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By David L. Llorito, Research Head and
Meryl Mae S. Marcon, Researcher
Conclusion
Distributing urban water is a very risky
business. The Lopezes and their French partners are now realizing
how hard it is to run a business that carries all sorts of risks:
capital intensity with long payback period, low rate of return,
political pressures on contracts and tariffs, protracted projects
with poor initial information.
Analysts observe that Maynilad’s financing
strategy and its recent action terminating the concession agreement
with the Metropolitan Waterworks and Sewerage System (MWSS), a
government agency now regulating the business, may have all the more
created financial uncertainties for the company.
Some analysts believe one of Maynilad’s errors
was that it relied too much early in the game on foreign financing.
Considering that it got 90 percent of MWSS’ previous debts,
analysts say Maynilad should have explored local sources. By
immediately seeking and getting foreign financing, it could have
heightened its foreign-exchange risks.
Frankie Arellano, Maynilad’s assistant vice
president for environmental management, says the company really has
no choice, because no local bank could afford to lend huge sums
required by the company.
It’s also a problem that bugs Manila Water.
But somehow, the company has managed to capitalize on the reputation
of the Ayalas to draw funding from both local and foreign banks,
thus lessening the risks.
For instance, analysts note that by
“returning” the west concession for “breaches of the
concession agreement” by the MWSS, Maynilad is actually telling
the world that regulatory or contractual risks—factors beyond the
control of the company—are very high in the country. “This
would all the more make potential creditors unwilling to lend
money,” one source said.
Asked about how Manila Water handled the risks,
Tony Aquino, president of the company, said it took a different
tack.
“Some people would like to talk about
political, regulatory risks, but I don’t think these are high,”
says Aquino. “By and large, the MWSS has followed the agreements .
. .. We went through a rate rebasing process. We say that in five
years we now know what we exactly need to do and what it will cost.
And the MWSS said, ‘Fine, that’s the right way to do it and
that’s the benchmark you will are going to be evaluated
against.’ And they have complied with that largely.”
A check with Maynilad’s financial statements
showed that it actually got many of the things it wanted from the MWSS:
1. On December 12, 2000, Maynilad— together
with Manila Water—petitioned the regulatory office for an
automatic “currency exchange adjustment.” This will allow both
concessionaires to recover their foreign-exchange losses on their
concession fee payments and foreign currency-denominated loans
through their customer billings. By February 2001, the MWSS approved
their requests “in principle.”
2. On October 5, 2001, Maynilad got an
“amended agreement” with MWSS addressing its “force majeure”
complaints (e.g. El Niño, the East Asian currency crisis, delay in
the new 300 million liters a day of bulk water) with the MWSS. The
amended agreement allowed Maynilad to increase its tariff rates by
P4.21 a cubic meter from October 2001 to December 2002 to recover
foreign-exchange losses during that period.
3. The agreement also provided a “special
transitory mechanism” that will allow Maynilad to recover
foreign-exchange losses from January 1, 2001 to December 2001,
including foreign-exchange losses from its $100 bridge loan.
The agreement also allowed quarterly rate
adjustments “with respect to present and future foreign-exchange
losses or gains…” from January 1, 2002, until the end of the
agreement.
4. Take note that on March 8, 2001, Maynilad
stopped paying its concession fees to the MWSS. The agreement
further gave the company a grace period through a provision that
allows Maynilad to resume payments to the MWSS of its maturing
obligations “subject to [Maynilad’s] capacity to pay, depending
on cash flows . . ..” Maynilad will also pay only the balance of
all past obligations and future concession fees upon the release of
its $350-million term loan with the Asian Development Bank and other
international financial institutions.
5. On December 14, 2001, the MWSS allowed
Maynilad another round of price adjustments effective in 2002. This
new round of rate increases allowed “extraordinary price
adjustments” of P0.61 a cubic meter and a “foreign currency
differential adjustment” to recover foreign-exchange losses of
P4.07 a cubic meter.
On March 4, 2002, however, the MWSS passed
resolution 68-2002 extending the deadline for the payment of
Maynilad’s suspended concession fees from June 30, 2002, to
November 30, 2002. The resolution requires Maynilad to resume
payment of its concession fees including penalties and interests
with or without the closure of the $350-million term loan from the
ADB and other financial institutions.
On December 9, 2002, Maynilad issued a “notice
of early termination” to the MWSS telling the government agency
that it is returning the concession after 60 days. Apparently,
Maynilad had failed to gain approval for the $350-million term loan.
And the final stroke came on February 7, 2003,
when Maynilad president Rafael Alunan III wrote the MWSS a letter
confirming the termination of the concession “due to MWSS’
serious breaches of its obligations under the concession
agreement.”
The letter added, “Maynilad … will continue
to perform its obligations on behalf of the MWSS to the extent
necessary to serve the public interest, … and to provide
uninterrupted and efficient services to the customers of the west
zone concession.”
Part 1
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