Water privatization in Metro Manila

Financial arrangements and Vice-Chairman of Manila Water, the subsidiary of Ayala Corporation that holds the water concession for East Manila. Under a concession agreement, private companies collect and own revenues from water tariffs. In return they have to pay for operating costs, investments and in the case of Manila a concession fee to the Filipino government to pay for the legacy debt and the relatively modest cost of running a regulatory office. The investments under the Manila concessions were financed through debt, equity and retained earnings. During the first years of the concessions the companies faced difficulties in obtaining loans due to the East Asian financial crisis. In 2003 Manila Water obtained a US$30 million loan from the International Finance Corporation (IFC) followed by two more loans of the same amount. IFC invested US$15 million in Manila Water in preparation of the initial public offering (IPO) of its shares on the Manila stock exchange in 2005. The IPO raised nearly US$100 million. and Manila Water issued several local currency bonds beginning with a 4 billion (almost US$100 million) bond issued in 2008. Investments in sanitation were financed partly through World Bank loans to the government, with MWSS implementing. During its first 15 years Manila Water alone invested US$1.2 billion in exchanging 85 percent of the existing network, expanding the network, modernizing a water treatment plant and building wastewater treatment plants. The return on equity has been higher than the return on total capital. In the case of Manila Water, the return on equity has been 18-20 percent beginning from its fourth year of operation. water tariffs in Manila are set by the Board of MWSS upon recommendation of its regulatory office and on the basis of four mechanisms: • First, tariffs are adjusted automatically on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Initially this mechanism was applied with a lag, but after a contract amendment it is now applied every three months. • Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index). • Third, tariffs are adjusted every five years to guarantee a certain rate of return to the private concession holder (rate rebasing). The company's performance vis a vis regulatory targets is also considered in determining the tariff. • Fourth, extraordinary price adjustments can also be granted, but only in specific circumstances such as a change in law or force majeure. Both private companies initially had to post a performance bond that MWSS could call if the companies failed to fulfill their obligations. Maynilad had posted US$120 million because of its larger share of both the concession area and MWSS' old debts, and Manila Water posted US$80 million. Water resources 98 percent of the water used in Metro Manila comes from the Angat Dam about 40 km to the northeast of Manila, a multipurpose dam that is also used for irrigation and hydropower generation. From Angat Dam, water flows through the Angat River to the much smaller Ipo Dam from where it is diverted through tunnels to the La Mesa Basins. From these basins, about 60 percent of the water is provided to West Manila and 40 percent to East Manila, where the respective water companies treat the raw water. In West Manila, Maynilad treats up to 2.4 million cubic meters per day in its Mesa 1 and Mesa 2 treatment plants. In East Manila, Manila Water treats up to 1.7 million cubic meters per day in its Balara treatment plant. Except in times of extended drought, Angat Dam supplies 4.1 million cubic meters per day of water for Metro Manila. Per capita water consumption in Metro Manila is about 100 liter per day. Even if one assumes 50 percent water distribution losses, Angat Dam can supply more than 20 million inhabitants, compared to a current population of 12 million. However, during severe droughts the water supply is insufficient. For example, during the drought of 1998 water supply to Metro Manila had to be reduced by 30 percent and water supply for irrigation was completely cut. and that MWSS is "obsessed" with the dam. The construction of the dam has been repeatedly delayed for lack of funding. Manila Water also planned to tap into the lake to complement the water supply of the quickly growing Rizal area to the north. This was presented as a measure to adapt to climate change, since it will reduce the dependence on the Angat River, which is vulnerable to drought. At the same time, together with NGOs, Manila Water planted trees covering more than 300 hectares of land in the Ipo and Marikina watersheds to protect its main current water source. ==Development of the concessions==

