A DECADE LATER, LEGAL TIFF STILL HAUNTS WORLD'S LARGEST WATER PRIVATIZATION

TWENTY-THREE years ago, an elephant that couldn’t fly became lean and water was separated into two.

These characterized the world’s largest water privatization: the Metropolitan Water and Sewerage System (MWSS)—the elephant, according to former government official Mark Dumol— shredded a large chunk of its workforce when its water business was halved into the East Zone and the West Zone. MWSS no longer was the operator; it became a regulator and franchisor of water for East Zone franchisee Ayala Corp. and West Zone franchisee Benpres Holdings Inc. beginning August 1, 1997.

This almost came to naught because of a legal tussle prior to the bidding for the contract, according to Dumol, then Chief of Staff at the Department of Public Works and Highways (DPWH). In his book

The Manila Water Concession: A Key Government Official’s Diary of the World’s Largest Water Privatization, Dumol said that while a Committee on Privatization reviewed documents related to the business transaction, the Court of Appeals (CA) issued a 20-day restraining order on the awards of contract.

Dumol wrote that then-President Fidel V. Ramos “vowed to fight the [RO], using all of the government’s resources.” Ramos and his administration did, and Maynilad Water Services Inc. and Manila Water Co. Inc. took over the operation previously led by the MWSS.

More than two decades later, a tiff between the MWSS, Maynilad and Manila Water and the Supreme Court on waste water muddies the generation, storage and distribution of a very essential resource. Waste not, want not

THE legal row on dirty water revolves around two sections of the CWA, or the “Clean Water Act of 2004” [Republic Act (RA) 9275]: Sections 7 and 8. Included in the legal tussle are the fines and penalties imposed on the regulator and the concessionaires when they were sued by the agencies attached to the Department of Environment and Natural Resources (DENR) because of these sections.

Section 8 of the CWA provides that “within five years following the effectivity of this Act, the Agency vested to provide water supply and sewerage facilities and/or concessionaires in Metro Manila and other HUCs [highly urbanized cities] as defined in Republic Act 7160, in coordination with LGUs [local government units], shall be required to connect the existing sewage line found in all subdivisions, condominiums, commercial centers, hotels, sports and recreational facilities, hospitals, market places, public buildings, industrial complex and other similar establishments including households to available sewerage system: Provided, that the said connection shall be subject to sewerage services charge/fees in accordance with existing laws, rules or regulations unless the sources had already utilized their own sewerage system: Provided, further, that all sources of sewage and septage shall comply with the requirements herein.”

Section 8 continued that, “in areas not considered as HUCs, the DPWH in coordination with the Department, DOH [Department of Health] and other concerned agencies, shall employ septage or combined sewerage-septage management system.”

A world of difference

MAYNILAD said in its Motion for Reconsideration (MR)—in the High Court’s August 2019 decision upholding the DENR’s fines—that the SC literally interpreted Setion 8 and failed to consider that it is “related to and is dependent on Section 7, considering that the NSSMP [National Program on Sewerage and Septage Management] required under the latter provision is, by express wording, to be prepared in connection with Section 8 of the same law.”

Maynilad added, “This is confirmed when one takes into consideration the definition and contents of the NSSMP” under Rule 7 of DENR Administrative Order (AO) 2005-10 dated May 16, 2005, otherwise known as the CWA implementing rules and regulations (IRR), “which specifically implements Section 7 of the CWA.” Thus, Maynilad said it “most respectfully moves for the reconsideration of the [SC] decision” dated August 6, 2019. Maynilad said it received the SC decision on September 17 while its MR is dated December 11, 2019.

Manila Water, on the other hand, said in its prefatory statement in its own MR, that it is presenting to the High Court the “proper interpretation of the provisions” cited in Section 8.

Manila Water asks if it is “mandated within five years from enactment of the law [the CWA] to establish a complete centralized sewerage system or interconnect sewage lines existing at the time of the enactment of the law to available sewerage systems.”

The Ayala-led Manila Water noted, “With all due respect, there is a world of difference between the two.”

Manila Water explained that, “from an urban development perspective, it is impossible to establish a complete centralized sewerage system that will service a steadily rising urban population within just five years.”

