IFC's response to FDC was also released in various Metro Manila dailies.

The National Executive Committee
Freedom from Debt Coalition
34 Matiyaga Street
Quezon City
1100 Philippines


To Whom It May Concern:

We recently received an open letter regarding the involvement of the World Bank and the International Finance Corporation (“IFC”) in advising the government of the Philippines on the privatization of water services in Manila. I have gladly met with civil society organizations and the press in the past to discuss IFC’s participation in the water sector.

Your letter expresses profound concern about the quality and scope of service that provided to customers in the concession zone that has been operated by Maynilad Water Systems. We share your concern. We consider improved water service an issue of the utmost importance because 20 percent of the rural population and 8 percent of urban residents – 10 million Filipinos in all – lack access to fresh drinking water.

We differ, however, in our perspective on the impact of private sector involvement in Manila’s water system. I am pleased to have the opportunity to provide some background that might address some of the issues you have raised.

Background

As you are aware, by the mid-1990s, the Philippine government was faced with a crisis in water supply. Various studies at the time showed that if nothing were done to correct operational inefficiency and years of under-investment in network rehabilitation and development of new supply sources, metropolitan Manila today would be on the eve of a calamitous water supply shortage.

At the time of the introduction of private participation in 1997, Metropolitan Waterworks and Sewerage System (“MWSS”) directly supplied potable water to nearly 60 percent of the more than 10 million inhabitants within its service area through a total network of 779,000 house water connections. Less than 9 percent were connected to a sewerage system. Less than 9 percent were connected to a sewerage system. Its operations had steadily deteriorated due to years of under-investment in facilities and failure to address non-revenue water, which stood at over 60 percent in the mid-1990s. To offer a comparative sense of the problems faced in the Philippines at the time of privatization, I refer you to the table below.

Performance of Selected Asian Utilities, 1996
City Population(million) Water Availability(hours/day) Water Coverage(% of population) Non-Revenue Water(% of water production) Staff / 1000 connections
Manila 10.6 16 67 61 9.8
Singapore 3.0 24 100 7 2.0
Hong Kong 6.3 24 100 36 2.8
Seoul 10.6 24 100 35 2.3
K. Lumpur 1.4 24 100 36 1.4
Bangkok 7.3 24 82 38 4.6
Source: Second Water Utilities Data Book, Asian and Pacific Region, Asian Development Bank, October 1997. Statistics cited above were essentially based on 1996 data.

The actual concession scheme was devised and implemented by the Ramos government based on a 1995 law. IFC was selected as the advisor. The MWSS public-private partnership aimed to achieve the following over the 25-year period of a concession:

· Increase capital investments and operational efficiencies that will expand service coverage;
· Create competition and enable performance to be benchmarked;
· Ensure 24-hour water supply;
· Improve sewerage services;
· Reduce non-revenue water to an acceptable level; and
· Relieve the government of the financial burden needed to improve MWSS facilities.

The system was divided into two zones, East and West. The Zone West was the larger, covering over 7 million people in 17 cities and municipalities in Metro Manila and the nearby province of Cavite. It is about two-thirds of the total city. The Zone East covered over 4 million customers.

Bidding was conducted in February 1997. Actual turnover of service was n August 1st 1997. The concessionaires were awarded a 25 year concession on the basis of ambitious service quality improvements, which would require substantial investments—the estimate was $7 billion over the life of the contract. Concessionaires inherited a 120 year old water network, one of the oldest in Asia. This needs billions of pesos to repair and replace.

The bid was organized on the basis of tariffs. The winner of each zone would be the bidder that offered the biggest reduction of tariffs—provided that the same firm could not win both zones.

An important goal was to minimize the risk of excessive tariff disparity between the geographical zones. Since achieving the performance targets in the contracts required far more capital expenditure in the Zone East, the concessionaire in this area was given the responsibility for assuming only 10 percent of MWSS’s existing and disbursed international debt. The larger Zone West, lying alongside Manila Bay, needed less area specific capital expenditure it was thus allocated the remaining 90 percent. This uneven division of the debt was therefore an intentional balancing action.

Four bids were received for each zone. The ex ante split of debt was validated by the actual bids received as follows:

· None of the bidders presented an unacceptably high differential between the offers for the two concession zones.
· Aboitiz / CGE and Benpres / Lyonnaise bid more aggressively for the West Zone, while Ayala / United and Metro / Anglian bid more aggressively for the East Zone.
· With the exception of Ayala / United bid, which was much lower for both concessions, all bids were remarkably close to each other.

The results were that the Zone West was awarded to Maynilad Water System (“MWS”) – owned by the Benpres (59 percent) and Lyonnaise (40 percent) – on basis of a tariff of P4.97 / CM (0.19 US c/ CM). This was an approximately 43 percent decrease in the pre-award tariff. The Zone East was awarded Manila Water Company (“MWC”) – owned by the Ayala Group (44 percent) and United Utilities (20 percent) – on a basis of a tariff of P2.32 / CM (0.09 US c/ CM), an approximately 75 percent decline in the pre-award tariff.

A formula was put in place to index the tariffs to increases in the cost index of the utilities. A foreign exchange adjustment was an element of this. Although all the bidders accepted this at the time, it is fair to say that the peso’s subsequent devaluation by more than a 100 percent was not foreseen. Naturally, it has caused difficulties. The uneven distribution of debt meant that these were, indeed, exacerbated for one of the concessions. I think it is fair to say that one of the lessons IFC and other advisers have taken from this and other similar experiences has been how (and whether) to configure foreign exchange rate adjustments into such concessions.

With regards to our remuneration, indeed IFC was partially remunerated on a success fee basis. Our total fees were a fraction of the $6.2 million figure indicated in your letter. The correct fee is a matter of public record – the actual fee was $1million.

Results

IFC’s advisory involvement stopped seven years ago, although we have offered to assist the Government on several occasions. Our broad understanding is that both concessionaires, despite the challenges of the peso depreciation, have been able to make substantial new investments, improve the provision of water supply in terms of coverage and quality, and improve non-revenue water and other key performance indicators.

Both MWS and MWC have completed over a 1 million new connections from 1997 to end 2003, expanding coverage by 28 percent (see figures supplied by MWSS attached to this letter). In addition, through a program to make water supplies available to poor communities, they have managed to benefit around 150,000 poor families by 2003. MWC has been modernizing its system, running 100 km of new main, secondary and tertiary lines, rehabilitating old pumping stations and reservoirs. In higher sections of the city, it has been building new deep wells and rehabilitating old ones. On the basis of a $55 million loan in 2000, MWC increased its supply from 440 million litre per day (mld) to 700 mld.

The system has always been characterized by high levels of non-revenue water, which represented 61 percent of Metro Manila’s water supply prior to privatization. The concessionaires have managed to reduce the non-revenue water, albeit at a slower than expected rate, by 4 percent for the entire system to end 2003.

The government’s target was to provide water supply on a 24 hour basis by June 2000. This target was not met as the crisis hit the concessionaires’ capital expenditure program. One problem to achieving better performance is that MWSS is responsible for providing the bulk water supply to the two concessionaires. In the concession agreements it was envisaged that MWSS would supply an additional 400 mld to the concessionaires. Concessionaires have contributed to MWSS efforts to preserve deteriorating reservoirs and watersheds (by reforesting and preventing illegal resettlements), but delays in starting bulk supply projects such as the Laguna Lake and Laiban Dam have meant that this additional water has not been forthcoming. Delays in the provision of public investment of this nature, are one of the reasons why private investment was required in the first place.

Conclusion

The objective of the private participation in 1997 was to improve service to the people of the Metro Manila area. The design of the concession structure, which IFC advised on, aimed precisely to achieve this – by incorporating performance targets, by establishing yardstick competition, and bidding on reduced tariffs. The evidence is that significant improvements were made. There are a million more connections today than in 1997. These are not just to people in the wealthy neighborhoods. Both concessionaires have made dramatic inroads into low-income areas and they consider residents in those neighborhoods to be important clients. Tariffs were lowered substantially from pre-concession levels.

It is indeed true that one of the two concessions awarded has encountered well publicized difficulties – though the success of the other is equally well-known. Since IFC has had no subsequent involvement in Maynilad, we are not in a position to comment in detail on the reasons for their difficulties. They are complex, and clearly external factors have played a part. You correctly point out that the concession now has considerably more debt than when it was privatized. This reflects substantial investment that has contributed considerably to the expanded or improved assets of this utility.

We remain committed to helping the Philippines develop solutions, learn from experience, and create an environment for increased investment in the water sector. We would look forward to working with all parties who are committed to finding solutions and working together in a constructive manner. The problem of lack of access to water is too great and the stakes are too high for IFC and the World Bank to do otherwise.

We believe the emphasis for promoting badly needed investment today should be put squarely on raising awareness, directing subsidies to where they can be most effective, and increasing investment from all sources, whether public or private.


Yours sincerely,


(Jessica O. Ang)
for Vipul Bhagat
Country Manager
International Finance Corporation


Annex 1 – Key Indicators for MWS
Service Indicators Prior to Privatization Concessionaire – MWS Gains
2001 2002 2003 (up to 3rd Q) MWSS Combined
Population served based on official no. of water service connections (Million) 7.3 5.3 5.2 5.6 26% increase
Official no. of service connections 779,380 577,637 573,194 608,173 28% increase
Ave. annual water production (MLD) 2,800 2,417 2,363 2,316 39% increase

Service Coverage (Water coverage based on official no. of service connections) 67% 79% 78% No data submitted by MWSI
Water Availability (hrs) 17 21 21 No data submitted by MWSI
Staff/1000 Connections 9.8 4.5 4.1 No data submitted by MWSI
Equivalent No. of Staff 7,638 2,594 2,366 No data submitted by MWSI
Reported No. of Leaks per Year 27,053 41,242 98,611 50,778
No. of Leaks Repaired per Year 20,585 38,508 92,189 43,328
Non-Revenue Water 61% 66.25% 68.68% 69%
No. of Fire Hydrants - 2,073 3,867
Water Service connections extended to urban poor 61,370 63,370
Source: MWSS Regulatory Office

Annex 1 – Key Indicators for MWS
Service Indicators Prior to Privatization Concessionaire – MWCI Gains
2001 2002 2003 (up to 3rd Q) MWSS Combined
Population served based on official no. of water service connections (Million) 7.3 3.2 3.4 3.65 26% increase
Official no. of service connections 779,380 352,982 369,699 396,778 28% increase
Ave. annual water production (MLD) 2,800 1,724 1,658 1,577 39% increase

Service Coverage (Water coverage based on official no. of service connections) 67% 76 82 85
Water Availability (hrs) 17 21 21 21
Staff/1000 Connections 9.8 4.3 4.1 3.8
Equivalent No. of Staff 7,638 1,530 1,516 1,515
Reported No. of Leaks per Year 27,053 40,454 38,225 Data submitted by MWCI is ongoing deliberation at the RO
No. of Leaks Repaired per Year 20,585 39,688 37,461 30,221
Non-Revenue Water 61% 48.29% 52.66% 50.77%
No. of Fire Hydrants - 1,794 1,115 1,815
Water Service connections extended to urban poor 14,504 22,160 11,673
Source: MWSS Regulatory Office

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