One after another, developing countries succumb to the pressure of
privatizing valued public utilities and state enterprises in the belief that
doing so would help take them out of their fiscal and commercial quagmire.
While certain structural reforms have proven their worth, many others fail
big time.

What happens when privatization fails? What happens when a private interest
that bought into a privatized asset turns out to be incapable of meeting the
obligations it signed itself to fulfill? What happens when the private
operator duck losses it did not anticipate when it first entered the bidding
process?

The Philippines offers many experiments in, and some of the starkly failed,
privatizations, the recent being the case of the water utility in the
capital. What international financial institutions and multinational
investors hail as the biggest water sector privatization in Asia shows a
shameful spot too big to ignore.

Following is a narration of how Filipino consumers and taxpayers have been
dealt a raw deal in the privatization of the capital’s water utility, and
how they are being set up for even further injury. For brevity, details of
the disputes have been either omitted or simplified.

 Privatizing Water Services in Manila

Water privatization in Manila started eight years ago when the public
corporation Metropolitan Waterworks and Sewerage System (MWSS) granted two
25-year concessions for the management and operation of its facilities. The
entire MWSS service area was split between two Concessionaires.

The East Zone Concession was awarded to Manila Water Company, owned by the
Filipino corporation Ayala Corporation and International Water Ltd., a joint
venture partner formed by US-based Bechtel Overseas Corp. and UK firm
Northeast Water. The East Zone covers the cities of Makati, Pasig,
Mandaluyong, Marikina, most parts of Quezon City, some parts of Manila, and
the municipalities of San Juan, Taguig, and Pateros and Rizal province.

The West Zone covers the areas of Bacoor, Las Piñas, Muntinlupa, Quezon City
(part), Caloocan, Malabon, Navotas, Rodriguez (part), Cavite, Makati (part),
Noveleta , Rosario, Imus, Manila (part), Parañaque, San Mateo (part),
Kawit, Marikina(part), Pasay, and Valenzuela. The Concession was granted to
Maynilad Water Services Inc. (“Maynilad”), a partnership between Filipino
corporation Benpres Holdings and Ondeo Waters, an affiliate of French water
giant Suez Lyonnaise de Eaux.

With the Concessions came specific service obligations (new connections,
continuity of supply, water quality standards, sewerage services, etc.) and
the payment of Concession Fees computed based on the debt service and
budgetary requirements of the MWSS. Concessionaires were required to post a
Performance Bond to secure the performance of their service obligations, the
payment of penalties that may arise, and the payment of Concession Fees.

 Troubles in the West

Barely three years into privatization, the MWSS started facing major
disputes particularly from Maynilad.

Maynilad ran into troubles, having failed to realize many of its financial
projections based on the optimistic bid it submitted. In October 2000,
citing foreign exchange losses on account of the Asian Crisis, Maynilad
applied for automatic accelerated relief on its foreign exchange losses, and
to be allowed to defer payment of Concession Fees. Failing to get these, it
stopped paying Concession Fees in March 2001.

The series of negotiations to address the dispute culminated in
the approval of Amendment No. 1 which gave Maynilad major relief including
the accelerated recovery of forex losses, the implementation of a Foreign
Currency Differential Adjustment (FCDA) for all other present and future
forex losses or gains, and a commitment from the MWSS to rebase water rates.
What this meant was the increase in water tariffs within the five-year
no-increase period stipulated in the Concession Agreement. Yet Maynilad did
not resume payment of Concession Fees.

Further disagreements ensued when the completion of the rate rebasing
exercise was extended several times. This led to the serving of notice of
Early Termination by Maynilad to MWSS, which eventually gave rise to
arbitration. In November 2003, the Appeals Panel for Major Disputes declared
that there was no case for Termination, and that the Concession Agreement
shall remain in force. It also directed Maynilad to pay the Concession Fees
due with the corresponding interests.

Instead of complying with the Arbitral Award, Maynilad filed in
November 2003 a Petition for Rehabilitation before a local court. MWSS
initially opposed the petition, but later negotiated a compromise embodied
in a proposed amendment (Amendment No. 2) to the Concession Agreement in
March 2004.

Amendment No. 2 was a shameless bail out that committed
government to limit its drawing of the US$120 million performance bond to
only US$50 million, foregoing US$70 million that is already demandable. It
then converts the remaining accrued and unpaid concession fees into equity
in Maynilad, effectively buying virtually worthless shares. All this was
done to free the sponsors from their counter-guarantees to the performance
bond.

