Water privatization in the Philippines
Encyclopedia
Water privatization in Metro Manila began in 1997 with the high-profile award of two concession contracts for the Eastern and Western halves of Metro Manila
. The concessions represent the largest population served by private operators in the developing world. As of 2010, the concession in Eastern Manila is highly successful and has led to significant improvements in access, service quality and efficiency: the population served more than doubled from 3 in 1997 to 6.1 million in 2009, the share of customers with continuous water supply increased from 26% to more than 98% and non-revenue water
declined from 63% to 16%. The concession in Western Manila failed when the company Maynilad went bankrupt in 2003. It was sold to new investors in 2007 and performance has improved since then. The share of the population with access to piped water in Western Manila increased from 67% in 1997 to 86% in 2006 and the share of customers that enjoys 24-hour water supply increased from 32% in 2007 to 71% in early 2011.
supplying Metro Manila, the Metropolitan Waterworks and Sewerage System (MWSS), emerged from the inability of MWSS to expand coverage for a growing population or to improve service quality and efficiency; MWSS is one of many 'government-owned and controlled corporations' (GOCCs) in the Philippines. By 1996, MWSS only provided water supply for on average 16 hours each day to two thirds of Metro Manila. While designed supply was generally adequate, delivery was not. According to the Asian Development Bank
, the share of non-revenue water (NRW)
, water supplied which is not billed e.g. due to leakage and illegal connections, was more than 60%; this is an extremely high percentage compared to other Asian cities such as Seoul
(35%), Kuala Lumpur
(36%) and Bangkok
(38%). Furthermore, MWSS depended on government subsidies due to poor cost recovery. A few years earlier, the government had privatized electricity supply which resulted in a reduced number of blackouts. The government wanted to repeat this perceived success in water supply.
The concession contracts were for 25 years and included targets concerning coverage, service quality and economic efficiency. An objective was to increase water coverage in Metro Manila
to 96% by 2006. The companies were expected to be regulated by the MWSS Regulatory Office, which was staffed to a large extent with employees of the former public utility. The two concession holders inherited the debt of MWSS. However, the debt was not shared equally between the two halves of the city: Because Western Manila is more prosperous, 90% of the legacy debt was assigned to the Western zone. The Benpres Group, the Filipino partner of Maynilad, was in a desolate financial situation when it entered the contract, providing little cushion for the first difficult years. The International Finance Corporation
(IFC) of the World Bank Group advised the government about the design and bidding of the two concessions.
The concessions were awarded through international competitive bidding. According to a study by the British NGO WaterAid
both companies "appeared to have made particularly low bids, on poor foundations, with the assumption they would change the terms of the contract once it was won."
Maynilad incurred high costs, in part because it awarded contracts to affiliates of Suez without competitive bidding. Maynilad also brought in new staff from its mother company Benpres that had no experience in water supply, which led to tensions and reduced the motivation of incubmbent staff. Maynilad thus invested in expanding access in the Western zone, but due to its business model and the heavy load of inherited foreign-currency debt it soon ran into financial difficulties. It then slowed down its investments and in April 2001 it stopped paying the concession fee to the government..
Manila water, on the other hand, initially did not invest in system expansion in its Eastern Zone. It focused on reducing non-revenue water and initially borrowed only small amounts in local currency. It bid out works competitively and gained the trust of former MWSS employees which were trained in relevant fields. Only a few top positions were filled with outsiders seconded from its mother company Ayala or its foreign partners. Manila Water used a "territory management" approach to reduce non-revenue water under which decentralized operating units were given substantial responsibility to decide about appropriate actions. Evaluation and compensation of staff in the decentralized units was linked to their performance. With these policies Manila Water made a profit as early as 1999 and was thus able to gain the confidence of banks and to gradually increase its borrowing.
In 2002 water tariffs were increased substantially for both concessions, exceeding their pre-privatisation level in current prices. By 2003 tariffs reached 11.4 Pesos in the Western zone and 10.1 Pesos/m3 in the Eastern zone. Targets concerning coverage and non-revenue water were adjusted downwards with agreement of the regulatory agency. A critical study of the two concessions concluded in 2002 that they both were a "failure" and a "corporate muddle, whereby the supposed benefits of private sector participation disappear, and government and public administrators are seemingly unable to prevent it."
