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


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

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

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)

Water rate hikes: Maynilad, Manila Water want P153 B in future income tax passed on to consumers

water protest 1

Income tax is not a form of investment and is in fact an obligation of Manila Water and Maynilad. Yet, they charge it on consumers and even profit from it.

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:

PNoy and the Big Water monopolies

PH water rates among Asia’s highest

Water shortage in Metro is beyond El Nino

PNoy and the Big Water monopolies

big water and pnoy

Daang matuwid pa ba when big business is practically running the government and profiting immensely at the expense of the people?

By July, the 14.2 million consumers of Maynilad Water Services Inc. and Manila Water Co. Inc. will have to shell out more for their water bill. If your household is consuming 30 cubic meters (cu. m.) a month, be ready to pay an additional P234 (if your service provider is Manila Water) to P342 (Maynilad). That’s how huge the looming rate hikes are. Apparently, the 42% annual increase in the profits of Maynilad and 18% for Manila Water in the past five years are not enough for the Big Water monopolies. They want more, at our expense, of course.

The increases are due to the so-called “rate rebasing”. It’s a rate adjustment process mandated by the 1997 privatization contract or the Concession Agreement between the MWSS and its private concessionaires – Maynilad and Manila Water. Under the Concession Agreement, the concessionaires are entitled to adjust their basic rates every five years throughout the 40-year contract to achieve a guaranteed rate of return. During the rate rebasing exercise, the concessionaires submit their previous five-year performance, their new five-year business plans and their proposed tariffs to implement it, which the MWSS-Regulatory Office (MWSS-RO) reviews and approves. Since the last rate rebasing exercise in 2007, Maynilad has been posting annual profits of P3.92 billion and Manila Water, P3.68 billion. During the public consultations, Manila Water said they expect to earn P5 billion annually in the next five years after the rate rebasing; Maynilad refused to disclose its anticipated profits.

Planned increases

According to regulators, Manila Water wants a rate hike of P5.83 per cu. m. and Maynilad, P8.58 (revised from the P10.30 reported earlier). But these refer to the basic charge only. If you look at your water bill, there are other items in it that will also increase when the basic charge is raised. The environmental charge, for example, is 20% of the basic charge. Then, there’s the foreign currency differential adjustment (FCDA), which accounts for the quarterly fluctuations in the foreign exchange (forex). The FCDA is negative when the peso gains against the dollar and is positive when the peso weakens. The FCDA is currently at negative 0.37% of the basic charge for Manila Water and negative 0.98% for Maynilad. The FCDA is expected to be positive as the dollar is gaining strength in recent months. Then, there’s also the value-added tax (VAT), which is 12% of the basic charge plus the environmental charge. Factoring in these other charges, the rate hike of Manila Water could reach P7.81 per cu. m. and Maynilad, P11.41 per cu. m. Thus, the estimated P234 to P342 increase for households consuming 30 cu. m.

The table below compares our estimated monthly bills today and after the rate hikes are implemented. (Note: The table has been revised to adjust the estimated monthly water bill for Maynilad customers using 10 cu. m.)

water rates current vs hiked revised

Unreasonable rate hikes

The rate increases being sought by Maynilad and Manila Water are unreasonable for two major reasons. First, the rate hikes cover not just the cost of past projects (which consumers also finance through water tariffs) but also include future expansion and improvement plans. This means that the private concessionaires want to charge consumers the cost of projects that are yet to be implemented. This is clearly anti-consumer and allows the abuses of Maynilad and Manila Water. In their previous rate rebasing exercises, the private concessionaires charged the costs of unimplemented projects to their consumers such as the Laiban Dam Project and the 15 CMS Water Source Replacement Project, among others. According to the MWSS-RO, the costs of unimplemented projects are recovered through succeeding rate rebasing exercises. If that is the case, then water rates should have been reduced during the 2007 rate rebasing. But this did not happen because the cost of new future projects as well as new assumptions in the business plans (population growth, demand, etc.) of the concessionaires negate the supposed cost recovery of unimplemented projects in favor of the consumers. The same scenario is expected in the ongoing rate rebasing exercise.

Second, the private concessionaires are earning profits at unreasonably rapid pace. Using the return on rate base (RORB), for instance, it appears that Maynilad and Manila Water are earning beyond the 12% limit imposed on public utilities. Estimates peg the RORB of the concessionaires at more than 14 percent. 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. Thus, the RORB of Maynilad and Manila Water could further go up beyond the estimated 14% if the total value of the old MWSS assets already built prior to privatization is excluded. Meanwhile, using the return on equity (ROE) as standard, it also appears that Maynilad and Manila Water are profiting tremendously from their operations. It is estimated, for instance, that Manila Water has an ROE of around 19% while Maynilad has about 45 percent. These are way higher than the ROE of those in other public utilities such as telecommunications (16%) and electricity (15%). The ROE is a measure of profitability wherein the net income is computed as a proportion of the equity or the investments poured in by the investors. Maynilad and Manila Water has a very high ROE because of the very high tariffs they set while a very large chunk of the cost of MWSS privatization is financed by loans (which are fully passed on to consumers) and not by their actual investments.

