The Main Body of the Report on the Findings and Recommendations of Bagong Henerasyon Partylist on its Research and

Investigation Together with the Committee on Good Government and Public Accountability of MWSS
(Metropolitan Waterworks and Sewerage System)

TABLE OF CONTENTS
The Impetus for Congressional Inquiry .................................................. 3 The Metropolitan Waterworks and Sewerage System (MWSS) ................. 7 Privatization .......................................................................................... 8 The Concession Agreements (CAs) ......................................................... 9 Non-termination of contact even when there was default and contract extended long before the stipulated expiration .................... 11 Legal effect of privatization of the water and sewerage services as public service ................................................................................... 12 Projects under the regime of privatization ......................................... 14 MWSS water supply responsibilities under the regime of privatization ..................................................................................... 17 The Regulatory Office (RO)................................................................ 18 Tariff adjustment process ................................................................. 22 Rates and rate rebasing.................................................................... 22 The 2003 rate rebasing .................................................................... 25 The 2008 rate rebasing .................................................................... 26 The Return on Rate Base (RORB) of the two concessionaires ............ 26 The RORB Revisited ......................................................................... 33 Borrowings under the regime of privatization.................................... 41 Receivables of the MWSS under the regime of privatization............... 44 Arbitration versus Maynilad ............................................................. 45 The hefty bonuses and allowances.................................................... 46 The apportioning of housing units in La Mesa Dam, including sale of La Mesa Watershed Property under MWSS Board Resolution No. 296-2002 ......................................................................................... 48 Probable conflicts of interest in interlocking directors and officers of the MWSS and the concessionaires; in the RO ..................................... 49 Recommendations ............................................................................... 50 A. Continuing Committee Work ...................................................... 51 B. Legislative Action ....................................................................... 53 C. Administrative Referrals............................................................. 60

ABSOLUTELY PRIVATE & CONFIDENTIAL

________________________________________________________________________ Submittal to the Committee on Good Government and Public Accountability of the findings and recommendations of: Representative Bernadette Herrera-Dy ________________________________________________________________________

The Impetus for Congressional Inquiry

In his first State of the Nation Address, President Benigno Simeon C. Aquino III questioned the hefty salaries, bonuses and allowances that executives and members of the Board of Trustees of the Metropolitan Waterworks and Sewerage System (MWSS) received, which reach up to 30 months annually, for so many years now.

The President was appalled at how in 2009 alone, the MWSS executives and members of its board of trustees could, in conscience, get as much as P211.5 million in salaries, allowances and benefits. Of this gargantuan amount, 38% or P81.2 million represent regular salary and allowances, while 62% or P130.3 million represent bonuses (derived from MWSS analysis of Personnel Expenses Breakdown). MWSS executive and board members get an average of P2.7 million each a year. Just for attending a meeting, a member of the board gets P14,000.00 or a total of P98,000.00 a month.

Apart from their regular salary, the MWSS executives and members of the board get P98,000.00 for each of the following: mid-year bonus, year-end bonus, grocery incentive, productivity bonus, financial assistance,

Christmas bonus, additional Christmas package. The total cash amount in bonuses and benefits excludes provision for motor vehicle, technical assistance and personal loan privileges!

Worse, the President also bewailed the fact that the MWSS executives and members of the board have converted into residential lots portions of the La Mesa Dam watershed, appropriated the lots for themselves and built residential houses thereon. The implications of this action are serious as, among others, it threatens the sustainability and availability of water as a national resource. This action of the MWSS is impermissible.

In the meantime, the people continue to reel from poor water and sewerage services and from all indications, not one of the projects initiated by the MWSS that cost billions of pesos in local and foreign loans have been completed, some of them scuttled, dead in the water!

The present Inquiry into the MWSS is in response to the aforesaid concern voiced, and shock expressed, by the President. Representative Bernadette Herrera-Dy, in her privilege speech, called for an in-depth investigation in aid of legislation of the MWSS toward probable legislative action for reform and strengthening of the institution, considering the following:

(a)

Since its establishment in 1971, the MWSS has not

effectively resolved the water problem, nor has it provided efficient sewerage and sanitation service. Water rates have increased

tremendously since 1997, while there has not been any significant improvement in the quality of the water supply and service. Sewerage and sanitation services are in dismal state posing serious risks to the health and safety of the more than 15 million people in Metropolitan Manila. The absence of sanitary pipes connected to sewerage treatment plants (STPs), which is the international standard of sewerage system, becomes very evident during the advent of floods, as deaths and serious ailments are caused by leptospirosis and other diseases due to floating human feces and its residue feasted on by rats. In addition, this absence of sanitary pipes further causes contamination, pollution and heavy influx of disease-carrying rats, flies, cockroaches, mosquitoes and other insects placing real health dangers on communities and homes in Metro Manila. In fact, since 7 May 2009, the Department of Environment and Natural Resources (DENR) has started assessing fines and penalties of P200,000.00 per day on Maynilad and Manila Water for continuing violations of Republic Act No. 9275 and its implementing rules and regulations.

(b)

After close to 15 years of privatization, the MWSS has not

come up with comprehensive plan on how to develop new water sources, provide uninterrupted water supply at just and equitable

rates, and construct adequate and safe sewerage facilities and sanitation services;

(c)

Quite apart from the hefty bonuses and allowances of up

to 30 months annually they have been receiving1, the MWSS executives and members of its Board have apportioned for themselves and even for non-MWSS officers and employees such as from the Commission on Audit, Department of Public Works and Highways and the Office of the Government Corporate Counsel, housing units in the La Mesa Dam area. A portion of the La Mesa Dam Watershed Property has been sold to MWSS employees by authority of Board Resolution No. 296-2002 in violation of Section 2, Article XII of the 1987 Constitution;

(d)

The MWSS obtained gargantuan loans and initiated over-

priced projects, some of which have not even been started and others remain unfinished after the lapse of long periods of time. Yet, the
1

An example: apart from her regular salary, MWSS officer-in-charge Macra A. Cruz received for the last quarter of 2008 (16 September 2008 to 17 December 2008), P425,649.00; for the whole of 2009 (7 January 2009 to 22 December 2009), P4,008,122.56; and for the first 7 months of 2010 (14 January 2010 to 26 July 2010), P1,523,128.75, all in benefits and allowances, which include CNA incentives (2 in 2010, each for P75,000.00), performance bonus for P75,474.95 in 2009, GOCC incentive for P75,474.95 in 2009, discretionary allowances (4 in 2009, the first for P90,417.74; the second, for P120,000.00; the third for P137,513.72; and, the fourth, P142,645.89), traditional anniversary bonuses (2 in 2009: the first, for P75,474.95 and the second, for P78,188.40; 1 in 2010, for P147,182.20), grocery allowances, mid-year financial assistance, family day allowance, educational assistance, rate rebasing bonus for P78,386.40 in 2009, privatization financial assistance for P78,388.40 in 2009, efficiency incentive benefit for P78,388.40 in 2009, scholarship allowance (2 in 2009: the first for P78,388.40, and the second, for P98,591.10, SSL 3 differential, PX mart allowance, family week allowance for P98,591.10 in 2009, calamity economic assistance (2 in 2009, each for P98,591,10), year-end financial assistance for P98,591.10 in 2009, corporate Christmas packages (2 in 2009: 1 for P30,000.00, and another for P98,591.10), Christmas bonuses (2 in 2008: 1 for P71,860.95; and another for P71,460.45), calamity financial assistance for P98,591.10 and another for calamity economic assistance for the same amount, both in 2009, car loan for P800,000.00 in 2009, productivity incentive bonuses (4 in 2009: 3 for P98,591.10 each, and 1 for P94,096.53), financial assistance, OGCC/GOCC celebration for P98, 591.10, productivity enhancement pay (2 in 2010: the first for P98,951.10; and the second, for P98,791.10), annual family day (2 in 2010: the first for P20,000.00; and, the second, for P78,591.10), enhancement mid-year F.A. for P98,791.10 in 2010, enhanced scholarship for P98,791.10 in 2010, and privatization anniversary for P237,987.60 in 2010. It looks like the MWSS has created an entire cornucopia of every conceivable name for executive benefits and allowances.

