Rates to go higher in 2015 on ICC ruling, contract terms
First of three parts
ON Monday, January 5—the same day Metro Manila commuters were bid good morning with a 45 percent hike in light rail fares—DMCI Holdings Inc. in a disclosure to the Philippine Stock Exchange announced that water rates for customers of Maynilad Water Services would soon increase as well.
The water rate increase was the outcome of a December 29 ruling in Maynilad’s favor by the International Court of Arbitration of the International Chamber of Commerce (ICC) based in Singapore. Maynilad filed the suit against the Metropolitan Waterworks and Sewerage System (MWSS) after the latter rejected an application for a rate increase in September 2013 and instead ordered Maynilad (and its counterpart, Manila Water) to reduce water rates.
A similar claim filed by Manila Water is still pending before the ICC; given the ruling favoring Maynilad, most now expect that Manila Water will likewise be permitted to raise rates for its customers.
The terms of the concession agreement between Maynilad and MWSS leave little to no recourse for the government or consumer advocates to further contest the rate increase, as the ICC dispute resolution process is considered final and binding. The decision, which MWSS has said it will have to study before the rate increase can be implemented, will push the basic charge for water higher by 9.8 percent according to the DMCI disclosure, or an average of P3.06 per cubic meter.
The arbitrary increase for Maynilad and the anticipated similar rate adjustment for Manila Water are in addition to smaller increases already imposed by the two water concessionaires at the beginning of this month for the foreign currency differential adjustment (FCDA), which added P0.38 per cubic meter to Maynilad customers’ bills, and P0.36 per cubic meter for Manila Water customers.
The water rate hike controversy, following closely as it does the equally contentious increase in light rail fares, is a stark example of what critics say is an manifestly unfair approach to public-private partnerships in the Philippines: Concessionaires and franchisees for public services such as water, electricity, and transport systems are granted operating terms that pass virtually all risks and costs on to consumers, and effectively hand the companies involved a “blank check” to expand profits by tying the hands of regulators.
This week’s special report looks at three ongoing issues that strongly suggest the critics may be right: The water rate hike, the imposition of a feed-in-tariff (FIT) charge to electric consumers set to take effect in February, and a long-running, complicated legal battle between Meralco and the Energy Regulatory Commission (ERC) and consumer advocates, in which latter have alleged that the utility giant and the regulatory body conspired to comprehensively inflate power rates by grossly overpricing cost inputs.
Born of necessity
The current arrangement for the provision of water for Metro Manila and nearby areas arose from the “water crisis” of the mid-1990s, which resulted in privatization of the water system through the Water Crisis Act (RA 8041) of 1995.
“Crisis” is not too strong a word. By the MWSS’ own admission, it was substantially failing to fulfill its mandate. Its rate of water loss (called ‘non-revenue water’ in industry terms) was the highest is Asia; it had only been able to physically cover 69 percent of its service area, within which only about 8 percent of the population actually received water; water supply was inconsistent, only being available for an average of 16 hours per day, and often at very low pressure; and the agency has huge financial losses.
The solution facilitated by RA 8041 was to first divide the huge service area into two smaller, more manageable zones, and then engage private concessionaires to provide water and sewer services, leaving MWSS as the contractor/regulator. In 1997, the West Zone, which includes most of Manila and Quezon City, the western cities from Navotas to Las Piñas, and parts of Cavite Province, was awarded to Maynilad Water Services, while the East Zone covering the rest of Metro Manila and most of Rizal Province was awarded to Manila Water.
Maynilad is primarily owned by a consortium of the Manny V. Pangilinan-led Metro Pacific (MPIC) and the Consunji conglomerate DCMI; through MPIC, which also has a 5.2 percent stake in Maynilad independently from its partnership with DCMI, the First Pacific investment concern of Indonesian magnate Anthoni Salim indirectly controls slightly less than 30 percent of Maynilad. Manila Water, on the other hand, is an Ayala-led consortium; other partners include Mitsubishi, International Finance Corporation, and First State Investment (UK and Hong Kong) Ltd.
Because of the urgency of solving the Metro’s water problems as quickly as possible, the concession agreement offered attractive terms. Perhaps too attractive; some of the more interesting provisions the concession agreement are:
• Authority to use an “alternative index” for calculating fees and prices “in the event that the Concessionaire and the Regulatory Office determine that the CPI [consumer price index]is for any period not an accurate reflection of the rate of inflation in the Philippines as it relates to this Agreement.”
