Intelligent Investing

Why gov’t shouldn’t nationalize water concessions

/ 04:07 AM December 09, 2019

Shares of Manila Water Corp., Metro Pacific and DMCI fell sharply last week after President Duterte responded furiously to the Singapore-based arbitration court’s order that the Philippine government should pay P7.4 billion in compensation to Manila Water for losses incurred because it was not able to increase rates since 2015.

President Duterte said he would sue Manila Water and Maynilad for economic sabotage as the current contract was lopsided in favor of the water concessionaires.


He also said he ordered Solicitor General Jose Calida and Finance Secretary Carlos Dominguez III to draft a new contract that is favorable to the public and to the government that he will force the concessionaires to accept. If Manila Water and Maynilad reject the new contract, their concessions will be taken away from them.

As someone representing the financial sector, I hope the President will think twice about executing this threat.The main reason is that no investor, foreign or local, will want to make any investments in the Philippines if the government does not respect the sanctity of the contract. This in turn will seriously hamper the country’s ability to meet its “AmBisyon Natin 2040” goal, wherein the Philippines would be “predominantly middle class” with a per capita income of at least $11,000.


For this to happen, the Philippines will need to sustain an annual GDP growth of 6.5 percent and this would require a lot of investments from the private sector.

Admittedly, it seems like the water concessionaires got too good a deal at the expense of the government and the Filipino people, especially since they are now earning billions of pesos yearly.

However, the quality of water services has also improved significantly since Manila Water and Maynilad first won the concessions in 1997. This would not have happened if not for the several billions of pesos worth of investments made over the past 22 years. No investor would risk billions if they were not expecting to generate a reasonable amount of return.

I remember before when water services were still run by the government, it was a necessity for every house to have a water tank and a water pump because water services were often interrupted and pressure was too weak to reach the second floor. The timba and the tabo were common fixtures in every bathroom, including homes in high-end villages.

Although water rates were cheaper, access to water was much more difficult. In fact, it was not uncommon for people to be buying water from fire trucks.

Interest rates were also much higher and the peso’s trend was a lot weaker in 1997 since the Philippine government’s financial standing was not as strong. This might be the reason why the government had to offer much higher returns to entice investors to participate in the privatization of the water concessions.

The returns of the water concessionaires today are probably much higher than what the government anticipated them to be when they initially privatized the water concessions especially since economic conditions are much better now. Some provisions that were made before when the original contract was drafted may also no longer be necessary.


However, rather than abruptly changing the provisions of the original contract and forcing the water concessionaires to accept them, we hope the government will enter into discussions with the water concessionaires to come up with a mutually beneficial agreement. After all, both Manila Water and Maynilad have expressed openness to compromise with the government even though they won the arbitration case.To some extent, companies that are engaged in providing public utilities are cognizant of the risk that the government may not honor their contract.
Many years ago, I asked the management of a publicly listed company about this and they said that to protect themselves from such a risk, they always factor in a much higher required rate of return when evaluating government contracts.

Assuming the worst case scenario where Manila Water and Maynilad reject the new contract and the government ends up nationalizing the water concessions, there is a strong possibility that the quality of water services will eventually return to its pre-privatized state and all Filipinos will once again need to have timba and tabo in their bathrooms. Either that or the government will be forced to award the concession to a new group requiring an even higher rate of return because of increasing concerns that the government may change its mind again. This in turn will make water services even more expensive for the Filipinos.

Aside from water, the quality of other public utilities will also be at risk of deteriorating significantly or becoming much more expensive which is contrary to what the government wants to achieve in the first place.

For the said reason, I hope the government doesn’t simply change its contract with the water concessionaires, but instead engage in a discussion with Manila Water and Maynilad so that all parties can come up with a win win solution and so that investors will continue to find it attractive to invest in the Philippines.

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