Maynilad says 65% of rate hike will be used to pay for its income tax

/home/wpcom/public_html/wp-content/blogs.dir/062/2418548/files/2015/01/img_3937-1.jpg

Manny Pangilinan and his foreign backers and financiers, who have interests in LRT, MRT and Maynilad, must be grinning widely right now.

With the public still reeling from the huge LRT/MRT fare hike, Maynilad Water Services Inc. announced that it will soon implement a significant increase in its basic charge. The average increase is P3.06 per cubic meter. What makes this rate hike as awfully unjust as the LRT/MRT fare hike is that 65% of the increase (about P1.99 per cu. m) will be used to recover the income tax of Maynilad. This was disclosed by the water firm’s Chief Finance Officer as quoted in a news report.

This means that hapless consumers will continue to pay for the corporate income tax of a highly profitable big business that has been cashing in on a basic service. In 2013, Maynilad reported a core income of P7.53 billion. (See chart below) Since 2010, its core income has been growing by more than 16% annually. Maynilad’s rising profits are mainly pushed by ever increasing water rates due to periodic and automatic adjustments allowed in its Concession Agreement with the Metropolitan Waterworks and Sewerage System (MWSS). Since taking over in 1997, Maynilad’s water rates have already ballooned by more than 500 percent. Since 2010, its all-in tariff (basic charge plus other charges) has jumped by more than 40 percent, which could further go up when the higher basic charge is implemented.

Image from Metro Pacific
Image from Metro Pacific (Core earnings represents earnings associated with business operations, and exclude earnings from goodwill, gains or losses from nonrecurring items, pension gains, legal settlements or employee stock options; source: Investopedia)

But while it has been earning billions of pesos from onerous and skyrocketing water rates, Maynilad wants to further milk the consumers dry by passing on their obligation to pay income tax to their customers. How does Maynilad justify this patently scandalous practice? A direct statement from its Chief Finance Officer: “Siyempre ang negosyante, ini-invest niya ‘yung pera niya para may return. So ang usapan dito, magkano ba ang tubo na dapat kitain ng pera na ‘yun. Importante ‘yung computation ng taxes kasi kailangan natin malaman magkano ‘yung net na iuuwi.”

To recall, the MWSS-Regulatory Office (RO) disallowed Maynilad and Manila Water Co. from including income tax recovery in their computation of the basic charge. Maynilad and Manila Water separately challenged the decision through arbitration led by the International Chamber of Commerce (ICC), a dispute resolution mechanism established by the Concession Agreement. Manila Water is still awaiting the result of its own arbitration case as of this posting.

More than eight million Maynilad customers are supposed to enjoy a reduction in their monthly water bill. In its decision last September 2013, the MWSS-RO ordered Maynilad to cut its basic charge by P1.46 per cu. m (which shall be distributed in five tranches at P0.29 per cu. m. per year) Now instead of a rollback, consumers are faced with a big rate increase. (Download the MWSS-RO resolution here)

The income tax is actually just one of the various issues raised by the MWSS-RO against Maynilad and Manila Water. Another is the P1 per cu. m. currency exchange rate adjustment (CERA), which the regulators ordered Maynilad to discontinue charging to its customers since a similar recovery mechanism – the foreign currency differential adjustment (FCDA), which recently also pushed water rates up – is already being imposed by Maynilad. But apparently, because of the arbitration, the CERA will remain in Maynilad’s water bill, and is now tucked in the basic charge.

Arbitration further exposes the privatization of MWSS, the region’s largest public-private partnership (PPP) deal in the water sector, as greatly anti-people and contrary to public interest. The Maynilad case clearly shows that effective public regulation is a sham in a program like PPP that is heavily biased to private corporate interests. The MWSS privatization was designed precisely to undermine government regulation as decisions are ultimately made by an arbitration panel where the concessionaire and a representative of foreign business interests have a say. ###

For background/additional information and discussion:

PNoy and the Big Water monopolies

Water arbitration: Issues and implications

Water rate hikes: Maynilad, Manila Water want P153B in future income tax passed on to consumers

Manila Water, Maynilad’s multi-million “pa-pogi” also charged to consumers

Maynilad, Manila Water ads further expose anti-consumer MWSS privatization

PH water rates among Asia’s highest

LRT/MRT fare hike and the Aquino admin’s irrational, baseless claims

Image from RILES Network
Image from RILES Network

On 4 January, the Department of Transportation and Communications (DOTC) will start implementing the controversial fare hike for light rail transit (LRT) 1 and 2 and metro rail transit (MRT) 3. The issues surrounding the fare hike have not changed, with the administration mouthing the same irrational and baseless claims to justify the increase. Meanwhile, the fare hike has been further exposed as merely benefitting big business interests. The privatization of LRT 1 as well as the DOTC admission that the fare hike will not be used to upgrade MRT 3 despite the many glitches and breakdowns illustrate this.

‘Distance-based fare scheme’

According to the DOTC Order No. 2014-14, the new formula that shall be implemented is Php11 base fare + Php1 per kilometer. It is similar to riding a taxi – the flag down rate is Php11 and the meter goes up by Php1 for every additional kilometer. The DOTC calls this a ‘distance-based fare scheme’ and is consistent with the so-called ‘user-pays’ principle.

Under this scheme, commuters of the light rail system are facing a significant increase in fares. An end-to-end trip in LRT 1 and 2 will cost commuters Php10 more. In MRT 3, the additional cost for an end-to-end trip is Php13. The fare hike ranges from 0-50% for LRT 1; 25-79% for LRT 2; and 30-87% for MRT 3, depending on the station of origin and destination. (See Tables 1, 2 and 3)

Table 1

LRT 1 old and new fares, single journey (Php)

From Baclaran to: Old New % increase
Edsa 15 15 0
Libertad 15 15 0
Gil Puyat 15 15 0
V. Cruz 15 15 0
Quirino 15 15 0
Pedro Gil 15 20 33
UN Avenue 15 20 33
Central Terminal 20 20 0
Carriedo 20 20 0
Doroteo Jose 20 20 0
Bambang 20 20 0
Tayuman 20 30 50
Blumentritt 20 30 50
Abad Santos 20 30 50
R. Papa 20 30 50
5th Avenue 20 30 50
Monumento 20 30 50
Balintawak 20 30 50
Roosevelt 20 30 50
Sources of data: LRTA and DOTC
Table 2

LRT 2 old and new fares, single journey (Php)

From Recto to: Old New % increase
Legarda 12 15 25
Pureza 12 15 25
V. Mapa 12 15 25
J. Ruiz 13 20 54
Gilmore 13 20 54
Betty Go-Belmonte 13 20 54
Araneta-Cubao 14 20 43
Anonas 14 25 79
Katipunan 14 25 79
Santolan 15 25 67
Sources of data: LRTA and DOTC
Table 3

