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Regulatory risk in PH among highest in region

Fitch unit cites retroactive changes in government policy, intervention
/ 04:03 AM December 24, 2019

The Philippines has one of the highest regulatory risks in Asia-Pacific as recently exemplified by retroactive changes in water concession deals with the private sector, research firm Fitch Solutions said.

Commenting on the recent water row on Monday, 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.

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These risks can 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, the research firm warned.

However, Fitch Solutions said investor confidence might gradually pick up as the Philippines improves on its framework for public-private partnerships (PPPs) in infrastructure-building.

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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 said the Philippines had one of the biggest 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 Southeast Asian markets such as Vietnam (59.4), Indonesia (49.1) and Malaysia (70.2). Following the cancellation of concession extension agreements by the Philippines’ Metropolitan Waterworks and Sewerage System (MWSS) with Manila Water Co. and Maynilad Water Services, Fitch Solutions said similar agreements signed between the government and private companies could come under the spotlight. It said the water concession revocation case “paves the way for the review of other possibly ‘disadvantageous’ agreements, putting long-term financial viability of companies relying on such contracts at risk.”

“We believe investors will be concerned over the possibility of similar instances of government intervention, which would create uncertainty for their business operations. As such, as mentioned earlier, there is a possibility that foreign direct investments may take a hit in the short term,” the research said.

Meanwhile, Fitch Solutions said this incident also showed that the government had acknowledged the weaknesses in the current contracting process, especially for PPPs.

“Authorities will be able to gain experience and move up the learning curve and improve on processes and frameworks to allow for fairer, more transparent and flexible agreements in the future,” it said.

Concessions for the provision of water and waste services for Metro Manila were awarded to Manila Water Co. and Maynilad Water Services during the term of President Fidel V. Ramos in 1997. A 15-year extension of the contracts, which would otherwise expire in 2022, was granted for both concessionaires in 2009, during the term of then President Gloria Macapagal-Arroyo.

However, a lengthy legal dispute with Maynilad and Manila Water and the government that resulted in offshore arbitration rulings that favored the private sector concessionaires, alongside years of “sub-par” services, had invoked the attention of the Philippine government, Fitch Solutions noted.

In December 2019, President Duterte ordered that the concession extension agreements be stripped and renegotiated, derailing the long-term planning of the private concessionaires and creating a high degree of financial difficulties–in aspects such as borrowing and attracting new capital–due to revenue uncertainty.

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“The revocation of water concessions also highlights deficiencies in the due diligence and contracting processes in the past and present and we believe other deals signed between the government and the private sector are also at risk of scrutiny,” Fitch Solutions said.

“The government had alluded to ‘onerous provisions’ within the existing concession, which ‘disadvantaged taxpayers’, as a basis for revocation, review and renegotiation. While this may suggest that such concessions lack robust, well thought-out provisions and pricing mechanisms, as well as provisions which allow for reviews in the event the mechanics and details of these provisions become outdated, similar, though inadequate provisions were actually present in the agreement between MWSS and the two companies.”

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