The water case: increased rates for poorer services

Ma. Victoria R. Raquiza
Philippine Rural Reconstruction Movement (PRRM)

In August 1997, the government-run facility that provided safe drinking water to 11 million Metro Manila residents, the Metropolitan Waterworks and Sewerage Services (MWSS), was privatised. The MWSS story belies the claim that privatisation automatically provides additional funds to government or improves the efficiency and effectiveness of the management of companies. What it bolsters, however, is the concern that cost-recovery and profit-making are the primary goals of privatisation—even at huge economic and social costs to consumers and citizens.

Thethree waves of privatisation

In 1984, under pressurefrom mounting debt, the Marcos administration accepted a World Bank condition toformulate a policy that defined and explicitly limited the participation ofgovernment-owned or controlled corporations (GOCCs) in the economy. The policyalso called for the disposal of non-revenue-generating GOCCs and the generationof funds from their sale to finance key development programmes, such as agrarianreform. During her first year in office (1986), President Corazon Aquinoannounced that she would continue implementing her predecessor’s privatisationpolicies.[1]

Privatisation has takenplace in three waves,[2]characterised by the Department of Finance (DOF) as the following:“reprivatisation” (first wave), aimed at raising revenues; “infrastructureprivatisation” (second wave), aimed at mobilising the private sector to buildinfrastructure; and privatisation of the “social sectors” (third wave), inwhich the government sees its role as that of “enabler”.[3]

The first wave began rightafter the 1986 EDSA Revolution thattoppled the Marcos regime, and involved the disposal of GOCCs, most of whichwere linked to the cronies and relatives of deposed President Marcos. The secondwave began in 1990, first encompassing the power sector and, later, othersectors such as infrastructure (roads, airports, sea ports), utility (water),and even information technology. The third and current wave, which started inthe mid-1990s, is expected to cover social services such as housing, health,postal services and pension funds.

Accessibilityproblems in quality public education

Primary and, to somedegree, secondary education remain largely under government control. However, inthe areas of pre-school, technical/vocational and higher education, the privatesector plays a big role. In 1997, the private sector accounted for 51.4% oftotal pre-school enrolment, 82% of technical/vocational enrolment, and 79% ofcollege enrolment. In 1997, it contributed 42.7% of total education spending.[4]

The problems faced by thepublic education sector are not simply about access but also about quality.Although net enrolment is relatively high by regional standards, completion ratefor primary education has not gone beyond its 1990 level of 67.6%. Poor qualityis cited by various government-commissioned studies as a major factor in lowprimary school completion rates. More teachers, textbooks, and classrooms arecritical for upgrading the quality of basic education and improving completionrates. By providing more resources for primary and secondary education,implementing budgetary reforms would go a long way toward creating higher socialreturns.

Qualityhealth care: inaccessible and unaffordable for most

Access to public healthcare is a different story. Whereas education generally receives 18% to 22% ofthe national budget—surpassed only by debt servicing and local governmentallocations—health allocations have through the years consistently hovered at3%. Worse, only 1% of the poor is covered by the government’s health insurancesystem. Moreover, the National Health Insurance Programme is biased towardhospital care, usually available in urban, middle class communities, but ofteninaccessible to residents of rural areas. Public health specialist JonathanFlavier states that quality health care, inaccessible and unaffordable for most,has long been “privatised”.

Government policy in thelast five years has been to encourage public hospitals, especially thespecialised ones (e.g., heart, lung, and kidney centres), to become financiallyself-reliant by undertaking, among others, cost-recovery measures. This type ofprivatisation scheme, referred to as the “corporatisation” of public healthcare, is often justified on the grounds of social equity, since many patients ofspecialised hospitals come from the middle and upper classes and, therefore, canafford to pay.

It cannot be denied thatthese hospitals, through their indigent programmes, also cater to many of thepoor. Thus, it is important that revenues from “corporatisation” effortsdirectly benefit health programmes for the poor. Current efforts atcross-subsidies have drawn a lot of public criticism because of design andimplementation problems. But this does not mean that these should be scrapped,just improved upon. However, for the long term the State must prioritise basichealth by increasing its budget—something not high on the Arroyoadministration’s list. The 2003 health budget is projected to decrease by 4%while defence spending is expected to increase by 7%.