MRT 3 old and new fares (Php)

From North Avenue to: Old New % increase
Quezon Avenue 10 13 30
GMA-Kamuning 10 13 30
Cubao 11 16 45
Santolan 11 16 45
Ortigas 12 20 67
Shaw Boulevard 12 20 67
Boni Avenue 12 20 67
Guadalupe 14 24 71
Buendia 14 24 71
Ayala Avenue 14 24 71
Magallanes 15 28 87
Taft 15 28 87
Sources of data: LRTA and DOTC

(Download the complete fare matrix for LRT 1 stored value and LRT 1 single journey; LRT 2 stored value and LRT 2 single journey; and MRT 3)

The main reason cited by the DOTC for the fare hike is the need to cut down government subsidies for the light rail system. Supposedly, government is subsidizing 60% of the cost for each passenger of LRT 1 and 2, and 75% for each MRT 3 passenger. The average fare for LRT 1 and 2 is Php14.28, implying that the ‘actual cost’ is around Php35.70. This results in a deficit of Php21.42, which represents government subsidy per passenger. Similarly, the average fare for MRT 3 is Php12.40, with the actual cost at about Php49.60 and government subsidy at Php37.20 per passenger.

Authorities estimate that around Php2 billion in such subsidies will be freed up due to the fare hike. These savings, said the DOTC, can be used for ‘development projects and relief operations’ in areas outside Metro Manila to benefit those that do not use the LRT and MRT.

Irrational and baseless

But this argument is irrational and baseless.

First, it is wrong to pit the interest of LRT/MRT commuters against the interest of those from outside Metro Manila. It’s like saying that taxes from Metro Manila should not be used to pay for the cost of building and running public hospitals in Mindanao because the people of Metro Manila do not use the said facilities. Or that government support to Mindanao’s public hospitals should be reduced, and the money be used instead for relief and rehabilitation of typhoon victims in Metro Manila. Such argument eliminates the role of government in raising revenues and distributing them to fund the various needs of the people, regardless of where they are, such as key infrastructure like mass transportation and social services like hospitals.

Second, government should support the LRT/MRT as a mass transportation system. It offers social and economic benefits that even the DOTC recognizes: “Most urban railway systems in the world are not financially viable, but are implemented for their socio-economic benefits. Our Manila Light Rail Transit (LRT) systems promote the use of high-occupancy vehicles, thereby reducing traffic congestion on the corridors served, local air pollution and greenhouse gases emissions. Besides the substantial savings in travel time cost of LRT riders, the LRT systems reduce infrastructure investment in Metro Manila road expansion”. (See “Fare Restructuring Executive Report”)

When monetized, it is possible that the benefits far outweigh the government subsidies as related literature suggests. In its study on German rail subsidies, Swiss researchers found out that rail upgrades resulted to about 1.75 billion euros in benefits from road accidents prevention and lower nitrogen emission. (See “Does Supporting Passenger Railways Reduce Road Traffic Externalities?”)

The Japan International Cooperation Agency (JICA), in its separate study, calculated that traffic congestion in Metro Manila costs Php2.4 billion daily in 2012. With a reliable public transport system comprised of a large and efficient railway system, the losses can be reversed. Government can even save as much as Php4 billion daily by 2030, according to JICA. (See “Roadmap for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas”) Thus, instead of reducing the subsidies, government should even invest more in the expansion and development of the rail system.

Third, commuters have already been bearing their share of the burden by paying for the full cost of operation and maintenance (O&M). The farebox ratio or the proportion of fare revenues to total O&M cost measures this. A farebox ratio of 1.0 means that fare revenues cover 100% of O&M cost. From January to September this year, the average farebox ratio of LRT 1 and 2 is pegged at 1.10. Meanwhile, latest publicly available data show that the MRT 3 has a farebox ratio of 1.17 in 2012.

In relation to O&M costs, Filipino rail commuters actually pay more than commuters in North America and Europe where the public transportation system is heavily subsidized. In the US, for instance, the farebox ratio ranges from 0.12 to 0.71. In Canada, its 0.39 to 0.78; Spain, 0.41 to 0.90; France (Paris), 0.30; Germany (Berlin), 0.17; and the UK (London), 0.91. (See Farebox recovery ratio, Wikipedia)

Fourth, government expenses in LRT/MRT are bloated not because of low fares. As just mentioned, current fares, in fact, already pay for the cost of O&M. In the case of MRT, the costs swelled because of the onerous financial obligations of government arising from its build-lease-transfer (BLT) contract with the privately owned MRT Corporation (MRTC). Under this deal, government agreed to pay for the guaranteed annual 15% return on investment (ROI) of the MRTC in the form of equity rental payments (ERP), as well as the settlement of MRTC’s tax liabilities.

These financial obligations under the BLT comprise about 81% of total MRT 3 expenses, while only 19% go to O&M (based on 2012 latest available data). (See Table 4) The DOTC admitted that the MRT fare hike would go not to the much-needed improvements of the infrastructure, amid glitches and breakdowns, but to serve government’s questionable financial obligations to the MRTC. Note that half of the projected Php2-billion ‘savings’ that government expects to generate from the fare hikes will come from the MRT.

Table 4

Summary of MRT 3 financial operations, 2012

Items MRT % distribution
Expenses (Php billion) 9.33 100.0
     Opex 1.82 19.5
     BLT financial obligations 7.51 80.5
         Taxes, duties & fees 2.01 21.5
         Equity Rental Payment & admin costs 5.50 59.0
Revenues (Php billion) 2.16 100.0
     Rail revenues 2.14 98.8
     Non-rail revenues 0.03 1.2
Farebox ratio (rail revenues/opex) 1.17
Source of data: DOTC

For LRT 1 and 2, bulk of the expenses goes to debt servicing with more than 47% and depreciation of the infrastructure with almost 16% (also based on 2012 data). (See Table 5) Government, through people’s taxes, shoulders these expenses since the LRT system is a public investment. But what makes the fare hike more unjust, particularly in the case of LRT 1 that has been recently privatized, is that the people will bear an increasing share of the debt-servicing burden even as the system generates private profits for the consortium of the MVP-Ayala group (which won the LRT 1 public-private partnership or PPP project) and their foreign backers and partners. Indeed, in the context of the PPP, LRT 1 commuters and all taxpayers (including those who do not use the LRT 1) are oppressed with regular and automatic fare increases and profit guarantees and generous tax exemptions granted by the Aquino administration to the MVP-Ayala group. LRT 2, which is also in the PPP pipeline, will soon be under a similar situation.

