[ANALYSIS] Writing contracts on water

We enjoy no 2020 vision on the ultimate consequences of the water concession controversy ignited late last year by President Duterte. The trigger was his order reported on December 4, 2019 to file charges that may include economic sabotage and plunder against those involved in the original 1997 contracts and their 15-year extension in 2009. 

Within a week, Justice Secretary Menardo Guevarra condemned provisions of the government contracts with Manila Water and Maynilad as “onerous and disadvantageous to the government and the consuming public.” The Metropolitan Waterworks and Sewerage System (MWSS) cancelled the contract extension from 2022 to 2037, fueling speculation that other players might take over the Ayala and Metro Pacific concessions. By then, the concessionaires had decided to waive the international arbitration court judgment awarding them nearly P11 billion compensation and to explore the renegotiation of their contracts.

Another week later, both Guevarra and Finance Secretary Carlos Dominguez disclaimed any thought of canceling the contracts, despite Presidential Spokesperson Salvador Panelo’s allegation that, guided by public officials, the concessionaires “raped the economy for their own personal aggrandisement,” bleeding the country dry “to the outrageous detriment of the Filipinos.” Both justice and finance departments support renegotiation with the alleged rapists. 

MWSS has announced no plans for managing its responsibilities following the imminent termination of the concessions. Claims that contract provisions prevent the state from intervening in fixing contract fees are misleading. Regular review of rate adjustments that Mr. Dominguez advocated is already provided in the original agreements.

Never powerless

Government is never powerless against the private sector, which cannot compel the enforcement of contracts.

Their recourse is international arbitration, permitted in the agreements but also lacking both police powers and popular appeal, especially when the battle is waged in the arena of bureaucratic rules, populist politics, and social media. Where 40% of families consider themselves poor, even mendacious accusations trump reasonable contracts when they promise lower consumer costs.  

Still, no charges have been filed and the dispute might be arguably dismissed as a tempest in a teapot that did produce some good. High-profile hearings focused attention on the water services business, thus exposing the complaints of the Commission on Audit and water districts against PrimeWater Infrastructure Corp. for high costs, poor service, and failure to pay franchise taxes. These may also add pressure on transport and communications companies to improve their services. 

But the furor also caused continuing, real-world consequences.

The concessionaires and their investors have not recovered from the P128-billion hit on the value of their shares. Banks have reportedly suspended releases on approved loans and new loan approvals, inflicting collateral damage on concessionaire contractors and consultants. The issue also clouds prospects for mobilizing the substantial, long-term funding to build and sustain the infrastructure for reliable, affordable water and sewage services. 

Increased risk

The controversy cautions private business on the increased risk of ventures into highly-regulated projects covering public utilities. The field is sufficiently fraught and complex, demanding massive investments over an extended period and rarely promising quick recovery of capital and profits. 

Hence, the Philippine privatization of water services in 1997, at a time of severe shortage, gained international notice. One concessionaire dropped the project, an indication that the contract was no sweetheart deal. Manila Water persisted and leveraged the expertise it acquired to emerge as the largest direct foreign investor in Vietnam’s water sector, delivering half of the bulk water requirements of Ho Chi Minh City.

But it was government, assisted by international financial and legal advisers, that crafted the terms of the concession contracts. Offered to the private sector on a take-it-or-leave-it basis, the contracts went to the lowest bidders. If public officials are now deemed liable for onerous provisions in the agreements, two presidents, several of their Cabinet members and the MWSS boards can face charges.

Over the concession period, such projects will encounter changes in technology, market conditions, and even in the natural resource environment that may lead to unforeseen, disastrous losses or spectacular profits. Agreements must provide against such contingencies to protect the public interest –  without denying the rights of the concessionaires. What is their recourse against a successor administration unilaterally revising the covenants of an earlier government to negate rights granted them in the original agreements?

This is the critical question raised by the current water dispute. Without provisions for a credible process to negotiate protection from what is sometimes cited as Material Adverse Government Action (MAGA), agreements might as well be written on water. This issue now threatens, not just the water concessionaires, but other current and potential public–private partnership projects. – Rappler.com 

Edilberto C. de Jesus is professor emeritus at the Asian Institute of Management.