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By David L. Llorito, Research Head, with Meryl
Mae S. Marcon, Researcher
Part 1 of 3
Does privatization of water distribution in
Metro Manila work?
If one goes by the numbers, the answer seems to
be yes. In 1997, only 7.3 million Metro Manila residents had tap
water. Now it’s almost 10 million. Twenty-four-hour availability
of water has also improved in many areas.
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Figure
1. Metro Manila Water Supply System
Concession Service Area |
On February 7, however, the Lopez-owned Maynilad
Water, one of the two private water concessionaires in the
metropolis, announced it was returning its concession to the
government-run Metropolitan Waterworks and Sewerage System (MWSS) a
move that muddied up the future of water privatization in the
Philippines.
Maynilad Water claims MWSS committed “breaches
of its obligations under the concession agreement” and is
demanding $500 million in damages from the government.
Looking at the issue closer, it appears that
Maynilad Water is looking for a way out of its financial troubles.
Its latest financial statement shows that in 2001, the company’s
losses ran up to P1.7 billion, from only P618 million in 2000. Its
debts in 2001 reached P14 billion, from P9.6 billion in 2000. Now
the company is suffering serious cash flow problems and is blaming MWSS
for its woes.
But why is Maynilad losing heavily? And why is
the other concession—the Ayala-led Manila Water Corp.—making
money?
In 1997, the Philippines surprised water policy
experts by doing the unexpected: announcing what is considered
“the biggest water privatization” in the world. The deal
involves turning over the business of distributing water to 11
million Metro Manilans from the MWSS to two private corporations,
Maynilad Water and Manila Water.
The idea of turning over water distribution in
Metro Manila to private companies came as a result of the early
“successes” of President Fidel V. Ramos in mobilizing private
resources to solve the power crisis that hit the country in the
early nineties. If it worked for power, why not water?
During that time, only 67 percent of households
had piped water. Supply was available only 16 hours a day on
average. Water pressure was low, forcing many residents to install
booster pumps and back up tanks. Sixty-three percent of water pumped
into the network was “nonrevenue” or stolen water because of
runoffs from old leaky pipes and illegal connections.
Addressing these problems would require huge
amount of money which the government did not have. Even if the
government had the money, it would have gone down the drain because
of the sheer inefficiency of mwss. During that time, MWSS was
overstaffed: it had 8.5 staff for every 1,000 connections as against
1.8 in Kuala Lumpur, 2.4 in Singapore, 2.7 in Hong Kong, and 2.3 in
Seoul. In short, MWSS was more of an employment agency than a water
authority.
President Ramos wanted to plug the leaks in
mwss’s operations. He urged Congress to pass a “water crisis
law.” On June 7, 1995, Congress passed Republic Act 8041, the
“Water Crisis Act of 1995,” to improve water delivery, expand
coverage and develop new water sources. To achieve these ends, the
law encourages the participation of the private sector.
Four months later, the government officially
approved the privatization of mwss. State officials did not know
anything about privatizing water distribution, so it hired the
International Finance Corp. as a consultant.
Based on IFC recommendations, the government
divided the MWSS service area into two zones—East and West.
Gregorio Vigilar, former secretary of the Department of Public Works
and Highways, says the setup guarantees that when one concessionaire
fails, the other could take over the operations, preventing service
disruption. It was also a way to ensure that the government could
have a benchmark that it could use to assess the performance of the
other concessionaire.
For the whole of 1996, the government screened
the technical and financial plans of 50 interested firms. Four
companies qualified: the Ayala Group comprising Ayala Corp., Bechtel,
United Water, and Mitsubishi; The Lopez Group comprising Benpres
Holdings and Lynnaise des Enux; Aboitiz Equity Ventures and
Compagnia Generale de Eaux; and Metro Pacific and Anglian Water
International.
The Ayala group came in as the Manila Water
Corp. and the Lopez group as Maynilad Water Services, Inc.
On January 6, 1997 the four submitted their
financial and technical bids. After 20 days, the government
announced the winning bids based on the proposed water tariffs. The
Ayala group submitted the lowest bids for both the East (P2.32 a
cubic meter) and West Zones (P2.51 a cubic meter). However, since
the rule says that one group could only have one concession, the
West Zone ended up on the lap of the Lopez-owned Benpres Holdings
and its partner, Lyonnaise des Eaux, which submitted the next lowest
bid (P4.97 a cubic meter).
