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By David L. Llorito, Research Head with
Meryl Mae S. Marcon, Researcher
Special Report Part 2
El Niño and the East Asian currency crisis in
1997 delayed the mwss’s bulk water projects. For the Maynilad
Water Services operating the west zone concession, these accounted
for its current financial difficulties. Analysis by Manila Times
Research, however, shows that Maynilad Water is probably telling
half the story.
That the MWSS has failed to provide the 300
million liters a day bulk water supply from Laguna Lake is true
enough. This additional supply was supposedly meant to meet the
water needs of Parañaque, Las Piñas, Muntinlupa and the five towns
of Cavite.
Dr. Cristina David, research fellow at the
Philippine Institute for Development Studies, who extensively
studied the issue, says that bidders for the west zone were made to
assume that an additional 300 million liters a day of bulk water
would be available by the end of 1999 through a
build-operate-transfer project at no cost to the winning
concessionaire. In 2001 the National Economic and Development
Authority reportedly turned down the much-delayed project because of
high cost and environmental factors. Private-sector sources say the
project is being revived this year, but that there are no
indications when the bidding will start.
El Niño and the East Asian currency crisis were
headache for Maynilad. Nevertheless, com-pared with the performance
of Manila Water of Ayala group, the east zone concessionaire, the
factors being blamed by Maynilad Water for its problems appear to be
less compelling to explain its financial difficulties.
In 2002, for instance, Manila Water posted a
P2.5 billion revenue, more than double its P1.66-billion revenue in
2001. From the P2.5-billion revenue, the company got a net income of
P553 million, tripling its previous profit of P176 million. But why
is Manila Water making money and Maynilad losing badly? Besides the
usual litany of Maynilad problems is (e.g. East Asian currency
crisis, El Niño, among others), there seem to be three major
factors: failure to deal with the problem of nonrevenue water,
failure to improve operational efficiency, and failure to get fresh
loans to ensure a good cash flow.
Failure to mend the leaks
Given the usual inertia in government, it must
have been obvious that the only way winning concessionaires could
make money is to reduce nonrevenue water.
One MWSS employee who now works with Manila
Water says that during the pre-privatization period, it was
difficult for the company to deal with nonrevenue water because some
employees were making money selling stolen water from MWSS pipes to
vendors, who in turn, were selling them 20 times the MWSS price
mostly to urban-poor communities.
The MWSS is so top heavy and bureaucratic that
it usually takes two weeks or more to attend to reported leaks.
Cutting response time to problems like this and improving
operational efficiency should significantly reduce non-revenue
water.
As Table 1 shows, Maynilad has failed miserably
to do so. In 1998, a year after privatization, nonrevenue water was
65.4 percent. In 2002 nonrevenue water deteriorated to 69.8 percent!
The table shows constant improvement in the number of households
covered, indicating that more water is wasted as more houses are
getting tap water.
A 69.9-percent nonrevenue water translates into
1,649 million liters lost or stolen every day. At the current
Maynilad rate of P19.92 per cubic meter, this translates into about
P12 billion lost revenues for Maynilad in 2002. In five years, the
table shows, Maynilad lost P36 billion to water thieves and leaks.
This indicates a thriving multibillion-peso black market for stolen
water, tax free, and an attractive incentive for some people to
resist projects that would mend the rickety water network.
Compared with Maynilad, Manila Water has made
some improvement in the battle against nonrevenue water. In 1997,
nonrevenue water in the east zone was 63 percent. In 2002 it dropped
to 53 percent. Sherisa P. Nuesa, Manila Water’s chief financial
officer, says this reduction in lost water enabled the company to
increase water delivery from 440 million liters a day in 1997 to 750
million liters a day while maintaining production at about 1,600
million liters a day throughout the five-year period.
Nuesa notes that only 26 percent of the
population were enjoying 24-hour water supply. Now the figure is 83
percent. She said these increases in billed water enabled Manila
Water to make money as early as 1999, when the company posted a
hundred-million-net income. Since then it has been registering
increasing profits: P123 million in 2000, P176 million in 2001 and
P553 million in 2002.
The secrets, says Tony Aquino, president of
Manila Water, are “greater efficiency and fiscal discipline.” He
said Manila Water had bid so low that at the start it was wondering
how to cope with the currency crisis that hit the country after the
company won the concession in 1997. Nevertheless, with its low bid
Manila Water was forced to cut operating costs to the barest
minimum, thus turning the “threat into an opportunity.”
