Water privatization in Metro Manila began when the then President of the Philippines, Fidel Ramos, instructed the government in 1994 to solve what he called the water crisis in Manila by engaging with the private sector. In 1997, two concession contracts for the Eastern and Western halves of Metro Manila were awarded after an open competition. The concessions represent the largest population served by private operators in the developing world.Philippe Marin: Public-Private Partnerships for Urban Water Utilities, World Bank, 2009. Both winning companies, Maynilad Water Services in West Manila and especially Manila Water in East Manila, submitted bids with extremely low water tariffs. The tariffs proved to be too low to finance the investments needed to improve performance, especially after the East Asian financial crisis and the devaluation of the Philippine Peso.
Maynilad expanded access, but unable to reduce water losses it stopped paying concession fees to the government and went bankrupt in 2003. It was temporarily taken over by the government, sold to new investors in 2007 and performance has improved since. Manila Water struggled initially, but increased its contractual rate of return by arbitration in 1998, improved performance, and in 2003 the International Finance Corporation (IFC) provided a loan and took an equity stake in the company, followed by an initial public offering (IPO) of shares on the Manila stock exchange in 2004 and local currency bond sales in 2008.
Neither company achieved its contractual targets of increased access. Improvements in access and service quality were slow during the first years, especially in West Manila. Progress in water sanitation has been far below the contractual targets of access to sewerage from less than 10 percent to 66 percent in West Manila and 55 percent in East Manila until 2021.
Tariffs in both halves of the metropolitan area were first reduced, but then increased substantially. After adjustment for inflation, in 2008 average tariffs in West Manila were 89 percent higher than the pre-privatization tariff of 1997, and 59 percent higher in East Manila.
Background
Financial arrangements
Under a concession agreement, private companies collect and own revenues from water tariffs. In return they have to pay for operating costs, investments and in the case of Manila a concession fee to the Filipino government to pay for the legacy debt and the relatively modest cost of running a regulatory office.
The investments under the Manila concessions were financed through debt, equity and retained earnings. During the first years of the concessions the companies faced difficulties in obtaining loans due to the East Asian financial crisis. In 2003 Manila Water obtained a US$30 million loan from the International Finance Corporation (IFC) followed by two more loans of the same amount. IFC invested US$15 million in Manila Water in preparation of the initial public offering (IPO) of its shares on the Manila stock exchange in 2005. The IPO raised nearly US$100 million. and Manila Water issued several local currency bonds beginning with a 4 billion (almost US$100 million) bond issued in 2008.
Investments in sanitation were financed partly through World Bank loans to the government, with MWSS implementing. During its first 15 years Manila Water alone invested US$1.2 billion in exchanging 85 percent of the existing network, expanding the network, modernizing a water treatment plant and building wastewater treatment plants.
The private companies are allowed to earn a rate of return on total capital per their respective financial bids, called "weighted average cost of capital" or "market-based appropriate discount rate" in their contract. Manila Water's rate of return in its bid was only 5.2 percent. On that basis it submitted a very low tariff that allowed it to win the concession. In 2001, Manila Water succeeded in having its rate of return increased to 9.3 percent after international arbitration. Maynilad's bid had a more realistic 10.4 percent rate of return in its bid had from the beginning. The return on equity has been higher than the return on total capital. In the case of Manila Water, the return on equity has been 18-20 percent beginning from its fourth year of operation.
water tariffs in Manila are set by the Board of MWSS upon recommendation of its regulatory office and on the basis of four mechanisms:Manila Water: Understanding Manila Water - Mechanisms for tariff adjustment, retrieved on February 27, 2011 First, tariffs are adjusted automatically on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Initially this mechanism was applied with a lag, but after a contract amendment it is now applied every three months. Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index). Third, 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 specific circumstances such as a change in law or force majeure.
Both private companies initially had to post a performance bond that MWSS could call if the companies failed to fulfill their obligations. Maynilad had posted US$120 million because of its larger share of both the concession area and MWSS' old debts, and Manila Water posted US$80 million.
Water resources
98 percent of the water used in Metro Manila comes from the Angat Dam about 40 km to the northeast of Manila, a multipurpose dam that is also used for irrigation and hydropower generation. From Angat Dam, water flows through the Angat River to the much smaller Ipo Dam from where it is diverted through tunnels to the La Mesa Basins. From these basins, about 60 percent of the water is provided to West Manila and 40 percent to East Manila, where the respective water companies treat the raw water. In West Manila, Maynilad treats up to 2.4 million cubic meters per day in its Mesa 1 and Mesa 2 treatment plants. In East Manila, Manila Water treats up to 1.7 million cubic meters per day in its Balara treatment plant.