Table 5

Summary of LRT 1 & 2 financial operations, 2012

Items LRT 1 & 2 % distribution
Expenses (Php billion) 8.37 100.0
     Opex 3.03 36.2
     Depreciation 1.33 15.9
     Capex 0.06 0.7
     Financial obligations 3.95 47.1
         Loan payments 2.43 29.1
         Interest expenses 1.51 18.1
Revenues (Php billion) 3.67 100.0
     Rail revenues 3.44 93.8
     Non-rail revenues 0.23 6.6
Farebox ratio (rail revenues/opex) 1.13
Source of data: DOTC

Applying these data to the estimated full cost that LRT 1 and 2 and MRT 3 passengers must pay will suggest that:

  • Of the Php49.60 per passenger that represent the full cost of an MRT 3 ride, about Php40.18 represent the onerous BLT financial obligations of government. This means that without such onerous obligations, the cost would only be Php9.42 per passenger, Php2.98 smaller than the current average fare for MRT 3 of Php12.40; and
  • Of the Php35.70 per passenger that represent the average full cost of an LRT 1 and 2 ride, about Php22.49 represent debt servicing and depreciation. If these will not be passed on to the commuters, the cost per passenger would only be Php13.21, Php1.07 lower than the current average fare for LRT 1 and 2 of Php14.28.

Clearly, there is no need for a fare hike if only government will fulfill its mandate of providing a reliable and affordable mass transportation system and avoid passing on to the commuters unjust, onerous and unnecessary burden. So why then is government adamant in pushing the fare increases?

PPP and the user-pays principle

The Aquino administration’s PPP program is the underlying reason for the LRT/MRT fare hike. President Aquino announced the supposed need for a fare hike in his first State of the Nation Address (SONA) in 2010 together with his declaration of PPP – including for Metro Manila’s light rail system – as his administration’s centerpiece economic program. A fare hike and mechanisms to automatically implement and guarantee fare adjustments are meant to make PPP for the light rail system palatable to private investors.

The so-called ‘user-pays’ principle that the DOTC cited in its order is a neoliberal principle that simply means government will no longer be responsible in ensuring public access to LRT/MRT as a key infrastructure and public good. Subsidies will eventually be totally eliminated and commuters have to pay for the full cost, i.e. operation, maintenance, capital expenditures, debt servicing, etc. that would push fares to onerous and exorbitant levels. A review of the concession agreement between the Aquino administration and the MVP-Ayala consortium for LRT 1 shows how the user-pays principle will operate and oppress the commuters and general public. It is unjust because fares in LRT and MRT as a mode of mass transportation and as a public good should be premised on the people’s ability to pay and overall economic and social benefits, and thus should be supported through a progressive distribution of public resources.

Private profits at public expense

A closer examination of the profile of LRT/MRT commuters will further illustrate the oppressiveness of the user-pays principle while further supporting the need for a public good approach to Metro Manila’s light rail system. A previous study by JICA showed that almost 32% of LRT/MRT users during weekdays are students; 49% are employees and workers; and almost 10% are unemployed. This means that 9 out of 10 LRT and MRT commuters are ordinary income earners, students and jobless/job-seekers, and need substantial government support. (See “Chapter 8: Passenger Ridership Characteristics and Origin-Destination Patterns,” Mega Manila Public Transport Study, April 2007)

While commuters are burdened with unnecessary and oppressive fare hikes, big business interests will cash in big time from LRT/MRT. These business interests have close ties with the Aquino administration and in fact are the leading players in the PPP program of government. The MVP group, which also represents Indonesia’s Salim business empire, has economic interests in MRT 3 and together with the Ayala family and Australian investment giant Macquaire, will expand, operate and maintain LRT 1 through the Light Rail Manila Consortium (LRMC).

Meanwhile, the MVP-Ayala group is also positioning itself to corner the LRT 2 PPP deal, which is up for bidding this year. Other prospective bidders include San Miguel Corp. (SMC) of presidential uncle Danding Cojuangco and his right hand man Ramon S. Ang, and Japan’s Marubeni Philippines Corp. as well as other big local tycoons such as Aboitiz, Consunji and George Ty.

Petitions at the SC

Various groups have already expressed plans to question the LRT/MRT fare hike before the Supreme Court (SC). It is interesting to see how promptly the SC will act on the petitions that will be filed considering the urgency of the matter. Note that every day that passes without a temporary restraining order (TRO) on the new fares means millions of pesos are being collected from the commuters. These may no longer be returned to them in case the SC decides against the fare hike. It is extremely necessary, therefore, that the SC immediately issues a TRO to mitigate the harm on the commuters.

Another issue that must be closely watched in relation to the SC is the LRT 1 concession agreement. Assuming that the SC issues a TRO and later declare the fare hike illegal, this will not prevent the MVP-Ayala group from still collecting their additional revenues from the fare hike through ‘deficit payments’ from government under the LRT 1 PPP deal. This will make the SC decision practically futile unless the concession agreement between the MVP-Ayala group is also declared illegal. ###

Heartless, greedy Meralco thrives under privatized, deregulated regime

meralco ganid

With the country still reeling from the devastation wrought by Yolanda, the people are facing yet another disaster – the calamity of soaring prices. People ask: Are the oil companies and Meralco (Manila Electric Co.) that heartless and greedy?

Alas, this is the cruel reality of neoliberal economics, of deregulation and privatization. The market is regarded as greater than the people, and government allows the heartless and greedy to reign.

Price hikes

Starting December, oil firms implemented a record-high increase in LPG prices. Petron hiked its LPG price by P14.30 per kilogram (kg); Liquigaz, P13; and Solane, P11. These translate to an increase of P121 to P157 for an 11-kg LPG tank commonly used by households.

Then the oil companies jacked up the price of other petroleum products. Diesel rose by P1.35 per liter; kerosene, P1.20; and gasoline, P0.35. This week, oil firms implemented another round of oil price hikes with diesel rising by 30 centavos. Prior to the latest increases, the price of diesel has already jumped by P4.08 per liter this year and gasoline by P2.04, based on the Department of Energy’s (DOE) monitoring.

And of course, Meralco said that it will implement a hefty increase in power rates this month. The distribution utility said that the hike in its generation charge could reach P3.44 per kilowatt-hour (kWh) but it will be implemented in installments to mitigate the impact.

The Energy Regulatory Commissioned (ERC) allowed Meralco to collect the increase in three tranches. That would be P2 in December, P1 in February and P0.44 in March.