loans and costs of the projects have already been and continue to be charged to the consumers; and,

(e)

In addition, the farmers of Bulacan and some portions of

Pampanga, numbering more than 20,000, tilling about 26,000 hectares of agricultural lands are losing heavily2 on the farm producerice, vegetables and fruitsdue to the 15 cms of water that has been diverted to domestic water by the National Water Regulatory Board (NWRB) and the MWSS for concessionaires Manila Water and Maynilad.

The Metropolitan Waterworks and Sewerage System (MWSS)

The MWSS is a government corporation organized and existing pursuant to Republic Act No. 6234 (1971), as amended (the Charter). It was incorporated in June 1971. By the terms of its Charter, MWSS is given the jurisdiction, supervision and control over all waterworks and sewerage systems within Metropolitan Manila, the entire province of Rizal and a portion of the Province of Cavite. The MWSS is mandated and tasked primarily to: (a) ensure uninterrupted and adequate supply and distribution of potable water for domestic purposes to its customers at just and equitable rates; and, (b) provide sewerage and sanitation services to the public.

An Indignation Manifesto on Water Use Conflict was submitted together with the photos by the suffering farmers of Bulacan to MWSS, to the concessionaires, NIA and NWRB in May 2008, and to the committee sometime in March 2011 by a Bulacan farmers group.

Actually, the MWSS is one of the oldest government institutions. It traces its origin back to 1878 with the formation of the Manila Water Supply System. From its incorporation in 1971 until the privatization of the water and sewerage system in 1997, the MWSS operated the water and sewerage systems in the greater metropolitan area of Manila, the province of Rizal and part of the province of Cavite.

Privatization
In 1995, Congress, in response to the worsening shortage in water supply due to, among others, the El Nino phenomenon, enacted Republic Act No. 8041, otherwise known as the National Water Crisis Act of 1995.

Implementing this law, the President issued Executive Order No. 286 (6 December 1995) and Executive Order No. 311 (20 March 1996), mandating the MWSS to enter into arrangements that would result in the involvement and participation of the private sector in any segment, operations and/or facilities of MWSS.3

In May 1996, the MWSS initiated a bidding process for the selection and appointment of concessionaires. Ten firms each paid US Dollar 25,000 for the right to undertake due diligence. On 6 January 1997, four consortia submitted their bids for the two concessions. The consortium of Manila Water Company, Inc.
4

(Manila Water) submitted the lowest bid for both

Hearing of 15 Dec. 2010. Manila Water was incorporated only on 6 January 1997, a month before it signed and executed the CA with the MWSS. It is a consortium among Ayala Corporation (AC), United Utilities Pacific Holdings, BV (UI), a subsidiary of United Utilities
4

the East and West Zones, but was only awarded the East Zone as the bidding rules prohibited one consortium from operating both zones. The other consortium, Benpres-Lyonnaise Waterworks5, later to become

Maynilad Water Services, Inc. (Maynilad), being the second lowest bidder, was awarded the West Zone.

Thereupon, MWSS signed and executed the separate concession contracts6 (CAs): one, on 21 February 1997, with the Manila Water for the East Zone; and two, on 1 August 1997, with the Maynilad for the West Zone. The original term of the CAs was 25 years, from 1997 to 2022. However, before their expiration, MWSS already extended the CAs for another 15 years.7

The Concession Agreements (CAs)

The CAs signed and executed by the MWSS with the concessionaires grant the latter as contractor to perform certain functions and as agent for the exercise of certain rights and powers under the MWSS Charter, the sole right to manage, operate, repair, decommission and refurbish the Facilities in the Service Area, including the right to bill and collect for water

PLC, Mitsubishi Corporation (MC) and BPI Capital Corporation (BPI Capital). On 31 May 2004, the IMF became one of the principal shareholders of Manila Water. 5 Benpres-Lyonnaise Waterworks is a consortium between Benpres Holdings Corporation of the Philippines, a company within the Lopez group of companies, and the Suez Lyonnaise de Eaux of France, the worlds leading water industry drinking water supplier. 6 There is report to the effect that the CAs was drafted only after the bidding. It is said that the CAs were initially drafted by the International Monetary Fund and some provisions were copied from concession agreement from the UK. Some provisions were contributed by the two concessionaires. 7 Hearing of 9 November 2010.

and sewerage services supplied in the Service Area.8 In practical terms, the MWSS transferred to the concessionaires the tenancy of its land and operational fixed assets and an exclusive right to produce and treat raw water, distribute and market water, collect, transport, treat, dispose and eventually re-utilize wastewater, including reusable industrial effluent discharged into the sewerage system. Also, under the CAs, whatever is transferred to, acquired or built by the concessionaires remains or becomes, as the case maybe, the property of the MWSS, and all such assets will revert to the MWSS upon termination or expiration of the CAs. The CAs set out the performance targets, performance standards, arrangements for capital investment, and mechanisms for tariff adjustments.

At the heart of the CAs are the service obligations and commitments of the concessionaires, among others, to: (a) meet 100 percent water coverage within 10 years; (b) have no real increase in water rates within the first 10 years; (c) provide uninterrupted, 24 hour water service to all connected customers within 3 years, meeting standards set by the Department of Health (DoH); and, (d) put in place a waste water program that dramatically improves public health and environmental conditions 80 percent coverage within the 25-year concession period.

Unfortunately, close to 15 years of privatization, the concessionaires are hardly on target in the performance of their obligations and commitments: they have not met the target of 100 percent water coverage as
8

Sec. 2.1, Art. 2, Concession Agreement.

10

they committed to do within 10 years of their contract; the increases in their water rates have been horrendous; they have not achieved their target of uninterrupted, 24 hour water service to all connected customers; and their 25-year horizon looks dim for a waste water program being put in place for the improvement of public health and environmental conditions.

Non-termination of contract even when there was default and contract extended long before the stipulated expiration

At the hearing of the Committee on 9 November 2010, Representative Bernadette Herrera-Dy mentioned that there have been various irregularities in the operation of the MWSS, among them, in the granting of extension of the CAs even long before their stipulated expiration. The original term of the CAs is 25 years, and therefore the CAs are to expire in 2022. However, long before their term expiration in 2022, the CAs have already been extended for another 15 years.

On the other hand, Representative Milagros Magsaysay wanted to know how it was that the CA with Maynilad was not rescinded despite the latters default. Worse, not only was the contract re-awarded to Maynilad; it was extended for another 15 years, which extension was made even long before its term expiration. Worst of all, the renewal of the CAs was made even in the face of poor performance by the two concessionaires, Manila Water and Maynilad. Under RO Resolution No. 09-008-CA, the 15 years term extension as approved by MWSS Board even carried with it the

11

provision that the concessionaires are already allowed to undertake water sources development, thereby making them bulk supplier and retailer of water at the same time, a probable violation of Sections 19 and 22, Article XXII of the 1987 Constitution and exceeding the grant of concession authority under the CAs.

