Privatization, Water crisis

Questions on Manila Water’s compensation

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Still reeling from public backlash, Manila Water will now “voluntarily” compensate consumers affected by the water supply interruptions. The estimate is that the initial compensation will cost the Ayala firm Php150 million. That obviously is merely a drop in the ocean of Manila Water profits, so to speak. In 2018, it reported a net income of Php6.5 billion.

Everyone – including the senators, congressmen and even the MWSS chief regulator – is saying that Manila Water’s offer is not enough. There should be a rebate, per the concession agreement. Manila Water claims it will cooperate with regulators.

While efforts to make Manila Water to account are commendable, and recent developments on demands for compensation are welcome as immediate relief especially for poor consumers, important questions remain:

(1) How about Manila Water customers, or even Maynilad’s for that matter, who have been without 24/7 water supply even BEFORE the artificial water shortage happened? They number about 300,000, based on the private concessionaires’ own reports. Aren’t they entitled to compensation and rebate, too?

(2) If the basis of the compensation is the failure of Manila Water to fulfill its contractual obligations, who is accounting for more than 20 years of failure and neglect of BOTH Manila Water and Maynilad under MWSS privatization?

(3) If public pressure succeeds in seeking reasonable and just compensation – if there is ever such a thing for depriving people something as very basic as water in the name of profits – from Manila Water, does it mean water privatization actually works and all it takes is a vigilant public and effective regulator? ###

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Privatization, Water crisis

Privatization is creating an artificial water shortage

13pila
(Photo: Inquirer.net)

First published by Bulatlat

Metro Manila’s supposed water crisis is one that is not caused by lack of supply and new water sources, or as some would argue, by lack of foresight and preparations by regulators and Manila Water. Rather, it is caused by lack of effective state control over water resources after government allowed the privatization of Metro Manila’s water system 22 years ago.

There lies the artificial water shortage.

By official accounts, the available supply for Metro Manila’s water needs is still enough. But instead of taking on the role of ensuring that this water reaches the people for their basic domestic use, government has deferred to two separate private companies (Manila Water and Maynilad), each with their own profit motives and considerations, in determining how water reaches the end-consumers through their separate distribution networks.

Worse, these private concessionaires have not improved the infrastructure enough to maximize existing water supply despite massive increases in their rates (and profits) for the past two decades. Imagine this – every day, about 1,177 million liters of water are lost due mainly to defective infrastructure. That’s equivalent to almost eight times of the supposed deficit in water supply that Manila Water is grappling with.

As it is, according to the concessionaires’ own performance reports, almost 300,000 people in their service areas are already without 24-hour water supply even before the current supply issues began early this month. That is the “normal” situation for these people under the regime of privatized water. The actual figures could be higher, as government regulators do not seem to verify – or do not have the capacity to check – the performance of the concessionaires.

Both Manila Water and Maynilad source the water they distribute from Angat dam that based on official pronouncements still holds enough water to supply the needs of the capital region and nearby areas. Angat dam supplies 4,000 million liters per day (MLD) or 96% of Metro Manila’s water (the rest come from Laguna Lake, 3% and deep wells, 1%).

But while Manila Water has a deficit, Maynilad has surplus supply. How did that happen? When the Ramos government privatized the Metropolitan Waterworks and Sewerage System (MWSS) in 1997, its service area was divided into two and then bid out to private companies. The east zone was won by Manila Water and the west zone, by Maynilad.

As part of the concession agreement, Maynilad will get 60% of Angat’s raw water and Manila Water the remaining 40 percent. That translates to 2,400 MLD for Maynilad and 1,600 MLD for Manila Water. The said sharing arrangement was based on the population size of the concession areas awarded to them by government. At present, Maynilad services around 9.5 million people in the west zone and Manila Water, 6.8 million in the east zone.

The 150-MLD challenge

Manila Water claims that its 1,600 MLD from Angat is no longer enough as its requirements already rose to as high as 1,750 MLD. The 150-MLD deficit is being blamed for the water supply interruptions that have been affecting some half a million people in the east zone.

This reported increased demand from Manila Water’s customers could have been easily met if the government were in charge of water management and distribution. Under the present privatized setup, water that flows to Metro Manila is divided to the concession areas of Manila Water and Maynilad, and this creates unnecessary challenges for an effective and responsive mechanism in water allocation and distribution.

The water flows between the concessionaires are connected through cross-border pipes. As one of the stop gap measures to help address the supposed 150-MLD shortage in the east zone, Maynilad agreed to open some of these cross-border pipes so that 50 MLD of water allocated for the west zone could be directed to Manila Water’s concession areas.

