Water privatization in Metro Manila: Difference between revisions

Water privatization in the Philippines began in 1997 with the high-profile award of two concession contracts for the Eastern and Western halves of Metro Manila. The concessions represent the largest population served by private operators in the developing world.^[1] As of 2010, the concession in Eastern Manila is highly successful and has led to spectacular improvements in access, service quality and efficiency. The concession in Western Manila failed when the company Maynilad went bankrupt in 2003. It was sold to new investors in 2007 and performance has improved since then.

The plan to privatize the public utility of Manila, the Metropolitan Waterworks and Sewerage System (MWSS), emerged from the inability of MWSS to expand coverage for a growing population or to improve service quality and efficiency. By 1996, MWSS only provided water supply for on average 16 hours each day to two thirds of Metro Manila. According to the Asian Development Bank, the share of non-revenue water (NRW), water which is not billed e.g. due to leakage and illegal connections was more than 60%, an extremely high percentage compared to other Asian cities such as Seoul (35%), Kuala Lumpur (36%) and Bangkok (38%).^[2] Furthermore, MWSS depended on government subsidies due to poor cost recovery. A few years earlier, the government had privatized electricity supply which resulted in a reduced number of blackouts. The government wanted to repeat this perceived success in water supply.

In 1995, the Water Crisis Act was passed, providing the legal framework for the privatization of MWSS. The private participation was implemented through two concession contracts, in which the concessionaires were given the task to operate and manage the facilities, whereas MWSS preserved the ownership of the infrastructure.^[3] In order to facilitate benchmark comparisons, the service area was divided in two zones for which concession were awarded in 1997:

• the Maynilad Water Services, Inc., a joint venture by the French Suez and the Filipino Benpres Holding was awarded the concession contract for the West Zone, and
• the Manila Water Company, Inc., consisting of the Filipino Ayala Corporation as well as the British United Utilities, the US company Bechtel and Mitsubishi was awarded the East Zone.

The concession contracts were for 25 years and included targets concerning coverage, service quality and economic efficiency. An objective was to increase water coverage in Metro Manila to 96% by 2006. The companies were expected to be regulated by the MWSS Regulatory Office, which was staffed to a large extent with employees of the former public utility. The two concession holders inherited the debt of MWSS. However, the debt was not shared equally between the two halves of the city: Because Western Manila is more prosperous, 90% of the legacy debt was assigned to the Western zone. The Benpres Group, the Filipino partner of Maynilad, was in a desolated financial situation when it entered the contract, providing little cushion for the first difficult years. The International Finance Corporation (IFC) of the World Bank Group advised the government about the design and bidding of the two concessions.^[4]

After the concession came into force, tariffs at first decreased substantially since the private companies had submitted very low bids. In the Western zone the base tariff was 5 Pesos/m3 and in the Eastern Zone it was only 2.3 Pesos/m3, compared to 8.6 Pesos/m3 before the concession. The concessionaires were faced with a severe drought and the Asian financial crisis. Because of the rapid currency devaluation, debt service denominated in foreign currency doubled.^[5]

Maynilad incurred high costs, in part because it awarded contracts to affiliates of Suez without competitive bidding. It pursued an approach to connect poor communities that included laying pipes in slums, which made it difficult to control theft. Indeed, non-revenue water even increased in the Western zone. Maynilad also brought in new staff from Benpres that had no experience in water supply, which led to tensions and reduced the motivation of incubmbent staff. Maynilad thus invested in expanding access in the Western zone, but due to its faulty business model and the heavy load of inherited foreign-currency debt it soon ran into financial difficulties.^[5] It then slowed down its investments and in April 2001 it stopped paying the concession fee to the government.^[4].