Legal effect of privatization of the water and sewerage services as public service

The matter of privatization of water and sewerage services by the MWSS awarding and signing of the separate CAs with the two

concessionaires raises the threshold question of whether or not, like the MWSS their principal, the two concessionaires are public service or public utility subject, among others, to the legal limitation of 12% profit set by law and the audit authority of the Commission on Audit (COA). This issue is not mooted by the declarations by the MWSS, in its Board Resolution No. 2004201, and the RO, in its Resolution No. 04-006, that the two concessionaires are mere agents and thus are not public service or public utility subject to the legal limitation of 12% profit limit set by law on public utilities and the audit authority of the COA. Fundamentally, it is outside the power and authority of the MWSS and the RO to declare that the two concessionaires are mere agents, not public utilities. The power to make such declaration or determination is judicial, the matter being a legal issue.

12

What makes for a public service or public utility is the nature and character of the service it renders, and the value or impact of such service to the public. Public service is a stock phrase or term found in most definitions of a common carrier and a public utility. A public service is a service for public use. In simple parlance, a public utility or public service is an entity that caters to the public such as public transportation, electric and power supply and water supply. In KMU v. Garcia9, the Supreme Court said that public utilities:

x x x are essential to the general public. They are enterprises which specially cater to the needs of the public and conduce to their comfort and convenience. As such, public utility services are impressed with public interest and concern. The same is true with respect to the business of common carrier which holds such a peculiar relation to the public interest that there is superinduced upon it the right of public regulation when private properties are affected with public interest, hence, they cease to be juris privati only. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect grants to the public an interest in that use, and must submit to the control by the public for the common good, to the extent of the interest he has thus created.

This is echoed in National Power Corporation v. Cabanatuan City10, where the Supreme Court ruled that water supply and irrigation companies are public utilities, like the two concessionaires, Manila Water and Maynilad, upon the following holding:
Public utilities are purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of which are declared

G.R. No. 115381, 23 Dec. 1994, citing Pantranco v. Public Service Commission, 70 Phil. 221.c G.R. No. 149110, 9 Apr. 2003, citing National Waterworks & Sewerage Authority v. NWSA Consolidated Unions, 11 SCRA 766, 774.
9 10

13

by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.11

The fact that Maynilad and Manila Water are concessionaires under concession contracts with the MWSS does not make them any less public service or public utility than their principal, the MWSS. They are, for all intents and purposes, as much a public service or public utility as their principal is a public service or public utility. This is so, among others, because under the CAs and, in actuality, they, and practically none other, supply water and provide sewerage service directly to the public within their respective zones and they bill and collect directly from the public for their supply and provision of water and sewerage services to them.

Projects under the regime of privatization

Representative Bernadette Herrera-Dy, in her Privilege Speech, enumerated the projects undertaken by the MWSS under the regime of privatization, their fund source and present status, as follows:

(a)

The Pinugay Sewerage Treatment Project (Antipolo City),

allegedly overpriced by about P150 million, and the Bicti-Novaliches Aqueduct Project (BNAQ-6), which has resulted in an unnecessary cost of P103.94 million. These projects are not yet efficiently and prudently used even as both have been front loaded and their cost already included in the 2003 rate rebasing;

11

Emphasis supplied.

14

(b)

The Laiban Dam Project at cost of P45.3 billion. This

project was initiated in 2003 and supposed to be completed by next year. The cost of this project has been inputted (advanced collection from water consumers) into the 2008 Rate Rebasing by the MWSS and the concessionaires. The Laiban Dam Project is projected to produce 1,900 MLD of raw water from the Kaliwa River for the first phase and possible expansion of 3,280 MLD raw water from the Kanan River in Tanay, Rizal. The project cost was set in 2007 at P25 billion for Phase 1 until its completion in 2032; and at P26.5 billion for Phase 2 until its completion also in 2032;

(c)

The Wawa Dam Project at cost of P732 million. This

Project is intended to increase the water supply in San Mateo and Rodriguez, Rizal as well as provide the resettlement site of the Pasig River Rehabilitation Project. Supposed to have been commenced in 2003 and completed in 2005, this project remains unimplemented. However, portion of the cost of this project was already included (advanced collection from water consumers) in the 2003 Rate Rebasing by the MWSS and the concessionaires;

(d)

The Water Supply Project of Maynilad in Laguna Lake at

the initial cost of P100 million. This project was supposed to have been completed in 2007, but remains uncompleted till the present. In an interview published in the newspapers, Maynilad President Ricky

15

Vargas was quoted as saying, the project seems not so reliable. In the meantime, the cost of this project has been included in the 2003 Rate Rebasing by the MWSS and the concessionaires;

(e)

The Angat Reliability Project at cost of P5.4 billion. This

project is aimed to replace the 15 cms irrigation water supply from the Angat Dam, supposed to be for the use of the farmers of Bulacan and portions of Pampanga, but converted to domestic water by the NWRB and the MWSS for Manila Water and Maynilad. From the latest available figures, both the concessionaires have already collected in advance from the consumers of Metro Manila a combined amount of P4 billion, more or less, for this project, which the RO is now asking to be placed in escrow as the money is apparently still in the hands of Maynilad and Manila Water. The project however remains

unimplemented; yet, its cost has already been included in the 2008 rate rebasing;

(f)

The Earthquake Contingency Project at cost of P4.13

billion. This project is intended to reduce the damaging impact of an earthquake and ensure continuous water supply during the calamity. Even when the project is for earthquake emergency, its cost has already been included in the 2008 rate rebasing and the money collected appears to be in the hands of Manila Water. (Maynilad did not apply with the RO to have this advanced collection from the

16

consumers and apparently opted to cover this business risk by the insurance company); and,

(g)

The MWSS contract administered aqueduct projects that

have more than doubled their contract price to the disadvantage of the consumers.

MWSS water supply responsibilities under the regime of privatization

The MWSS is responsible for the supply of raw water to the concessionaires water treatment plants. The main source of water of MWSS is the Angat Dam in Bulacan Province, which comprises approximately 97% of the MWSS total water supply. The other source of water supply is supplemented by ground-sourced water supply from MWSS-owned deep wells and privately-owned wells, which serve fringe areas not connected to the central supply distribution system.

The MWSS is not responsible for the quality of the water it supplies to the concessionaires. The concessionaires are responsible for ensuring the water supplied by the MWSS meets prescribed standards prior to its distribution to, and consumption by, the consumers. The raw water obtained from the Angat Reservoir is treated by the concessionaires in two water treatment facilitiesthe Balara and the La Mesa plants. The combined

17

capacity of the Balara and La Mesa plants is four billion cubic meters per day.

The Regulatory Office (RO)

The CAs provide for the establishment and funding of a Regulatory Office (RO) by the MWSS Board, supposedly pursuant to Section 4 (c) of the MWSS Charter.12 By the express terms of the CAs, the RO is under the jurisdiction of the MWSS Board and functions as a Committee13. It is composed of five (5) members, one of whom is designated as the RO Director or Chief Regulatory Officer who has overall responsibility for the operation of the RO. The CAs stipulate that no member of the RO shall have any present or prior affiliation with the MWSS or either of the concessionaires (or any affiliate of either of the concessionaires).14

The funding of the RO for 1997, was P100 million allocated by the MWSS from the concession fees received from the concessionaires and other operator. For succeeding years, the RO budget will be allocated by the MWSS from the concession fees paid for the year by the concessionaires and other operator but such annual budget shall not exceed P200 million for any year15.