Privatisingpublic utilities: the case of water

In August 1997, thegovernment-run facility that provided safe drinking water to 11 million MetroManila residents, the Metropolitan Waterworks and Sewerage Services (MWSS), wasprivatised. This move—touted the biggest ever in the world of a water serviceutility—was hailed by its chief architect, the World Bank.[5]However, the results of the MWSS privatisation have revealed many pitfalls.

The privatisation of theMWSS was a “build-operate-transfer” arrangement. Under this scheme,ownership remains with the government but the facilities, properties,receivables, supplies, inventories, including all records and transactions, areturned over to the private sector. After 25 years, everything that was leased toand built by the concessionaires would revert to the government. A governmentregulatory office (RO) is responsible for setting the water rates and ensuringcompliance of contracts by the concessionaires.

The winning bidders camefrom two Filipino oligarch families, the Ayalas and the Lopezes. They securedtheir bids by joining forces with two major global watercompanies—International Water (USA), and Lyonnaise des Eaux (France)respectively. The Ayala-led consortium, Manila Water Company, Inc. was awardedthe East Zone concession; while the Lopez-led consortium, Maynilad WaterServices, Inc., took over the West Zone concession.

The privatisation of theMWSS was intended to resolve the ongoing water crisis. Both concessionaires wereexpected to improve water supply (then, covering only 67%); expand sewerageservices (then, with 8% coverage); and, reduce the 58% water losses (also callednon-revenue water or NRW) due to pilferage and leaks. They also promised tolower water rates.

Less than a year after theawarding of their contracts, both concessionaires applied for rate increases atthe RO. Fiercely opposed by citizens’ groups, it was not granted. By early2001, however, the two companies were pushing for contract revisions that wouldallow them to adjust water rates even without the approval of the RO. Accordingto the two concessionaires, they were incurring losses as a result of exchangerate devaluation resulting from the Asian financial crisis, and required theflexibility to automatically adjust prices as needed.[6]

Despite huge protests bycitizens’ movements, President Arroyo, through the MWSS Board, approved anamendment of the concession agreement in October 2001, which gave Maynilad andManila Water the power to automatically increase water rates without ROapproval.

“Increasedrates for poorer services”

In 2002, four years afterprivatisation, West Zone residents pay an average basic charge of PHP 15.46 (USD0.30) per cubic meter of water, an amount higher than the pre-privatisation rateof PHP 8.78 (USD 0.17). East Zone residents, meanwhile, pay a lower rate of PHP6.75 (USD 0.13) per cubic meter. However, additional costs such as the 10% VATand the 10% environmental charge mean that the actual water rate of Maynilad isPHP 20 (USD 0.39) per cubic meter while that of Manila Water is about PHP10 (USD0.20) per cubic meter—rates that are higher than before privatization.[7]Petitions from the two companies for another round of water price increases inJanuary 2003 were recently granted. In particular, Manila Water was granted arate increase of PHP 14.22 (USD 0.28) per cubic meter starting 1 January 2003 tobe followed by yearly adjustments until 2005. On the other hand, Mayniladapplied for a new rate of PHP 30 (USD 0.59) but was granted only PHP 26 (USD0.51). The petitions are based on the rate-rebasing scheme that has been mademandatory under the amended contracts.[8]

A study by the Freedom fromDebt Coalition (FDC) reveals that efficiency has not improved under theprivatised regime. From 1997-2001, the proportion of NRW was actually 7% higherfor Maynilad. NRW also rose from 45.2% to 48.3% in the case of Manila Water inspite the fact that they targeted NRW to go down by 16%.[9]Moreover, a fifth of the residents in the East and West Zones are still notconnected to the water system.[10]Worse, under the amended contract, the concessionaires have been allowed tolower or postpone their performance targets. Little wonder then that manycitizens’ groups have criticised the government for “dagdag presyo, bawas serbisyo” (increased rates for poorerservices).

Furthermore, not all MWSSfinancial obligations were absorbed by Maynilad, as required by the contract.The MWSS, for instance, had to borrow money to pay for the maturing loans ofMaynilad, which had also requested a moratorium on payment of all concessionfees since 2001 due to its ongoing financial difficulties.