“We maximized the use of limited resources and
kept our operating costs to the minimum,” says Aquino. “Our
operating expenses increased at an average rate well within
inflation. This also allowed us to keep our overall cost per cubic
meter and our tariffs low, especially when compared with other
operators in the region.”
Management styles
The sense of vulnerability at the start of the
concession appears to have forced Manila Water to evolve better
management styles. Aquino realized that the only way for the company
to improve is by decentralizing its operations and empowering the
areas’ business managers to make important decisions. The setup
also has a carrot-and-stick system that financially rewards better
performers and penalizes laggards. It also tried hard to provide new
lines to poor communities.
The reason for this, Aquino says, is social
service and plain business sense. He notes that if poor communities
have piped water of their own that is 10 or 20 times cheaper than
those provided by vendors, the black market for water will be
reduced. By the end of 2002, company records indicate that Manila
Water has covered 110,000 households, or 660,000 individuals.
Through its “territory business managers”
who regularly “walk the line,” Manila Water also tried hard to
develop partnerships with local community groups and politicians to
ensure community ownership of the new water network. “That’s the
only way to be successful,” says Aquino.
Interviews with several branch managers of
Maynilad revealed that the Lopez-controlled firm is doing similar
management techniques. “In fact, Manila Water just copied its
decentralized business structure from us,” says one branch
manager.
The main difference perhaps is that Manila Water
may have instilled a more effective business culture among its
employees than Maynilad Water. For instance, asked about the
difference in management styles and cultures between the old MWSS
and Maynilad, Frankie Arellano, formerly a MWSS employee and now
assistant vice president for environmental management of Maynilad,
says there is no difference except that Maynilad is a social service
and a business enterprise that needs to earn money to be viable.
Judging whether changes in values and business
cultures have an impact on operational efficiency could be tricky.
But an analysis of the financial state-ments of Manila Water and
Maynilad shows that in 2001 (the latest available document) a ratio
of their revenues to their assets would show that Manila Water earns
30 centavos for every peso of its assets while Maynilad earns only
18 centavos for every peso of its assets.
Wrong assumptions
In fairness to Maynilad Water, one big reason
why it is encountering serious financial difficulties is probably
the wrong assumptions it made on the distribution of debts that
would be assumed by the company. It got 90 percent while Manila
Water got only 10 percent.
Press materials provided by the MWSS he to The
Manila Times suggest that the purpose was to sweeten the deal for
the east zone because low coverage and low population density in
that area are assumed to require much investment in setting up
additional networks. All the bidders, except Manila Water,
apparently believed it because all of them submitted lower bids for
the west zone than their bids for the east zone.
It was a great mistake that Maynilad is paying a
high price for, particularly when the East Asian currency crisis
struck in 1997. These loans were denominated in dollars when the
exchange rate was low.
Because of the difficulties in enforcing laws
against water thieves, the two concessionaires realized that only
the fastest way to deal with nonrevenue water is by decommissioning
or “killing” the old pipe lines and laying down new ones to
start a clean slate. But that requires huge investments that were
not anticipated. This is true of Maynilad, where during the bidding,
it thought the west zone had only 2,500 kilometers of piped network.
When the company started its rehabilitation work, it learned the
network was close to 4,000 kilometers, thus throwing off its
assumptions.
Failure to get the money
Other analysts, however, say Maynilad could have
weathered the storm from the currency crisis it promptly obtained
the $350-million term loan from the Asian Development Bank and other
international financial institutions on top of the bridge loans that
it got in the past. Maynila’s main problem was that it got the
concession when international aid and investment for water
infrastructure were on the decline worldwide.
In 2000 and 2001, Benpres Holdings, the flagship
company of the Lopezes, reported net losses of P353 million and
P10.2 billion, fanning rumors about Maynilad’s mother company
having serious financial difficulties. These factors could have made
it all the more difficult for Maynilad to source funds abroad.
“In the absence of the $350-million term loan,
Maynilad lacked the financial muscle to deliver on its service
commitments and reduce nonrevenue water, which is principally
capital-intensive,” Alunan told the ADB on April 18, 2002, in an
effort to secure the loan.
In the case of Manila Water, financing has never
been its problems. Aquino says the company had obtained funds from
local banks ($65 million), the Danish International Development
Agency ($2 million), and the German Investment and Development Co.
($20 million). “We are still negotiating for another $50 million
from the International Finance Corp.”
Says Aquino: “We need to keep borrowing so we
keep expanding the network and satisfy the growing population. When
we factor it out as a capital expenditure, we are still making
money. Kasi kung hindi ka kumikita, walang magpapahiram sa ’yo.
You should be able to show profit so that your banker will lend you
money.
Part 1
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