Ayala unfazed by Manila Water setback

Despite the bitter experience of water distribution unit Manila Water Co. with regulators, conglomerate Ayala Corp. will not hold back from participating in major infrastructure projects under the public-private partnership (PPP) framework.

In an interview, Ayala Corp. managing director John Eric Francia said that the group would still participate in upcoming PPP projects despite the perceived increase in regulatory risks arising from the MWC episode.

Among the key projects still in Ayala’s pipeline were the Mactan-Cebu International Airport rehabilitation, Light Railway Transit 1 extension, Cavite-Laguna Expressway and the automated collection fare system (ACFS) for railways, he said.

“There’s always a recourse if there’s a difference in views on the concession agreement. There’s such a thing as arbitration process, the last resort if you will, if you can’t strike any agreement and that’s present in all concession agreements. There’s [an] arbitration clause, just in case,” Francia said on the sidelines of last Friday’s launch of Ayala’s Volkswagen distributorship.

“You know, we’re very careful, [resorting to arbitration] only in extreme scenarios, to protect the sanctity of the agreement. [Recourse] is there and government has a track record of respecting outcomes of arbitration, and that’s a good thing. That’s a glass half full,” he said.

For Ayala group, diversification into lucrative but highly regulated businesses like infrastructure is part of long-term growth strategy.

The arbitration proceedings initiated by MWC against regulator Metropolitan Waterworks and Sewerage System (MWSS) could take about six to 12 months to reach resolution, Francia said.

The case stemmed from MWSS’ rejection of the petition by MWC and Maynilad Water Services Inc. to raise water tariffs.  The regulator instead ordered a rate cut for the next five years.

Francia said the arbitration process could take about six to 12 months to be resolved.

Deutsche Bank, in a research note dated Sept. 13, said some aspects of the MWSS’ decision could be deemed “reasonable”—such as the cut in capital spending to build new water sources—but noted that many aspects would likely be “contestable under an impartial, well-informed panel.”

Among the items which Deutsche Bank sees the concessionaires getting favorable results from arbitration are the provisions on removal of tax income recovery, disallowance of substantial capital expenditure over the past five years and calculation of the appropriate discount rate.

Credit Suisse, in a separate report, agreed that the concessionaires would likely receive a favorable decision post-arbitration.

“We also believe that it is in the best interest of the Philippine government to be supportive of a tariff increase for the concessionaires. From a broader perspective, we believe that a successful execution of the government’s push for greater private sector investments will be on the line,” said the report.