But generation is just one component of the electricity bill that will rise. Also increasing is the transmission charge, which will go up by P0.04 per kWh. Taxes (value-added tax and local franchise tax), system loss charge, lifeline rate subsidy and others, which are a percentage of generation and transmission costs, will also add another P0.67 per kWh in the Meralco bill.

Thus, the actual rate hike to be felt by consumers would be P2.41 per kWh in December, P1.21 in February and P0.54 in March.

However, while the sudden impact of a one-time huge rate hike will be mitigated, consumers will end up paying more. According to the ERC, Meralco may charge its customers an interest on the entire deferred amount or the so-called carrying cost.

And even at a staggered basis, the rate hike would still be tremendous. A 200-kWh household, for instance, will see its Meralco bill jump by P482 this month.

The increase in power bill creates a domino effect on the prices of other basic goods and commodities. Contrary to propaganda of government and big business, wages are not the main driver of price hikes but electricity cost. The Employers Confederation of the Philippines (Ecop) said that power accounts for as much as 40% of production cost.  With the big Meralco rate hike, Ecop also warned of higher prices.

‘What can we do?’

The official who is supposed to be in charge over the oil and power sectors – Energy Secretary Jericho Petilla – had this to say to the restless public: “Kung nagkasabay-sabay silang lahat, hindi yan pinlano, it just happened. What can we do…? Don’t buy, kung namamahalan kayo!”

Of course, Meralco’s customers could not choose not to buy electricity from Meralco. They have no choice. Petilla’s remarks sum up government’s indifference to the plight of consumers, which the Aquino administration has repeatedly displayed in its almost four years in power.

By themselves, the record increases in petroleum prices and electricity bills are already oppressive. But what makes them doubly onerous is that the country is still recovering from Yolanda’s onslaught. Government has not even fully accounted the total number of dead, which now stands at 5,796, according to the latest official count.

Note that this is not the first time that these same companies displayed total disregard of public interest and welfare. Last year, amid the torrential, Ondoy-like rains that poured over Metro Manila, oil companies and Meralco also increased prices.

Price control

Ironically, the country is supposed to be under a state of national calamity as declared by President Benigno Aquino III through Proclamation No. 682. But the string of record price hikes shows that big business can act with impunity.

The reason is that the price control aspect of the proclamation is limited by law and the overall deregulation policy of government. Under Republic Act (RA) 10623 (which amended RA 7581 or the Price Act), the price of LPG may be controlled under a state of calamity but only for 15 days. The price of LPG and other petroleum products is deregulated under RA 8479 or the Oil Deregulation Law.

Electricity rates are also not included among the basic necessities that government may control during a state of calamity. Through RA 9136 or the Electric Power Industry Reform Act (Epira), government deregulated the setting of the generation charge of Meralco and other distribution utilities. Epira also deregulated rate-setting through the wholesale electricity spot market (Wesm).

To pave the way for the deregulation of the oil and power industries, government privatized Petron Corp. and the National Power Corp. (Napocor).

The Oil Deregulation Law and Epira trump the Price Act and any proclamation of a state of calamity. Apparently for government, not even the strongest typhoon ever recorded could change that. Both policies were imposed on the country by foreign creditors led by the World Bank and the Asian Development Bank (ADB).

Artificial tightness

The huge Meralco rate hike is a perfect example of how privatization, deregulation and lack of state control over key sectors burden the consumers. Had government not relinquished effective control over energy development to profit-oriented private business, the public would have been spared from the impending hefty increase in power rates.

The supposed tight energy supply is only artificial. It could have been prevented if the maintenance shutdown of the country’s energy sources and power plants were effectively controlled by government. But because it relies too heavily on private business, government has no handle in determining the maintenance schedule of power plants in a way that ensures energy security and public interest.

For instance, the maintenance shutdown of Malampaya started on Nov. 11, the same date that President Aquino put the country under a state of calamity. Energy officials already knew then that it will trigger a big spike in power rates. At that time, energy supply in Luzon was already tight due to a series of maintenance shutdowns of major power plants.

Plant shutdowns

Meralco, in fact, already implemented a large increase in power rates in November when it jacked up its rates by P1.24 per kWh. The utility giant said that the maintenance shutdown of several big power plants was the main factor behind the rate hike. These were Unit 2 of Malaya power plant in Rizal (Dec. 2012 to Oct.); Unit 2 of Pagbilao plant in Quezon (Aug. to Nov.); Unit 1 of Sual plant in Pangasinan (Sep. to Oct.); and Sta. Rita Module 20 (Oct. 23-28).

In addition, a number of power plants were also on forced outage. These were San Lorenzo Module 60 (May to Mar. 16, 2014); Unit 1 of Masinloc plant in Zambales (Sep. 25-28); Unit 2 of Calaca plant in Batangas (Sep. 29 to Oct. 1); Quezon Power (Oct. 5-6); and Unit 1 of Sual plant in Pangasinan (Oct. 22-26).

Monopoly and manipulation

But instead of ensuring that Malampaya will remain online, especially after Yolanda, government stood idly as the source of 40% of Luzon’s power needs was cut off. The shutdown of Malampaya and of the other power plants, said Meralco, forced its suppliers Sta. Rita and San Lorenzo power plants to use more expensive fuel.

The utility giant claimed that it was also compelled to buy more from the Wesm where electricity is being sold at a higher price. Meralco said that its exposure to Wesm will increase from less than 5% to 12% due to the Malampaya shutdown.

Note, however, that the private investors who control Meralco are the same investors that control the power plants as well as the traders in the Wesm. The 1,000-megawatt (MW) Sta. Rita and the 500-MW San Lorenzo plants are owned by the Lopez group, which also has a 3.9%-stake in Meralco. Power plants associated with the Lopez group also account for around 18% of the capacity registered at Wesm.

Illegitimacy of rate hikes

The concentration of ownership over power generation and distribution, and even over the spot market, raises a valid question on the legitimacy of the power rate hikes. The same thing can be said in the case of the oil industry wherein basically just four companies lord over more than 80% of the industry.

Thus, the move of the House of Representatives to investigate Meralco’s rate hike is a welcome development. Officials of the distribution utility, the power plants, and also the DOE should explain the circumstances behind the huge increase.

There is certainly a need to closely look at the shutdown of Malampaya and the power plants as well to determine if the big power investors are abusing the public through their unhampered control over the energy sector.

