Water now and for tomorrow

Introspective, Business World
Posted on June 30, 2013 08:21:53 PM

THERE HAVE recently been emotional calls in media and in the streets for reduction in water tariffs, much somewhat disconnected from considerations of quality of service and investments needed to maintain standards. I feel it useful to revisit a column I wrote in Jan. 2011, "A PPP Success Story," that goes back to why PPP was adopted to solve what was rightfully called a "water crisis" (http://romeobernardo.blogspot.com/2011/01/a-ppp-success-story-business-world.html).

Let me start with some disclosures. I had sat on the MWSS Board back in the 1990s as Finance undersecretary when work on its privatization started. I have keenly kept tabs of developments in the "largest water privatization in the world" since then and became very familiar with the regulatory regime as an advisor of one of the concessionaires, Manila Water. I am also a consumer, sharing a desire to pay the least for the best.

Readers of my past column know that I am greatly impressed by how water services have improved tremendously since my days in the government. Manila Water’s early achievements in slashing non-revenue water, raising water deliveries by over 2.5x, doubling the number of customers and at a 24-hour water availability service level are, most importantly, meeting health standards which I understand is being replicated in the west zone since the entry of Metro Pacific in late 2006.

In a span of six years to 2012, Maynilad has also reclaimed 600 mld of water by reducing non-revenue water from 66% to 43%, raising volume of water deliveries from 629 to 1,200 mld, and serving eight million customers (from six million) with 24/7 water availability, including some 1.7 million in poor communities.

The improvements in service delivery came after the two concessionaires poured in a combined ₱105 billion in investments (₱60 billion for Manila Water from 1997 to 2012 and ₱45 billion for Maynilad under MPIC) to expand and upgrade the water and sewerage network. Judging from the state of the country’s other infrastructure, including water facilities in other major cities in the country, government would never have had the resources to make similar investments, on the aggregate equivalent to 1% of last year’s GDP, for water distribution.

Unfortunately, this important detail is often lost in the emotionally charged debate on water tariffs, with some sectors even considering the mere fact that tariffs have been rising since 1997 the singular proof of the failure of privatization. Granted that the annual growth rate in water tariffs post privatization may seem high, the evolution of water rates needs to be assessed not only against the above investments to expand and upgrade the system but also their historical and forward-planning contexts.

Two historical facts stand out. A well-known "twin" event is the almost immediate shock to debt servicing cost of the two concessionaires due to the Asian financial crisis in 1997 followed the next year by a shock to revenues due to a severe El Niño drought. Both were extraordinary events that could not have been anticipated in the concessionaire bids and thus, led to unexpected, extraordinary adjustments in water tariffs.

The second, less well-understood historical fact is the design of the privatization contest where the winning bidders were chosen based on lowest submitted tariff. Understandably, the objective at the time of the reformers was to secure broad-based buy-in for water privatization by asking consumers to pay less. Some would say that the resulting bids, at deep discounts to then existing rates, planted the seeds of "high" water tariffs today. Had the contest been designed based on highest concession fee, similar to what was done for the NAIA Expressway, the initial tariff rate would likely have stayed at ₱8.78/m³ (not ₱2.32/m³ for the east zone and ₱4.97/m³ for the west) and government would have received a windfall from the winning bidders.

But perhaps the key inputs to understanding the more recent evolution of water tariffs are the size, timing and nature of investments needed to meet service targets that can keep customers satisfied. Contrasting utility services (water, electricity, telephone) during typhoon Milenyo, UP professor and Inquirer columnist Randy David, a Manila Water customer, explained the uninterrupted water service as likely arising from a service culture that is based on "anticipation of possible disruptions, adequate preparation for emergencies, regular maintenance of the delivery system, a continuity team that is activated in times of disaster, and provision of substitute services during prolonged interruptions of regular service ("Public Lives: Decency and public utility firms," PDI, Oct. 15, 2006)".

The mandate to cover the entire concession area requires the concessionaires not only to provide the above service quality to existing customers but to undertake expansion plans (a) with future population growth in mind and (b) involving more difficult terrains in less populated areas, as well as (c) invest in less tangible and thus, less appreciated sanitation and sewerage services that have health and environmental benefits beyond the confines of the concession area. By the nature of a network service, all this would have to be borne by existing customers even if they do not directly benefit from expansion of piped water services to hilly Antipolo.

At the end of day, the water bill of Metro Manila residents, amounting to an average 3% of household income, remains within international standards of affordability, i.e., 5% of income. One also cannot ignore statistics showing that despite the massive capital infusion and superior operational metrics (24-hour water availability, low NRW, etc.), the two concessionaire’s water charges are also among the lowest in major cities in the country. For example, a 30-m³ consumer in the east zone is billed ₱458 for his water consumption compared with same volume water bills in Metro Cebu (₱463), Iloilo (₱509) or Baguio (₱1,137). The differences are even starker for those consuming up to 10 m³  even while the service quality in these areas are more like those of pre- privatization MWSS.

