‘Canceled water deals to hit investor confidence’
Credit to Author: Mayvelin U. Caraballo, TMT| Date: Mon, 23 Dec 2019 16:09:59 +0000
THE government’s cancellation of the extension of its water contracts with two concessionaires may negatively affect investor confidence in the Philippines, a Fitch Group unit has warned.
In a report released on Monday, Fitch Solutions said the Metropolitan Waterworks and Sewerage System’s recent revocation of concession extension agreements with Manila Water Co. Inc. and Maynilad Water Services Inc. “exemplifies the high regulatory risk which contracts between the government and private organizations are subjected to.”
The revocation, it added, derails any long-term plans which these companies have devised, and in the short term would create financial difficulties in matters such as borrowing and attracting new capital because of the revenue uncertainty.
According to the Fitch Group unit, the Philippines has one of the largest regulatory risks compared to other major markets in the region, based on its proprietary Project Risk Index. This index measures the risk of carrying out an infrastructure project from a financing, construction and operation angle.
The risks of retroactive changes in government policy and, more pertinently, government intervention in deals signed between public and private stakeholders, is comparatively higher in the Philippines, it noted.
This, Fitch Solutions suggested, “will undermine investors’ confidence, especially that of foreign companies who are less familiar with the Philippine regulatory and business environment, possibly leading to a higher cost of doing business and deterring inflows of foreign direct investment.”
It also believes the cancellation shows that the government is willing to exercise executive power that overrides contractual agreements, if it deems necessary.
“We believe investors will be concerned over the possibility of similar instances of government intervention, which would create uncertainty for their business operations,” the Fitch unit said.
The revocation, it added, also highlights deficiencies in the due diligence and contracting processes in the past and present. It believes that other deals signed between the government and the private sector might also face scrutiny.
“Similar agreements signed between the government and private companies may come under the spotlight, as the water concession revocation case paves the way for the review [of] other, possibly ‘disadvantageous’ agreements, putting long-term financial viability of companies relying on such contracts at risk,” Fitch Solutions said.
Nevertheless, it emphasized that the cancellation also showed that the government had acknowledged the weaknesses in the current contracting process, especially for public-private partnerships.
“Authorities will be able to gain experience and move up the learning curve, and improve on processes and frameworks to allow for fairer, more transparent and flexible agreements in the future,” Fitch Solutions said.