Despite the tariff increases and the lowered targets, Maynilad went bankrupt in 2003. After a string of financial, legal, and regulatory disputes the concession was bid out again and was bought in 2007 by a consortium of the Filipino construction company DMCI Holdings and the Filipino investment firm Metro Pacific Investments Corporation
(MPIC). Suez continues to hold a 16%-minority share in Maynilad.
After the tariff increase of 2001 Manila Water began to invest in expanding the water network, including in poor neighborhoods, and achieved a significant increase in access. In 2009 Manila Water's concession was extended by another 15 years until 2037 instead of 2022.
Sanitation services, however, still have a long way to go. In the East Zone, only 10% of people have sewerage connections, with the other 90% relying on septic tanks, which Manila Water is obliged to empty. Manila Water plans to invest US$1 billion in sanitation between 2011 and 2018 to bring sewerage coverage to 70%.
Maynilad. Among the earliest attempts to address the problem was the construction of piped networks by a small local company called IWADCO (Inpart Waterworks and Development Company) using its own funds and buying water in bulk from the utilities. Local banks initially refused to borrow to the company even when it already had 25,000 paying customers. A NGO called Streams of Knowledge, which is associated with the Philippine Center for Water and Sanitation and was supported by UNDP, helped to set up the arrangement together with the local government and Maynilad which provides water at a discounted bulk rate. Users pay their water bills to water coordinators from the respective communities, which in turn pay Streams, which in turn pays a salary to the coordinator, pays the bulk water bill and returns part of the funds to the community.
Maynilad built the piped network only to supply points at the entry of narrow alleys, from where residents distributed it among themselves with rubber hoses. A connection fee of 5000 Pesos (about US$90) was paid in instalments, resulting in monthly payments of about 200 Pesos (US$3.70) per household. This was about four times less than what the poor had paid to water vendors before. Maynilad pursued an approach to connect poor communities that included laying pipes in slums, which made it difficult to control theft. Indeed, non-revenue water even increased in the Western zone.
Manila Water's approach to connect poor communities usually involved no pipes inside the communities, but included a single bulk meter for up to 100 households. It was the responsibility of the community to connect its members and any losses beyond the bulk meter were not incurred by the utility.
. Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.
The two concessionnaires submitted bids with tariffs that were much lower than the previous tariffs: 26% of the previous tariffs in the Eastern zone and 57% in the Western zone. Tariffs remained at these low levels for five years until the first rate rebasing took place in 2002. By the end of 2006 the tariff was, in real terms, 150% higher than the pre-privatization tariff in the Western zone and 23% higher in the Eastern zone. As of 2008, residential customers in the Eastern Zone who consumed about one cubic meter per day paid a monthly water bill of 395 Pesos (US$10) or 13 Pesos/m3 ($0.33/m3).
Metro Manila
Metropolitan Manila , the National Capital Region , or simply Metro Manila, is the metropolitan region encompassing the City of Manila and its surrounding areas in the Philippines...
. The concessions represent the largest population served by private operators in the developing world. As of 2010, the concession in Eastern Manila is highly successful and has led to significant improvements in access, service quality and efficiency: the population served more than doubled from 3 in 1997 to 6.1 million in 2009, the share of customers with continuous water supply increased from 26% to more than 98% and non-revenue water
Non-revenue water
Non revenue water is water that has been produced and is “lost” before it reaches the customer. Losses can be real losses or apparent losses . High levels of NRW are detrimental to the financial viability of water utilities, as well to the quality of water itself...
declined from 63% to 16%. The concession in Western Manila failed when the company Maynilad went bankrupt in 2003. It was sold to new investors in 2007 and performance has improved since then. The share of the population with access to piped water in Western Manila increased from 67% in 1997 to 86% in 2006 and the share of customers that enjoys 24-hour water supply increased from 32% in 2007 to 71% in early 2011.
Situation before privatization
The plan to privatize the water utilityWater industry
The water industry provides drinking water and wastewater services to residential, commercial, and industrial sectors of the economy. The water industry includes manufacturers and suppliers of bottled water...
supplying Metro Manila, the Metropolitan Waterworks and Sewerage System (MWSS), emerged from the inability of MWSS to expand coverage for a growing population or to improve service quality and efficiency; MWSS is one of many 'government-owned and controlled corporations' (GOCCs) in the Philippines. By 1996, MWSS only provided water supply for on average 16 hours each day to two thirds of Metro Manila. While designed supply was generally adequate, delivery was not. According to the Asian Development Bank
Asian Development Bank
The Asian Development Bank is a regional development bank established on 22 August 1966 to facilitate economic development of countries in Asia...