Sec. 11.1, Art. 11, Ibid. Sec. 4, Organization and Operation of the Regulatory Office, Exhibit A, Ibid. Sec. 2, Ibid. 15 Sec. 11.2, Art. 11, Ibid.
13 14

12

18

The RO is mandated to issue the guidelines that shall ensure the provision by the concessionaires of the highest quality services to its customers that are practically achievable.16 It has the power to defer implementation of specific service obligations of the concessionaires17, and the authority to determine compliance by the concessionaires with the latters coverage targets18 and with the Philippine Drinking Water Standards as regards the water supplied by them to the customers19. It is the authority that handles tariff adjustment of the concessionaires.20

Further, the RO has the authority to pass upon the asset condition of the concessionaires to ensure that the water and sewerage system of the service area of each concessionaire is capable of meeting its service

Sec. 5.4, Art. 5, Ibid. Sec. 5.1, Art. 5, Ibid. 18 Sec. 5.1.1, Art. 5, Ibid. 19 Sec. 5.1.4, Art.5, Ibid.
17 20 There seems to be some legal issue here insofar as the RO is given the power to handle the approval of tariff rates of the concessionaires. In Garcia, supra, the Supreme Court ruled that rate-making or rate-fixing is a governmental function which cannot be relinquished in favor of those who would benefit and profit from the industry, in that:

16

It is a delicate and sensitive government function that requires dexterity of judgment and sound discretion with the settled goal of arriving at a just and reasonable rate acceptable to both the public utility and the public. Several factors, in fact, have to be taken into consideration before a balance could be achieved. A rate should not be confiscatory as would place an operator in a situation where he will continue to operate at a loss. Hence, the rate should enable public utilities to generate revenues sufficient to cover operational costs and provide reasonable return on the investments. On the other hand, a rate which is too high becomes discriminatory. It is contrary to public interest. A rate, therefore, must be reasonable and fair and must be affordable to the end user who will utilize the services. es virtual law library Given the complexity of the nature of the function of rate-fixing and its far-reaching effects on millions of commuters, government must not relinquish this important function in favor of those who would benefit and profit from the industry. Neither should the requisite notice and hearing be done away with. The people, represented by reputable oppositors, deserve to be given full opportunity to be heard in their opposition to any fare increase. If rate-fixing cannot be relinquished in favor of those who would benefit and profit from the industry, then ratefixing may have to be taken out from the self-regulating facet of the MWSS and given back entirely to the proper government agency that has jurisdiction over fixing of rates of water and sewerage services as public utility, namely, the National Water Resource Board (NWRB). Therefore, no longer should the MWSS itself approve the rates and such approval subject only to appeal to the NWRB by the consumers or other interested party. Instead, the MWSS or the concessionaires must first file for approval of their proposed rates with the NWRB where there would be publication of the application of new rates and public hearing conducted thereon.

19

obligations, that any defect in the facilities that could adversely affect public health or welfare or cause damage to persons or third-party property is repaired and corrected, and that the concessionaire has sufficient financial, material and personnel resources available to it to meet its obligations under the CAs.21 In this regard, the RO is authorized to commission an independent technical audit of the accuracy and completeness of any asset condition report and/or compliance report of the concessionaires, and the latter are obligated to fully cooperate with any such audit, the cost of which shall be borne by the concessionaire.22

It is clear from the terms of the CAs that the RO was created to enforce the CA provisions and ensure that the actions of the concessionaires shall not compromise the public interest. However, precisely because it is nothing but a creation of the CAs, not by an act of Congress, that the RO is instantly stymied by its lack of independence, and as its mandated functions imply a passive role in monitoring and review, its powers are at best merely recommendatory-- it does not possess regulatory powers over the concessionaires.

The ROs lack of independence is immediately perceivable from its financial dependence on the concessionaires as can be gleaned from the express terms of the CAs. It stands to reason, therefore, that the ROs performance cannot be free from suspicions of corruption and collusion,

21 22

Sec. 6.5.2, in rel. Sec. 6.5.1, Art. 6, Ibid. Sec. 6.5.3, Art. 6, Ibid.

20

especially as there is no provision in the CAs making the budgetary allocation for the RO mandatory.23

This, in fact, calls for a thorough review of the performance of the RO particularly in the tariff adjustment process. It must be noted that the MWSS executives and members of its board routinely receive rate rebasing bonuses at the end of each rebasing exercise. Then, too, the allowance by the RO of the advance collection of the cost of projects by the concessionaireseven when the projects have not been completed and some of them no longer implementedraises questions not only of propriety but motive especially in view of the absence of any provision in the CAs for such advance collection of project costs.

The action of the RO in this respect is questionable, if not dubious, in light of the fact that burdening the public of cost of projects that have not been completed or even abandonedand therefore have absolutely no corresponding benefits would accrue only in futuro or upon completion of the projects, borders on plunder and serious derogation of the public interest and public trust.

To make matters worse, the cost of these projects have not been independently verified or evaluated. It could be that the costs of these projects were taken from estimates using rule of thumb rather than a full

23

Cf. Jocelyn Cartas Cuaresma, Is There Water After Privatization? The Case of the Metropolitan Waterworks and Sewerage System (2006).

21

blown project feasibility studies. Given the present cozy relationship among the RO, the MWSS and the concessionaires, collusion could not be discounted as all would benefit from approving the cost of the projects for inputting into the rate rebasing formula.

Tariff adjustment process

Each CA provides for the adjustment of the standard rates in three ways: (1) an annual inflation adjustment, or the C value, which accounts for movements in the consumer price index (CPI); (2) the extraordinary price adjustment, or the E value, which accounts for the financial consequences of unforeseen events and occurrences beyond the control of the

concessionaires; and, (3) rate rebasing, which involves the adjustment of tariff levels to allow the concessionaires to recover over the life of the concession operating, capital maintenance, investment expenditures,

business taxes and other payments to debt services and earn a rate of return on such expenditures, or the R value. The R value (or rate rebasing adjustment) is the percentage by which the standard rate is multiplied to obtain the new rebased tariff. The sum of the C, E and R values is known as the rate adjustment limit.

