Tuesday, May 22, 2018
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Corporate Securities Info

Sanctity of contracts

The bashing that Manila Water Co. and Maynilad Water Services Inc. went through recently in connection with their concession agreement with Metropolitan Waterworks and Sewerage System illustrates the difficulty of doing business with the government.

The two concessionaires were criticized for passing on to their customers “illegal” charges, e.g. income tax obligations, representation expenses and other special operational costs.

Although these billings have been in place for almost 16 years, they drew public attention only in the course of the hearing of the companies’ petition for an upward adjustment of their tariffs.


In response to the criticisms, the companies placed full-page advertisements in the broadsheets stating that these charges were agreed to by MWSS in the concession agreement it signed with them in 1997.

Thus, in consideration for multi-million peso investments for the improvement, development and operation of Metro Manila’s water and sewerage systems, the concessionaires were authorized to collect, in addition to the usual water tariffs, the questioned billings.

The agreement, which is effective up to 2022, also provides for a rates review mechanism every five years to enable the concessionaires to get a fair return on their investments.


Surprise, surprise, after all these years, the MWSS suddenly found something wrong with those charges. Its chief regulator, Emmanuel Caparas, said passing on the companies’ tax liability to the customers was illegal and that the operational expenses included in the computation of the rate basis were inappropriate.

The belated expression of concern for the welfare and interests of the water customers is comical, to say the least.

Until some so-called public interest groups demonized the charges as exploitative, MWSS considered them fair, equitable and consistent with generally accepted practices in developed countries.

It did not find any reason to question them, or rock the boat, so to speak, because the concessionaires were ably performing the mission it was supposed to undertake under the law that created it.


It also helped that the two companies were regularly remitting concession fees to MWSS that enabled it to continue to operate and sustain the cozy lifestyle of its officers and employees until President Aquino put an end to the allowance-giving spree of its former board of trustees.

The billings that were earlier considered to be in the best interests of water-starved Metro Manila residents metamorphosed into unconscionable financial impositions on the hapless wards of MWSS.


What was in the mind of MWSS when it planned the privatization of its facilities? Did it think it was in a strong bargaining position? Or did it feel it was obliged to quickly turn over its system to the private sector?

In the auction or bidding of government projects or assets, the government has the upper hand. Subject to existing laws or regulations, it can dictate the terms and conditions (or Terms of Reference) of the planned sale or auction.

Bidders or participants can be disqualified outright if they do not meet the pre-qualification standards set by the government office overseeing the activity. Until the award is signed, that office has complete control over the proceedings to make sure the bids submitted meet the objectives of the whole exercise.

If in 1997 MWSS believed it was negotiating from a position of strength and, that early, felt the questioned charges were illegal, it could have made that matter clear in the Terms of Reference or, if the bidders asked for it, turned them down pronto.

On the other hand, if MWSS was under pressure from the administration then to privatize its facilities as soon as possible to deflect criticisms about its failure to meet the water needs of Metro Manila residents, it had no choice but accept the demand of the concessionaires to include the questioned charges in the concession agreement.


It is not uncommon that, due to external pressure or instructions from the higher ups, some public officials are forced into agreements that, although legally defensible on its face, contain morally questionable provisions. As the legal adage goes, not everything that is legal is moral.

The fear of displeasing the powers-that-be often motivates public officials into looking the other way or being less circumspect in their actions. They sometimes take solace in the thought that “in case anything goes wrong with the transactions he entered into, it would be his successor’s headache, not his.”

Whatever may be the reason behind entering into an agreement, a contract freely entered into must be dutifully complied with by the parties. That is the norm in civilized societies.

The present board of trustees of MWSS has to decide whether or not it will respect the terms and conditions of the concession agreements entered into by its 1997 predecessor in regard to the questioned charges.

Unless the concessionaires agree to their deletion or a competent court declares them illegal, MWSS cannot, in the exercise of its regulatory authority, disallow their collection.

Neither will the threat of some publicity-seeking senators to investigate the matter be of any consequence to the legality of those agreements. The inviolability of contracts freely entered into by the parties is protected by our Constitution.

Doing business with the government can sometimes be a pain in the neck.

For comments, send your e-mail to rpalabrica@inquirer.com.ph.

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TAGS: Contract, Government, Manila Water, Maynilad, Metropolitan Waterworks and Sewerage System, MWSS, Philippines
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