Because of the controversy it generated, the MWSS was compelled to withdraw
its concurrence to Amendment No. 2. But it again went into “good faith
negotiations” with Maynilad, which produced a Revised Rehabilitation Plan.
The terms of the rehabilitation plan remains under negotiations, with the
court requiring that it be finalized by end April 2005 for its final
evaluation.

 Bail Out

The latest version of the rehabilitation plan is contained in the report
submitted by the rehabilitation receiver to the court on 20 December 2004.
Based on the report, the rehabilitation plan will have the following key
features:

1. It assumes a full draw by MWSS of the US$120 million performance
bond, thereby satisfying US$120 million of about US$170 to US$200 million in
accrued unpaid concession fees. The balance, along with additional accruals
arising from only the partial payment of current concession fees from 2004
to 2007 and cost of borrowing, shall be paid from 2008 to 2012.

2. There will be partial up-front payment of Maynilad debts to local
and bridge loan banks, with the balance restructured over 8 to 9 years.

3. There is partial write-off of debts owed to Suez and Benpres to
reduce the accumulated losses of Maynilad.

4. The Standby Letter of Credit Banks becomes a creditor of Maynilad
for US$120 million after the draw of the US$120 performance bond. This is
guaranteed by Suez to the extent of 40% and Benpres for the remaining 60%.
The SBLC banks calls on Suez guarantee of US$48 million, reducing SBLC
exposure to US$72 million. Of this amount, US$33 million is settled by the
assignment of all of Benpres equity to the SBLC banks, leaving US$39 million
in exposure to Maynilad, to be paid in eight years.

5. Suez sells a portion of its equity to MWSS for US$27 million. The
SBLC banks sells the Benpres shares assigned to it to MWSS for the same
amount of US$33 million. Thus, US$60 million of the US$120 million proceeds
from the draw of the performance bond will be used by MWSS to buy equity in
Maynilad.

6. The tariff is adjusted from P19.92 per cubic meter to P30.19 per
cubic meter, with yearly adjustments.

7. Sliding back of service targets.

The Revised Rehabilitation Plan is nothing but a more sophisticated masking
of Amendment No. 2. In their comment/opposition to the receiver’s report,
AER and its co-parties point out that the rehabilitation plan is a scheme to
bail out Maynilad majority owner Benpres Holdings. Without the
rehabilitation plan, Benpres would have to pay the SBLC Banks, Bridge Loan
Banks and Local Banks more than US$130 million as guarantor of Maynilad’s
loans. But, under the rehabilitation plan, Benpres would only have to
assign to the SBLC banks its entire shares in Maynilad at a price of US$33
million, in exchange for a release on the remainder of its guarantees.
Hence, it will be saving more than US$97 million. But in order to secure the
SBLC’s concurrence to the plan, the MWSS must purchase from the SBLC Banks
the same shares for US$33 million. Similarly, in order to secure Suez’s
concurrence to the plan, the MWSS must purchase from Suez a total of US$27
million worth of its shares in Maynilad. In effecting this purchases, the
MWSS will be using US$60 million of the US$120 draw on the performance bond
which are public funds.

To aggravate matters, the MWSS will be purchasing shares the value of which
have been inflated. AER estimates that MWSS is buying for US$60 million a
company value of only US$22 million. Not only will the purchase be grossly
overpriced, the use of 50% of the proceeds of the performance bond for the
transaction will have a negative impact on the financial position of MWSS.
In a Memorandum to the Board of Trustees submitted by Estrellito A. Polloso,
Manager, MWSS Finance Department, and Frank A. Cruz, Consultant on New Water
Resources dated 7 October 2004, MWSS will be in unsound financial position,
posting negative cash balances in 2006 to 2008, and again in 2011. He
identified as one of the two main causes of the projected gap the
application of the US$60 Million out of the US$120 million proceeds from the
performance bond to the acquisition of equity on Maynilad, instead of using
it for its intended purpose of paying MWSS loan obligations.

Finally, the rehabilitation is ultimately made feasible by a huge tariff
increase and downgrade in service obligation of Maynilad.