Except in times of extended drought, Angat Dam supplies 4.1 million cubic meters per day of water for Metro Manila. Per capita water consumption in Metro Manila is about 100 liter per day.Abandon the Laiban Dam, August 2009, A Position Paper of the Freedom from Debt Coalition Even if one assumes 50 percent water distribution losses, Angat Dam can supply more than 20 million inhabitants, compared to a current population of 12 million. However, during severe droughts the water supply is insufficient. For example, during the drought of 1998 water supply to Metro Manila had to be reduced by 30 percent and water supply for irrigation was completely cut. Therefore, since the mid-1990s MWSS has pursued the construction of a new dam, the Laiban Dam, to supply Manila with water. Besides the need to hedge against the risk of drought, this is being justified with projected increased domestic per capita demand and projected increased commercial and industrial water demand. Civil society groups oppose the dam, saying that it is not needed, it would cause social and environmental damage, and that MWSS is "obsessed" with the dam. The construction of the dam has been repeatedly delayed for lack of funding.
Maynilad began to diversify its water sources by tapping into Laguna Lake, a large but polluted lake to the east of Manila. In February 2011, the President of the Philippines, Benigno Aquino, inaugurated the 0.1 million cubic meter per day multistage treatment plant, the first drinking water treatment plant to draw water from the lake. The plant aimed to supply 1.2 million residents in the south of the metropolitan area. Manila Water also planned to tap into the lake to complement the water supply of the quickly growing Rizal area to the north. This was presented as a measure to adapt to climate change, since it will reduce the dependence on the Angat River, which is vulnerable to drought. At the same time, together with NGOs, Manila Water planted trees covering more than 300 hectares of land in the Ipo and Marikina watersheds to protect its main current water source.
Development of the concessions
Before privatization
Before privatization, the Metropolitan Waterworks and Sewerage System (MWSS) provided water for on average 16 hours every day to two thirds of Metro Manila. It was also inefficient, overstaffed and suffering from very high water losses. According to the Asian Development Bank, the amount of non-revenue water (NRW) (water supplied but not billable e.g. due to leakage and illegal connections) was more than 60 percent; this was much higher than in Seoul (35 percent), Kuala Lumpur (36 percent) and Bangkok (38 percent), and only comparable to Jakarta. Tariffs were low and MWSS was dependent on subsidies that the government was keen to abolish. The utility was saddled with debts of US$800 million owed to the Asian Development Bank, the World Bank and the Japan Bank for International Cooperation. Manila residents had become accustomed to poor water service in Manila and did not feel a strong urge to change the situation, especially because water tariffs were very low.
According to a book by Mark Dumol, a senior civil servant in charge of the privatization, President Fidel Ramos insisted in 1994 that there was a "water crisis" in Manila at a time when no one else spoke about a water crisis. Ramos began to convince others that there was a water crisis, which increased political support for privatization.Mark Dumol: The Manila Water Concession. A Key Government Officials Diary of the World's Largest Water Privatization, World Bank, Directions in Development, 2000
Preparation for privatization (1994–97) The government of Corazon Aquino had initiated a wide-ranging privatization programme selling 122 companies for US$2 billion in 1986-1992. When Fidel Ramos succeeded her he broadened the privatization program to infrastructure, resolving an electric power crisis through rapid private investments in power plants in 1992-94. Based on this perceived success, Ramos asked his Secretary of Public Works and Transport Gregorio Vigilar to apply the same approach to resolve the water problems of Manila.
In June 1994, the British company Biwater and a Malaysian firm approached Ramos with an unsolicited proposal to buy MWSS. The government refused, because by law MWSS could not be sold; it was open to the idea of a public-private partnership, such as a concession contract under which the government would retain ownership of the assets. The Filipino government wanted to select the private partner on a competitive basis. Among the interested companies were the two largest French international water companies, Conpagnie Générale des Eaux and Lyonnaise des Eaux. The French embassy and Lyonnaise des Eaux told the government about what they presented as the success of the water privatization in Buenos Aires where Lyonnaise had won a concession in 1993 and competitive bidding had initially reduced water tariffs below their previous level under government management. Lyonnaise brought government officials to Macao, where it had reduced water losses. The officials also visited France and England.
In 1995, the "Water Crisis Act" was passed, providing the legal framework for a public-private partnership, which was to take the form of concession contracts.,