It continued: “Such undertaking in such a timeframe would require simultaneous excavation in the roads that would bring the metropolis to a standstill.”

Tariffs, taxes

ACCORDING to Maynilad, the SC’s “isolated and overly restrictive reading of Section 8 of the CWA has consequences which are prejudicial to the trust beneficiaries— the general public—under [a] ‘Public Trust Doctrine.’”

In its MR, the Pangilinan-led Maynilad added that, “In addition to promoting the fragmented approach abhorred by the CWA, and thereby aggravating the overall water pollution problem, the isolationist approach to Section 8 of the CWA, which forces compliance [whether then or now] in a span of five years, has other detrimental consequences [that] impose great burden on the general public.”

It explained: “First, forcing complete interconnection in a span of five years would result in a huge financial burden on Maynilad’s customers.”

It is the MWSS, the company explained, that has the power to fix periodically the water rates, which include the sewerage charge. “In fixing the rates or in determining the adjustments thereto during a rate rebasing exercise, the past receipts and expenditures as well as the anticipated receipts and expenditures of the concessionaires are taken into consideration.”

The company also emphasized “that the expenditures involved in completing interconnection in just a span of five years, if it were to be effective at all, would not only pertain to the connection of all existing sewage lines to available sewerage systems, but also, to the acquisition of all the necessary land and rights-of-way/road access to build sufficient wastewater treatment facilities that are necessary to treat sewage and septage, and likewise, to the construction, operation and maintainenace of said facilities.”

Expenditures massive

MAYNILAD said that “requiring all of these to be done in a span of five years would mean massive expenditures in a short period of time, thereby resulting in unacceptable tariff levels which the general public will have great difficulty paying.”

Based on its financial projections, Maynilad said it would have to spend more than P149 billion using 2019 prices to put up sufficient wastewater facilities to meet 100-percent sewerage coverage by 2022. Such expenditure would result in an increase in tariff by P11.74 per cubic meter, which is more than twice the tariff increase of P5.73 for the period 2018 to 2022, or almost P49 per cubic meter, Maynilad explained.

“This does not yet consider the capital expenditures needed for the development of alternative water sources, concession fee payments and other costs to operate the water and wastewater treatment facilities of Maynilad,” the company added.

Such “sudden increase would cripple common Filipinos’ access to water, as many would be unable to shoulder such high financial burden, especially in these difficult times where they are already dealing with skyrocketing prices of other equally important necessities like food, electricity and gasoline,” Maynilad claimed. “Worse, even with the drastic increase in expenditure, it would be difficult to guarantee the efficiency of a sewerage and septage management program that is haphazardlyimplemented, and even lacking, in terms of guidance from the respective government agencies like the DOH and the DPWH.”

Road congestion

INTERCONNECTING all the sewage lines in the service area of Maynilad within a period of five years will aggravate the already unacceptable traffic situation in Metro Manila, the utility claimed in its MR.

This, at a time when Metro Manila has been declared the most congested developing Asian city in a 2019 report of the Asian Development Bank (ADB). In 2018, the Japan International Cooperation Agency (Jica) had estimated that the country was losing P3.5 billion daily due to traffic congestion in Metro Manila.

Maynilad said assuming it pushed for the interconnection of all sewage lines within five years as demanded by the SC’s decision, the Jica estimates it “would most certainly soar to unconscionable amounts.”

The company said that for Maynilad alone, achieving 100-percent sewerage coverage for its concession area in a span of five years would mean having to lay down sewer lines with a total length of 424,283 meters within the said period.

“Even assuming that this is humanly possible given such distance and time period, traffic within the affected areas would have to be at a complete standstill in order to accommodate the excavation works necessary to lay down the said sewer lines,” the company warned.

It added that this is especially true with respect to Metro Manila, where 378,855 meters of the 424,283 meters or 89 percent of the required sewer lines will have to be installed.

Five years

IT must be stressed that the works required to install a centralized sewerage network involve an extensive excavation of major and minor thoroughfares. Conventional methods of trench digging for large-bore gravity sewerage would be chaotic and would take decades to implement.