Before privatization suggested that what he called the "water crisis" in Metro Manila should be solved by involving the private sector. Before privatization, the Metropolitan Waterworks and Sewerage System (MWSS) provided water for on average 16 hours every day to two thirds of Metro Manila. Tariffs were low and MWSS was dependent on subsidies that the government was keen to abolish. The utility was saddled with debts of US$800 million owed to the Asian Development Bank, the World Bank and the Japan Bank for International Cooperation. Manila residents had become accustomed to poor water service in Manila and did not feel a strong urge to change the situation, especially because water tariffs were very low. According to a book by Mark Dumol, a senior civil servant in charge of the privatization, President Fidel Ramos insisted in 1994 that there was a "water crisis" in Manila at a time when no one else spoke about a water crisis. Ramos began to convince others that there was a water crisis, which increased political support for privatization. Preparation for privatization (1994–97) The government of Corazon Aquino had initiated a wide-ranging privatization programme selling 122 companies for US$2 billion in 1986-1992. When Fidel Ramos succeeded her he broadened the privatization program to infrastructure, resolving an electric power crisis through rapid private investments in power plants in 1992-94. Based on this perceived success, Ramos asked his Secretary of Public Works and Transport Gregorio Vigilar to apply the same approach to resolve the water problems of Manila. the water service area in Manila was divided in two zones, to facilitate performance comparisons ("benchmarking"), based on the model of Paris which at that time was served by two private water companies. There was debate about the decision to split the service area as it was complicated, including personnel, assets and the customer database. It brought benefits and caused "huge complications" according to one of the government's lead negotiators, Mark Dumol. The concessionaires were expected to be regulated by the newly created MWSS regulatory office, but its role remained ambiguous. While some office members expected to actively monitor and control the private companies, its first chief, Rex Tantiongco, insisted that it was part of the utility, to implement decisions agreed to between the MWSS Board of Trustees and the concessionaires. First five years (1997-2001) where the business hub of Manila city is located. Manila city is part of the Western water concession. After the contract came into force, base tariffs initially decreased substantially from 8.6 Pesos/m3 in all areas to 5 Pesos/m3 in the Western zone, and only 2.3 Pesos/m3 in the Eastern Zone. In the first years, concessionaires were faced with both a severe drought and the Asian financial crisis. Their debt doubled, because of a rapid 50 percent devaluation of their Peso income, and legacy debts were denominated in foreign currency. Maynilad incurred high costs, in part because it awarded contracts to affiliates of Suez without competitive bidding. It also brought in new staff from its mother company Benpres who were inexperienced in water supply, which led to tensions and reduced the motivation of incumbent staff. Maynilad thus invested in expanding access in the Western zone, but due to its business model and the heavy load of inherited foreign-currency debt it soon ran into financial difficulties. Despite its successful management Manila Water's concession could not survive based on the extremely low tariffs it had committed itself to charge. As early as 1998 Manila Water requested an increase of the 5.2 percent rate of return it had included in its own bid to calculate its tariff. The MWSS Regulatory Office refused to grant the increase. Manila Water then seized an international arbitration panel. The panel granted an increase to 9.3 percent, which resulted in a substantial tariff increase. Civil society groups criticized the decision, saying it undermined the integrity of the original bid at the expense of customers and competitors. The Filipino government neither returned West Manila to public management, nor accept Manila Water's offer to take over the entire metropolitan area, but offered its share in Maynilad for sale. In December 2006 a consortium of the Filipino construction company DM Consunji Holdings, Inc (DMCI) and the Filipino telecommunications/real estate company Metro Pacific Investments Corporation (MPIC) bought it for a low sales price of US$503.9 million. While many public tenders impose a high equity, this was not the case here. Also, the tender only required expertise in utilities management — including telecommunications and energy — not specifically water utilities management, which allowed a wider variety of bidders to come in. As of 20111, Suez continued to hold a 16 percent-minority share in Maynilad. By January 2008 the new owners had paid off the US$240 million debt to the government. Manila Water improved