Rates and rate rebasing

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Rate rebasing24 has been implemented by the RO starting 2003. It is done every 5 years, and the tariffs set or adjusted are intended to allow concessionaires to earn on their past expenditures and provide sufficient funding for their future projects. The 2003 rate rebasing was followed in 2008 and the next will be in 2013. Through rate rebasing, the MWSS allows the concessionaires to recover their expenditures and such cost is directly passed on to the consumers, regardless of whether the project is implemented or not.25 Even then, it appears that without benefit of public hearing or any rate rebasing exercise, on 16 February 2011, the MWSS and the RO have approved water rate increase for Manila Water and Maynilad.26

As mentioned earlier, the CAs do not have any provision expressly allowing advance collection of the cost of projects to be undertaken by the concessionaires but the RO has allowed such advance collection of project costs by the concessionaires27--even when they have not as yet been determined to be efficiently and prudently incurred contrary to Section 4.0, General Rate Setting Policy/Rate Rebasing Determination, of the CAs. This was admitted by RO chief regulator Quizon and his deputy Randy Sacay and both claim that, if at all, advance collection of project costs from consumers was just the ROs own innovation, duly approved by the MWSS Board.28 Worse, Quizon admits that the RO is yet to come up with the component
Secs. 9.1, 9.2, 9.3, and 9.4, Art. 9, Ibid. Privilege speech of Rep. Bernadette Herrera-Dy, 7 Sept. 2010. 26 Hearing of 8 March 2011. 27 This is not the case with the LWUA. If there is a capital program to be implemented by the water district, a review of the tariff is undertaken. If and when approved by the LWUA, the increase or rate rebasing will be implemented one year after the program has been completed. LWUA does not allow collection on the increase in tariff ahead of project implementation. 28 Hearing of 8 March 2011.
25 24

23

elements of the Rate on Return Base (RORB). In fact, they are just about to hire a consultant to evaluate and determine the component elements of RORB.29

Since the start of 2003 Rate Rebasing, MWSS BOT and RO have been allowing the concessionaires to collect as part of rate passed on the to consumers projected income tax to be paid for its possible income by the concessionaires since per CA, Income Tax is part of their OPEX. The irregularity lies in the fact that the concessionaires had also enjoyed a tax holiday for five years by BOI and yet, the projected tax income for the same period had been included in the rate rebasing.

The reduction of water tariff levels was supposed to be a major benefit from the privatization of the MWSS. This was on the assumption that the private sector would be able to operate the public utility at a more efficient price level than the Government.30 At the onset of the CAs in 1997, the Maynilad water rate per cubic meter was pegged at P7.21, and Manila Water, at P4.02 per cubic meter. Now it is more than P33.32 per cubic meter for Maynilad, and more than P30.34 per cubic meter for Manila Water31, charged as basic cost to consumers excluding those add-ons to their monthly water billings.

Ibid. Note 22, Cuaresma. Representative Bernadette Herrera-Dy privilege speech. It appears that the RO approved new rates for Manila Water and Maynilad just last 16 February 2011.
30 31

29

24

The 2003 rate rebasing

At the 2003 rate rebasing, the RO allowed Manila Water to collect in advance from the consumers the P732 million cost of the Wawa Dam Project and the P52 million initial feasibility study cost and detailed engineering of the Laiban Dam Project. Then, too, the initial P100 million cost of the 300 MLD Water Supply Project in Laguna Lake, was likewise included in the 2003 rate rebasing.

According to RO chief regulator Manuel Quizon P150 million was collected from the Wawa Dam Project, but because the project had to be stopped due to certain issues, the P150 million collection was reversed and deleted through tariff reduction provided for under the self-correcting provision of the CA.32 However, MWSS deputy administrator Goldelio Rivera declared that there was no such P150 million tariff reduction; rather, the amount was realigned to the San Rafael Treatment Plant Project, which has a higher project cost of P1.4 billion.

Also, the claim of RO chief regulator Quizon that the P150 million was deducted from the opening cash position of Manila Water for the next rate rebasing is not reflected in the 2008 rate rebasing of Manila Water. It does not also appear in the minutes of 2008 rate rebasing of the Manila Water.

On the other hand, it states in sub-section 1.3.10, paragraph 1.3, Conclusions and Recommendation in the 2003 Rate Rebasing for Maynilad,
32

Hearing of 9 November 2010.

25

that Maynilad have not allowed investment for sewerage, which is disappointing. With forecasted increases in the water coverage and consumption, wastewater generated will increase. This is a potential threat to the environment and public health.33 Despite this, the RO in its Rate Rebasing Determination Resolution 02- 2006 allowed Maynilad to collect the following Environmental Charge Fees to Consumers for the following years:

2003 Environmental Charge 2.21

2004 2.21

2005 2.21

2006 2.20

2007 1.8534

The 2008 rate rebasing

For the 2008 rate rebasing, advance collection was allowed from the provision for Natural Wealth Tax from 2008 to 2012 for Bulacan even when not yet due. Then, too, collections were allowed for the 15 cms Angat Reliability (Irrigation Replacement) Project, even when the project has not been started; the Laiban Dam Project, which is no longer realizable; and the Earthquake Contingency Fund. All the costs of these projects are now being collected from the consumers.

The Return on Rate Base (RORB) of the two concessionaires

33

Final Draft Report Rate Rebasing, Thames Water Technical Team UPECON Foundation. Regulatory Office, In Re: Rate Rebasing Determination Maynilad Water Services, Inc.

34

26

At the 15 December 2010 hearing, Representative Bernadette HerreraDy stated that based on its audited financial statements, the returns on investments (ROIs) of the Manila Water from 2005 to 2009 are, as follows:

2005- 34.9% 2006- 35.3% 2007- 30.9% 2008- 31.5% 2009- 34.1%

Manila Water disputes these figures, claiming that since 1997 until the present, Manila Water has been losing, and based on its rate rebasing, the ROI should only be 9.3%. Additionally, Manila Water insists that it is misleading to use the net income for the year over revenueswithout considering the investmentsto determine the ROI. Further, Manila Water claims that it uses the Return on Rate Base (RORB) calculated by the RO in a way that the MWSS assets and the new assets invested by the two concessionaires are incorporated in the calculation of the RORB. Based on the latest calculation (in 2009) for the East Zone assets of the MWSS and the new investments of Manila Water showed a ROI of only about 8%.

However, presented below are the RORBs of Maynilad and Manila Water from 2006 to 2009. The figures were taken from the audited financial statements of the two concessionaires over the period from CY 2006 to 2009.

27

The RORB is defined as:

Income after interest and taxes (except corporate income tax)___ Net revalued fixed assets in operation + 2 months operating capital

Maynilad Water Services, Inc. Financial Ratios 2005-2009 (000) 2005 Net Income Operating Expenses 2 months working capital Income Taxes Net Income plus income taxes Net Revalued Fixed Assets plus 2 months working capital Return on Equity Return on Assets Net Profit Margin RORB 1,837,554 6,376,434 1,062,739 28,867 1,866,421 18,463,884 81.64% 8.16% 22.29% 10.11% 2006 976,378 6,776,921 1,129,487 976,378 20,037,920 29.99% 3.96% 14.63% 4.87% 2007 1,666,351 6,214,137 1,035,690 1,666,351 18,582,835 -51.40% 6.81% 22.59% 8.97% 2008 1,994,140 6,269,211 1,044,869 1,994,140 23,611,810 212.81% 5.74% 24.19% 8.45% 2009 2,824,626 6,224,885 1,037,481 1,569,033 4,393,659 30,433,817 75.09% 7.40% 26.60% 14.44%

Concession Assets Concession Assets - Restated

11,896,608

12,774,104

13,147,558 17,345,988 22,236,673 29,062,512

Increase in Concession Assets due to extension of life of agreement to 2037

6,825,839

Manila Water Company, Inc. Financial Ratios 2007-2009 (000) 2005 Net Income Operating Expenses 2 months working capital Income Taxes Net Income plus income taxes 2006 2,464,470 3,868,961 644,827 2,464,470 2007 2,596,946 3,747,613 624,602 987,343 3,584,289 2008 2,788,068 4,656,857 776,143 1,468,665 4,256,733 2009 3,230,519 5,297,027 882,838 1,005,011 4,235,530

28

Net Revalued Fixed Assets plus 2 months working capital Return on Equity Return on Assets Net Profit Margin RORB

18,914,699

22,538,973 20.81% 9.29%

24,689,932 19.28% 7.67% 31.28% 17.24%

31,047,979 19.04% 7.38% 33.89% 13.64%

39.69% 13.03%

35.42% 15.90%

Concession Assets - Restated

18,269,872

21,914,371

23,913,789

30,165,141

Increase in Concession Assets due to extension of life of agreement to 2037

6,251,352

For Maynilad, the RORB exceeded the benchmark 12% in 2009 with 14.44%, while for Manila Water, it has far exceeded the RORB since 2006 (financial statements for 2004 to 2005 unavailable), with 13.0% in 2006; 15.90% in 2007; 17.24% in 2008; and, 13.64% in 2009. In computing for the net revalued fixed asset account, both concessionaires restated their financial statements to reflect the IFRIC 1235 adoption in 2006.

