Fitch: retroactive changes in PH water deals hurt investor sentiment

Metropolitan Waterworks and Sewerage System (MWSS). Photo from https://www.mwss.gov.ph

Retroactive changes in water concession deals exemplify high regulatory risk and deficiencies in due diligence and contracting process in the Philippines and may hurt investor confidence in the short-term, research firm Fitch Solutions said on Monday.

Citing its proprietary Project Risk Index (PRI) – which measures the risk of carrying out an infrastructure project from a financing, construction and operation angle – Fitch Solutions also said the Philippines had one of the highest regulatory risks compared to other major markets in the region.

Based on the regulation sub-component of the PRI, which feeds into the wider PRI scores, the Philippines scored 48.2, lower than other emerging South-East Asian markets such as Vietnam (59.4), Indonesia (49.1) and Malaysia (70.2).

Fitch Solutions said the risks of retroactive changes in government policy and more pertinently, government intervention in deals which had previously been signed between public and private stakeholders were comparatively higher in the Philippines. As such, the research firm said this would undermine investors’ confidence, especially that of foreign companies who are less familiar with the Philippine regulatory and business environment, possibly leading to a higher cost of doing business and deterring inflows of foreign direct investment.

However, Fitch Solutions said investor confidence may gradually improve as the Philippines improves on its frameworks for public-private partnerships (PPPs) in infrastructure-building.

The cancellation of concession extension agreements by the Philippines’ Metropolitan Waterworks and Sewerage System (MWSS) with Manila Water Co.and Maynilad Water Services demonstrates that contracts signed between public and private parties are “subjected to heightened regulatory risk,” Fitch Solutions said.

“Similar agreements signed between the government and private companies may come under the spotlight, as the water concession revocation case paves the way for the review other, possibly ‘disadvantageous’ agreements, putting long-term financial viability of companies relying on such contracts at risk,” Fitch Solutions said.