Big Water running the government

Alas, despite this really onerous burden awaiting us, we should not expect the Aquino government to step in and restrain the greed of Big Water. Maynilad and Manila Water managed to put their top officials in strategic Cabinet positions, advising the President on key government policies. Secretary Rogelio Singson used to be the president and chief executive officer (CEO) of Maynilad. He now heads the Department of Public Works and Highways (DPWH), where the Metropolitan Waterworks and Sewerage System (MWSS) is an attached agency. Secretary Rene Almendras used to be the president of Manila Water. He is now the so-called “Little President” of the Philippines, after a stint as chief of the Department of Energy (DOE). Almendras is reportedly one of the closest to Aquino, being in the innermost of the inner circle of the President.

Singson has the notoriety of generating the first political controversy faced by the Aquino administration. Just a week after taking over as DPWH Secretary, Singson appointed himself as ex-officio chairman of the Board of Trustees of the MWSS. While the move was obviously sanctioned by Malacañang through Executive Secretary Paquito Ochoa, Singson was forced to backtrack after his self-appointment as MWSS head was widely criticized due to conflict of interest. Prior to his appointment as DPWH Secretary, Singson, as Maynilad CEO, tried to seal a midnight deal with Efraim Genuino, Gloria Arroyo’s appointed chairman of the Philippine Amusement and Gaming Corp. (PAGCOR). It involved a water concession deal for the Bagong Nayong Pilipino Entertainment City in Parañaque City that would have reportedly deprived government of an estimated P3.6 billion in water fees. Days before Aquino’s inauguration, Genuino and Singson allegedly teamed up to lobby the MWSS Board to approve the deal because Maynilad was concerned that the new PAGCOR leadership under Aquino might not be as accommodating as Genuino. President Aquino, however, defended Singson, saying that he was satisfied with the Cabinet official’s, as well as PAGCOR’s, explanation that there was no contract yet.

Almendras, meanwhile, enjoys a close friendship with Aquino, which dates back to their Ateneo days. His current office, Cabinet Secretary, was created by the President to accommodate Almendras, whom Aquino had to remove from the DOE after a dismal performance underlined by the Mindanao power crisis. The office of the Cabinet Secretary used to be the office of the Cabinet Secretariat which simply facilitates information in Malacañang, according to a Philippine Daily Inquirer report. But Aquino transformed the office through Executive Order (EO) No. 99 and gave Almendras the mandate to among others, determine priorities in the Philippine Development Plan (PDP) and sit in the National Economic and Development Authority (NEDA) board executive committee and subcommittees on infrastructure, social development and investment. NEDA approves public-private partnership (PPP) projects such as MWSS’s Concession Agreements with Manila Water and Maynilad. Changes in the contract between the MWSS and the private concessionaires, including those that concern water rates, also require NEDA sanction.

Aquino indeed has deep ties with the Big Water monopolies. The Ayala family, which controls Manila Water, has a long history of close association with the Aquino family, dating back to the time of Aquino’s late mother Cory as Philippine President. Manny V. Pangilinan, who controls Maynilad, has done a number of mega business deals with presidential cousin and officially declared top Aquino funder in the 2010 polls, Tonyboy Cojuangco such as the PLDT and TV5 deals. MVP and the Ayalas are seen as among the major backers of Aquino in his presidential bid. So don’t be surprised that the chief executives of their business interests landed strategic Cabinet positions.

Don’t be surprised as well that Aquino made PPP or privatization his centerpiece economic program. PPP creates more opportunities for MVP and the Ayalas to further expand their business empires. In fact, Pangilinan’s group and the Ayala family are among the most aggressive in cornering PPP contracts being offered by administration. The Ayalas, for instance, clinched the very first PPP project of Aquino – the P1.96-billion Daang Hari-SLEX Link Road Project. Meanwhile, MVP and the Ayalas have teamed up to bid for the P60-billion extension and privatization of LRT 1, the largest PPP project of the Aquino administration. Incidentally, Malacañang is even using the privatization of MWSS as a showcase in promoting PPP. MWSS privatization is truly a showcase of how PPP can be so profitable for big business. But it’s also a showcase of how privatization can be so oppressive and onerous.

MVP’s Metro Pacific Investments Corp. (MPIC) holds 43% of Maynilad. The Consunji family, which also has close ties with Aquino, controls 25% through DMCI Holdings. Big foreign companies have a substantial share in Maynilad as well with MCNK JV Corp., a unit of Japanese giant Marubeni Corp., and Lyonnaise Asia Water Limited, a unit of French firm Suez, one of the world’s largest water companies, each holding a 16% stake. The Ayala Corporation, on the other hand, has a direct 43%-stake aside from the share being held by Philwater Holdings Co. Inc., which is 60% owned by Ayala and 40% by UK-based United Utilities. Other investors in Manila Water include another Japanese giant, Mitsubishi Corp. (8%) and the World Bank’s IFC (6%) as well as First State Investments of the UK (10%), Singapore-based global fund manager Aberdeen Asset Management plc (5%) and US-based equity mutual fund Smallcap World Fund Inc. (5%).

Daang matuwid pa ba when big business is practically running the government and profiting immensely at the expense of the people? Water rates today are about 585% to 1,119% higher than the initial rates when MWSS was privatized. Our water bill is now among the most expensive in Asia. Still, we face more increases that the Aquino administration will allow despite the harsh impact on the people and despite rising poverty and joblessness.

The Aquino administration, Maynilad and Manila Water must be held accountable for exploiting and oppressing the consumers. We have to end the greed of the Big Water monopolies of Ayala and Pangilinan and their foreign partners, and reverse the anti-people policy of MWSS privatization. (END)