As sewage pipelines must be installed five meters, on the average, below the ground (vis-a-vis water lines which are installed only a meter, on the average, below ground), contractors would have to dig deep, which in itself is also a difficult process considering the numerous factors affecting the process of excavation, like soil liquefaction and positioning of existing pipelines, among others, the utility pointed out.

“With such intricacies and considering the length of sewerage lines that need to be installed, requiring interconnection in a span of five years [assuming possible] would lead to a complete standstill of traffic in roads and thoroughfares in Metro Manila, as well as portions of Cavite, and, as a consequence, adversely impact businesses and the economy in general.”

In residential areas bordering central business districts and even in commercial districts, the roads are too narrow that they sometimes cannot accommodate even two-way traffic. Rerouting in these areas could be possible if work were to be done only at certain times of the day.

But Maynilad asserted that if it simultaneously worked on interconnecting all sewage lines within the area as the SC deci

sion would impose, there would be no alternative routes left for individuals residing in or passing through the area. Overspending

MANILA Water also raised the traffic congestion flag and the amount of investments required.

The company claimed that “even under the most optimistic of projections,” a complete centralized sewerage system would require an estimated total investment of at least P114.836 billion in capital expenses and P57.4 billion in operating expenses, or a total expenditure of P172.240 billion to complete the project within a period of 19 years. It added that the traffic congestion concomitant to the project would cost P3.5 billion in losses, which translates to a daily loss of an estimated P274 for every motorist in Metro Manila, which is a few steps behind Metro Manila’s minimum wage of P345.

“It bears emphasis that the investment required is actually on par with cities of comparable size, population and density to that of Metro Manila,” Manila Water said.

It cited as example Singapore’s development of its sewerage system to achieve full coverage within 40 years. The firm added that in Hong Kong, the modernization of the city’s sewerage system required two tranches of investments amounting to $8.1 billion with projected annual operating cost of $1.43 billion and $10.8 billion, with projected additional annual operating cost of $700 million to ensure full sewer coverage within eight years.

Recoup expenses

MANILA Water said that as of December 2018, it had already spent a total of P38.5 billion for wastewater projects, greater than the P36.9 billion it collected in sewer charges.

“On the assumption that costs related to the full implementation of the sewerage network are to be recovered by the concessionaires, by the end of the concession agreement, the fees that ought to be collected from the end consumers [on top of their water consumption] would amount to P26.70 per cubic meter—or a 780.18-percent increase in water rates.

“In Metro Manila, where the median household monthly income is P35,416.67 per month with P29,083.33 going to expenses, the additional fees would not only eat into the meager savings of the average Filipino household, but also potentially divert funds supposedly dedicated to other necessities,” Manila Water said. “In this regard, the additional expenses clearly have an exclusionary effect since it makes it more difficult for the average Filipino family to have access to water.”

It told the High Tribunal that “this setup is diametrically opposed to the very spirit” of the Clean Water Act, “which aims to not only improve the quality of water resources, but also ensure that the populace has access to safe and reliable water supply.”

The penalty explained

IN its decision, the SC upheld the CA’s decision in finding Manila Water and Maynilad to have violated Section 8.

The two companies were imposed a fine amounting to P921,464,184 each, based on the assumption they must establish a complete centralized sewerage system within five years from effectivity of the CWA.

The SC noted that as of 2016, Manila Water had only completed 19 percent of a complete centralized sewerage system. Maynilad had attained only 13-percent sewerage coverage for its water-served population as of April 30, 2017.

“Basing on Maynilad and Manila Water’s own assertions, petitioners’ compliance with Section 8 of the law is dismal at best,” the SC said. “Given that a decade has already passed following the effectivity of the Clean Water Act, both concessionaires’ compliance to Section 8 at this current year do not even reach 20-percent sewerage coverage.”

Meanwhile, Buhay Party-list Rep. Lito Atienza, the secretary of the Department of Environment and Natural Resources (DENR) whom the water companies had sued all the way to the SC when he imposed the fines, expressed relief over the SC’s August 2019 ruling at a recent BusinessMirror Coffee Club Forum organized by the ALC Media Group.