• An exclusivity clause that gives the concessionaires a no-bid right of first refusal for any “new developments” (i.e., new service areas). That is not at all unusual, but what is questionable is the provision that if a concessionaire refuses a new project area and decides later to take it over from a third-party provider, it can do so “on substantially similar terms” as the company being replaced, provided the latter is given at least 60 days’ notice.
• A requirement that any procurement contracts totaling P250 million or more (In 1997; the limit is adjusted annually for inflation) must be offered for public bidding, which put another way, is an exemption for any purchases of goods or services totaling less than that amount. Moreover, the concessionaire is granted the “sole discretion” to determine the bid specifications and selection criteria for the larger tenders.
Rate ‘re-basing’ disputed
The concessions also allow for recalculation, or “re-basing” of the basic water rate every five years for the term of the agreements with the two companies—25 years for Manila Water, and 40 years for Maynilad, or until 2022 and 2037, respectively. In September, 2013, the MWSS rejected both companies’ rate increase requests, and instead ordered both to reduce their basic rates.
At the time, revelations—primarily about Manila Water—that expenses such as corporate meetings, gifts for employees and visitors, and the company’s own income taxes were being charged to water customers sparked public indignation, which some consumer advocates suggest may have emboldened MWSS to reject the rate hike requests. Instead of P5.83 per cubic meter increase, Manila Water was ordered to reduce its basic rate by 29 percent over the next five years; Maynilad, which had asked for a P8.58 increase, was likewise ordered to reduce its basic rate by P0.29 per cubic meter per year.
The rate reductions were to take effect in October 2013, but within a month of the MWSS ruling, both companies had filed disputes against MWSS at the ICC in Singapore. As stipulated in their concession agreements, both companies suspended the rate reduction, keeping the old rates in place pending the outcome of the arbitration proceeds.
The key issue that needed to be addressed by the ICC arbitration panel was whether or not certain expenses such as corporate income taxes and costs for projects not yet completed could be included in the calculation of customer rates, explained activist and author Arnold Padilla.
“The problem really lies in the concession agreements,” said Padilla, a research consultant for Ibon Foundation. Too many provisions in the concession agreements are subject to interpretation, Padilla explained. The billing of the company’s income taxes to customers is one example; according to Padilla, the relevant provisions in the concession agreements include “all Philippine business taxes” as allowable expenses, but do not clearly indicate that those include or exclude regular income tax.
The concession agreements are unfair to consumers because the ambiguity of the rules allows the concessionaires “to pass all of their risks on to their customers,” Padilla argued. Among other things, water consumers have paid some P6 billion for ‘unrealized’ projects, Padilla pointed out; these are expansions of facilities or services that have been deferred, cancelled entirely, or still listed as “planned” long past their anticipated starting dates.
Opaque dispute resolution process
Despite the questions raised about what is permitted or not under the concession agreement, the ICC panel evidently accepted much of Maynilad’s justification for higher rates, although the awarded amount was less than what the concessionaire was originally seeking.
What exactly was accepted, however, is a matter of speculation; arbitration
panel rulings are not made public by the ICC (although the parties involved could presumably disclose the details), and even the identity of the officials on the panel—one each designated by the regulatory agency, the concessionaire, and the ICC—is kept confidential.
That is another huge disadvantage to consumers, according to Padilla. “There’s no chance for any public input,” Padilla said. “Again, that’s a shortcoming in the concession agreement. It allows for a dispute resolution process concerning customer rates that disregards customer interests.” The effect of this, Padilla and other consumer advocates have argued, is that the MWSS, the agency which is supposed to regulate water utilities, is actually obliged to surrender that authority in case of a disagreement with a concessionaire.
As of now, MWSS has said it must “study” the ICC ruling before giving the rate increase the green light, as the final amount differs from Maynilad’s original rate request. For its part, Maynilad seems disinclined to wait very long: In its disclosure to the PSE, however, Maynilad stressed that it could invoke the terms of its concession agreement to collect all at once the difference between the new higher basic rate and the old rate for the period (about 16 months) that the new rate was deferred pending arbitration, even while offering to break up the increase into smaller tranches over two or three years to lessen the burden on customers.