If the MWSS were in charge of water distribution from the start, such option could have been resorted to much earlier and in a manner that is less complicated and bureaucratic (e.g., asking Maynilad’s permission first); more effective (e.g., redirecting more than 50 MLD, if needed); and much faster (e.g., under privatization, most of the cross-border pipes have been already cut and will need time to restore) to avoid the supply woes that tens of thousands of households are being forced to bear today.

Aside from the cross-border pipe arrangement with Maynilad, Manila Water is also expecting to have another 50 MLD from its new treatment plant in Cardona, Rizal (with a maximum capacity of 100 MLD when completed) and a further 100 MLD from existing deep wells.

Missing water

What is not highlighted amid all the frenzy in securing additional supply is the more than a billion liters of water wasted daily, mostly from leakages in the existing distribution infrastructure of Maynilad and Manila Water, or what the water industry calls non-revenue water (NRW).

At present, by MWSS’s own account, the NRW of Manila Water is at 11% while that of Maynilad is at 39 percent. Looking at the volume of water that flows through their respective systems, water losses in Manila Water’s concession area is around 176 MLD and about 1,001 MLD in Maynilad’s for a total of 1,177 MLD.

On its website, Maynilad claims that as of 2018, its NRW is 27.1 percent. On the other hand, Manila Water’s own website claims they deliver 1.3 billion liters out of their 1.6 billion Angat dam allocation, or an NRW of 12 percent. Using these figures, the total volume of water losses from both concessionaires is still huge at 888 MLD.

Based on the original targets when MWSS was privatized, the volume of water losses should have already been reduced to less than a billion liters a day (around 732 to 976 MLD) as early as 2001 or 18 years ago. Instead of the promised reduction, the volume of water losses has increased (per MWSS’s NRW estimates) amid a growing service area that has expanded by about five million people in the past two decades. This even as present all-in rates (i.e., basic charge plus other charges, supposedly to recover investments used to improve water supply) have grown about 3-4 times of their 1997 level in real terms.

Note that Maynilad still has a surplus supply despite wasting more than a billion liters of water per day, while Manila Water, which has a much lower reported NRW than its west zone counterpart suffers a deficit. This further underscores the inefficiency and wastefulness of water resource management and the artificiality of water shortage under MWSS privatization.

The combined water losses of both Manila Water and Maynilad is more than 28% of the estimated current water supply of 4,167 MLD from the Angat dam, Laguna Lake and active deep wells. The MWSS is saying that the international standard is 20% while other studies suggest that the apparent economically reasonable NRW is between 10 and 12 percent.

In any case, halving the current total NRW (as estimated by MWSS) could produce an additional 588 MLD in water supply. It is interesting to note that the controversial Php12.2-billion Chinese-funded Kaliwa dam (which government, using the metro water shortage as pretext, wants rushed amid unmet environmental compliance) has a projected capacity of 600 MLD. In other words, addressing the issue of water losses substantially lessens the pressure of building new dams and avoiding the unnecessary environmental, social and economic costs they entail.

Finding accountability

To be sure, urgent demands to make Manila Water and their operator led by the Ayala group and their foreign partners accountable for the current water woes in Metro Manila are justified and legitimate. But they should be made to account outside the narrow framework of their commitments under the concession agreement (or privatization contract), and instead be held liable in the context of the assertion of people’s rights to water and reversing MWSS privatization.

The privatization contract, by design, heavily favors the private concessionaires. When the World Bank (through the International Finance Corp. or IFC) crafted the concession agreement in 1997, it ensured that the private concessionaires will be able to operate profitably in order to pay back the World Bank and other foreign creditors the hundreds of millions of dollars in debts that MWSS owes them. The IFC itself, as the World Bank’s private investment arm, is an investor in the MWSS privatization through Manila Water. Thus, from the onset, MWSS privatization was never about the provision of water services but the collection of private profits for foreign investors and creditors and their local partners.

The MWSS itself, for instance, is saying that it appears there is nothing in the concession agreement that they can use to penalize Manila Water for causing the current water supply problems in its service area. Regulators claim that they can use the concession agreement’s rate rebasing exercise (when concessionaires ask for higher basic charges) but that will not happen until 2022. There is also no assurance of accountability as Manila Water (as well as Maynilad) could always question and reverse the decision of regulators through an international arbitration mechanism provided under the privatization contract.

Focusing on just Manila Water absolves Maynilad and its operators led by Manny Pangilinan’s group and its Indonesian backers (Salim group) and Japanese investors (Marubeni) of accountability, and reinforces the wrong notion that the issue is simply mismanagement on the part of Manila Water. The prevailing impression today is that Maynilad customers are “fortunate” when in reality, Maynilad’s very high NRW deprives all consumers in Metro Manila and nearby areas of valuable water supply.

Most importantly, it diverts the issue away from privatization as the central issue in, and underlying reason behind, the artificial shortage. As such, it also has the effect of absolving government of responsibility when in fact, the biggest accountability in all this lies with government for abandoning its duty to ensure water for the people.