But more importantly, policy makers must reconsider government’s energy development program that is hinged on deregulation and privatization. Even without a super-calamity like Yolanda, neoliberal policies like Epira and the Oil Deregulation Law are already greatly oppressing the public. ###

Read more about Epira and the Philippine power industry here and Oil Deregulation Law here

 

Water arbitration: issues and implications

It's not enough that there are well-meaning regulators who will monitor the water companies. The long-term solution is to reverse MWSS privatization. (Photo from the Water for the People Network)
Arbitration shows that it’s not enough that there are well-meaning regulators who will monitor the water companies. The long-term solution is to reverse MWSS privatization. (Photo from the Water for the People Network)

Updated, first published as IBON Features

Last 24 September, Manila Water Co. Inc. officially filed a dispute notice before the International Chamber of Commerce (ICC) questioning the decision of the Metropolitan Waterworks and Sewerage System (MWSS) – Regulatory Office (RO) to reduce water rates. Maynilad Water Services Inc., meanwhile, will also file soon its own dispute notice that shall set off arbitration proceedings.

(Download a PowerPoint presentation on the arbitration process here)

What does this mean and what are the implications?

One is that aside from paying the costs of arbitration, consumers may have to wait as much as three months (90 days) or possibly even longer to enjoy the lower water rates ordered by regulators. That, of course, optimistically assumes that the lower rates will be implemented at all. There is the possibility that the lower rates could even be reversed after arbitration.

Another is that even when the lower rates are finally upheld, there is no guarantee that the money amassed by the water firms during the delay in its implementation and charging more than what they should have will still be returned to the consumers. The new rates are supposed to have taken effect beginning January 1, 2013 but there is still no mechanism for how to treat the overcharging at current higher rates by water firms since the start of the year.

Consider further that arbitration of a Rate Rebasing dispute should be decided by not later than September 30 of the year in which the dispute is referred to the panel per the Concession Agreements (CA) between the private concessionaires and the MWSS. A decision in so short a time is unlikely to happen though.

(Download a copy of the Concession Agreement and related documents here)

Already greatly exposed as being contrary to public interest, the privatization of Metro Manila’s water system is further being bared as exceedingly anti-people with the concessionaires’ push for arbitration.

It also belies claims that privatization can benefit the public if only strict regulation is applied. In contrast, the current controversy shows that there can be no effective regulation under privatization. In the case of MWSS, the privatization contract or CA was designed to undermine government regulation as decisions are ultimately made by an Appeals Panel where the concessionaire and a representative of foreign business interests have a say.

Appeals Panel

Arbitration is a dispute resolution mechanism provided under Section 12.2 of the CA. It is the last resort for concessionaires and the MWSS to settle disagreements, which could no longer be resolved through negotiation, on the interpretation and implementation of the CA. Arbitration proceedings under the CA are in accordance with the United Nations (UN) Commission on International Trade Law.

An Appeals Panel handles the arbitration proceedings. According to Section 12.3 of the CA, its members include one representative each designated by the concessionaire and the MWSS-RO. A third member acts as the Chairman of the Appeals Panel and his or her appointment depends on the nature of the dispute.

For major disputes such as the ongoing controversy arising from the Rate Rebasing exercise, the President of the ICC will appoint the Chairman. For minor disputes, the representative of the concessionaire and the RO in the Appeals Panel will designate the Chairman. Foreigners can be appointed as members of the Appeals Panel, including as Chairman.

Among those being eyed to represent the RO in the Appeals Panel are former Supreme Court (SC) Chief Justice Reynato Puno, former SC Associate Justice Jose Vitug, and University of the Philippines (UP) College of Law Dean Danilo Concepcion.

But the RO representative is easily outnumbered by the two representatives from the private sector, i.e. the concessionaire and the Chairman appointed by the ICC. Being from the business sector, the ICC representative could be presumed to be more partial to the interest of the concessionaires than of the public. Decisions by the Appeals Panel need not be through consensus but by a simple majority vote.

Moreover, consumers are not represented in the Appeals Panel. They also do not have access to the proceedings which are done behind closed doors.

Also, under Section 12.5 of the CA, government regulators and the concessionaires agreed to waive their right to appeal the decision of the Appeals Panel through any court, judicial or regulatory body. This illustrates how, under MWSS privatization, government has abdicated its sovereign power to regulate and set policies to protect the public interest.

RO resolution

To recall, the RO denied the rate hike applications of Maynilad (Php8.58 per cubic meter) and Manila Water (Php5.83 per cu. m.). Instead, the regulators ordered the concessionaires to reduce their basic charge by Php0.29 (Maynilad) to Php1.45 (Manila Water) per cu. m. every year until 2017.

(Download a copy of the RO resolutions: Maynilad, Manila Water)

The concessionaires’ rate hike proposals and the subsequent RO decision form part of Rate Rebasing. It is an exercise to determine water rates that will allow the concessionaires to recover their expenses and assures them of a profit rate. Rate Rebasing is done every five years throughout the 40-year lifespan of the CA.

While still falling short of correcting and reversing the 16 years of abuse and oppression of consumers under MWSS privatization, the RO’s decision is still a welcome development and would not have been possible without strong public pressure. It affirmed many of the issues long being raised by anti-MWSS privatization advocates. Aside from the highly controversial income taxes (additional data and discussion here), the RO resolution also covered other questionable items being charged to consumers such as the cost of unimplemented projects, donations and advertising, and bloated costs of projects, among others.

On top of these disallowed items, the RO also ordered the concessionaires to stop charging the Php1 per cu. m. Currency Exchange Rate Adjustment (CERA). Thus, the immediate impact of the RO resolution on water bills by October should be a reduction of Php1.29 per cu. m. for Maynilad customers and Php2.45 for Manila Water’s.

Derailing the rate cuts

But such rate cuts will only become effective if the RO resolutions are not derailed by the arbitration proceedings. The concessionaires argue that arbitration means that the lower rates will not be implemented yet. And worse, it may even be reversed in case the Appeals Panel decides in favor of Maynilad and Manila Water.

In a paid ad (see image below), Maynilad cited Section 7.1 of the CA. This section pertains to MWSS’s obligation to “cooperate with the concessionaire” on, among others, the implementation of changes to standard rates as instructed by the RO or by the Appeals Panel. According to Maynilad, the said provision means that the Appeals Panel will have the final say on the new rate in case the RO-determined rate is brought to arbitration. Thus, current rates will continue to apply until the Appeals Panel has made a decision.

maynilad paid ad - 16 sep

Regulators are questioning such interpretation of the CA. But if the concessionaires were right, consumers will continue to pay water bills bloated by the income taxes of and other onerous charges imposed by the water firms. Section 12.4 (vi) of the CA says that unless stated otherwise the Appeals Panel has 90 days to make a decision from receipt of a dispute notice. But it can also opt to extend the proceedings if mutually agreed by the disputing parties although a decision should be made not later than September 30 of the year in which the rebasing dispute is referred to.