The generous leeway givento Maynilad by government apparently was still not enough. In December 2002,Maynilad filed a notice of termination to the MWSS claiming that it was not ableto live up to its responsibility of addressing lenders’ concerns, a provisionstipulated in one of the amendments written into the contract. As such, Mayniladwas not able to clinch a USD 350 million loan from the Asian Development Bankand a number of private commercial banks, because of nagging doubts aboutMaynilad’s viability.

As far as the MWSS—aswell as citizen groups like FDC—are concerned, Maynilad enjoyed too manyconcessions and had only to look at its own backyard to explain its economicwoes; inefficiencies in disbursement of funds, misprioritised spending (e.g.higher-than-average salaries of executives). But one cannot overlook the biggerpicture to get a better sense of Maynilad’s economic straits: its parentcompany, Benpres, long since in the red, faces USD 600 million in maturingloans. The word is out that banks are not willing to extend any more credit. Assuch, FDC asserts that this has severely affected Maynilad’s capacity toinvest in improving services. Government has stepped in and is calling for acompromise: one option is to give Maynilad a five year moratorium of payment ofconcession fees, which would mean PHP 14 billion (USD 262 million) of revenuelosses for government. A legal battle has now ensued and the issue lies beforean arbitration panel. Groups like FDC are gearing up for mass actions demandingthat government stop coddling the Lopez oligarchs, and to take over the Mayniladoperations of the West zone.

If privatisation is to workfor both private investors and the public interest, a number of measures must beput in place. For one, a strong regulatory framework that effectively checksunethical corporate behaviour should exist. This includes the creation of a lawprohibiting the concentration of more than one public utility in the hands of asingle family or interest and the strengthening of anti-trust measures to curbmonopolistic and unfair corporate practices, e.g., price fixing, tie-inarrangements, and the like.[11]Equally important, the regulatory body must have the financial capability toindependently monitor the performance of contract obligations—unlike in thecase of the MWSS which, due to lack of resources, was dependent on the datagiven to it by the very entities it was supposed to regulate. Finally, theparticipation of citizens’ groups and social movements in regulation, and notjust the business sector, must be ensured.

TheMWSS story belies the claim that privatisation automatically provides additionalfunds to government or improves the efficiency and effectiveness of themanagement of companies. What it bolsters, however, is the concern thatcost-recovery and profit-making are the primary goals of privatisation—even athuge economic and social costs to consumers and citizens.



[1] Leonor Briones. “Impacts of Privatization on Distributional Equity: The Case of the Philippines”. Paper presented at the Interregional Expert Group Meeting on the Impacts of Privatization on Distributional Equity, UNDP, 20-24 September 1993 in New Delhi, India.

[2] Lauro Ortile. “Privatisation in the Philippines”. Challenges and Opportunities in Energy: Proceedings of the 2nd Workshop on Economic Cooperation in Central Asia. 1998 Manila: Asian Development Bank. < CAREC/Energy/chap15.pdf>
[3] Filomeno Sta Ana. “Reforming the Pension System: Is Privatization a la Chile the Best Route?” Unpublished paper, 1997.
[4] Rene Raya. “Financing Education in the Philippines”. Action for Economic Reforms. Unpublished paper, December 2001.
[5] Violeta Q. Perez-Corral. MWSS: Anatomy of a Privatization Deal. Quezon City: Freedom from Debt Coalition, 1998.
[6] Malou Tabios, Rhoda Viajar and Jollete Fajardo. 2001. “Breaking New Ground: the Water Privatization Campaign”. PAID!. Vol. 11, Nos. 1-2, November 2001. Quezon City: Freedom from Debt Coalition.
[7] Interview with FDC water specialist Jolette Fajardo, 31 October 2002.
[8] Rate-rebasing allows the concessionaires to re-validate assumptions made at the time they tendered their bids with a view to making the necessary adjustments.
[9] Interview with Jollete Fajardo.
[10] Jocelyn Cuaresma and Rommel Rabanal. “Is there water after privatization? The case of the MWSS.” Unpublished paper, October 2002.
[11] Perez-Corral, op. cit.