The result surprised government officials
because the bidding process resulted in different tariff rates:
P2.51 a cubic meter in the East Zone and P4.97 for the West Zone.
On August 1, 1997, the MWSS turned over the
operations of the concessions to the winning bidders.
The deal was expected to generate $7 billion
worth of investments over 25 years and improve availability and
efficiency of water and sanitation services to most Metro Manila
households. It was also a happy arrangement for MWSS whose debts
with the World Bank, Asian Development Bank and other lending
institutions were passed on to the new concessionaires—90 percent
to Maynilad and 10 percent to Manila Water.
Many could not understand the 90-10 split
between the Maynilad and Manila Water. Frankie Arellano, assistant
vice president of Maynilad for environmental management, says it’s
probably because most of those borrowings were for projects in the
West Zone.
MWSS sources, however, say it was a way to make
investments into the East Zone attractive since the said concession
area is less densely populated and has low coverage, thus needing
more capital investments. The West side which lies beside the Manila
Bay, has a higher population density and an extensive network thus
requiring less investment. It’s a faulty assumption that caused
much of Maynilad Water’s undoing a few years after.
Nevertheless, the Philippines became an
overnight sensation among water policy experts worldwide.
Traditionally, only rich countries are able to privatize urban water
distribution. For many water experts therefore, the Philippine
experience became a model for other poor countries.
Five years later, the privatization experiment
appears to have generated confusing results. Manila Water is making
money (P553 million in 2002) while Maynilad is financially bleeding.
It is openly blaming mwss, now the regulating body, as well as the
El Niño and the Asian currency crisis that hit the country in
1997-1998. Since Maynilad is operating the larger concession, many
observers are worried that its problems may actually reflect the
weaknesses of the entire privatization experiment.
On February 7, Maynilad issued a statement
terminating its concession agreement with the mwss, implying that
the operations and management as well as the debts it assumed will
have to revert back to the state-owned agency. The statement was
interpreted by many as a veiled threat.
In terminating its concession agreement,
Maynilad Water blames MWSS for “breaches of its obligation under
the Concession Agreement.” Arellano said the MWSS is now under
arbitration hence he is not allowed to discuss the issue. But when
one looks at Maynilad’s latest financial statements, the company
seems to point to the following as the culprit: The failure of MWSS
to complete the vital concession projects on time such as the
Umiray-Angat Transbasin Project, the Manila South Distribution
Project, Angat Water Supply Optimization Project, Manila Second
Sewerage Project, and the LMQ-3 Project, and the 300 million liters
a day Laguna Lake water supply project.
“. . . MWSS failed to initiate the critical
300 million liters a day water supply project in Laguna de Bay,”
Maynilad says its latest financial report. “These delays have
brought serious financial impact to the company.”
Are the complaints valid? Rafael Alunan III,
Maynilad president, says the El Niño had reduced bulk water supply
that it could distribute to its customers by 40 percent. Less water
to sell meant less revenue to cover expenses. Had all these projects
been completed on time, Maynilad said it should have not suffered
financial difficulties.
Even more devastating is that Maynilad absorbed
90 percent of MWSS debts that were denominated in dollars. These
loans were obtained at a time when the foreign exchange was P26=$1.
After the Asian crisis, the peso slipped to P40:$1 and eventually to
more than P50:$1. This resulted to the rise of its debts, now
reaching $800.
“To illustrate the magnitude of the impact [of
the Asian crisis], the total revenues of Maynilad for the first
three years equaled the amount of concession fees paid to MWSS,”
Alunan told officers of the Asian Development Bank (ADB) on April
18, 2002 in an effort to secure approval for its $350-million term
loan from the bank, the European Investment Bank and six other
international commercial banks. Maynilad Water has been wanting to
get the loan as early as 1998.
Arellano admits that the concession agreement
allows for the recovery of foreign exchange losses. Yet one can only
recover these losses within 25 years. That’s the reason—Arellano
says—why Maynilad is experiencing serious cash flow problems.
But are these explanations valid? A deeper look
into the issue would reveal that Maynilad’s explanation is only
half the story.
Part 2
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