The Japanese Chamber of Commerce in the Philippines (JCCP) expressed their dismay over the recent decision of the Metropolitan Waterworks and Sewerage System (MWSS) to disallow water concessionaires to recover their corporate income tax.
In a letter addressed to Trade and Industry Secretary Gregory Domingo dated September 26, JCCP President Takashii Ishigami said that the move by the MWSS is a “total disregard to the contractual rights and intent” of the parties involved, and said that the government’s failure to uphold the sanctity of contracts will have a negative effect on the country’s investment climate.
Ishigami started the letter by saying that the privatization of the water and wastewater operations of the MWSS in 1997 has been regarded as one of the largest and most successful public-private projects in the country. He said that the privatization and “the perceived soundness and stability of the policy and regulatory framework have enabled the concessionaires to attract private funds to finance the rehabilitation and construction” of the said projects.
“With the improvement in the water supply situation in Metro Manila came a marked improvement in the quality of life of its residents. However, the recent decision of the MWSS to reduce the tariff being charged by the concessionaires is undermining the legitimacy of a contract that was prepared, signed and guaranteed by the Philippine Government 16 years ago,” Ishigami said.
“In particular, the MWSS decision to disallow the recovery of corporate income tax in determining the tariff is contrary to the parties’ consistent understanding, agreement, and practice of allowing the concessionaires to recover corporate income tax,” he added.
According to Ishigami, the contracts that were presented to bidders during the bidding of water concessions in 1996 and in the rebidding in the west service area in 2006 included corporate income tax as part of the recoverable expenses, and that it can be included by the concessionaires in their cash flow calculations. It was also considered recoverable as determined by tariff adjustments in earlier rate rebasing exercises.
He said that aside from affecting the concessionaires’ investments to further improve the water supply and sewerage systems in Metro Manila, the MWSS decision will also send “a very strong message to the business community about the level of commitment” of the government in upholding contracts.
“We view the MWSS’ unilateral and arbitrary act of changing the terms of interpretation of the concession agreement, in total disregard to the contractual rights and intent of the parties, with grave concern. The decision of foreign investors to invest in long-term PPP projects in the Philippines is due to a large extent their belief that the Philippines has a stable and predictable regulatory environment, and is a country that guarantees the binding effect sanctity of contracts. International commercial lenders and international financial institutions share the same concern,” Ishigami said.