MWSS antics expose regulatory risks in PH
The Metropolitan Waterworks and Sewerage System is not listening to its superiors. Nor has it grasped the implications of its decision to mock an arbitration order by the Singapore court of the International Chamber of Commerce.
MWSS officials adopted a populist stance with little regard to an international arbitration court ruling. The tribunal of the ICC, the foremost international arbitral institution for global trade, ruled in favor of Maynilad Water Services Inc. on Dec. 29 and ordered MWSS to grant the west zone concessionaire a rate increase equivalent to P3.06 per cubic meter.
But the water regulator put off the rate increase in defiance of the ICC order that was supposed to be final and executory in keeping with the 1997 concession agreements. Worse, MWSS wants to further reduce contract-allowed corporate expenses passed on to consumers, based on a subsequent ICC ruling on a separate arbitration case.
The Finance Department, which oversees the operations of the MWSS as a government-owned and–controlled corporation, or GOCC, has rebuked the water regulator for postponing the long-due adjustments in Metro Manila’s water rates. Finance said the MWSS stance was baseless and too costly for the agency in the first place.
The position of Finance—contained in two confidential memorandums to President Benigno Aquino III that were leaked last week to the media by left-leaning allies of MWSS regulators posing as consumerism activists—virtually undermined the position of party-list group Bayan Muna that the national government should not honor its letters of undertaking or commitment of sovereign guarantee to pay for MWSS’ contract breaches.
Finance warned that the MWSS reversal would compel the national government to cough up and pay Maynilad Water over P5 billion in corporate losses since the regular rate-rebasing process began in January 2013, plus P208 million for every month since the ICC court handed out its verdict on Dec. 29, 2014. The payment serves as sovereign guarantee to compensate the concessionaire for whatever financial losses that arise from MWSS’ breach of the original concession agreement that both parties signed in 1997.
The department said the MWSS action would hurt the Philippine government’s credibility before the international community, and ultimately erode the confidence in President Aquino’s privatization thrusts and investment-generation programs, like his centerpiece public-private partnership scheme.
Business community watching
The private sector has weighed in. Indicative of the business community’s low regard for MWSS in the aftermath of the arbitration controversy, the GOCC made its debut in the latest Executive Outlook Survey of the Makati Business Club as one of the worst performers among 64 government agencies and state-run firms in the country.
MWSS ended up at No. 58 of 64 agencies at the bottom rung with the worst negative satisfaction ratings in the Second Semester 2015 survey.
Finance Secretary Cesar Purisima has told President Aquino that MWSS should have granted the adjustments sought by the two concessionaires in their 2013 rate-hike petitions because the payment of compensation for damages would be “credit negative” and would impact adversely on Malacañang’s privatization and PPP programs.
“A call on the undertaking letter may also result in a drop in our credit rating as ratings agencies increase the assumed probabilities of our contingent liabilities being called,” said Purisima of the sovereign guarantee that the national government would have to assume because of MWSS’ inaction on the rate-adjustment petition.
“We need to protect the credibility of the government,” Purisima said in his memorandum to Aquino.
“When the contract was entered into, there were terms. The reading of the DoF of the terms of the contract between the Republic and these concessionaires was that it was allowed, and in fact several administrations of the MWSS respected that contract from 1997 to 2013... There’s been precedent already and then suddenly, there’s been a change of administration in the MWSS and then we changed.”
MWSS’ breach of Maynilad Water’s 1997 concession agreement and its eventual defiance of the ICC’s arbitral ruling are the kind of regulatory risks that foreign and local businessmen have been bitching about as the reason why most investors continue to overlook the Philippines, despite its impressive 22 credit ratings upgrade since 2010 that propelled it into the region’s fastest-growing and Asia’s newest economic star.
“When a Philippine GOCC does not honor its contract even after an arbitration decision rules against its position, the investment climate of the country is harmed. This case is being watched closely as it affects investor confidence,” adds John Forbes, a senior advisor at the American Chamber of Commerce of the Philippines.