, called appropriate discount rate (ADR), of 9.3% enjoyed by Maynilad and Manila Water, which they can apply on their income tax (as part of Opex) and other expenses.
In the ongoing rate rebasing (an exercise that adjusts water tariffs based on past and future expenses and a guaranteed ADR), Manila Water wants to pass on an estimated P76.96 billion in income tax from 2013 until the end of its Concession Agreement (CA) with the MWSS in 2037. Maynilad, meanwhile, wants to pass on an estimated P75.92 billion during the same period of its own CA.
That’s a total of P152.87 billion worth of future income tax – or about P6.11 billion a year until 2037 – that they want us to shoulder starting today. They also want an ADR of 8.9% applied on these expenses. These amounts are included in their proposed rate hikes – P5.83 per cubic meter (cu. m.) for Manila Water and P8.58 for Maynilad.
The WPN called this practice “parasitic”. Imagine, income tax is not even a form of investment and is in fact an obligation of the concessionaires. Yet, they charge it on us and even profit from it. Parasitic indeed!
From 2008 to 2012, Manila Water has accumulated a net income of almost P20 billion and Maynilad, around P22 billion, due to rising water rates. Manila Water’s profits have been growing by about 18% annually and Maynilad, more than 40%, in the last five years. And they did not shell out a single centavo to pay for their income tax obligations. We, the consumers, paid it for them. And again, we will shoulder the tax on their future corporate income if their proposed hikes will be approved by the MWSS-Regulatory Office.
While they amass billions of profits, the water concessionaires invest very little and assume practically no risk. Consumers pay for the impact of inflation on their operation. Consumers pay for the impact of foreign exchange losses on their foreign-denominated loans. Consumers pay for any event that will affect their income, from calamities to changes in our laws. Consumers pay for the cost of protecting the environment from possible hazards of the concessionaires’ operations. Consumers pay for their past (including unimplemented) and future capital expenditures (Capex). Consumers pay for their past and future Opex, including income tax.
The concessionaires justify their action of passing on their income tax by arguing that they are not public utilities and that the Meralco ruling does not apply on them. In April 2003, the Supreme Court (SC) issued a ruling that prohibited the Manila Electric Co. (Meralco) from including income tax as a recoverable operating expense.
(Read the SC decision here.)
Following is the pertinent portion of the SC decision:
“Income tax, it should be stressed, is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities. Clearly, by its nature, 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. Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. No benefit is derived by the customers of a public utility for the taxes paid by such entity and no direct contribution is made by the payment of income tax to the operation of a public utility for purposes of generating revenue or profit. Accordingly, the burden of paying income tax should be Meralco’s alone and should not be shifted to the consumers by including the same in the computation of its operating expenses.”
But for Manila Water and Maynilad, they are not public utilities and are merely “agents” of the MWSS, which in the concessionaires’ distorted logic remains the public utility. It’s pretty obvious that such argument is garbage. When the MWSS was privatized in 1997, it turned over all its functions as a public utility to Manila Water and Maynilad – from operating and improving the water service system to charging and collecting tariffs from consumers.
For the sake of argument, however, let us accept that MWSS is the public utility and Manila Water and Maynilad are just its agents. It therefore follows that as mere agents, the concessionaires derive their authority and functions from the MWSS. But by insisting that they are not covered by the SC ruling on income tax, which only supposedly covers the MWSS as the public utility, Manila Water and Maynilad have put themselves in a more privileged position than their supposed principal.
A similar case can be raised on the issue of 12% limit on the return on rate base (RORB) for public utilities. The rate base is computed by adding up the value of all the assets used in the operation of the public utility and from it, the allowed rate of return is calculated. A cap is imposed to prevent user fees from soaring too much because a public utility provides an essential service. The concessionaires claim that they are not covered by the cap, again because supposedly they are not public utilities. So, the 12% RORB applies to MWSS only as the public utility but not to its agents, again making the concessionaires more privileged than MWSS.
And there’s more. If you look further at their Opex, you’ll find items such as Advertising, Promotions and Recreation. This is how Maynilad described the said item: “This pertains to the cost of enhancing and promoting the image of Maynilad, developing harmonious relations with different local government units, establishing rapport with tri-media, advertisement and publication of notices in newspapers and magazines of general circulation, TV/Radio broadcasts, website, public consultations on ground and cost of sponsorships. It also includes athletic, recreational and annual cultural celebrations.”
As part of the Opex, it’s passed on to us. So we’re paying to enhance and promote the image of Maynilad? We’re paying so that they can have harmonious relations with LGUs and media? We’re paying for public consultations stage-managed by the concessionaires to justify their onerous rate hikes and where critical consumers are not allowed to participate? And what exactly are sponsorships, athletic, recreational and cultural celebrations and what do they have to do with the provision of water services?
All of these highlight the fundamental problems of MWSS privatization and the concept of public-private partnership (PPP), especially on key infrastructure and services like water. Big business will squeeze every centavo from consumers, pitilessly bloating our water bill and draining our pockets. Private profits don’t have a concept of public interest and public accountability. This oppression and injustice must stop. (End)
More on MWSS privatization: