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The dispute between the Metropolitan Waterworks and Sewerage System (MWSS) and the two water companies has finally spilled over to the Department of Finance (DoF). After failing to force the MWSS to implement a hike in water rates based on the December 29 2014 arbitral award, Maynilad decided to demand compensation from the government through the DoF.
The demand for compensation is based on letters of undertaking issued by the government in favor of Maynilad and Manila Water on July 31, 1997 and re-affirmed on March 17, 2010. The letters of undertaking are a form of sovereign financial guarantee which is often used by governments as an economic incentive for investors to go into certain projects. In this case the letters of undertaking provide for indemnification of any losses caused by a delay in the implementation of any increase in water rates.
In February this year, following the MWSS’s announcement that it would defer implementation of Maynilad’s rate hike, Maynilad sent Finance secretary Cesar Purisima a letter demanding the payment of P3.44 billion constituting lost revenue as of February 2015 and an additional P208 million for every additional month of delay. Manila Water followed suit and asked for P79 billion to cover projected losses until the end of its concession in 2037. Excluding the additional monthly losses being claimed by Maynilad, the current claims for compensation amount to a staggering P82.44 billion!
Maynilad’s claim that it is losing money has been disputed by the MWSS since the Concession Agreement provides for the recovery of expenses until the end of the contract. In simple terms, this means that whatever amount Maynilad is unable to recover at present, may be recovered in succeeding years. On the other hand, Manila Water’s demand for P 79 billion is even harder to justify since it is based on projected losses all the way to 2037. In other words, Manila Water is demanding advance payment on losses it has yet to incur.
The sovereign guarantees issued to both companies would have remained largely unknown to the public had it not been for the current dispute following the different outcomes of separate arbitration cases. Now that it is out in the open, it would be good to have a serious discussion about sovereign guarantees and the huge risks they pose including the risk of diverting much needed government resources.
Just to put things in perspective, the money the water companies are asking for is significantly larger than the P53.9 billion allocated by the Aquino administration in 2015 for basic education facilities which includes the construction of 31,728 classrooms and the repair of 9,500 more. It is more than double the P37.1 billion cost of Philhealth premium subsidies which will benefit 15.4 million poor families. Rather than using the state’s limited resources to guarantee Maynilad and Manila Water’s profits, the Freedom from Debt Coalition argues that they should be used to fund essential public services so we won’t have to rely on private businesses to provide them.
Apart from the propriety of using public funds to the ensure the profitability of private investments, the current brouhaha involving Metro Manila’s water concessionaires can also be viewed from the perspective of tax justice. After all, the major sticking point in both arbitration cases was the question of whether or not Manila Water and Maynilad should be allowed to pass on corporate income taxes to their respective customers. FDC and other anti-water privatization advocates have argued it is unfair to force water consumers to bear the cost of a corporation’s income taxes, especially since they–the consumers–are already paying direct as well as indirect taxes. If government agrees to compensate Maynilad and Manila Water, it practically legitimizes the unjust practice of making ordinary consumers shoulder the burden of paying income taxes for wealthy corporations.
The Manila Water/ Maynilad Arbitration Cases Explained
Since 2013 the Metropolitan Sewerage System and Metro Manila’s two water concessionaires, Maynilad and Manila Water have been engaged in a messy dispute involving water tariffs. The dispute eventually led to separate arbitration cases, which although involving essentially the same set of facts, produced remarkably different decisions.
The arbitration process is a private process for resolving disputes involving parties in a contract. In arbitration, disputes between parties are settled outside of the existing judicial system. Often the process is highly opaque. Confidentiality agreements prevent parties in the dispute from divulging details of the arbitration process during and even after the decision is reached. In addition, the decision called an arbitral award or simply award, is often also understood to be final and non-appealable.
Arbitration is the dispute settlement mechanism mandated by the Concession Agreements signed between the government and the two water companies in case a major dispute (including rate-setting disputes) arise between them. The Concession Agreement also provides that the arbitration panel will be headed by the International Chamber of Commerce—the largest business organization in the world.
The arbitration cases involving MWSS and the two water companies servicing Metro Manila stem from MWSS’ decision in September 2013 to reject petitions for upward adjustments in water rates and to instead order water rate cuts for both concessionaires. The petitions for hikes in the basic water charge were part of the latest rate-rebasing exercise undertaken by the MWSS and the two water concessionaires. The rate-rebasing process is done every five years to determine appropriate tariffs for a given period.
After a thorough review of the merits of the rate hike petitions with the help of financial, technical and legal experts, the MWSS Regulatory Office recommended the water rate reduction largely on the basis of disallowances in recoverable expenses. Among the items disallowed were corporate income taxes which both water concessionaires had been passing on to consumers in the past. According to the MWSS, Maynilad consumers had been shouldering P3.1 billion of Manila Water’s and Maynilad’s corporate income taxes annually since 2008. The reduced water rates were to have taken effect in October 2013. Had they been implemented, they would have resulted in a P7.24 reduction in water rates for Manila Water and P1.28 reduction for Maynilad.
The significant reductions in the basic water charges of both water companies were never implemented, however, because a few days after the announcement of the decision, Manila Water took the matter to arbitration. Maynilad did the same a couple of days later.