• Rough waters ahead

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    Conflict over water rates aggravated by vague laws, inconsistent rulings

    (Second of two parts)

    THE ongoing dispute between the government, through the Metropolitan Waterworks and Sewerage System (MWSS), and Greater Manila’s two water concessionaires, Maynilad and Manila Water, could end up costing Philippine consumers more than P80 billion. It should have been avoidable, but vague provisions in the enabling law that privatized water utilities, the Water Crisis Act of 1995 (RA 8041), and in the concession agreement with the two service providers made conflict between consumer and business interests inevitable, with the MWSS squarely in the crossfire.

    No one would argue that “crisis” was too strong a word to describe the sorry circumstances under which RA 8041 was swiftly written and enacted. The MWSS, which was created in 1971, was by its own admission failing miserably by the mid-1990s to fulfill its mandate “to ensure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes at just and equitable rates.” 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; water supply was inconsistent, only being available for an average of 16 hours per day, and often at very low pressure; only about 8 percent of its customers were connected to the sewer system; and poor procurement practices, understaffing, and inefficient financial and accounts management had led to huge financial losses.

    RA 8041 offered a solution by first dividing the vast MWSS service area into two smaller, more manageable zones, and then engage private concessionaires to provide the 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.

    Initially it seemed to work; from less than 70 percent coverage, the two concessionaires had, within just a few years, extended water services to more than 90 percent of the combined service areas, encompassing a population of more than 14 million people. Fueled by private investment, the quality and reliability of the water services improved as well.

    Questionable provisions
    The current dispute began in 2013 with the MWSS’ rejection of the two concessionaires’ ‘rate re-basing’ request, which has now moved on to a disagreement over compensation for claimed financial losses. But even before these disagreements, consumer advocates such as the Water for People Network (WPN) questioned some of the provisions of the concession agreements, which seemed to heavily favor the private contractors over consumers, such as:

    Authorization to use an “alternative index” to the one (based on the consumer price index) developed in RA 8041’s implementing rules and regulations “in the event that the Concessionaire and the Regulatory Office determine that the CPI 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 gave the concessionaires a no-bid right of first refusal for any “new developments” (i.e., new service areas). That by itself is not unheard of in utility concessions, but what caused raised eyebrows among critics of the deal with Maynilad and Manila Water was the provision that if a concessionaire refuses a new project area and decided later to take it over from a third-party provider contracted after that ‘first refusal,’ it could do so “on substantially similar terms” as the company being replaced, provided the latter was given at least 60 days’ notice. This, critics charged, effectively gave the two water concessionaires a potential monopoly over water services in the region covered by MWSS, which includes all of Metro Manila and most of the provinces of Bulacan, Rizal, Laguna and Cavite.

    Exemption from the obligation to conduct public bidding for procurement contracts totaling less than P250 million (in 1997; the inflation-adjusted amount is considerably higher now). Contracts over that amount do require public bidding, but the concessionaires are granted “sole discretion” in determining bid specifications and selection criteria.

    The justification for the seemingly too-attractive terms for the concessionaires in the concession agreement was the urgency of the crisis facing the Metro’s population. Because the water problems needed to be solved as quickly as possible, the concession agreement offered terms that would immediately entice investors.

    As it turned out, however, the problems that the next Administration will be forced to address were the result not of what was in the concession agreement, but what was overlooked.

    Public utilities or not?
    The key to the argument for higher rates by the concessionaires in 2013 was the inclusion of corporate income taxes in the two companies’ rate calculations. In a definitive Supreme Court ruling in 2003, electric distributor Meralco was ordered to refund its customers several years’ worth of charges due to income taxes, because under Philippine law, a company designated as a ‘public utility’ cannot pass those costs on to its customers.

    Maynilad and Manila Water, however, argued that they were not actually public utilities (despite providing a service that is universally considered a ‘public utility’ anywhere else), because they were “mere agents and contractors” of MWSS, which is specifically defined as the public utility with respect to water services.

    IBON Foundation director Sonny Africa explained, “The reason for the concessionaires’ insistence and the government’s counter-insistence [on defining the concessionaires as public utilities]is really for the tax thing. Our understanding is that former UP law dean [Pacifico] Agabin, who was the government’s expert witness, used basic definitions of “public utility” contained in Section 13(b) of the Public Services Act and Section 14 of the older Act 2307 which considered “water and sewerage” as public utilities.”

    In addition, Africa pointed out, there were a number of legal precedents from court cases to support that position.

    “MWSS further pointed out that if, for the sake of argument, the two concessionaires were only contractors, they still shouldn’t be able to pass on income taxes to their customers because their principal, MWSS, is unambiguously a public utility,” Africa added. Or in other words, conditions that apply to the contractor must apply to its subordinate providers.

    The problem with the government’s argument, however, is that it runs counter to the MWSS’ own judgment of the status of its concessionaires, which was spelled out in an MWSS board resolution from 2004 (Resolution 04-006-CA): “The RO [Regulatory Office] shall consider and treat the Concessionaires as mere agents and contractors of MWSS which is and still remains to be the public utility. The Supreme Court decision in the Meralco case is not applicable to the Concessionaires….”

    Even if, as Africa noted, former Bureau of Internal Revenue commissioner Liwayway Vinzons-Chato issued an opinion that income taxes were not part of the “Philippine business taxes” that the companies could recover through customer billing, as provided for in the concession agreement, the MWSS’ own rule regarding their status, and specifically noting the similar circumstances of the Meralco case did not apply, made that opinion irrelevant.

    Inconsistencies from the ICA
    Complicating the entire issue is that the International Court of Arbitration in Singapore, the dispute resolution mechanism provided for in the concession agreement, arrived at different rulings in Maynilad’s and Manila Water’s virtually identical cases, ruling in favor of Maynilad and against Manila Water.

    When asked if international arbitration was an appropriate way to resolve contractual disputes, IBON’s Africa offered an interesting perspective. “They put intrinsically profit-seeking investors/corporations on the same plane as presumably public welfare-seeking States/governments,” he said. “This is actually why IBON is opposed to international dispute settlement mechanisms—we’d like to think that it’s always better to err [on the side]of public interest.”

    Without the distinction being made by the arbitration process itself—its availability, Africa pointed out, is strictly a matter of contractual agreement among the parties involved —contradictory rulings by different arbitration panels are entirely possible, either leaving the government, as will be the case now, to resolve the discrepancy, or obliging the parties to try again in arbitration.

    What happens next?
    According to Africa, IBON is presently in a “wait-and-see” position. “If new absurd rates are computed, we may ask the Supreme Court to subject this to judicial review – specifically to rule on the legal matter of whether they [Manila Water and Maynilad] are public utilities or not,” he said. “We could also go to the NWRB [National Water Resources Board] about the inclusion of corporate income tax.”

    Doing that would provide some definitive answers, but how long it might take is anyone’s guess. In the meantime, both concessionaires are in the process of seeking additional arbitration for their lost revenue claims, with Maynilad hoping for a resolution sometime before the end of this year.

    Over the longer term, fixing the infirmities exposed in the Water Crisis Act and the concession agreement that led to the rate and revenue dispute—however, unintended that outcome was—may very well require legislative attention. Significantly, none of the questions over the public utility designation of concessionaires or the recovery of taxes is even addressed in the law, and as experience suggests, are not adequately defined in the concession agreement. With a potential resolution from arbitration for at least Maynilad’s part of the issue— a claim that is worth at least P3.4 billion—in the offing for later this year, the new Administration is likely to have to devise a strategy quickly if it hopes to satisfy both potential investors in vital infrastructure and services and the consumers who pay for them.

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