On top of all these is the issue of arbitration costs which under Section 12.6 of the CA shall be all shouldered by the public sector – i.e. government through the MWSS and the consumers through the pass-on charges that can be imposed by the concessionaires. Arbitration costs include the fees and expenses of panel members and legal, economic or technical consultants retained by the Appeals Panel. In its 16-year history, arbitration proceedings have been conducted thrice with the total cost reaching P140.04 million.

Clearly, it is not enough that there are well-meaning regulators who will monitor the water companies. By design, MWSS privatization was meant to protect the interests of the private investors, making effective regulation practically impossible. As water advocacy groups like the Water for the People Network (WPN) assert, lower water rates can only be realized through effective state control. IBON Features

Sona 2013: Silent on water tax, all-out on LRT/MRT fare hike

Photo by Cheryl Favila/Reuters
Photo by Cheryl Ravelo/Reuters

Two things stood out in the State of the Nation Address (Sona) that reaffirmed the big business and neoliberal bias of President Benigno Aquino III. First, which stood out because of its conspicuous absence in the Sona, is the issue of passed on income taxes and other expenses by Manila Water and Maynilad. Second is the all-out push by Aquino to hike the fares in LRT and MRT, which is tied to the regime’s public-private partnership (PPP) or privatization program.

Incidentally, both involve two influential business interests that are widely seen to have close ties with the Aquino administration – the Ayala family and the group of Manny V. Pangilinan (MVP). The Ayalas control Manila Water while the MVP group controls Maynilad. These big business interests have also set up the Light Rail Manila Consortium, one of the bidders in the scheduled privatization of LRT 1 this month.

Double standards

Aquino’s evasion of the water income tax issue underscores the double standards of his daang matuwid and anti-corruption rhetoric, which as usual was again prominent in his speech. In his Sona, the President praised the Metropolitan Waterworks and Sewerage System (MWSS) for instituting reforms in the agency. It will be recalled that in his first Sona, Aquino hit the water agency for hefty bonuses enjoyed by its officials. Such anomaly has already been addressed, said Aquino, citing the almost P2-billion income of MWSS last year from a P34-million deficit in 2010. He also praised Sec. Rogelio Singson, who used to be president and CEO of Maynilad, for addressing corruption in the Department of Public Works and Highways (DPWH).

But while extolling the MWSS and Singson for the supposed good governance reforms in their agencies, Aquino did not mention the onerous Concession Agreement that involved MWSS and Singson and made consumers pay for the income taxes, corporate donations, advertisements and other expenses of Maynilad and Manila Water. More importantly, the President said nothing on what he intends to do with the said anomalous PPP contract. Did Sec. Rene Almendras, who as former Manila Water president was also involved in implementing the controversial Concession Agreement had a hand in determining the content of the Sona in his capacity as Secretary to the Cabinet?

The presence of former top executives of the Ayalas and MVP in key Cabinet positions and the PPP as centerpiece economic program of the Aquino administration explain the deliberate silence of the President on the controversy hounding Manila Water and Maynilad. While the MWSS-Regulatory Office is disputing the private water concessionaires on the issue of income taxes and other pass-on charges, it is still Malacañang that will be decisive ultimately.

Through their paid ads weeks before the Sona, Manila Water and Maynilad have warned not only the regulators but Malacañang itself on the supposed sanctity of privatization contracts. They know that the privatization of MWSS is regarded as the barometer of PPP in the Philippines and a decision detrimental to the water concessionaires (and favorable to the consumers) will seriously undermine the PPP initiatives of Aquino. Aquino’s refusal to issue a categorical statement backing the widespread public clamor against the questionable charges of Manila Water and Maynilad in his Sona speaks volumes about where the President’s loyalty lies. Malacañang apparently does not want to upset the Ayalas and the MVP group which have been among the most aggressive in securing PPP contracts from government.

Fare hike and privatization

While Aquino was silent on the abusive pricing of Manila Water and Maynilad and the oppressiveness of the Concession Agreement, the President was clear in his relentless push to increase the fares in LRT and MRT. Like the MWSS, the LRT and MRT fare hike was also among the controversial issues raised by Aquino in his first Sona.

Reiterating his position in 2010, Aquino claimed that increasing the LRT and MRT fares to approximate air conditioned bus fares is justified. He raised the argument repeatedly pointed out by Department of Transportation and Communications (DOTC) officials – that government is supposedly subsidizing P25 (LRT) to P45 (MRT). Freeing up such subsidies means more funds for social services that will benefit the entire country and not only the Metro Manila commuters, argued the President. The DOTC has earlier announced that it will implement a P10-fare hike to be implemented in two tranches.

But it has been pointed out that the supposed subsidies, in the case of MRT, actually go to service debts arising from the guaranteed profits and sovereign guarantees given by government to the train system’s former private operators. LRT lines, on the other hand, are generating enough revenues to cover its maintenance and operation, although debts also bloat the total costs. Debts, however, should not be passed on to commuters as mass transportation is a public investment that generates economic and social gains.

Aquino and his transportation officials are not saying it, but the real reason behind the persistent drive to raise LRT and MRT fares is the government’s grand PPP program for Metro Manila’s light rail system. It will start with the P60.63-billion LRT 1 extension and privatization, the biggest PPP project so far of the administration. Increasing the fares would demonstrate government’s resolve and ability to regularly adjust fares, despite its unpopularity, to make the system profitable as planned in the draft 35-year Concession Agreement for LRT 1.

The said LRT 1 Concession Agreement is as onerous as the MWSS Concession Agreement. Its latest draft (as of June 27) still contains the so-called regulatory risk guarantee. Section 20.4.a of the draft agreement allows the private LRT 1 operator to secure “deficit payment” from government (i.e., taxpayers) when the approved fare is lower than the “notional fare”. The notional fare is a pre-determined fare level set out in the Concession Agreement that will ensure the commercial viability of LRT 1 and the profits of its private operator. This effectively deregulates the setting of fares and renders meaningless any intervention from Congress, the courts and other regulatory agencies.

Aside from the Ayala-MVP group, other LRT 1 bidders are presidential Uncle Danding Cojuangco’s SMC Infra Resources Inc.; the Consunjis’ DMCI Holdings Inc., which also lists Japanese giant Marubeni Corp. as one of its partners; and the MTD Samsung Consortium of Malaysia and South Korea.

Aquino packaged his Sona as the Sona of the people. He claimed that inclusive growth is behind every initiative of his administration. The past three years say otherwise. His silence on the Manila Water and Maynilad controversy, his all-out push for LRT and MRT fare hike, his rabid promotion of neoliberal privatization, all say otherwise. (END)

Maynilad, Manila Water ads further expose anti-consumer MWSS privatization

water protest 3

With their full-page ads (see images below) published in various newspapers defending the unscrupulous practice of passing on their income taxes to consumers, Maynilad and Manila Water unwittingly affirmed what anti-privatization advocates have been saying all along.