Under IFRIC 12, Service Concession Assets of both concessionaires were recognized beginning calendar year 2006. The Service Concession

Assets form part of the Net Revalued Assets in computing for the RORB. As defined, the Service Concession Assets consist of the present value of total estimated concession fee payments including regulatory maintenance cost pursuant to the Concession Agreement and the costs of rehabilitation works incurred. In addition, total interest and other borrowing costs are

IFRIC is International Financial Reporting Interpretative Committee, which is tasked to review accounting standards used internationally.

35

29

capitalized and form part of the concession assets. capitalization range from 4.96% to 6.12%.

The rates of

Thus, Service Concession Assets are not all tangible assets (having physical form) but likewise included intangible assets the value of which were computed using the present value of the concession fees to be paid to the MWSS plus the interest and borrowing cost of the loans.

Service Concession Assets of both concessionaires increased in 2009 as a result of the extension of the life of the CAs. As the life of the

agreement is extended, the return on rate base of both concessionaires will diminish. The use of the Service Concession Assets as a denominator in determining the RORB is in fact erroneous. The components of the Service Concession Assets require no cash outlay but just mere estimation based on the companys perception of what should be included.

A case in point is the capitalization of interest cost and borrowings. This means that the company does not recognize all interest and borrowing costs as expenses but rather as part of the concession assets. In addition,

the concession assets are even more bloated by discounting the future concession fees to be paid to the MWSS. The components therefore of the concession assets are imagined cost as estimated by the concessionaires.

When the RORB is computed using the actual assets invested by both concessionaires into the system, the results are even more appalling. Below

30

is the RORB using the tangible fixed assets used in the operations of the two concessionaires:

Maynilad Water Services, Inc. 2005 Total Fixed Assets net of Concession Assets RORB using Net Fixed Assets Manila Water Company, Inc. 2005 Total Fixed Assets net of Concession Assets RORB using Net Fixed Assets 2006 2007 557,971 219.60% 2008 722,896 185.99% 2009 986,655 172.80% 5,504,537 27.98% 2006 6,134,329 13.44% 2007 201,157 134.73% 2008 330,268 145.01% 2009 333,824 205.98%

There are no data available for Manila Water, but for Maynilad, the RORB for 2005 and 2006 are more palatable since IFRCI 12 was not yet adopted and therefore only actual tangible fixed assets put into operations was used as the denominator in determining the RORB. Starting in 2006, however, when IFRIC 12 was adopted and the financial statements of the concessionaires were restated and therefore the true state of the investment of the concessionaires were clouded under the Service Concession Assets, the RORB of both concessionaires went beyond the limit set by law. In order to reduce the RORB, extension of the contract life had therefore the effect of increasing the denominator of the formula and consequently reducing the dividend.

31

The MWSS assets could not properly be used as the denominator in computing the RORB because in 2004, the assets of MWSS were reappraised thereby increasing its total value. With the increase in asset values, the effect would be decreasing the rate of return as the asset values expanded. In addition, the COA report made exception to the financial In such a case,

position of MWSS as the fixed assets were not verified.

computing the RORB using the MWSS assets and consolidating the income of the grantees will not give an accurate picture.

To finally resolve the question on whether the RORB of the grantees or MWSS itself is within the 12% limit as set forth, only tangible assets of the grantees and verified and confirmed assets of MWSS should be used in the computation. Since 2005, MWSS has not submitted the list of property,

plant and equipment used in determining the value of the assets in used. In addition, when the assets are revalued, there should be two appraisals undertaken and the average appraisal value should be used.

In this regard, it is relevant to mention that the 12% limitation on profit imposed by law on public utilities must have to be read into Section 9.4 of the CAs which provides that after the 10th year of the contract, the rates for water and sewerage services provided by the Concessionaire shall be set at the level that will permit the Concessionaire to recover over the 25year term (net of any grants from third parties and any possible Expiration Payment) operating, capital maintenance and investment expenditures

32

efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on the MWSS Loans and Concessionaire Loans incurred to finance such expenditures, and to earn a rate of return (referred to herein as the Appropriate Discount Rate) on these expenditures for the remaining term of the Concession in line with the rates of return being allowed from time to time to operators of long-term infrastructure concession arrangements in other countries having credit standing similar to the Philippines.

It is hard to believe that the RO in its rate rebasing exercises could have simply neglected or omitted to take into account the 12% profit limitation set by law, which means the act could only be intentional such that criminal liability attaches to such egregious omission. Not only that. The rate rebasing should also be based on tangible assets already in place instead of programmed expenditures that can be scuttled or deferred to a future date. The rate of return is theoretically defined as the return on funds already invested.

The RORB Revisited

The present water tariff rates charged by the two concessionaires are exorbitant, to say the least. Based on hypothetical computation, we arrived at the following rates assuming that the concession assets of the concessionaires are used.

The table below summarized the findings using the RORB formula:

33

2007 Manila Water - Water Tariff - All-in Rate Using RORB Amount of Rate Overcharged per cubic meter Total Additional Income (000) 20.54 17.27 3.27 1,221,233.57

2008 24.86 19.66 5.20 2,015,018.56

2009 27.99 22.82 5.17 2,048,797.47

Maynilad Water - Water Tariff - All-in Rate Using RORB Amount of Rate Overcharged per cubic meter Total Additional Income (000)

32.96 29.09 3.87 1,106,765.60

32.05 28.54 3.51 1,105,686.08

31.19 27.85 3.34 1,170,292.68

Both Maynilad and Manila Water earned enormously from the way they have used concession assets in determining their water tariff rates. The RO surreptitiously looked the other way as these rates were being deliberated. There is no way by which the rates can be justified unless they combine the assets of the MWSS with the assets of the Manila and Maynilad water systems. Using the consolidated assets of the three companies in

determining the water tariff would approximate the present water rates being charged by the concessionaires. Presented below is a table showing the average tariff that should be charged by the concessionaires assuming that the assets of the MWSS are consolidated, to wit:
2007 Average Tariff per cubic meter Manila Water - All-in water rate Maynilad - All-in water rate 31.10 20.54 32.96 2008 31.91 24.86 32.05 2009 33.04 27.99 31.19

As stated, the return on rate base (RORB) is computed using the formula:

34

Income after interest and taxes (except corporate income tax)___ Net revalued fixed assets in operation + 2 months operating capital

This formula is a means by which the water concessionaires can come up with the rates to be charged to its consumers. As defined in the Section 9.4 of the Concession Agreement, the rates for water and sewerage services provided by the Concessionaire shall be set at the level that will permit the Concessionaire to recover over the 25-year term (net of any grants from third parties and any and possible investment Expiration Payment) operating, and capital

maintenance

expenditures

efficiently

prudently

incurred, Philippine business taxes and payments corresponding to debt service on the MWSS Loans and Concessionaire Loans incurred to finance such expenditures, and to earn a rate of return (referred to herein as the Appropriate Discount Rate) on these expenditures for the remaining term of the Concession in line with the rates of return being allowed from time to time to operators of long-term infrastructure concession arrangements in other countries having a credit standing similar to the Philippines.