Manila water, on the other hand, initially did not invest in system expansion in its Eastern Zone.^[6] It focused on reducing non-revenue water and initially borrowed only small amounts in local currency. It bid out works competitively and gained the trust of former MWSS employees which were trained in relevant fields. Only a few top positions were filled with outsiders seconded from Ayala or its foreign partners. Manila Water's approach to connect poor communities usually involved no pipes inside the communities, but involved a single bulk meter to which up to 100 households. It is the responsibility of the community to connect its members and any losses beyond the bulk meter are not incurred by the utility. Also, Manila Water used a "territory management" approach to reduce non-revenue water under which decentralized operating units were given substantial responsibility to decide about appropriate actions. Evaluation and compensation of staff in the decentralized units was linked to their performance. With these policies Manila Water made a profit as early as 1999 and was thus able to gain the confidence of banks and to gradually increase its borrowing.

In 2002 water tariffs were increased substantially for both concessions, exceeding their pre-privatisation level in current prices. By 2003 tariffs reached 11.4 Pesos in the Western zone and 10.1 Pesos/m3 in the Eastern zone. Targets concerning coverage and non-revenue water were adjusted downwards with agreement of the regulatory agency.^[5]

Despite the tariff increases and the lowered targets, Maynilad went bankrupt in 2003. After a string of financial, legal, and regulatory disputes the concession was bid out again and was bought in 2007 by a consortium of the Filipino construction company DMCI Holdings and the Filipino investment firm Metro Pacific Investments Corporation (MPIC).^[7] Suez continues to hold a 16%-minority share in Maynilad.^[8]

After the tariff increase of 2001 Manila Water began to invest in expanding the water network, including in poor neighborhoods, and achieved a spectacular increase in access.^[6] In 2009 Manila Water's concession was extended by another 15 years until 2037 instead of 2022.^[9]

Manila Water achieved significant improvements 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% to 94% (2006);^{[10] [6]}
• non-revenue water declined from 63% to 16%; ^[11]
• the share of customers with continuous water supply incrased from 26% to more than 98%;^[10]
• labor productivity increased substantially, as evidenced by a decline of the number of staff per 1000 connections from 9.8 to only 1.4;^[10]
• the percentage of people judging the utility's performance as "very good" increased from 28% to 100%, according to a survey by the University of the Phillipines;^{[10] [12]} and
• despite tariff incrases, residential tariffs stand at only US$0.33/m3 and thus are about 10 times cheaper than water sold by vendors.

Sanitation services, however, still have a long way to go. In the East Zone, only 10% of people have sewerage connections, with the other 90% relying on septic tanks, which Manila Water is obliged to empty.^[12] Manila Water plans to invest US$1 billion in sanitation between 2011 and 2018 to bring sewerage coverage to 70%.^[10]

In the West Zone Maynilad claims to have connected 600,000 people to the water supply system, including many poor in slums such as Happyland. Maynilad built the piped network 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.^[4] The share of the population with access to piped water increased from 67% in 1997 to 86% in 2006.^[6] After Maynilad's ownership changed in 2007, it implemented an ambitious investment program. One of the results is that the share of customers that enjoys 24-hour water supply increased from 32% in 2007 to 71% in early 2011.^[13]

Water tariffs in Manila are adjusted on the basis of four mechanisms. First, tariffs are adjusted automatically every three months on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index). Third and most importantly, 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 spefific circumstances such as a change in law or force majeure. Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.^[14]

The two concessionnaires submitted bids with tariffs that were much lower than the previous tariffs: 26% of the previous tariffs in the Eastern zone and 57% in the Western zone. Tariffs remained at these low levels for five years until the first rate rebasing took place in 2002. By the end of 2006 the tariff was, in real terms, 150% higher than the the pre-privatization tariff in the Western zone and 23% higher in the Eastern zone.^[1] As of 2008, residential customers in the Eastern Zone who consumed about one cubic meter per day paid a monthly water bill of 395 Pesos (US$10) or 13 Pesos/m3 ($0.33/m3).^[15]

Water supply and sanitation in the Philippines

• Mark Dumol:The Manila Water Concession. A Key Government Officials Diary of the World s Largest Water Privatization, World Bank, Directions in Development, 2000
• Jude Esguerra:New Rules, New Roles: Does PSP Benefit the Poor? The Corporate Muddle of Manila's Water Concessions, WaterAid, 2003