Political Economy of Reform During the Ramos Administration 1992-1998

World Bank Growth Commission Working Paper 39
By
Romeo L. Bernardo and Christine Tang

http://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_39_Philippines_Case_Study_Political_Economy_Reform_During_Ramos_Administration_1992_1998.pdf

Being water secure

Business World, Introspective

WATER SECURITY is ensured only when long-term investment and financing for the sector are sustainably and efficiently done to meet the needs of a growing population, the economy and the environment. This was the clear message delivered at a recent forum on Water Security organized by Finex.

IFC Resident Representative Jesse Ang said in the forum that while the Philippines is not yet considered a water-scarce country, management of the resource needs to be strengthened. While former MWSS Chairman Dondi Alikpala concurred that there is no water deficit yet, former MWSS Administrator Dr. Lito Lazaro explained why: “With the improved efficiency of both Manila Water and Maynilad in reducing previously big leakages (non-revenue water) the gain to Metro Manila is almost like building a new huge dam.”

Dr. Lazaro was too modest to discuss the benefits reaped over 16 years of the highly successful “largest water privatization” in the world: the broad public welfare gains, not just in water security, but in environmental protection, health, and outreach to poor communities. In short, clean water made available to Mang Juan. As CEO of MWSS, he was one of the three architects, under the direction of President Ramos, who made this privatization happen. The other two were then DPWH Secretary and MWSS Chairman Virgilio Vigilar, and Mark Dumol, the Secretary’s Chief of Staff. I was a member of the MWSS Board as Finance Secretary Bobby de Ocampo’s representative, and consider myself fortunate to have had a big front view and a small role.

The success story of this privatization is objectively and engagingly told in a book Built on Dreams, Grounded in Reality (http://asiafoundation.org/resources/pdfs/Chapter4.pdf) by former UP School of Economics Dean and our only living National Scientist in Economics, Dr. Raul Fabella. Chapter 4, “The Privatization of MWSS: How and Why It Was Won” 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 sewage services than the state. It is now considered a singularly successful structural reform in the annals of Philippine political economy.”

The welfare gains for the public is a matter of public record. In the Joint Statement on Water Public Private Partnership (PPP), the Foundation for Economic Freedom, the Management Association of the Philippines, the Employers Confederation of the Philippines, and Philippine Chamber of Commerce and Industries noted that the water PPP has “contributed much to improve public welfare by having more than doubled the number of customers served, provided 24 hour water service availability that meets health standards, while addressing the needs of millions in the poor communities. The improvements in service delivery came after the two concessionaires poured in a combined P105 billion in investments to expand and upgrade the water and sewage network, achieved without adding to government’s fiscal burden or public debt exposure.” They further lamented that it’s a pity that this “successful, internationally recognized model PPP has not been replicated outside Metro Manila where the water situation remains at pre-privatization MWSS standards”.

It is disturbing indeed that instead of building on this success and nurturing the greater water security achieved over the years, we now observe populist myopic demands, not just by the usual suspects from the protest industry, but by MWSS itself, for arbitrary reductions in water rates -- already the lowest in the country, and compare favorably internationally. This will inevitably compromise water security over the medium and long term as needed investments for maintaining service quality and protecting the environment are neglected.

The Japanese Chamber of Commerce and Industry was quite emphatic in this regard: “We view the MWSS’ unilateral and arbitrary act of changing the terms or interpretation of the concession agreement, in total disregard of the contractual rights and intent of the parties, with grave concern.” Such unilateral populist action by government agents is referred to in regulatory economics literature as “administrative expropriation,” a form of “government opportunism” inflicted on captive investors in utilities. (See e.g. Spiller and Tommasi, pp 515-543, Handbook of New Institutional Economics, Menard and Shirley, eds. 2005. )

There are a number of issues in the dispute notices that the two concessionaires submitted for international arbitration, ranging from the computation of the appropriate discount rate (allowed rate of return) to the disallowances pertaining to past and future investments, and incredibly, a reinterpretation 16 years hence, of treatment of corporate income taxes. As these are in the realm of a legal process, it is best to refrain from discussing these. One trusts that as had happened in the previous two arbitrations, all parties will abide by the final decision of the Panels, and move on from there to follow in good faith, the letter and spirit of the Concession Agreements.

The one item of contention that calls for comment is on who is responsible for investing in new raw water sources -- an key element to water security. The insistence of the current MWSS management that investments in such are excluded under the Concession Agreements, and therefore disallowed in the tariff rate setting, squarely contradict the intent of the Agreements. More fundamentally, given MWSS, and government’s, dismal track record in public service provision -- especially when contrasted with the two concessionaires’ -- such revisionist interpretation will certainly bring us back to pre-privatization water insecurity.

Mark Dumol, in a letter reproduced in the widely read column of Boo Chanco (“Did P-Noy accept excuses for infra lag?”, Philippine Star, June 26, 2013) was categorical on what they had in mind: “Without any doubt, the original intent of the MWSS concession agreement was that all aspects of the provision of potable water, from raw water sourcing to treatment to distribution would be the responsibility of the concessionaires.”

I also consulted Dr. Lito Lazaro on this and he said “in my mind it was clear that raw water development is the responsibility of the concessionaires. How can the concessionaires be held to their targets if they are not responsible for the raw water development, since complying with the targets assumes that water is available?”

I asked Dr. Lazaro why the Concession Agreements were not absolutely explicit in its provisions on this. He said the “main reason for this is that there were unsolicited proposals pending with the MWSS on most of these water sources” that there was need to protect the Agreements from legal challenges from such proponents claiming vested rights under the BOT law. In fact one such proponent filed a TRO to stop the MWSS privatization bidding; thankfully, it was thrown out by the courts.

This unilateral reinterpretation by MWSS, which now risks all the gains achieved in one and half decades, had Mark Dumol wondering: “Why has the MWSS voluntarily decided to take on this obligation which would require it to seek huge financing, hire a lot of staff for a Project Management Office, design and bid out the projects and then deal with big contractors and consultants? One can only guess why.”

Why indeed.

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