Note too that Manila Water rates compare well also versus other Asian cities. Based on a 15-m³ consumption, Manila Water dollar rate (0.26/m³) falls in the middle of Jakarta (0.59), Beijing (0.47) Bangkok (0.27), New Delhi (0.19), Hanoi (0.19), Kuala Lumpur (0.18) and Phnom Penh (0.16). Few of these have achieved close to the performance standards of Manila Water -- the reason the company has received mandates to run and introduce the same kind of improvements in three of these countries in collaboration with local partners. MWC has received prestigious international awards for providing for the urban poor, environmental sustainability and for operating efficiency from The World Economic Forum, INSEAD, IFC/World Bank, and the International Water Association. It has also been written up as a case study of a successful reform undertaking by the Harvard Business School, the International Finance Corporation, the World Bank Growth Commission and others.

One particularly noteworthy work was penned in 2011 by former UP School of Economics Dean Raul Fabella, also our only living National Scientist in Economics with whom I am honored to share this "Introspective" column space as a fellow Trustee of IDEA. His Chapter 4, "The Privatization of the Metropolitan Waterworks and Sewerage System: How and Why It Was Won," in the book "Built on Dream, Grounded on Reality"(http://asiafoundation.org/publications/pdf/996) had this to say: "The privatization of MWSS was clearly a triumph of the principle of comparative competence -- the private sector proved more competent at the delivery of water and sewerage services than the state. It is now considered a singularly successful structural reform in the annals of Philippine political economy."

I have heard Sec. Purisima refer to this privatization in a public forum as a most successful PPP, which bears emulation. The administration of President Aquino has pinned its hopes on PPP to deliver needed infrastructure to address woeful backlog, raise the productivity and performance of the economy, and improve the quality of life of our people, while keeping to its fiscal program.

Amidst calls for short-sighted tariff reductions, I truly hope that Philippine authorities will take the long view that seriously considers the quality water service requirements of present and future water consumers and safeguards the environment. And faithfully implement the MWSS Concession Agreement with continuity, consistency and fairness. Future private investments throughout the country  in water and in other needed infrastructure critically hinge on it.

Romeo Bernardo was Finance undersecretary during the Aquino 1 and Ramos administrations, and board director of Institute of Development and Econometric Analysis, Inc.

Markets stirred; economy to chug along

Business World
Introspective

JUST TWO weeks after the government announced a much-better-than- expected 7.8% GDP growth in 1Q2013 that bucked the regional growth slowdown, local stock prices grabbed headlines with the worst one-day dive since the Lehman crisis in October 2008. Many were stunned by the steep fall, especially following a new round of upgrades in analysts' growth forecasts. Some feared that the much talked about asset bubble had finally burst. Still others, who had missed the amazing bull run, are wondering if now is a good time to buy.

In truth, financial market volatility has greatly increased since the US Fed started hinting at slowing down its bond buying program with worries about a rapid rise in interest rates exacerbated by the Bank of Japan's recent decision not to expand its monetary stimulus. Thursday's 442-point drop (6.7%) in the Philippine Stock Exchange Index (PSEi) followed a month- long downtrend that saw the PSEi losing a cumulative 15% since a 7,403 intra-day record high was reached last May 15. The losses extend to the bond and currency markets with local interest rates having risen by over 70bp on average since mid-May and the peso losing about 5% against the dollar over he same period.

Rather than a change in internal fundamentals, we think that the drop in the equity, bond and peso markets are more a reflection of portfolio flows going back to the US with its emergent recovery and expectations of an end to the Fed's quantitative easing. Compared with other emerging markets, local financial prices may have been affected more because Philippine assets are among the most overvalued (e.g., very high price- earnings ratios) due in large part to past capital inflows attracted to the country's growth story and prospect of investment grade ratings. With the upgrade to investment grade already achieved and no clear further upside play, foreign players appeared to have decided to cash in earnings, with recent data releases showing poor numbers for FDI and exports as well as the World Bank's downward revision of world growth used as reasons for players to exit.

In fact, we are looking at significant upward adjustments to our growth forecasts for this year (from 6.1% to 7.2%) and next (from 5.8% to 6.2%.

But this is mostly based on the business cycle rather than a permanent structural shift that prospective investors, including a new class of players that can only invest in investment grade markets, may be waiting for. Our GDP revisions reflect largely the high current election-related spending growth, including likely frontloading in public infrastructure that may last only up to this quarter, and the ongoing private construction boom, a lagging indicator of past investment decisions in residential and business buildings that according to industry experts, take two to three years to complete.

The maturing of this cycle and rising interest rates will bring growth back to more normal levels, perhaps as early as late 2014 or early 2015. The much-hoped for revival of investments in PPP or in industrial zones may not be significantly large to keep growth high beyond 2015.

Meanwhile, the Monetary Board has kept its policy stance unchanged, with key borrowing and lending rates at 3.5% and 5.5%, respectively and the SDA rate at 2%. It had previously slashed the SDA rate by a cumulative 150bp and last month announced limits to trust accounts' access to the facility which will be phased over the next six months. In light of the capital outflows, the monies expected to be pushed out of the SDA facility are not expected to be inflationary and given their conservative risk profile, will likely have limited impact on prices of risky assets. The peso's depreciation is also welcome news. Both developments (SDA changes and weaker currency) will help to repair the BSP's balance sheet and increase policy flexibility.

This column was culled from a recent GlobalSource report written by Christine Tang and the columnist. Romeo Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.