Trickier than water

The tricky issue of water rates in Metro Manila, seen to be a deal breaker in the PPP projects of the Aquino (Part II) administration, just added to the problems confronting our dear leader, Benigno Simeon, aka BS.

While his hands are already full, what with the rebellion in Mindanao and the alleged thievery in the congressional pork barrel, he cannot ignore the worsening dispute over water rates.

In business, they are saying that the issue can reverse the economic gains of the administration. Whether the administration likes it or not, the water issue may dampen private investments, particularly in the numerous infrastructure projects of the Aquino (Part II) administration, which are also contractual in nature.

Last week, MWSS decided to roll back the water rates charged on customers by its two distribution contractors or concessionaires—Manila Water (Ayala group) and Maynilad (MVP group).

Actually, Manila Water asked MWSS for a 24-percent increase in rates, while Maynilad asked for 28 percent. But the regulator of the water system ordered a 30-percent cut for Manila Water and 5-percent cut for Maynilad.

In effect, MWSS threw away the tax recovery mechanism in their contracts, lowered the allowable rate of return, and reduced rather substantially the opening cash balance of the two companies.

Those are the major factors in computing the water rates that are part of the existing contract between the MWSS and the concessionaires.

Thus, Budget Secretary Florencio Abad reportedly insisted that the government must honor the contract as it stands. He said “the contract provides guaranteed profit for the water firms.”

The issue is simple: The MWSS now wants to remove some major provisions in the water concession, such as inclusion of the income tax in the rate computation, which the MWSS offered to the water companies in its public bidding in the 1990s.

At that time, water service in Metro Manila was a complete disgrace. People had to stay awake all night just to take advantage of the trickles of dirty water from the MWSS. Thanks to the privatization of the service in the past 20 years, most areas today have potable water all day, all the time.

Investment analysts were quick to react to the shocker dealt out last week by the MWSS on the struggling stock market.

For instance, the US firm JP Morgan called the MWSS decisions as “nothing short of disastrous,” noting that they would mean 80-percent cut in the value of Manila Water as a business, and 50-percent for Maynilad. In other words, the MWSS decision would be bad for the stock market.

Another foreign firm, Deutsche Bank, noted in a recent market report that the MWSS decision to reduce the “opening cash position” of Manila Water was the biggest reason behind the decrease in the value of the company. The bank said the MWSS moves, in effect, prohibited Manila Water from factoring its capital investments in the water rates. To top it all, MWSS did so … well, “retroactively.” (The “opening cash position” really just stands for the investments made by the company that it has yet to recover in the future.)

Here is another bomb from Deutsche Bank: The MWSS decision suggests that Manila Water could be worth close to nothing after adjusting for debt.

Ultimately, therefore, water service will only suffer. Look, if the concessionaires cannot recover their investments, they will be foolish to continue investing. For one, the banks will refuse to lend to any business with poor cash flow. And in business, they see all those drawbacks already, and they are already talking about holding back on their investments. Truly, nobody will want to deal with a government that reneges on its contracts.

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In the talks between Manila and Washington regarding “access” of the US military to Philippine military bases, my info is that the US side has been asking Manila for an agreement lasting some 20 years.

That seems to be a huge number. Some factions in the Aquino (Part II) administration want to break it down into a 10-year agreement, albeit renewable for another 10 years.

Based on reports, the talks already started last month on the “access agreement” that would allow US troops to return to the Philippines, reportedly as part of the strategy of the US military to increase its presence in Southeast Asia.

New reports quoted US Defense Secretary Chuck Hagel as saying that “the US does not seek permanent bases in the Philippines (because) that would represent a return to an outdated Cold War mentality. Instead we are using a new model of military-to-military cooperation benefiting two great allies and partners.”

From what I gathered, the US government is asking the Philippine government to allow the US military to use the former US bases here, namely, Subic and Clark, through troop rotation for military exercise and in times of crisis, similar to US arrangements with Australia and Singapore.

Here is the thing: Both sides seem to be hurrying a final agreement, right in time for the visit of US President Barack Obama to the region later this year.

DFA assistant secretary Carlos Sorreta, who is in the Philippine panel, reportedly said that the Philippines would still have “primary responsibility in matters of security whether it is an activity or a facility.”

Thanks to such an assurance from the Philippine panel that we are still the boss in the new arrangement with the US military, reports on the “access agreement” did not really elicit passionate and stringent opposition.

In fact, many in the government and in the private sector expressed their support for the agreement, considering the recent posturing from the bully that is China, flexing its military might at will in this part of the world.

Still it does not mean we should immediately accept the US panel’s proposals. True, we still need the US military on our side. But the Philippines must remain in control at all times. There must be no surprises such as storage of weapons here that are banned by international law.