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.

"A PPP success story"

Business World, Introspective

Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.

Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.

During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.

As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.

What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.

Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.

This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration (http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.

Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.

What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.

All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.

Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.

Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.

This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.

Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.

The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.

Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.

There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.

For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.