As long as water remains in the hands of unaccountable, profit-oriented private and foreign interests, the people of Metro Manila and adjacent provinces will continue to face insecurity in supply amid ever skyrocketing rates. This is the real water crisis that we face, and one that is permanent – El Niño or not – as long as there is no policy shift in the way that water resources are managed. ###

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Consumer issues, Privatization

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

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Privatization

UN report reaffirms water privatization amid MWSS rate hike controversy

Image from www.unwater.org

Image from www.unwater.org

First published as IBON Features

The World Water Day quietly passed by last March 22. It’s a United Nations (UN) event that has been observed since 1993 to highlight the issues facing global water resources. For this year, the World Water Day had as its focus the water-energy nexus and how the world’s poorest survive without access to safe drinking water, adequate sanitation, sufficient food and energy services. Alas, it was also an occasion used by the UN to push for the further privatization and commodification of water and energy resources.

Seriously challenged

In the Philippines, the UN’s renewed support for the corporate takeover of water and energy sectors came at a time when these policies are seriously being challenged as consumers grasp a better understanding of how oligarchic firms are squeezing them dry with impunity under privatization.

The controversial pass-on charges that private water operators Manila Water Company and Maynilad Water Services Inc. that include their corporate income tax, among others, have forced the Metropolitan Waterworks and Sewerage System (MWSS) Regulatory Office (RO) to reject the bid for higher water rates of the said companies. Meanwhile, the obvious price rigging at the power spot market compelled the Energy Regulatory Commission (ERC) to order the recalculation of the electricity rate hike that the Manila Electric Co. (Meralco) is seeking.

In both cases, it was the vigilant public – through people’s organizations, consumer groups and progressive political parties – that challenged the onerous rate increases. Thus, for proponents of privatization who are grappling with legitimacy issues, the UN report could not have come at a better time.

Water report

In its 2014 World Water Development Report released on the eve of World Water Day, the UN said that 768 million people do not have access to an improved source of water, 2.5 billion do not have access to improved sanitation, while 1.3 billion are not connected to an electric power grid and 2.6 billion use solid fuel – mainly biomass – to cook. It noted energy production accounts for close to 15% of water withdrawal but could increase to 20% by 2035 due to population growth, urbanization and changing consumption patterns. The UN warned that the challenge of meeting the demand for energy might well come at the expense of water resources and thus called for coordinated water and energy management policies. (You may download the full report here.)

Such coordinated policies, according to the UN, include revising pricing practices to ensure that water and energy are sold at rates that reflect their real cost and environmental impact more accurately. Furthermore, noting that the scope of investments required to developing durable alternative infrastructures, the UN underscored that the private sector should play a major role in supplementing public expenditure.

Private participation, full cost recovery

International financial institutions (IFIs) notably the World Bank and the Asian Development Bank (ADB) are long propagating this idea of private participation in infrastructure, or also called Public-Private Partnership (PPP), and the associated principle of full cost recovery. They in fact played a central role in bankrolling neoliberal structural reforms in the water and energy sectors in many countries, mostly in the poor, debt-ridden Third World.

Available data show that World Bank lending to the water sector from 2004 to 2011 is pegged at $34.79 billion, of which $22.14 or almost 64% are in the water supply and sanitation (WSS) subsector. Almost a quarter of WSS lending, meanwhile, went to Asia and the Pacific region. (See Chart below, click on image to enlarge)

World Bank lending to water

Reflecting the real cost of water and energy is of course a euphemism for more expensive water and electricity bills which often result from privatization and deregulation. Proponents of these neoliberal policies peddle the distorted notion that when the true economic cost of water and power is reflected through full cost recovery, its wasteful use will be addressed or even reversed, and would promote the efficient and equitable use of resources.

The Dublin Principle – a product of the 1992 International Conference on Water and Environment held in Dublin, Ireland – for instance, voiced the neoliberal assertion that “water has an economic value in all its competing uses and should be recognized as an economic good” and that “managing water as an economic good is an important way of achieving efficient and equitable, and of encouraging conservation”.

Full-cost recovery means that user fees paid for by consumers reflect the entire cost of investment and the guaranteed profits of private operators including differentials in factors that could affect profits such as foreign exchange, fuel prices, inflation, and in some cases even so-called regulatory risks, among others. The real intention, however, is to attract and ensure the participation in these sectors of private business, which naturally seeks profit assurances and risks protection.

PPP trends

Already, private investors have had substantial participation in developing and operating water and sanitation and energy infrastructures. Data collated by the World Bank’s Private Participation in Infrastructure (PPI) online database show that from 1990 to 2012, 111 countries reported private investments in the energy sector with a total of 2,653 projects reaching financial closure worth about $715.13 billion. Meanwhile, PPI indicators in the water sector during the same period are as follows: 63 countries; 814 projects; and $69.25 billion.

