Water concession agreement, a puzzlement!

Tomorrow’s what-ifs is now here as far as the current dispensation is concerned.

“… It’s a puzzlement…!” For those of you who enjoy watching musicals, you might remember this often repeated phrase from the much acclaimed Broadway musical and hit movie, “The King and I,” starring Yul Brynner as the King of Siam.

He would utter “… it’s a puzzlement …” everytime he was perplexed by the stubborn demeanor of his children’s governess, Anna, a prim and proper British school teacher.

It was a case of clashing cultures, between the West as personified by Anna who had an unbending view of how people should behave in a civilized society, and the East, where the word of the King of Siam is expected to be immediately adhered to by his people.

The story has a happy ending though as the King and the school mistress eventually discovered love and understanding for each other.

You might wonder why in heaven’s name am I talking about the puzzlement of the King of Siam. Well, “it’s a puzzlement” could very well now be the wailing lament of the water concessionaires, Manila Water and Maynilad.

As everybody in our archipelago now knows, the President of the Philippines has gone all out to lambast, curse and threaten to put behind bars all and sundry involved in the privatization of the water and seweage services in Metro Manila over two decades ago.

As a student of good corporate governance, I can’t help but wonder how the concessionaires’ board of directors will manage this conundrum.

First, a quick review of the facts. The water and sewage infrastructure in the mid-90’s which was being managed by the government’s water agency, The Metropolitan Waterworks and Sewerage System (MWSS), was in a state of total disrepair.

Water service, where available, was intermittent. Vast swathes of the metropolis was dry and the people had to resort to purchased water deliveries.

Leakages were rampant because of old and busted pipes. As a consequence, MWSS revenues were eroded and massive loans due to the gargantuan capital expenditures required to service the growing demand of the system mounted and had become unserviceable.

Plain and simple, somebody else other than the governement had to step in.

In 1997, with technical assistance from the International Finance Corporation (IFC), the government awarded the management of the system to the Ayala and the Lopez conglomerates. To entice these investors, some safeguards were included in the concession agreement, the most controversial of which is the so-called guaranteed return for their investments after deduction of all operating expenses related to the delivery of the services and business taxes. To provide comfort to the concessionaires, the agreement was approved and signed by the Office of the General Counsel, the Secretary of the Department of Finance and no less than the President of the Philippines.

In other words, from anybody’s point of view at that time, the agreement was legally airtight, binding and did not raise any concerns among the main principals as to its enforceability.

The agreement embodied a unique rate readjustment mechanism every five years to allow for the eventual recovery of whatever pricing increases are deferred due to the unspoken political or social concerns that might arise as a consequence of water rates going up.

It’s essentially pushing back any rate increases to future periods, very much like a hockey stick shaped pricing structure.

The question of course is what happens if by the end of the hockey stick, the pricing recovery formula will still be too steep for the public to accept without a fuss and the guaranteed return had not yet been achieved by the end of the concession agreement which is due to expire by 2022?

The solution? Extend the agreement by another 15 years, which is what happened in 2009.

I guess looking back now, it’s pretty much like saying, let’s keep everybody happy today and let others worry about the “what-ifs” tomorrow.

Well unfortunately, tomorrow’s “what-ifs” is now here as far as the current dispensation is concerned.

The water crisis a few months ago and the constant messaging that the current relief we are experiencing could be temporary is still very much in the public spotlight. The unfavorable ruling against the government by the Singapore-based international arbitration body and a bill for the recovery of “losses” of almost P11 billion by the concessionaires that have been booking billions in profits for the past few years, clearly is the straw that has broken the camel’s back for President Duterte.

Echoing the President, the incumbent Secretary of Justice has opined that “public good” has indeed been violated by the “onerous” provisions of the agreement between the concessionaires and the previous administrations.

The MWSS on the other hand, ostensibly acting on the instructions of the President, has proceeded to revoke the extension and is set to ask for a renegotiation of the concession agreement to remove the so-called ”onerus” provisions.

It remains to be seen however how these issues can be legally settled since these concerns are I believe, in my non-lawyer’s mind, quite subjective.

In so far as public opinion is concerned, I think there is a clear divide between the business community which, because of the likely negative impact on the perception at the moment of the lack of sanctity of agreements with government, understandably is sympathetic to the plight of the concessionaires, and the general public which believe the populist President is in the right in tamping down on the water rates and on the profits of business behemoths.

This ongoing saga is certainly precedent-setting as far as corporate governance case studies are concerned and will surely be extensively discussed in various fora.

There are no easy answers to this puzzlement and only time will tell how the clash of cultures, the capitalist vs the populist, will eventually play out.

Let us just hope that like the King of Siam and Anna, love and understanding will ultimately prevail!