its performance and increasingly gained the trust of investors and in 2003 the International Finance Corporation (IFC) provided a loan and took an equity stake in the company. This helped the initial public offering (IPO) of the company's shares on the Manila stock exchange in 2004, the first IPO since the East Asian financial crisis in 1997. In 2008, Manila Water issued the first local currency bond since the crisis. Contract extension, Maynilad turnaround and Manila Bay cleanup (2009-2012) In 2009, Manila Water's concession was extended until 2037 instead of just to 2022. Maynilad's new owners began to invest more heavily. Between 2007 and September 2011 the population served from increased 6.4 to 7.8 million, the share of customers with continuous water supply increased from 46 to 82 percent and non-revenue water decreased from 67 to 47 percent. In June 2010, Maynilad's Chief Executive Rogelio Singson, who had overseen its turnaround since 2007, became Secretary of Public Works and Highways. In December 2008 the Supreme Court of the Philippines ordered a number of government agencies, including MWSS and by extension the two concessionaires, to clean up Manila Bay. The Court called the bay "a dirty and slowly dying expanse mainly because of the abject official indifference of people and institutions". Following the court decision the concessionaires established ambitious investment plans for sewerage and wastewater treatment. In May 2012 the World Bank approved a US$275 million loan for a Metro Manila Wastewater Management Project. The loan was channeled to the two concessionaires through the Land Bank of the Philippines \. Disputes about tariff increases (2012-2015) For the 2013-2017 "rate rebasing process" the companies had requested price increases. However, in September 2013, the regulator MWSS ordered both companies to reduce their tariff. Manila Water and Maynilad were ordered to reduce tariffs by 29.47 percent and 4.82 percent respectively in five equal annual tranches over a period of five years, because "the utilities were unable to justify the need for higher rates based on their business and investment plans". The companies appealed against the decision at the International Chamber of Commerce which reversed the order against Maynilad in December 2014, allowing its tariffs to increase by 9.8 percent from 31.28 pesos (69 U.S. cents) per cubic meter, much less than the 28.3% increase initially requested by the company. Furthermore, there is disagreement about whether the companies can pass corporate income tax on to their customers. The companies claim that the government allowed them to do so back in 1997. However, the regulator MWSS blocked this part of the tariff increase and brought the issue to the Supreme Court of the Philippines for a final decision. oel Yu, chief regulator at MWSS, says that Manila Water’s return on equity is "in the region of 20%", while Maynilad’s is "in the region of 40%". ==Impact==

Between 1997 and 2002 improvements in access were limited and water losses even increased in West Manila. However, subsequently performance improved in both halves of the city. As of 2009, access had increased substantially, and efficiency as well as service quality had also improved significantly. The improvements were faster and more significant in the Eastern Zone compared to the Western Zone. Both companies made efforts to reach the poor in slums. However, tariffs also increased significantly, improvements remained far below the contractual obligations. Almost no improvements were reached concerning sanitation. Access to water In East Manila between 1997 and the end of 2009 the population served more than doubled from 3 to 6.1 million (2009) and the share with access to piped water increased from 49 percent to 94 percent (2006). The share of the population with access to piped water increased from 67 percent in 1997 to 86 percent in 2006. Manila Water operates 60 desludging trucks that empty septic tanks free of charge. The sludge is brought to two septage treatment plants. It plans to invest US$1 billion in sanitation between 2011 and 2018 to bring sewerage coverage to the contractual target. However, loss reduction during the first years was far below what had been planned. The 31 percent level of water losses that Manila Water had planned to reach in only one year, was achieved only in 2005. The 16 percent target reached in 2009 had initially been envisaged to be reached in 2001, according to Manila Water's financial model used to bid for the concession. In West Manila, according to MWSS, non-revenue water actually increased during the first years of the concession from 64 percent in 1997 to 69 percent in 2002, compared to a target of 30 percent. Service quality and customer satisfaction The concession contracts obliged the private companies to achieve an uninterrupted