From the onset, groups like the Water for the People Network (WPN) have been arguing that the crux of the issue on exorbitant water rates is the Concession Agreement, or the privatization contract, between the Metropolitan Waterworks and Sewerage System (MWSS) and the concessionaires. This contract, a form of public-private partnership (PPP), introduced a pricing mechanism that allowed full-cost recovery and guaranteed profits for Maynilad and Manila Water, all at the expense of consumers.

maynilad paid ad - pdi jul 9

manila water paid ad - philstar jul 9

(Download a copy of the Concession Agreement and related documents here)

Unjust and anti-consumer

The concessionaires got it all wrong when they argued that the inclusion of income taxes in the determination of water rates is legitimate because it is sanctioned by the Concession Agreement. They are banking on the so-called sanctity of contracts and blatantly ignore the larger and more fundamental issue of public interest. Such posture only underscores how unjust and anti-consumer the privatization of MWSS is, and exposes the lack of public accountability of profit-driven water service providers.

To recall, the WPN disclosed that the concessionaires passed on some P15.31 billion (Manila Water, P7.36 billion; Maynilad, P7.95 billion) worth of income taxes to their consumers from 2008 to 2012. The cost of future income taxes, estimated at P152.87 billion (Manila Water, P76.96 billion; Maynilad, P75.92 billion) from 2013 to 2037 (the end of the Concession Agreement) has been included as well in the monthly water bills.

Maynilad and Manila Water thought that the Concession Agreement is their best defense against all the flak they have been getting. In reality, however, they just inadvertently bolstered the position of anti-privatization advocates that the long-term solution to our problem of exorbitant water rates is the termination of the Concession Agreement and the reversal of MWSS privatization.

The MWSS-Regulatory Office (MWSS-RO), to which the paid ads are apparently addressed, will likely counter that, like Maynilad and Manila Water, they do respect the Concession Agreement. For the regulators, the issue is simply the proper interpretation of the privatization contract. The concessionaires, for instance, interpret Philippine business taxes referred to in the Concession Agreement as including income taxes while the MWSS-RO says otherwise.

Such dispute may be resolved “legally” through arbitration proceedings (an internal dispute settlement mechanism under the Concession Agreement) or the regular courts. But even when the result of these legal processes favors the regulators, the basic issue remains unresolved – why, in the first place, are the business taxes of the private water monopolies being shouldered by the consumers?

Other onerous provisions

And lest we forget, while the income tax is the most controversial, it is just one of the many questionable provisions of the Concession Agreement. The rate rebasing model, for example, is onerous because it allows the concessionaires to charge the cost of future expenses to consumers. Maynilad and Manila Water pass on to consumers not only the cost of projected income tax but also the cost of future projects. Some of these projects never materialized but were paid for anyway by the consumers. Two such unimplemented projects that have charged to consumers are the P48-billion Laiban Dam and the 15 CMS Water Source Replacement projects.

The Concession Agreement was designed in such a way that tariffs are regularly adjusted to ensure the financial viability of MWSS privatization. Aside from the rate rebasing every five years, the basic charge is also adjusted at the start of every year (January 1) to account for inflation, as measured by the consumer price index (CPI) for the month of July of the preceding year. It represents a double-whammy for consumers as they bear the brunt of both the inflation (rise in prices of basic goods and services, including water) and the rise in water rates due to inflation.

Under the contract, the basic charge is adjusted as well every quarter to reflect fluctuations in the foreign exchange (forex) rate, which is listed in the water bill as FCDA (foreign currency differential adjustment). The FCDA is being charged to protect Maynilad and Manila Water from losses in case of sharp declines in the value of the peso against foreign currencies that could bloat the concessionaires’ foreign loans as well as the concession fees.

While the FCDA could be negative, e.g. a reduction in the basic charge when the peso is stronger than other currencies (such as the announced rate reductions by the concessionaires last month), this is offset by another currency-related charge – the fixed P1 currency exchange rate adjustment (CERA). Burdening the consumers with the cost of forex fluctuations is already oppressive by itself but worse, consumers are even being double-charged for currency fluctuations with the collection of the FCDA and the fixed CERA. It is estimated that CERA collections have already reached P7.2 billion of which P3.4 billion went to Maynilad and P3.8 billion went to Manila Water.

Furthermore, the private concessionaires are also allowed to collect additional fees resulting from so-called extraordinary price adjustment (EPA). The EPA protects the profits of the concessionaires by charging additional fees to the consumers to cover for the financial consequences of “unforeseen events” such as changes in national laws or regulations and force majeure events (calamities, conflict, etc.), among others.

On top of these regular and guaranteed adjustments, the concessionaires collect as well the environmental charge which is equivalent to 20% of the basic charge. Maynilad is currently collecting an environmental charge of P6.93 per cu. m. while Manila Water is imposing P5.64. With the rate rebasing, the environmental charge could go up to P6.80 per cu. m. (Manila Water) to P8.63 (Maynilad). The concessionaires explain that the environmental charge pertains to additional service charges collected from consumers for the mitigation of environmental impacts in the course of water treatment and distribution and wastewater operations.

Again, imposing additional burden on consumers for the cost of something that is inherently a part of operating a water system is unreasonable. Worse, it appears that Maynilad and Manila Water are still negligent of their environmental obligations even as they impose the environmental charge. In August 2012, the Court of Appeals (CA) affirmed the P29.4-million fine imposed by the Department of Environment and Natural Resources (DENR) on MWSS, Maynilad and Manila Water for violating the Clean Water Act.

Foreign creditors

To better understand why the Concession Agreement was designed in a way that assures the commercial viability and profitability of Metro Manila’s water distribution system, we need to review the rationale behind the MWSS privatization. The main impetus for the privatization of MWSS in 1997 was the agency’s huge debts incurred from the World Bank, the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC). MWSS debts from the three international financial institutions (IFIs) reached around $800 million prior to privatization. Privatization was used a conditionality by these foreign lenders for new loans.

Thus, the overarching goal of privatization was not to make water services more accessible and address the corruption and inefficiencies of MWSS but to ensure that the agency will not default on its debts. But Maynilad and Manila Water did not assume the responsibility of paying the debts of MWSS but will simply act as collectors from the consumers who will shoulder these debts. From these collections, the concessionaires will pay concession fees to MWSS which it will use to service its loans. Aside from raising the concession fees, Maynilad and Manila Water are also allowed to collect their profits from the consumers.