Thus, as defined, the net revalued fixed assets of the concessionaires shall only be composed of assets in operations or those already efficiently and prudently incurred by the concessionaires. This would include the existing assets duly verified and confirmed by actual audit. Given the asset value, the revenues allowed to the concessionaires shall be composed of the following:

35

a. Return on investments defined as 12% of the net revalued assets plus two (2) months working capital; and, b. Operating expenses including depreciation of the fixed assets used in operations.

Total revenues that should be generated from operations using the current employed assets of the concessionaires should be the sum of the return on investment as defined in (a) and the operating expenses which would include the depreciation of the fixed assets as defined in (b).

In setting the water rate to be charged per cubic meter, the allowable total revenue is then divided by total annual volume consumption of the consumers. The dividend therefore is the average tariff that can be charged to the consumers. The average tariff is now the basis for computing the

rates per block depending on the incremental factor that the concessionaire would use. basis is a A sharper increase in the incremental factor on a per block mechanism used by the concessionaires to discourage

consumption.

Using this basic tariff derivation, we present a hypothetical tariff using the following assumptions:

a. Manila Water tariff based on total fixed assets without concession assets; b. Manila Water tariff based on total fixed assets with concession assets; c. Maynilad tariff based on total fixed assets without concession assets;

36

d. Maynilad tariff based on total fixed assets with concession assets; e. Average tariff using total fixed assets (including concessions assets) of MWSS, Manila Water and Maynilad; f. Fixed assets of Maynilad and Manila Water were taken from the audited financial statements less the concession assets. The MWSS fixed assets were taken from the COA reports. These assets were assumed to be in operations; g. Operating expenses of Maynilad and Manila Water were also taken from the audited financial statements while for that of MWSS from the COA reports; and, h. The billed volume of water for 2008 and 2009 was taken from the annual reports of both Maynilad and Manila. There were no adjustments made on the concession fees paid to MWSS by the concessionaires. If these were considered, MWSS would not have any operating expenses as the concession fees paid already exceeded MWSS operating expenses. The tariff derived from this hypothetical computation is already inclusive of the interest expenses and currency gains or losses, thus, the average tariff derived can be considered an all-in tariff. In the all-in tariff of both concessionaires, additional charges to the basic rates include CERA, FCDA, Environmental Charge and VAT.

On the basis of the above assumptions, the results are as follows: a. Manila Water Tariff without concession assets:
Without Concession Assets 2007 Total Fixed Assets net of Concession Assets (000) 2 months working capital (000) Total (000) Billed Volume of water in cubic meters in millions Rate computation for average tariff 12% return on total assets (000) Operating Expenses (000) Total Revenues to achieve 12% return (000) Average Tariff per cubic meter Actual tariff charged: 557,971 624,602 1,182,573 373.20 2008 722,896 776,143 1,499,039 387.30 2009 986,655 882,838 1,869,492 396.00

66,956 3,747,613 3,814,570 10.22

86,748 4,656,857 4,743,605 12.25

118,399 5,297,027 5,415,426 13.68

37

Manila Water Basic All-in 15.90 20.54 19.64 24.86 21.91 27.99

b. Manila Water Tariff with concession assets:

With Concession Assets 2007 Total Fixed Assets with Concession Assets (000) 2 months working capital (000) Total Billed Volume of water in cubic meters in millions Rate computation for average tariff 12% return on total assets (000) Operating Expenses (000) Total Revenues to achieve 12% return (000) Average Tariff per cubic meter Actual tariff charged: Manila Water Basic All-in 15.90 20.54 19.64 24.86 21.91 27.99 2,696,681 3,747,613 6,444,294 17.27 2,956,402 4,656,857 7,613,259 19.66 3,738,216 5,297,027 9,035,243 22.82 22,472,342 624,602 23,096,944 373.20 2008 24,636,685 776,143 25,412,828 387.30 2009 31,151,796 882,838 32,034,634 396.00

c. Maynilad Tariff without concession assets:

Without Concession Assets 2007 Total Fixed Assets net of Concession Assets (000) 2 months working capital (000) Total Billed Volume of water in cubic meters in millions Rate computation for average tariff 12% return on total assets (000) 24,139 39,632 40,059 201,157 1,035,690 1,236,847 286.00 2008 330,268 1,044,869 1,375,137 314.60 2009 333,824 1,037,481 1,371,305 350.2

Operating Expenses (000) Total Revenues to achieve 12% return (000) Average Tariff per cubic meter Actual tariff charged: Maynilad Water

6,214,137 6,238,276 21.81

6,269,211 6,308,843 20.05

6,224,885 6,264,944 17.89

38

Basic All-in

22.47 32.96

23.05 32.05

25.86 31.19

d. Maynilad with concession assets:

With Concession Assets 2007 Total Fixed Assets with Concession Assets (000) 2 months working capital (000) Total (000) Billed Volume of water in cubic meters in millions Rate computation for average tariff 12% return on total assets (000) Operating Expenses (000) Total Revenues to achieve 12% return (000) Average Tariff per cubic meter Actual tariff charged: Maynilad Basic All-in 22.47 32.96 23.05 32.05 25.86 31.19 2,105,657 6,214,137 8,319,794 29.09 2,708,033 6,269,211 8,977,244 28.54 3,527,560 6,224,885 9,752,445 27.85 17,547,145 1,035,690 18,582,835 286.00 2008 22,566,941 1,044,869 23,611,810 314.60 2009 29,396,336 1,037,481 30,433,817 350.2

e. With MWSS assets and concession assets of Maynilad and Manila:

Total Fixed Assets - MWSS, Maynilad, Manila Total Fixed Assets (000) 2 months working capital (000) -MWSS, Maynilad, Manila Total (000) Total Assets and working capital (000)

2007 83,332,051 1,668,009 85,000,060 87,419,480

2008 90,516,190 1,828,729 92,344,919 95,219,094

2009 103,860,696 1,928,036 105,788,732 109,029,529

2007 Billed Volume of water in cubic meters in millions Manila Water Maynilad Total Volume of Water Billed Rate computation for average tariff 373.20 286.00 659.20

2008 387.30 314.60 701.90

2009 396.00 350.20 746.20

39

12% return on total MWSS, Maynilad and Manila assets (000) Operating Expenses - MWSS, Maynilad & Manila (000) Total Revenues to achieve 12% return (000) Average Tariff per cubic meter Actual tariff charged: Manila Water Basic All-in Maynilad Basic All-in

10,490,338 10,008,054 20,498,392 31.10

11,426,291 10,972,372 22,398,664 31.91

13,083,544 11,568,216 24,651,760 33.04

15.90 20.54 22.47 32.96

19.64 24.86 23.05 32.05

21.91 27.99 25.86 31.19

It can be concluded, therefore, that water rates being charged by the concessionaires are beyond the average tariff that can be derived using the RORB formula. It should be noted that adjustments should be made to

reflect the actual assets in use by MWSS and the concessionaires but this was not possible as the information available to us came only from available materials on hand.

The

RORB

formula

gives

us

the

maximum

rate

that

the

concessionaires can charge the consumers.