water supply at a pressure level of 16 pound per square inch (1.1 bar), enough to bring water up to 11 meter above ground without additional pumping. They also required compliance with drinking water and effluents standards by the year 2000. A 2000 survey by MWSS had shown that in both halves of the concession 33 percent of residents had perceived an improvement in service, while 12 percent said that service has worsened, with 55 percent stating it had remained unchanged since privatization. In West Manila, after Maynilad's ownership changed in 2007, the company increased its investments. One of the results is that the share of customers that enjoys 24-hour water supply increased from 32 percent in 2007 to 71 percent in early 2011. Reaching the poor Many poor in Manila do not have access to piped water supply because the land where they live is occupied illegally and the private utilities are thus not allowed to connect them to the network. However, innovative solutions have been found to overcome this problem. In East Manila, Manila Water's approach to connect poor communities usually involved no pipes inside the communities, but included a single bulk meter for up to 100 households. It was the responsibility of the community to connect its members and any losses beyond the bulk meter were not incurred by the utility. In West Manila, Maynilad initiated early attempts to connect the poor in slums through the construction of piped networks by a small local company called IWADCO (Inpart Waterworks and Development Company) using its own funds and buying water in bulk from the utilities. Local banks initially refused to lend to the company even when it already had 25,000 paying customers. A NGO called Streams of Knowledge, which is associated with the Philippine Center for Water and Sanitation and was supported by UNDP, helped to set up the arrangement together with the local government and Maynilad which provides water at a discounted bulk rate. Users pay their water bills to water coordinators from the respective communities, which in turn pay Streams, which in turn pays a salary to the coordinator, pays the bulk water bill and returns part of the funds to the community. Maynilad built the piped network only to supply points at the entry of narrow alleys, from where residents distributed it among themselves with rubber hoses. A connection fee of 5000 Pesos (about US$90) was paid in instalments, resulting in monthly payments of about 200 Pesos (US$3.70) per household. This was about four times less than what the poor had paid to water vendors before. Tariff increases As mentioned before, the two concessionnaires submitted bids with tariffs that were much lower than the previous tariffs: 26 percent of the previous tariffs in the East Manila and 57 percent in West Manila. In West Manila the average tariff for all customer groups (base tariff) was 5 Pesos/m3 and in East Manila it was only 2.3 Pesos/m3, compared to 8.6 Pesos/m3 before the concession. Tariffs remained close to these low levels for five years until the first rate rebasing took place in 2002, followed by further significant tariff increases, as shown in the table below. • The percentage of 1996 real tariffs is calculated by first dividing the nominal tariff with the CPI and then dividing the resulting tariff for each year with the real tariff for 1996. By the end of 2008 the tariff was, in real terms, 89 percent higher than the pre-privatization tariff in the West Manila and 59 percent higher in East Manila. The average tariff for all customer groups, including commercial customers that are being charged a higher tariff than residential customers, was 32 Pesos/m3 (US$0.71/m3) in East Manila and 27 Pesos/m3 in West Manila (US$0.60/m3) at the beginning of 2008. This compares to an average tariff of US$0.70/m3 in Jakarta (2005) and US$1.62/m3 in Singapore (2010). Residential tariffs are much lower than the average tariff that also includes commercial users. A residential bill for a consumption of 30 cubic meters per month, including an environmental charge and value-added tax, was 395 Pesos (US$10) or 13 Pesos/m3 (US$0.33/m3) as of 2008. A residential water bill for the same consumption in West Manila was 489 Pesos/m3 (US$12) or 16 Pesos/m3 (US$0.39/m3). A residential water bill for a minimal consumption of 10 cubic meter per month, however, is only 109 Pesos (US$2.60), corresponding to only US$0.09/m3. For poor customers of Maynilad, this tariff is further reduced by 40 percent as of January 2012. Manila Water provides water for free to some institutions such as schools, hospitals, jails, and orphanages under its Lingap Projects. Connection fees for water or sewer connections also increased substantially. For example, the residential connection fee increased from Pesos 3,722 in 2000 to Pesos 7,187 in 2008 in the East zone. ==See also==