MWSS inaction on rate hikes deemed ‘credit negative’

The Department of Finance has not relented in advising the President that regulator Metropolitan Waterworks and Sewerage System (MWSS) should have granted the rate increases earlier sought by Metro Manila’s two water concessionaires, as a February letter showed the agency warning that paying these firms compensation may be credit negative.

“A call on the undertaking letter may also result in a drop in our credit rating as ratings agencies increase the assumed probabilities of our contingent liabilities being called,” Finance Secretary Cesar V. Purisima said in a Feb. 20 memorandum for President Benigno Aquino III.

The DOF was referring to the undertaking letters issued in 1997 and 2010 as part of the agreement with the water concessionaires, which Maynilad Water Services Inc. called upon after MWSS failed to implement the decision of the arbitration panel in December which upheld Maynilad’s proposed alternative rebasing adjustment of 13.41 percent.

The country currently enjoys investment grade status and, as of June, received 22 positive rating action since 2010.

Credit ratings are a measure of a government’s credit worthiness. As the stability of state finances is also related to a country’s performance, credit scores serve as a proxy grade for the economy. It will also bring in more foreign capital and funds that are restricted from being poured into countries with non-investment grade status.

In a subsequent March 4 memorandum for the President, Purisima said “the DOF disagrees with MWSS’ position,” adding that Maynilad’s call upon the performance of the undertaking might result in the payment of about P5 billion for Jan. 1, 2013 to Jan. 31, 2015, plus P208 million for every month of delay in payment.

Manila Water Co. Inc., for its part, claimed it would incur losses of about P79 billion from 2015 to 2037 due to an arbitration court ruling that required it to reduce water rates.

Recently, an appeals panel upheld the position of the MWSS to declare Manila Water as a public utility. The decision changes the fundamental character and rate of return of Manila Water.

As a result, Maynilad and Manila Water, in February and April respectively, sought compensation under the performance undertaking issued by the DOF in 1997.

A performance undertaking is a form of government guarantee that states agencies involved in a project will have to fulfill their obligations.

In the March 4 memo, the DOF pointed out that since “the arbitral award is final and binding upon MWSS… there is no basis for delaying the execution of the rate increase whatever the outcome of the arbitration case between MWSS and Manila Water.

“Maynilad may call on the government under the undertaking letters in this specific situation. MWSS’ reading would result in the illogical situation where the MWSS is practically allowed to be in breach of its contractual commitment to observe the standard rates with no recourse for Maynilad,” the DOF added.

It further said that the undertaking letters “clearly guarantee against delays in legitimate rate increases and do not foresee recovery of delays over the concession period.”

According to the DOF, “noncompliance with the arbitral award will reverse significant gains made by [the Aquino] administration in inspiring confidence in both privatization efforts and the public-private partnership program.”

The DOF noted that MWSS and the MWSS-Regulatory Office in a Feb. 25 letter justified the delay in implementation of the arbitral award, as well as questioned the applicability of the undertaking letters to this situation and the need for an immediate payment since delays in rate increases could be recovered over the rest of the concession period.

Due to government inaction thus far, Maynilad had served the government, through the DOF, a notice of arbitration and statement of claim. The arbitration proceedings will be conducted in Singapore by a three-man panel.