 Defending the Public Interest

Social movements and civil society organizations have been engaged in the
water privatization issue long before the MWSS was privatized. The Freedom
from Debt Coalition/FDC (http://freedomfromdebtcoalition.org
<http://freedomfromdebtcoalition.org/> ), the biggest multi-issue and
multi-sectoral coalition in the Philippines, is a staunch anti-privatization
advocate that calls for the commitment of government to treat water as a
human right. The Bantay Tubig/Philippine Water Vigilance Network
(http://ipd.ph/Bantay%20Tubig/web-content/b2big_main.html) works primarily
on regulatory issues and has been monitoring the two private concessionaires
of the MWSS since 2002. Both the FDC and Bantay Tubig work with affected
communities, and have been expanding their work from water utility to
broader water governance issues. The FDC convened the Philippine Freshwater
Network in 2004 which aims to develop alternative governance mechanisms for
water.

On the whole, groups like Bantay Tubig and the FDC have raised consciousness
about public interest concerns on water issues. Despite these efforts, the
government and the private concessionaires have forged ahead in crafting an
amendment to the Concession Agreement that accelerated tariff increases. Now
the Philippine government is in deep private negotiations with Maynilad to
finalize the terms of Maynilad’s rehabilitation. Absent public scrutiny, it
is not difficult to see why such deals could be detrimental to public
interest.

One reason for the difficulty encountered by public interest advocates in
influencing policy decisions is the closed nature of the forums for dispute
resolution between MWSS and the private concessionaires. The resolution of
conflicts between MWSS and the concessionaires is principally governed by
contract, the Concession Agreement. The arbitration provision, for instance,
excludes affected third parties such as consumers and taxpayers. While there
may be resort to the domestic courts, court proceedings are often made
inaccessible by the need for professional legal representation. Thus, the
forum for conflict resolution as well as the principal parties can choose to
ignore public interest advocates even when the public impact of the outcome
of the dispute resolution is huge.

Action for Economic Reforms (http://aer.ph <http://aer.ph/> ), a policy
group working on macroeconomic and governance issues, took the lead in
mid-2003 to formally intervene in the rehabilitation proceedings. The groups
already active in the water issue, such as FDC, Focus on the Global South,
AKBAYAN, and APL became co-parties in this intervention. A number of
legislators and individual advocates were also involved.[1]

The legal intervention has produced concrete gains. It has provided a
vehicle for sustaining policy debate on the issues of water privatization,
government regulation of public utilities, consumer issues, fiscal concerns,
and corruption. It has contributed substantially to the pressure on the MWSS
to draw fully on the US$120 million performance bond, and to continually
modify the rehabilitation plan. The legal intervention has also given the
public interest advocates an opportunity to be heard. However, the legal
intervention recently suffered a setback when the rehabilitation court
barred the parties from further participating in the proceedings. This was
questioned by the parties in the Supreme Court, but the outcome of this
remains uncertain.

The Philippine experience underscores the valiant efforts of social
movements, civil society and public interest groups to counter the heavy
influence of corporate interests and to negotiate a very narrow space for
intervention left for them to engage the issue. More ‘sophisticated’,
technical and legalistic means are employed to carry out, defend and resolve
issues around privatization, in the process obliterating the public policy
space that has once been an arena of struggle. The courts, for instance,
have long been accepted as another venue of struggle, a source of remedy,
especially when invoking Constitutional rights. But privatization
arrangements are now increasingly being designed to protect private parties
from public scrutiny. In the case of the MWSS privatization, regulatory
structures were blurred and no immediate relief is apparent for consumers
and taxpayers alike. Because the Concessions are contractual arrangements
between a government agency and a private entity, and because the resolution
of disputes is boxed in legalistic structures, the public is effectively
scratched out of the equation.

 Postscript

Recently, there had been reports that the World Bank is again poised to lend
money to the water utility, ostensibly to rehabilitate sewer pipes and to
strengthen public-private partnership in water provision. The World Bank had
been involved in the privatization of the MWSS from the very start, with the
International Finance Corporation designing the privatization plan and
eventually lending money to the East Zone Concessionaire. The renewed
involvement of international financial institutions like the World Bank in
the water privatization, especially now that huge public interest issues are
yet to be resolved, raises a lot of concern. Because the MWSS is already
privatized, the ultimate beneficiaries of the loan/s will be the private
concessionaires. How this will be done remains unclear. But one thing’s
sure, the planned lending will be examined closely by public interest
advocates.

---

* The authors may be reached at j.chavez focusweb.org and nepo aer.ph.
Additional information on the legal aspect of the struggle may be obtained
from the authors upon request. Readers are also encouraged to contact the
other groups mentioned in the article for related information.

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