, the share of non-revenue water (NRW)
Non-revenue water
Non revenue water is water that has been produced and is “lost” before it reaches the customer. Losses can be real losses or apparent losses . High levels of NRW are detrimental to the financial viability of water utilities, as well to the quality of water itself...
, water supplied which is not billed e.g. due to leakage and illegal connections, was more than 60%; this is an extremely high percentage compared to other Asian cities such as Seoul
Seoul
Seoul , officially the Seoul Special City, is the capital and largest metropolis of South Korea. A megacity with a population of over 10 million, it is the largest city proper in the OECD developed world...
(35%), Kuala Lumpur
Kuala Lumpur
Kuala Lumpur is the capital and the second largest city in Malaysia by population. The city proper, making up an area of , has a population of 1.4 million as of 2010. Greater Kuala Lumpur, also known as the Klang Valley, is an urban agglomeration of 7.2 million...
(36%) and Bangkok
Bangkok
Bangkok is the capital and largest urban area city in Thailand. It is known in Thai as Krung Thep Maha Nakhon or simply Krung Thep , meaning "city of angels." The full name of Bangkok is Krung Thep Mahanakhon Amon Rattanakosin Mahintharayutthaya Mahadilok Phop Noppharat Ratchathani Burirom...
(38%). Furthermore, MWSS depended on government subsidies due to poor cost recovery. A few years earlier, the government had privatized electricity supply which resulted in a reduced number of blackouts. The government wanted to repeat this perceived success in water supply.
Concession awards for East and West Manila in 1997
In 1995, the Water Crisis Act was passed, providing the legal framework for the privatization of MWSS. The private participation was implemented through two concession contracts, in which the concessionaires were given the task to operate and manage the facilities, whereas MWSS preserved the ownership of the infrastructure. In order to facilitate benchmark comparisons, the service area was divided in two zones for which concession were awarded in 1997:- the Maynilad Water Services, Inc., a joint ventureJoint ventureA joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
by the French SuezSuezSuez is a seaport city in north-eastern Egypt, located on the north coast of the Gulf of Suez , near the southern terminus of the Suez Canal, having the same boundaries as Suez governorate. It has three harbors, Adabya, Ain Sokhna and Port Tawfiq, and extensive port facilities...
and the Filipino Benpres Holding was awarded the concessionConcession (contract)A concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area. For example, sports arenas or public parks may have concession stands. Many department stores contain numerous concessions operated by other...
contract for the West Zone, and - the Manila Water Company, Inc.Manila WaterThe Manila Water Company, Inc. is a public utility company in the Philippines. Manila Water, as it is more commonly known, is the East Concessionaire of MWSS during its privatization on August 1, 1997, with its counterpart Maynilad Water Services, Inc. as the West Concessionaire...
, consisting of the Filipino Ayala CorporationAyala CorporationAyala Corporation is a holding company for the diversified interests of the Ayala Group. Founded in the Philippines by the Spanish and German Ayala, Roxas, and Zobel families during colonial rule, it is the country's oldest and largest conglomerate...
as well as the British United UtilitiesUnited UtilitiesUnited Utilities Group PLC is the UK's largest listed water business. The Group owns and manages the regulated water and waste water network in the north west England, through it subsidiary United Utilities Water PLC , which is responsible for the vast majority of the group's assets and...
, the US company BechtelBechtelBechtel Corporation is the largest engineering company in the United States, ranking as the 5th-largest privately owned company in the U.S...
and MitsubishiMitsubishiThe Mitsubishi Group , Mitsubishi Group of Companies, or Mitsubishi Companies is a Japanese multinational conglomerate company that consists of a range of autonomous businesses which share the Mitsubishi brand, trademark and legacy...
was awarded the East Zone.
