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, 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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