Cebu gets PPP right

MANILA, Philippines – There is more than meets the eye in Manila Water Company’s recent announcement it had bagged a deal to set up a joint venture with the Cebu provincial government to build and operate a 35 million liters per day bulk water facility.

The new P700 million dam will boost water supply for the northern and central areas of the island-province that is home to the Philippines’ 2nd biggest urban center after Metro Manila and one of its main tourist destinations.

It gives a badly-needed boost to President Benigno “Noynoy” Aquino’s public-private partnership (PPP) program, which is taking longer than expected to take off. After more year and a half in office, the administration has tendered just one PPP project as of end-2011 – the 4-km Daang Hari-South Luzon Expressway link — though officials have promised to launch at least 6 more projects in 2012.

The NAIA-3 trauma

The Cebu bulk water project possibly marks one of the few times when an unsolicited proposal was successfully subjected to a price or “Swiss” challenge, one of the most difficult provisions in the build-operate-transfer (BOT) law to implement.

The provision has given rise to legal disputes that delayed some of the country’s biggest infrastructure projects.

Price challenges are a mechanism for injecting some competition into what are essentially negotiated deals. Bidders are encouraged to bid lower than the price offered by the proponent who submitted an unsolicited proposal.

However, the contract does not automatically go to the lowest bidder because the original proponent has a right to match the lowest bid. The proponent’s right to match has discouraged many potential bidders from taking part in price challenges.

The series of long and complex legal suits over the Terminal 3 project for the Ninoy Aquino International Airport (NAIA) was triggered by disputes that arose while the government was subjecting initial award of the concession agreement to a Swiss challenge in the mid-1990s.  The Department of Transportation and Communication had a draft agreement with the Asia Emerging Dragons Corp (AEDC), a consortium composed of the country’s top Chinese-Filipino taipans.

However, it subsequently awarded the contract to a challenger who offered a lower bid, Philippine International Airport Terminal Co (Piatco), after the proponent refused to match the bid. AEDC subsequently filed suits against the DOTC and Piatco, saying they violated the BOT law.

Cebu’s experience

In contrast, the price challenge process worked very well for the Cebu bulk water project, and the  construction cost was cut by almost half from P1.5 billion to only P700 million, according to a Manila Water spokesman.

Two other consortia, Cebu Water and Metro Maynilad, offered bids that were lower by 44% and 25%, respectively, compared to Manila Water’s original project cost of P1.5 billion.

The lowest bidder, Cebu Water, still lost anyway after Manila Water decided to match its bid but Cebu consumers were the clear winners. The cost of treated water from the new facility dived from Manila Water’s original proposal of P24.90 per liter to only P13.95 per liter.

Public, private and PPP

The new Cebu water dam could be one of the 1st few sizeable water supply projects to be undertaken by a local government unit using the PPP framework.

Not many companies are comfortable entering into long-term contracts with local governments headed by elected officials with terms of office lasting no more than 3 years (though they are allowed to run for reelection for 2 more terms).

In fact, when Manila Water 1st looked into building the water supply facility in the province in early 2000s, it held initial talks not with the local government unit but with the Metro Cebu Water District, a state-owned utility that distributes water to some 2.3 million residents of Cebu city and 7 other cities and towns that make up Metropolitan Cebu.

However, the negotiations ended in failure because of disagreements over pricing and reimbursements. The provincial government then stepped in and accepted an unsolicited proposal from Manila Water.

Unlike the Metropolitan Waterworks and Sewerage System’s (MWSS) failed joint venture with San Miguel Corp to build the proposed 1,900 million liters per day Laiban dam in Tanay, Rizal, the Cebu bulk water project agreement does not contain a “take or pay” provision that compels water districts or utilities in the province to commit to buy the water from the new facility, said a Manila Water spokesman.

Rather, the joint venture of Manila Water and Cebu provincial government will make a competitive offer to the Metro Cebu Water District and other water utilities in the province to convince them to source water from the new facility.

“I hope the MCWD will consider buying water from us,” said Governor Gwen Garcia during a speech at the opening of the water districts’ association conference in Cebu on February 9, according to the province’s web site.

Armando Paredes, the MCWD general manager, said the water district was keen to receive a proposal from the joint venture. He added that cutting the cost of treated water by almost half to just P13.95 per liter bodes well for the project because that is very close to the water district’s average tariff. “It is a good starting point for negotiations,” he said in a phone interview.

Cebu paves the way

Located about 570 kilometers south of Manila, Cebu is one of the country’s most progressive provinces. It hosts one of the country’s biggest export processing zones outside Luzon, and is considered the educational, commercial and shipping hub in the central and southern Philippines.

But decades of negligible investments in water supply has left about half of the residents unserved by distribution networks of the MCWD and other utilities. Excessive dependence on ground water has lowered the water table, causing subsidence and salt water intrusion. The National Water Resources Board has listed Cebu as one of the country’s nine “water-stressed urban centers.”

The Cebu provincial government has taken an important step towards relieving the water stress in parts of the island. It may also show the way forward in implementing successful PPP projects not only for local government units but also national government agencies.

As Garcia, with a hint of local pride, told the participants in the water districts’ meeting: “Here in Cebu where Philippine history began, history continues to be made as we offer a template on how the public and the private sector may work together to serve an urgent need.”

While the Cebu water project is quite small compared to the usual scale of national government projects, Aquino and his officials should do well to learn all they can how Garcia and her team pulled it off.

They may yet gain an insight or 2 when it is the national government’s turn to oversee the Swiss challenge for one of its biggest PPP toll road projects in Metro Manila – the elevated expressway linking North Luzon Expressway and the South Luzon Expressway. – Rappler.com