The concession contracts were for 25 years and included targets concerning coverage, service quality and economic efficiency. An objective was to increase water coverage in Metro Manila
Metro Manila
Metropolitan Manila , the National Capital Region , or simply Metro Manila, is the metropolitan region encompassing the City of Manila and its surrounding areas in the Philippines...
to 96% by 2006. The companies were expected to be regulated by the MWSS Regulatory Office, which was staffed to a large extent with employees of the former public utility. The two concession holders inherited the debt of MWSS. However, the debt was not shared equally between the two halves of the city: Because Western Manila is more prosperous, 90% of the legacy debt was assigned to the Western zone. The Benpres Group, the Filipino partner of Maynilad, was in a desolate financial situation when it entered the contract, providing little cushion for the first difficult years. The International Finance Corporation
International Finance Corporation
The International Finance Corporation promotes sustainable private sector investment in developing countries.IFC is a member of the World Bank Group and is headquartered in Washington, D.C., United States....
(IFC) of the World Bank Group advised the government about the design and bidding of the two concessions.
The concessions were awarded through international competitive bidding. According to a study by the British NGO WaterAid
WaterAid
WaterAid is an international non-profit organisation set up as a response to the UN International Drinking Water & Sanitation decade . WaterAid is dedicated to helping people escape the poverty and disease caused by living without safe water and sanitation. It is based in London, England and was...
both companies "appeared to have made particularly low bids, on poor foundations, with the assumption they would change the terms of the contract once it was won."
Development of the concessions
After the concessions came into force, tariffs at first decreased substantially since the private companies had submitted very low bids. In the Western zone the base tariff was 5 Pesos/m3 and in the Eastern Zone it was only 2.3 Pesos/m3, compared to 8.6 Pesos/m3 before the concession. The concessionaires were faced with a severe drought and the Asian financial crisis. Because of the rapid currency devaluation, debt service denominated in foreign currency doubled.Maynilad incurred high costs, in part because it awarded contracts to affiliates of Suez without competitive bidding. Maynilad also brought in new staff from its mother company Benpres that had no experience in water supply, which led to tensions and reduced the motivation of incubmbent staff. Maynilad thus invested in expanding access in the Western zone, but due to its business model and the heavy load of inherited foreign-currency debt it soon ran into financial difficulties. It then slowed down its investments and in April 2001 it stopped paying the concession fee to the government..
Manila water, on the other hand, initially did not invest in system expansion in its Eastern Zone. It focused on reducing non-revenue water and initially borrowed only small amounts in local currency. It bid out works competitively and gained the trust of former MWSS employees which were trained in relevant fields. Only a few top positions were filled with outsiders seconded from its mother company Ayala or its foreign partners. Manila Water used a "territory management" approach to reduce non-revenue water under which decentralized operating units were given substantial responsibility to decide about appropriate actions. Evaluation and compensation of staff in the decentralized units was linked to their performance. With these policies Manila Water made a profit as early as 1999 and was thus able to gain the confidence of banks and to gradually increase its borrowing.
In 2002 water tariffs were increased substantially for both concessions, exceeding their pre-privatisation level in current prices. By 2003 tariffs reached 11.4 Pesos in the Western zone and 10.1 Pesos/m3 in the Eastern zone. Targets concerning coverage and non-revenue water were adjusted downwards with agreement of the regulatory agency. A critical study of the two concessions concluded in 2002 that they both were a "failure" and a "corporate muddle, whereby the supposed benefits of private sector participation disappear, and government and public administrators are seemingly unable to prevent it."
Despite the tariff increases and the lowered targets, Maynilad went bankrupt in 2003. After a string of financial, legal, and regulatory disputes the concession was bid out again and was bought in 2007 by a consortium of the Filipino construction company DMCI Holdings and the Filipino investment firm Metro Pacific Investments Corporation
Metro Pacific Investments Corporation
Metro Pacific Investments Corporation is a Philippine-based unit investment corporation of the First Pacific Company Limited with interests in real estate development and infrastructure development and management.-External links:* ' - Official website...
(MPIC). Suez continues to hold a 16%-minority share in Maynilad.
After the tariff increase of 2001 Manila Water began to invest in expanding the water network, including in poor neighborhoods, and achieved a significant increase in access. In 2009 Manila Water's concession was extended by another 15 years until 2037 instead of 2022.
