When privatization fails
Credit to Author: BEN KRITZ, TMT| Date: Mon, 14 Oct 2019 16:20:11 +0000
LAST week, the public, the media and some lawmakers erupted after a threatening statement was issued by Manila Water Co. Inc. that claimed it would have to impose a “780 percent” increase in water rates and tear up several hundred kilometers of streets if it was compelled to abide by a Supreme Court ruling that imposed heavy fines on the company and its counterpart concessionaire Maynilad Water Services Inc. This is what is known in business parlance as “a dick move,” and it was properly regarded as such by everyone who read it.
This is not the first time one or both of Metro Manila’s two water providers have been taken to task for attempting to grossly abuse their customers. Whatever else results, the current case should encourage a careful
reassessment of the wisdom and efficacy of privatization of basic public services.
The Supreme Court ruling, which was issued in early August, upheld a 2011 decision by the Court of Appeals, which in turn had confirmed a lower court ruling that the two water concessionaires had violated the Clean Water
Act of 2004 by failing to provide sewerage connections to all their customers within the five-year timeframe provided by the law. The 12-0 decision (two Justices recused themselves for having been associated with the Court of Appeals at the time of that court’s ruling) imposed a huge penalty on both water concessionaires: A P921 million lump-sum fine for each, plus an additional penalty of P322,000 per day from the date of the Supreme Court ruling until the expected sewerage network is completed.
Both concessionaires have appealed the Supreme Court’s ruling, but Maynilad has refrained from making inflammatory public comments about it. In this, they seem to have learned their lesson from a scandal in 2013, when they and Manila Water were denied a requested rate increase and actually ordered to reduce rates after it was revealed that they had been rolling their corporate income tax liabilities into their customer charges. Maynilad’s attempts to publicly explain their shenanigans then were met with appropriate derision, so they have apparently decided to let their counterpart absorb the punishment this time around.
For its part, Manila Water quickly tried to walk back its earlier statement after it was pointed out by regulator Metropolitan Waterworks and Sewerage System (MWSS) that the concession agreements with both suppliers specifically prohibit the passing of “penalties, interest charges on late payments, financing costs, bad debt provisions and depreciation provisions” on to consumers.
In a rather comical statement issued on Friday, Manila Water said, “We never stated that it will be an impending increase nor did we make any statement about passing [it] on to consumers.” Even though that is exactly what everyone heard, what Manila Water meant was, “…The 780-percent increase included in the pleading in our motion for reconsideration to the Supreme Court is what it would have cost to build wastewater facilities to comply with the Supreme Court decision subject of our motion for reconsideration,” which, as capital expenditures are allowed to be recovered through customer charges according to the concession agreement, amounts to precisely the same thing as a “780-percent rate increase.”
The bigger picture
Underneath the semantic tangle of Manila Water’s public statements and its appeal of the Supreme Court ruling are a few stark, unavoidable facts.
Since 1997, when the role of the MWSS was reduced from service provider (a job it was doing very badly) to mere regulator and the actual services were outsourced to Maynilad and Manila Water, both companies have been collecting an “environmental fee” from their customers, ostensibly to fund the completion of metro-wide sewerage networks, infrastructure that was later formally mandated by the 2004 Clean Water Act. This was, in fact, the main point of the law, to eliminate the appalling level of water pollution caused from sewage discharge into bodies of water, and groundwater contamination from hundreds of thousands of aging septic tanks.
Over the past 22 years, however, the companies’ progress toward providing a sewerage system – a stipulation of their concession agreements and a legal obligation per the Clean Water Act – can only be charitably described as modest at best. In its appeal, Manila Water has even had the temerity to argue that the Clean Water Act does not say what it actually says (thus again demonstrating a unique sort of selective corporate illiteracy), claiming that the law only required them to “interconnect” customers to “existing” sewerage systems. By 2009, the timeframe allowed by the law, it had done that, or at least done as much as it could, Manila Water said. There were 63,000 customers (either individual homes or businesses, subdivisions or large buildings such as condominiums) that potentially could have been hooked up to the “existing” system. Manila Water was able to accommodate 61,000 of
those; any more would have overwhelmed the system, the company explained.
For reference, Manila Water has approximately 6 million customers in its East Zone concession area, while West Zone supplier Maynilad has about 9.5 million.
Many critics of the MWSS and the water companies lay the blame for the entire sorry state of affairs with regard to Metro Manila’s water supply on the concept of privatization of public services, and in a way, they are absolutely correct. The rationale behind privatization is that private enterprise is much more agile than public enterprise, and that the profit incentive encourages private companies to deliver services as efficiently as possible.
Privatization often does work; a familiar example would be the comparative superiority of the Light Rail Transit (LRT)-1 and LRT-2 (not withstanding the recent fire damage to the latter, which appears to have been the result of an unforeseeable accident), which are privately operated, over the state-run Metro Rail Transit-3.
Privatization, however, clearly carries some large-scale risks, and these are manifested in the seemingly endless woes associated with water and sanitation services in Metro Manila. Concession agreements that are too favorable to concessionaires coupled with insufficient regulatory authority, inadequate enforcement tools, and weak enforcement performance have removed the incentives to provide efficient and cost-effective service. As a consequence, customers are bearing high costs for things they should not, such as corporate income taxes, unbuilt infrastructure, and double-digit system losses, while at the same time faced with frequent supply constraints.
The question now is whether or not privatization itself, in the context of the water and sanitation system specifically or any public services generally can be improved, or should be discarded. Either solution will require a great deal of analysis, effort and financial resources; but if whatever solution chosen results in something better than the current situation, those will be investments and not costs.
ben.kritz@manilatimes.net
Twitter: @benkritz