The IFIs played a key role in the privatization process. The World Bank, through its investment arm International Finance Corp. (IFC), acted as government’s consultant in the project. The IFC designed the Concession Agreement that the MWSS eventually signed with Maynilad and Manila Water.

Challenging Aquino’s PPP

Maynilad and Manila Water, by putting on the table the Concession Agreement, have upped the ante in this raging controversy on the income tax and other onerous charges. They have, in effect, challenged Malacañang to take a position on the matter of government’s contractual obligations with private investors. Indeed, the paid ads are addressed not only to the MWSS-RO but ultimately to President Aquino.

The concessionaires know that what is at stake for the Aquino administration is its centerpiece PPP program where government’s commitment to fulfill its contractual obligations is key to enticing and reassuring big investors. MWSS privatization, in fact, has been showcased by government to promote PPP. Also, the billionaires behind Maynilad and Manila Water, namely the group of Manny Pangilinan, the Consunjis and the Ayalas are among the huge business groups that are most active in participating in Aquino’s PPP initiative.

The controversy surrounding MWSS privatization is discrediting and undermining the entire privatization program of government and further exposing the anti-people character of PPP. This is bad news for Aquino, the economic elite and foreign creditors but certainly a welcome development for the people.

By the way, advertising costs are also being passed on by Maynilad and Manila Water to consumers. So we will also foot the bill of the expensive advertisements and media campaign of the concessionaires that intend to justify their abuses. Truly enraging!

Manila Water, Maynilad’s multi-million “pa-pogi” also charged to consumers

Maynilad donates to Pablo victims
Photo from Maynilad website

Last year, Maynilad donated P2 million and potable water to victims of typhoon Pablo in Mindanao. The West zone concessionaire of the Metropolitan Waterworks and Sewerage System (MWSS) also donated P1.82 million to help construct 1,500 houses for informal settlers in Parañaque. Meanwhile, Manila Water has been funding the Manila Water Foundation which had a budget of P14.82 million in 2012. The East zone concessionaire’s foundation implements livelihood programs, community disaster relief operations and even researches.

There is no issue with profitable companies like Manila Water and Maynilad being “charitable” and donating funds for mass housing and disaster relief. I can even forgive them for staging such acts of supposed kindness to boost their corporate image and reap brownie points in the process. But what is unforgiveable is when these pa-pogi campaigns worth hundreds of millions of pesos by the billionaire-owners of the concessionaires are still being charged to us, poor consumers. What is even more revolting is that they even profit financially from their purported acts of altruism.

These highly questionable expenses have been included in the calculations of Manila Water and Maynilad’s current basic rate hike proposals of P5.83 per cubic meter (cu. m.) and P8.58, respectively.

P279-M in donations, advertising

The various donations made by the MWSS concessionaires do not come from the pockets of Manny Pangilinan, the Consunjis and the Ayalas. They collect it from us through our monthly water bills. We don’t just pay for their income tax; we also pay for their charity work. Also part of their pa-pogi campaigns is advertising and promotion, the costs of which are also passed on to consumers. All in all, Manila Water and Maynilad passed on not less than P279 million of their advertising and promotion expenses and donations from 2008 to 2012.

Like the estimated P15.31 billion in passed-on income tax during the same period, the costs of advertising, promotion and donations have been inserted in the basic charge being imposed by Manila Water and Maynilad as recoverable costs under their operational expenses (Opex). While the amount pales in comparison with the huge sum of income taxes passed on to consumers, it is nonetheless as unconscionable and unjust. And again, like the income tax, the MWSS concessionaires did not simply pass on these expenses but even gained profits through a guaranteed rate of return on their recoverable expenses.

Out of the P279 million, advertising and promotion expenses of Manila Water represent P97 million, and for Maynilad, P140 million, based on documents from the MWSS – Regulatory Office (MWSS-RO). Maynilad also listed P42 million in donations that they included in their Opex while there’s no available data for Manila Water and probably tucked the said item under “Other expenses”. The regulators should conduct a further audit on this; they can begin with the annual budget of the Manila Water Foundation.

(See images below)

Mla Water advertising costs 2

Maynilad advertising costs 2

What exactly are advertising and promotion expenses? Maynilad described the said item, thus: “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.” Clearly, such expenses do not have anything to do with the provision of water services and passing the costs to us is blatantly anomalous and unreasonable.

Arbitration costs, too

The MWSS-RO has already declared that they will disallow the income taxes and donations as Opex items that Manila Water and Maynilad can recover from consumers. This is welcome news. Sadly, under the Concession Agreements entered into by MWSS with the concessionaires, the MWSS-RO has no real power to impose its decisions like real regulators. Manila Water and Maynilad can question the decisions of the MWSS-RO through the process of arbitration.

(Download a copy of the Concession Agreement and related documents here)

Under Article 12.2 of the Concession Agreement, all disagreements, disputes, controversies or claims that cannot be resolved through consultation and negotiation shall be settled through arbitration proceedings. The arbitration will be presided by a three-member panel composed of one representative each from the MWSS-RO, the concerned concessionaire and a chairman who shall be jointly appointed by the regulators and the concessionaire.

Meanwhile, Article 12.6 of the Concession Agreement states that the “Costs incurred by the Appeals Panel in connection with any proceeding (including the fees and expenses of panel members and legal, economic or technical consultants retained by the Appeals Panel), shall be apportioned between the parties as the Appeals Panel shall direct and the Concessionaire’s share of such costs shall be treated as an Expenditure”. (Emphasis added)

In other words, Manila Water and Maynilad can recover their expenses in the arbitration proceedings by passing on the costs to consumers as part of their expenditure. Since 1997, there have been three arbitration proceedings with the total expenses reaching more than P140 million. (See Table)

arbitration costs

It is important to emphasize that the MWSS-RO is just merely a creation of the Concession Agreement and is in fact being funded by Manila Water and Maynilad. The Concession Agreement’s Article 11.2 mandated the MWSS to allocate a portion of the concession fees paid by the concessionaires to fund the operation of the RO.

PPP contract

The Concession Agreement is a form of a public-private partnership (PPP) or privatization contracts that the MWSS entered into with the concessionaires in 1997 and will expire in 2037. The framework and model of setting water rates that allowed Maynilad and Manila Water to pass on highly questionable charges to consumers including their past and future expenses covering income tax, projects (many of which have never been implemented), as well as advertising, promotion and donations, among others.

Shall the 14.2 million consumers of Manila Water and Maynilad suffer 24 more years before our policy makers or Malacañang rescind this patently onerous and anomalous PPP contract? (End)