Private participation in the energy sector continues to expand both in the number of projects and cost per project. Again using the PPI database of the World Bank, the annual average of PPI investment in the energy sector has grown almost four-fold between the 1990s and the 2010s while the annual number of projects has increased almost three-fold. The average cost per energy project also grew by almost 44% during the same period.

Meanwhile, private participation in the water and sewerage sector has slowed down between the 1990s and 2010s – the annual average of PPI investment dropped by 10%; the annual average number of projects fell by 51%; and the average cost per project declined by more than 40 percent.

This may be explained by the fact that several of the biggest urban water utilities were privatized in the 1990s, particularly in the Third World, most notable of which were in Buenos Aires (Argentina) in 1993; Cancun (Mexico) and Gdansk (Poland) in 1994; Kelantan state (Malaysia) and Santa Fe province (Argentina) in 1995; Senegal, Cartagena (Colombia), and Aguascalientes (Mexico) in 1996; and Gabon, Cordoba (Argentina), La Paz–El Alto (Bolivia), Budapest (Hungary), Barranquilla (Colombia), Manila (the Philippines) and Casablanca (Morocco) in 1997.

Another reason is the widespread public opposition to water privatization sharpened by the contradiction between water as a human right and public good versus the neoliberal claim of water as an economic commodity that private firms can profit from. In recent years, there is an observable trend towards what some call remunicipalisation or the reversal of water utilities privatization such as in Paris, France; Dar es Salaam, Tanzania; Buenos Aires, Argentina; Hamilton, Canada; and in various municipalities in Malaysia.

However, it must be noted that water privatization has started to pick up again after the 2008 global financial and economic crises. From 2009 to 2012, private participation in water and sewerage has been growing by 28% per year in terms of investment cost. In 2012 alone, PPI investment in water and sewerage jumped by almost 54% although bulk of it was accounted for by Brazil’s three large projects worth nearly $2.5 billion – or almost 62% of the reported $4.04 billion. (See Chart, click on image to enlarge)

PPI in water and sewerage

Trumpeting “success”

Neoliberal apologists trumpet privatization as the solution to the lack of access to safe drinking water in the world, especially in poor countries, since state-run water utilities are supposedly too inefficient, bankrupt and oftentimes corrupt to perform its task. One major indicator that privatization champions point to is the Millennium Development Goal (MDG) on water where the world has supposedly achieved the target of halving the proportion of population without access to improved sources of water five years ahead of schedule. But this obscures the reality on the ground that many poor communities are still without access to reliable potable water as “improved sources” in the MDGs could refer not only to individual household connection but also to public taps or standpipes, tube well or boreholes as well as dug wells.

Take the case of the privatization of the Metropolitan Waterworks and Sewerage System (MWSS) in Metro Manila, for example. Private concessionaires Manila Water and Maynilad claim almost universal coverage of water supply in their service areas. But parts of their claim are the bulk water connections – mostly in poor communities – where the safety and quality of water and of services are often compromised. Such bulk connections include setting up a single meter for several households, reaching a hundred in some cases. The responsibility of individually connecting to the so-called “mother meter” is up to the community (through its local association or cooperative). In some instances, rubber hoses are used to connect the households to the water supply system. In other cases, a common faucet is built from where the people fetch their water.

Challenged by people’s experience, opposition

Clearly, claims of universal coverage and continuous supply of safe drinking water are bloated to give the false impression of improved services. But what is undeniable is how water rates in Metro Manila and adjacent areas have skyrocketed under privatization effectively further marginalizing those who do not have the capacity to pay. Since MWSS was privatized in 1997, the average basic tariff has already ballooned by 585% (Maynilad) to 1,120% (Manila Water).

This as the concessionaires passed on to the consumers billions of pesos in questionable charges including their corporate income tax; cost of unimplemented projects; and cost of advertising, promotion and donations on top of passed-on charges due to inflation and foreign currency fluctuations – all while collecting profits at guaranteed rates. The process of arbitration over the rejected water rate hikes between the concessionaires and regulators being conducted by design away from public scrutiny and without consumer participation is a further reason that makes privatization oppressive and unacceptable.

The policy regime perpetrated by privatization that allowed private, profit-oriented companies to take over economically strategic and socially sensitive sectors with negligible state intervention explains why water and power rates in the country are very high – in fact, among the highest in Asia. Endorsements from institutions such as the UN to continue such policies are constantly and increasingly being challenged by the people’s experience and opposition on the ground. ###

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Consumer issues, Privatization

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!

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Consumer issues, Privatization

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)

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Consumer issues, Privatization, Water crisis

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

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