Water rate cut ‘undermines sanctity of contracts’

MANILA, Philippines – The Japanese Chamber of Commerce and Industry of the Philippines raised alarm over the decision of the water regulator to reduce the rates charged by Metro Manila’s water distributors.

READ: First time: MWSS cuts water rates 

In a statement released on October 5, the business group said the decision of the Metropolitan Waterworks & Sewerage System (MWSS) to reduce the rates charged by water concessionaires Manila Water Company Inc. and Maynilad Water Services Inc. “undermines the sanctity of contracts,” a criticism foreign groups have made in the past.

“We view the MWSS’ unilateral and arbitrary act of changing the terms or interpretation of the concession agreement, in total disregard of the contractual rights and intent of the parties, with grave concern,” the chamber wrote.

Japanese trading firm Marubeni Corporation, which is a member of the chamber, has a 20% stake in Maynilad, the largest private water concessionaire in the Philippines in terms of customer base. Maynilad is a joint venture between Metro Pacific Investments Corporation and DMCI Holdings Inc.

Maynilad and Ayala-owned Manila Water asked MWSS for rate increases in the next 5 years. MWSS dismissed their petitions and for the first time since the 1997 privatization of water services, cut their rates, citing “unsubstantiated expenses, unliquidated cash advances,” among others.

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Maynilad and Manila Water have separately filed arbitration cases against MWSS to dispute the rate cuts. Both companies cited violations of their contracts.

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“The decision of the MWSS to reduce the tariff being charged by the concessionaires is undermining the legitimacy of the contract that was prepared, signed and guaranteed by the Philippine government 16 years ago,” the chamber said.

The privatization of Philippine water services has been regarded as one of the largest and most successful public-private partnership (PPP) projects in the world.

The chamber focused on the MWSS’ decision to “disallow the recovery of corporate income tax in determining the tariff” as against the contract forged with government.

“[This is] contrary to the parties’ consistent understanding, agreement and practice of allowing concessionaires to recover corporate income tax,” it added.

This market-based rate of return on the concessionaires’ investments “should not be perceived as anomalous or irregular,” it said. Including income taxes among the investors’ recoverable expenses is “common in water concession contracts” in the United Kingdom, Portugal, Chile and Peru. It added this is a way to allocate risk between the regulatory body and the investor “to secure and maximize the economic viability of concession contracts.”

MWSS’ move sends a “very strong message to the business community about the level of commitment of the Philippine government in upholding the sanctity of contracts,” the chamber noted.

The chamber also raised concern about the impact of the decision on the efforts of the government to encourage foreign investors to participate in bidding for capital-intensive infrastructure projects under the PPP scheme.

“The decision of foreign investors to invest in long-term PPP projects in the Philippines is due to a large extent to their belief that the Philippines has a stable and predictable regulatory environment,” it said. – Rappler.com