“At the end of 25 years, everything, including all the improvements paid for by the companies, reverts back to the government.

With Mr. Duterte’s angry rants subsequently mellowed and the economic doomsday scenarios by government policy wonks, the furor over Manila Water and Maynilad leaves many of us dazed and confused.

Standing too in the way at navigating through the issue is a thicket of ominous words like “oligarchs,” “economic sabotage,” “plunder,” “onerous contracts,” “re-basing rates,” “corporate income taxes” and many other such heady words.

True, given the chance we sooner will do away with all of it — so long as precious water comes out of our faucets. Still, there is no escaping we the naive have to deal with whatever spat there is on the public table involving the one natural resource we cannot do without.

But to get around the confusing voices either for or against the water firms, we need to start somewhere. I am of the belief we should start by looking at the water agreements themselves.

It is just wrong we all plunge headlong into a controversy where we either have largely forgotten, or worse, assume we know about its beginnings.

Anyway, what follows here I am indebted to a case study done by Jude Esguerra for the non-government organization WaterAid. Done in the early 2000s, the independent study, though critical of the concession agreements, gives us laymen some considerable points toward understanding the loud public spat involving Mr. Duterte and the water firms.

We should start by knowing exactly what sort of corporate animals are Manila Water and Maynilad. The two came about after the Ramos government privatized one of its “biggest headaches” — Metro Manila’s hugely indebted and grossly inefficient Metropolitan Water and Sewerage Services (MWSS).

After a series of deft political moves, the Fidel V. Ramos government successfully bids out water concession agreements. The Ayala-backed Manila Water and the then Lopez-backed Maynilad, with their foreign partners and investors, win the bidding war.

A few years later, however, Maynilad is taken over by the consortium of Metro Pacific and DMCI after the Lopez-backed firm ran into financial troubles.

At this point, there is need to quickly dispel whatever public misimpressions there is about both Manila Water and Maynilad — the two do not fully control water resources.

The MWSS’s deal with both Manila Water and Maynilad, says the WaterAid document, is not a “full privatization arrangement.” Full privatization means government divests ownership of its water utilities. The Philippine government retains ownership of MWSS assets.

“What the Concession Agreement provided was to give the private sector the right to use these (MWSS) assets. It also imposed an obligation on the concessionaire to maintain and expand these assets at the companies’ own expense,” says WaterAid.

At the end of 25 years, everything, including all the improvements paid for by the companies, reverts back to the government. The concession agreements were supposed to end by 2022, but were extended by the Gloria Macapagal-Arroyo administration to 2037.

Anyway, in return for the use of these assets, of which improvements require billions of pesos, the private companies are given the right to collect a fee from customers, which is to be regulated by a MWSS Regulatory Office (MWSS-RO).

“The Agreement can thus be seen as a procurement contract. The government, saddled by rising debts and inefficiencies, asks a company to run and operate the network and be responsible for getting the investments needed to expand coverage and improve service expansion,” says WaterAid.

In other words, the concession agreements simply mean a water “company spends its own money, or uses its credit-worthiness to borrow money from the banks, which will be sunk as investments into the (water) network. It is then given the right to reimburse these investments and expenses they have made, via the collection of a regulated fee from users.”

The reimbursement rules are important and are set by government for a reason — to provide incentives for increased efficiency. The contracts allow the water firms to keep the rewards of being efficient.

At the same time, mechanisms are provided in the contracts to adjust water prices, whether up or down. As far as I can understand, these mechanisms seem to be the main controversial issues in the current controversy.

Anyway, there are three grounds on which water rates may be adjusted. First is inflation. The regulator automatically allows for rate increases due to inflation, the concessionaires having some protection against inflation as their revenues do grow even if there’s high inflation.

Second is the Extraordinary Price Adjustment (EPA), which may be initiated once a year to prevent any unforeseen financial problems. For instance, should there be a drastic devaluation of the peso — as what actually happened to Maynilad — extraordinary price adjustments may be made.

Essentially, “the EPA provides protection to the company against a force majeure, or unanticipated costs arising from, for instance, new health or environmental standards that may be legislated in the future. This mechanism is well defined by the concession agreement.”

The third mechanism for price adjustments is the so-called “rate re-basing.” At the start of every five-year period, the concession agreements set a review of taxes so that they can be adjusted in case the companies stray beyond the “fair returns” definition set out in the contracts.

So, even while water firms reap higher profits from improved efficiency, these are reviewed at the end of every five years. Ideally, this gradual readjustment at the end of every five-year cycle simply means that consumers benefit from the concessionaire’s efficiency gains since low water tariffs means lower water rates.

What all these points to is that water firms are highly regulated by government. But we don’t live in a perfect world. In spite of tight regulations but given how government is sometimes in bed with private companies and capitalist greed, there are insidious ways wherein such regulations are questioned, reinterpreted and modified.

It is precisely those questions, particularly those based on the re-basing mechanism and “fair returns,” which bedevil the thorny and complex legal issues, involving even international courts, we have to deal with in the next couple of months about water.