Impact
The impact of the concessions was very different in the Eastern Zone from the Western Zone.Eastern zone
Manila Water achieved significant improvements in East Manila. Between 1997 and the end of 2009:- the population served more than doubled from 3 to 6.1 million (2009) and the share with access to piped water increased from 49% to 94% (2006);
- non-revenue waterNon-revenue waterNon revenue water is water that has been produced and is “lost” before it reaches the customer. Losses can be real losses or apparent losses . High levels of NRW are detrimental to the financial viability of water utilities, as well to the quality of water itself...
declined from 63% to 16%; - the share of customers with continuous water supply increased from 26% to more than 98%;
- labor productivity increased substantially, as evidenced by a decline of the number of staff per 1000 connections from 9.8 to only 1.4;
- the percentage of people judging the utility's performance as "very good" increased from 28% to 100%, according to a survey by the University of the Philippines; and
- despite tariff increases, residential tariffs stand at only US$0.33/m3 and thus are about 10 times cheaper than water sold by vendors.
Sanitation services, however, still have a long way to go. In the East Zone, only 10% of people have sewerage connections, with the other 90% relying on septic tanks, which Manila Water is obliged to empty. Manila Water plans to invest US$1 billion in sanitation between 2011 and 2018 to bring sewerage coverage to 70%.
Western zone
Despite the financial problems it encountered, Maynilad claims to have connected 600,000 people to the water supply system until 2003, including many poor in slums. The share of the population with access to piped water increased from 67% in 1997 to 86% in 2006. After Maynilad's ownership changed in 2007, it implemented an ambitious investment program. One of the results is that the share of customers that enjoys 24-hour water supply increased from 32% in 2007 to 71% in early 2011.Reaching the poor
Many poor in Manila do not have access to piped water supply because the land where they live is occupied illegally and the private utilities are thus not allowed to connect them to the network. However, innovative solutions have been found to overcome this problem.Maynilad. Among the earliest attempts to address the problem was the construction of piped networks by a small local company called IWADCO (Inpart Waterworks and Development Company) using its own funds and buying water in bulk from the utilities. Local banks initially refused to borrow to the company even when it already had 25,000 paying customers. A NGO called Streams of Knowledge, which is associated with the Philippine Center for Water and Sanitation and was supported by UNDP, helped to set up the arrangement together with the local government and Maynilad which provides water at a discounted bulk rate. Users pay their water bills to water coordinators from the respective communities, which in turn pay Streams, which in turn pays a salary to the coordinator, pays the bulk water bill and returns part of the funds to the community.
Maynilad built the piped network only to supply points at the entry of narrow alleys, from where residents distributed it among themselves with rubber hoses. A connection fee of 5000 Pesos (about US$90) was paid in instalments, resulting in monthly payments of about 200 Pesos (US$3.70) per household. This was about four times less than what the poor had paid to water vendors before. Maynilad pursued an approach to connect poor communities that included laying pipes in slums, which made it difficult to control theft. Indeed, non-revenue water even increased in the Western zone.
Manila Water's approach to connect poor communities usually involved no pipes inside the communities, but included a single bulk meter for up to 100 households. It was the responsibility of the community to connect its members and any losses beyond the bulk meter were not incurred by the utility.
Tariff adjustments
Water tariffs in Manila are adjusted on the basis of four mechanisms. First, tariffs are adjusted automatically every three months on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index). Third and most importantly, tariffs are adjusted every five years to guarantee a certain rate of return to the private concession holder (rate rebasing). The company's performance vis a vis regulatory targets is also considered in determining the tariff. Fourth, extraordinary price adjustments can also be granted, but only in spefific circumstances such as a change in law or force majeureForce majeure
Force majeure or vis major "superior force", also known as cas fortuit or casus fortuitus "chance occurrence, unavoidable accident", is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of...
. Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.
The two concessionnaires submitted bids with tariffs that were much lower than the previous tariffs: 26% of the previous tariffs in the Eastern zone and 57% in the Western zone. Tariffs remained at these low levels for five years until the first rate rebasing took place in 2002. By the end of 2006 the tariff was, in real terms, 150% higher than the pre-privatization tariff in the Western zone and 23% higher in the Eastern zone. As of 2008, residential customers in the Eastern Zone who consumed about one cubic meter per day paid a monthly water bill of 395 Pesos (US$10) or 13 Pesos/m3 ($0.33/m3).
Further reading
- Mark Dumol:The Manila Water Concession. A Key Government Officials Diary of the World s Largest Water Privatization, World Bank, Directions in Development, 2000