Atienza pointed to the huge incomes reported yearly by the two concessionaires in a bid to show that their operations, while requiring huge investments, were very profitable.

What about the LGUs?

THE total P2-billion fine imposed by the SC, meanwhile, has been cited as “excessive” and unjust by the water concessionaires.

Maynilad said it “and other water concessionaires have been unjustly singled out to suffer the detrimental consequences of the SC’s decision, despite and in spite of the glaring failure of other government players to concomitantly take the necessary steps to implement the CWA.”

“Without the LGU’s cooperation in appropriating needed land and right-of-way/road access; as well as the required DOH Guidelines and Standards on sewage, the DPWH’s NSSMP, and the DENR’s Water Quality Management Strategy Action Plan, the mandated interconnection of all sewerage lines within a five-year time frame is to force Maynilad to walk blindly into an undertaking which will unduly disrupt the everyday lives of the metropolis’ citizens,” the company said.

“Moreover, by the imposition of penal sanctions in the form of excessive fines, inflicted without the benefit of an evidentiary hearing, and therefore in the nature of a bill of attainder, this Honorable Court would sacrifice Maynilad upon the altar of an erroneous appreciation of wastewater management,” it added in its MR.

Lost legacy?

IN its concluding statements, Maynilad noted the history of the “world’s largest water privatization,” as cited by the International Finance Corp.

Indeed, “more than two decades ago, one of the most sweeping structural reforms in Philippine economy took place—the privatization of water and sewerage services in Greater Manila.”

Maynilad said this “drastic shift was set against the backdrop of an acute water crisis, with large swathes of Greater Manila having little to no supply of potable water, a proliferation of water theft and water smuggling, and lack of access to piped-in water supply.”

“At such time, the MWSS was supplying water to only twothirds of its coverage population, with an average of only 16 hours per day, as opposed to 24 hours in other Southeast Asian countries,” it said. “Out of the roughly 3,000 million liters per day flowing from the Angat reservoir, 56 percent was non-revenue water. With respect to sewerage, MWSS serviced only 8 percent of its coverage population.”

The Philippine government recognized that monumental problems—water supply and sanitation—called for bold action. Thus, RA 8041, or the Water Crisis Act of 1995, was passed, setting the stage for the privatization of state-run water facilities. The Philippine government decided to award concession contracts covering two service areas with a combined population of 11 million and projected investment needs of $7 bllion, the company wrote in its MR.

“In spite of the obstacles ahead and the enormous responsibility on its shoulders, Maynilad rose to the challenge and took it upon itself to do what no other water concessionaire has done,” the company said. “Thereafter, Metro Manila became ‘the biggest metropolis in the developing world to be served by private water operators.’”

These days, as the High Court is still reviewing the two concessionaires’ respective MRs, they both must grapple with yet another challenge. The Executive branch, completing a Justice department review of their 1997 concession agreements with the Ramos administration—and the subsequent 15-year extension to those contracts given by the Arroyo administtration—has hit back at Maynilad and Manila Water, deeming several provisions of the agreements “onerous.”

In marathon hearings at the House of Representatives on Tuesday, officials of both utilities announced they were waiving the collection from the government of separate awards, totalling P10.79 billion, given them by the Permanent Court of Arbitration in Singapore. The two companies had sought arbitration because they blamed huge losses on the refusal of the Philippine government—not the Duterte administration—to approve tariff hikes.

Waiving the arbitral awards and deferring scheduled January 2020 rate hikes; not to mention seeing the MWSS revoke its 2008 board resolution extending their original contracts from the 2022 expiration until 2037— the two giant utilities are, indeed, facing existential challenges.

If Justice Secretary Menardo I. Guevarra’s words are any consolation, the present government’s thrust is to redress any part of the 1997 deal that could give rise to more disputes. “The issue of paying the arbitral award is not as important as ensuring that disputes arising from burdensome provisions of the water concession agreements will never happen again in the future,” the DOJ chief said. Among others, he was apparently referring to sovereign guarantees, the restrictions on regulators, and the premature extension of the 25-year contracts.

Unless the government and the private concessionaires find a clear and just way out of this, what was once hailed as the world’s biggest privatization may end up as a major failure.