Jan 132015

The arbitration proceedings conducted by the interim Appeals Panel of the International Chamber of Commerce (ICC) in connection with Maynilad Water Services’ rate adjustment proposal ended in the same way it started almost a half-year ago: with zero fanfare.

But with the ICC panel’s decision after Christmas to uphold the rate-adjustment proposal by Maynilad Water Services Inc. (MWSI), the post-arbitration phase went the opposite direction: so much fuss, most of it coming from left-wing and bleeding-heart types who see any upward adjustment in public services as yet another cross to bear by ordinary consumers.

After staying under the radar since Maynilad formally sought ICC arbitration in October 2013, the Appeals Panel started hearing the case in August last year and then made its ruling last Dec. 29. But Maynilad learned about it only last Jan. 5.

Maynilad’s parents Metro Pacific Investments Corp. (MPIC) and DMCI Holdings disclosed that “in a decision dated 29th December 2014, the Appeals Panel… upheld the alternative rebasing adjustment of Maynilad,” both disclosures read. “This will result in a 9.8 percent increase in the 2013 basic water charge of P31.28/cu.m., inclusive of the P1 currency exchange rate adjustment (CERA), which the MWSS has now incorporated into the basic charge.”

For Maynilad president-chief executive officer Victorico Vargas, the ICC decision “confirms that the concession agreement works and restores investor confidence in the public-private partnership program of the government.” 

Vargas said the decision once ensure the continued implementation of Maynilad’s capital expenditure projects that are intended to benefit its customers.

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Meanwhile, Maynilad chief finance officer Randolph Estrellado explained that the Appeals Panel’s approval of Maynilad’s alternative rebasing adjustment translates to a 9.8 percent increase in the 2013 average base rate of P31.28 per cubic meter, or P3.06 per cu. m.

For most customers using an average of 20 cu. m., the new rate means an adjustment of P1.68 per cu. m., or a P50.40 increase in their monthly bills.

Estrellado said this is already lower than the original application because Maynilad submitted an alternative business plan for arbitration, as allowed under the rules, and because they already took into consideration the [MWSS] Regulatory Office’s reduction in capital expenditures and disallowed expenses.

And despite the two-year delay in the adjusted rates, Estrellado said Maynilad is willing to stagger collection of the P3.06/cu.m. average increase over the remaining three years of the five-year rebasing period that started in 2013, or roughly a one-peso rise per year from now till 2018 “to mitigate the impact to our customers.”

He explained that of the P3.06/cu.m. increase, about P2 accounts for the recovery of income tax. This means that the increase does not yet include the roughly P60 billion that Maynila needs to recover as well as future investments.

Other than the income tax recovery, Estrellado said, the rate increase would cover unfinished projects such as sewerage coverage expansions and improvement of water pressure in households from the current seven pounds per square inch (psi) to 16 psi.

The ICC-authorized adjustment along, with the Maynilad-proposed staggered payment, must be approved first by the MWSS Board, and would take effect 15 days after such the Board decision’s is published in a major newspaper.

The ICC decision is actually a victory for Metro Manila consumers, most especially ordinary Filipinos who had to cope with scarce and expensive potable water during the pre-privatization years.

Low-income Metro folk are the real winners in this ICC decision because MWSS’ arbitrary rate cut would have undermined Maynilad’s cash-intensive, long-term modernization program to supply potable water to as many households as possible in its West Zone concession.

The rate adjustment is, in fact, modest because Maynilad itself reduced its rate hike in the alternative business proposal that it had submitted to the Appeals Panel in the course of the arbitration proceedings;

A fair rate adjustment is reasonable because it is part of the concession deal, in which Maynilad had agreed to invest heavily to modernize the system in view of the government’s utter lack of cash to improve the system and MWSS’ $1-billion debt.

The new rebasing rate would enable Maynilad to go ahead with its modernization program, which includes sewerage coverage expansions and improvement of water pressure in households.

It would also help restore investor confidence in the Philippine economy and in President Aquino’s pet project Public Private Partnership (PPP).

Metro Manila’s water supply services has vastly improved since the 1997 takeover by the concessionaires, and the World Bank touted this restructuring and privatization of operations as a prime model of a successful PPP.

Both concessionaires – Ayala’s Manila Water and the Pangilinan-led Maynilad – are renumerated for their services by letting them earn a certain Rate of Return or profit level—called the Appropriate Discount Rate (ADR)—from the water and sewerage service charges that the two concessionaires are allowed to collect from their respective customers.

There have been three five-year rate rebasing periods since 1997 in which the concessionaires were allowed to adjust their rates to meet their ADRs. The fourth one, from 2013-2017, was interrupted when both concessionaires separately sought arbitration from the Paris-based ICC after MWSS arbitrarily ordered Maynilad and Manila Water to slash their rates rather than increase them.

In an analytical paper titled “The Privatization of the MWSS: How and Why it was Won,” former Dean Raul Fabella of the University of the Philippines (UP) School of Economics wrote that the turnover of MWSS operations to the two concessionaires “is now considered a singularly successful structural reform in the annals of Philippine political economy.”

“The privatization of MWSS was clearly a triumph of the principle of comparative competence—the private sector proved more competent at the delivery of water and sewerage services than the state. How it was clinched is a parable for those seeking to whittle down the compass of incompetence and inefficiency in a weak-governance environment. Where the state is weak and therefore easily hijacked, it is much better to cede territory to the market,” he concluded.

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