• SPECIAL REPORT

    Rough waters ahead

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    Post-Aquino govt to grapple with Maynilad, Manila Water arbitration fallout

    (First of two parts)

    IF water concessionaire Maynilad will have its way in relation to a favorable ruling by the International Court of Arbitration in Singapore, the new Philippine government that will have been in office for a few weeks sometime in the third quarter of this year will be compelled to pay the water distributor at least P3.4 billion in compensation.

    That P3.4 billion liability may only be the start. A different arbitration claim by another water concessionaire, Manila Water, could put the government on the hook for up to P79 billion over the next 21 years, or an average of about P3.8 billion per year.

    Meters for Manila Water customers in Quezon City.

    Meters for Manila Water customers in Quezon City.

    Both cases at the ICA are part of an ongoing dispute between the companies and the government’s Metropolitan Waterworks and Sewerage System (MWSS) after the latter rejected their applications for a rate increase in September 2013 and instead, ordered the two to reduce water rates.

    This evidently came as a surprise to the concessionaires, as the adjustment—“re-basing”—of their existing tariff rates should have been almost a mere formality under the terms of their concession agreement with MWSS, which provides for “rate re-basing” every five years. The MWSS balked, however, because in their rate calculations both companies had included their own income taxes and—particularly in Manila Water’s case, questionable expenses such as those for corporate meetings and events, as well as gifts for employees and visitors.

    MWSS ruled that the tax and other expenses were not provided for in the concession agreement, and instead of granting a P5.83 per cubic meter rate hike, ordered Manila Water to reduce its basic rate by 29 percent over the next five years; Maynilad, which had asked for an P8.58 increase, was likewise ordered to reduce its basic rate by P0.29 per cubic meter per year.

    Collision: New govt vs powerful business
    Manila Water is an Ayala-led consortium, which includes Mitsubishi, International Finance Corporation and First State Investment (UK and Hong Kong) Ltd.

    Maynilad is primarily owned by a consortium led by the Manny V. Pangilinan-led Metro Pacific (MPIC) and the Consunji conglomerate DCMI. A slightly less than 30 percent stake in Maynilad is controlled indirectly by the First Pacific investment concern of Indonesian magnate Anthoni Salim through MPIC, which also has a 5.2 percent stake in Maynilad independently from its partnership with DCMI.

    While Manila Water’s claim seems a lot less likely to be successful—the company has already lost one arbitration case at the ICA—most observers see circumstances favoring Maynilad, potentially setting the new Administration on a collision course with both powerful business and consumer interests.

    Claims for losses
    Within weeks of the MWSS rejection of their respective rate hike requests, both Maynilad and Manila Water filed arbitration claims against MWSS at the ICA, which is part of the Singapore-based International Chamber of Commerce (ICC). In December 2014 Maynilad won a favorable ruling from the ICA, which awarded the company a P3.06 per cubic meter rate increase. Manila Water was not so fortunate; in the decision on its claim handed down in April 2015, the ICA ordered Manila Water to cut its rates by P2.77 per cubic meter, which was still an improvement over the P7.24 per cubic meter rate cut ordered by the MWSS.

    The two new arbitration cases are the result of the fallout from the contradictory decisions of the ICA. Due to the confusion caused by the ICA’s ruling that income taxes were recoverable through customer tariffs in Maynilad’s case, but not in Manila Water’s, the MWSS refused to implement Maynilad’s rate hike until it had a chance to “study” the Manila Water ruling. Maynilad pointed out, in a demand letter to the government shortly after the decision in the Manila Water case was released, that the two concessionaires’ cases had been considered individually by different arbitration panels, and should be treated as such by the MWSS.

    The P3.4 billion claim made by Maynilad – and subsequently ignored by the government – was for losses incurred from September 2013 through March 2015 due to the difference between the rate determined by the arbitration panel and the reduced rate ordered by MWSS; beyond that, the company claimed at the time, it would lose between P180 million and P200 million in revenue per month for as long as the reimbursement claim remained unsettled.

    There are strong indications that settlement may be long in coming; while Maynilad is hopeful that its latest arbitration claim will move forward and deliver a decision by the second half of this year, MWSS signaled its intent to seek a judicial clarification as soon as the decision on Manila Water’s original claim was announced last April.

    In a statement at the time, MWSS chief regulator Joel Yu said he considered it urgent to take the matter to court, preferably the Supreme Court, as quickly as possible, a move the regulator almost as quickly gave up on, implementing the new rates according to the arbitration decisions the following month.

    Manila Water’s unusual approach
    On April 23, 2015, the day after the result of its first arbitration case was released, Manila Water filed a claim through the Department of Finance, demanding that the government follow through with the terms of a letter of undertaking that forms part of the concession agreement “to reimburse its losses in operating revenues arising from a significant diminution in the rate of return committed in its concession contract.”

    In other words, having been denied a rate hike and instead, compelled to cut its rates instead, Manila Water was, in effect, demanding that the government subsidize the rate hike it was prevented from collecting from its customers.

    Executive Director Sonny Africa of IBON Foundation, one of the public interest groups closely monitoring water rates and regulatory issues, confirmed that Manila Water’s new claim was a bit odd.

    “No, we’re not aware of any concessionaire making an advance claim like this,” Africa said, adding that entertaining it might set a “lousy precedent.”

    The claim, however, may not be as ridiculous as it appears at first blush. According to a statement from Manila Water explaining its new claim, the letter of undertaking issued by the DoF indemnified Manila Water against losses that were incurred as a result of MWSS’ action “resulting in the reduction of the standard rates below the level that would otherwise be applicable in accordance with the Concession Agreement.”

    The rejection of Manila Water’s September 2013 rate adjustment request and the subsequent unfavorable ruling at the ICA, in the company’s view, deny “Manila Water a rate of return ‘allowed from time to time to operators of long term infrastructure concession agreements in other countries having a credit standing similar to the Philippines’ pursuant to Section 9.4 of the Concession Agreement.”

    The P79 billion figure attached to Manila Water’s claim is the company’s estimate of its losses from 2015 and purportedly up to the expiration of its concession in 2037; the “losses are expected to be reimbursed as they are actualized for each remaining year” (an average of about P3.6 billion per year) of the concession, making the claim somewhat open-ended.

    That the letter of undertaking on which Manila Water is basing its claim exists and is a legally-binding provision is clear enough, but whether or not it applies at the scale Manila Water asserts it does, or applies at all, is subject to interpretation; the government made its position clear by ignoring Manila Water’s notice of claim, sending the company to again seek relief at the ICA.

    ‘Differences in interpretation’ seem to be at the heart of the disputes between the water concessionaires and the government, and the agreed-upon resolution mechanism, the ICA, has evidently only added to the confusion by making conflicting rulings. The uncertain circumstances have put business and consumers alike on edge; the business community has been made wary by an unclear response by the government to contract disputes, and consumers, naturally, are worried about the potential increase in water rates the tens of billions of pesos at stake represent.

    How the regulatory mess developed, and what might be done to improve the situation is the focus of the conclusion of this special report.

    (To be continued).

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