It serves as a guide in

determining the rates and can be subject to adjustments depending on the following:

a. The number of consumers in the area. An increase in the number of consumers or a spike in the average consumption of consumers would lead to a lower average tariff as the volume of billed water increases thus decreasing the average tariff from where the water rate charges are determined; and, b. The retirement of assets in use as this would lead to a decrease in the value of the assets; or, conversely increasing the value of the assets by including projects which are still on the drawing board and create an inflated return on investment which will be

40

used in arriving at the revenue figure required to recover the 12% return on investment and the operating expenses.

As a matter of fact, as the coverage of the area of the concessionaires is expanded, the water rate should go down, assuming that the water source is sufficient to service the needs of the growing population. The value of the fixed assets in place including its expansion into areas outside of the present franchise can be recovered without increasing the water rates. This is due to the expansion of the billable volume of water. An increase in the billable volume of water which can be achieved by expanding its area of operation shall decrease the average tariff of the consumers.

In the present state of the expansion of the concessionaires, infrastructure put in place by them are all charged to the consumers which are the pipe-laying and interconnection charges. It is in the large

infrastructure such as dam construction and spillway construction where the concessionaires assume a risk and that the risk can actually happen that collections can be made and only after the project has been completed. But in the present system of rate determination, the risk is not only mitigated but practically rendered absent because the RO allowed the concessionaires to include the cost of projects still in the drawing board as part of the value of assets which is contrary to the CAs.

Borrowings under the regime of privatization

41

The funding for these projects comes mainly from foreign borrowings of the MWSS under guarantee of the Government. Quite apart from foreign borrowings for the projects, the MWSS also obtained loans to cover its maturing loan obligations in both peso and foreign currency. One of these loans is the US Dollar 150 million or P6.9 billion loan from Banque Nacional de Paris-Paribas, which the MWSS obtained on 26 March 2004 and due and payable this year. This loan was to finance and re-finance the maturing loans of the MWSS in both peso and foreign currency, including the capital expenditures it incurred brought about by the non-payment by Maynilad of its obligations and arbitration-related expenses in 2004. National Treasurer Roberto Tan reports that the 150 Million US Dollar Loan plus its related interest have been paid from the National Treasury due to the sovereign guaranty of the Republic of the Philippines.

Under the circumstances, it appears necessary that an audit should be done on all the borrowings-- both local and foreign-- by the MWSS and the concessionaires. This is made imperative by the fact that not one project has ever been completed; some of them have even been abandoned or scuttled. On the other hand, with the innovation introduced by the RO of allowing the project costs to already be collected by the concessionaires from the customers, it is absolutely anomalous not to have all the borrowings and their disposition audited. The magnitude of these costs is simply staggering:

42

(a) The Pinugay Sewerage Treatment Plant is overpriced by P150 million36, and the cost of the Bicti-Novaliches Aqueduct Project has already reached a staggering additional cost of P103.94 million, which based on available documents per COA Report dated December 31, 2008, is due to several abnormally-allowed price adjustments;

(b)

The Laiban Dam Project, which is at a gargantuan cost of

P45.3 billion, was initiated in 2003 but remains uncompleted;

(c)

The Wawa Dam Project, which is at cost of P732 million,

was to commence in 2003 but remains unimplemented;

(d)

The 300 MLD Water Supply Project in Laguna Lake,

which is at the initial cost of P100 million, also initiated in 2003 for completion in 2007 but until now just being started with no assurance of reliability;

(e)

The 15 cms Angat Water Reliability Project is the

irrigation water replacement, which is at a cost of P5.4 billion, remains unimplemented; and, (f) The Earthquake Contingency Project, which is at the cost

of P4.13 billion, appears used for capital outlays but supposed to be an investment of Manila Water. However, it should be clarified that
36

A Memorandum for H.E the President for the complete background investigation received by the Office of the President dated March 3, 2010, for Pinugay Septage Treatment Project was submitted by the Presidential Assistant on Water

43

the collections from this project are supposed to be used for contingency {to be used only for} as emergency facilities during earthquake situations.

In the meantime, on 26 March 2004, the MWSS obtained a loan of US Dollar 150 million or P6.9 billion with the Banque Nacional de ParisParibas37 to finance and re-finance its maturing obligations in both peso and foreign currency borrowings, the capital expenditures brought about by Maynilads non-payment of its obligations and arbitration-related expenses in 2004. This loan exposure is compounded by the failure and refusal of the concessionaires to pay their obligations to the MWSS under the CAs. As per COA audit report of 2008, Manila Water owes the MWSS, P138.24 million, and Maynilad, P1.417 billion.

Receivables of the MWSS under the regime of privatization

The unpaid obligations of Manila Water amounting to P138.24 million and of Maynilad, amounting to P1.417 billion, are a significant portion of the total P4.25 billion receivable accounts of the MWSS as at year-end 2008 based on COA Report dated 31 December 2008, 36.1% of which are not supported with subsidiary ledgers and have remained outstanding for more than 10 years now. The amounts are not insignificant. An audit of these obligations is imperative as liability for such huge amounts may include prosecution for plunder.
A public disclosure document by MWSS detailing about the status, operation, systems, financial transactions with concessionaires and all data was submitted to Banque National De Paris-Paribas dated 16 March 2004.
37

44

Arbitration versus Maynilad

Since March 2001, Maynilad has not paid any concession fees to the MWSS as required under its CA with the MWSS. As at 15 March 2004, the amount of payables due from Maynilad was P8.5 billion (which includes debt service, progress billing, cost of borrowings and guarantee fees in the calculation of principal and interest owed to the MWSS). The dispute was resolved by arbitration with the arbitration order declaring that the CA shall continue in full force and effect; that all unpaid concession fees should be paid by Maynilad within 15 days of the award; that interest on the unpaid concession fees was also payable to the MWSS in accordance with the CA; and, that as a means of recovering the amount owed by Maynilad, the MWSS may draw on the performance bond put up by Maynilad at the time the CA was entered into.

Maynilad failed and refused to comply with the arbitral award; instead, it filed an action with the Supreme Court seeking to set aside the arbitral award, which it lost. Still, Maynilad failed and refused to comply with the final and executory decision of the Supreme Court, confirming the arbitral award, as it elected to file a petition for corporate rehabilitation. On 17 November 2003, Maynilad obtained a stay order from the rehabilitation court, thereby staying the enforcement of the Supreme Court duly-affirmed arbitral award. In 2004, Maynilad submitted with the rehabilitation court a new rehabilitation plan. The new plan provided for the immediate liquidation

45

of unpaid concession fees through drawing on its US Dollar 150 million performance bond and a conversion of debt to equity.

It appears that in early 2004, Maynilad obtained agreement with the MWSS, approved by then President Gloria Macapagal-Arroyo, for the conversion into equity of its P8.5 billion indebtedness, subject of the arbitral award and confirmed by the Supreme Courteven as Senator Juan Ponce Enrile criticized the agreement as another scandalous sweetheart deal (of the President) that would cost taxpayers and consumers alike of at least P8 billion to save the Lopez familys Benpres from bankruptcy for mismanaging Maynilad Water.

In 2006, the MWSS bidded out 83.97% of Maynilads equity. The Maynilads West Zone, DMCI and Metro Pacific won the bid and retained the corporate name Maynilad. The MWSS or the Office of the President still has to exercise its 16.3% equity rights in Maynilad by appointing government representatives to the latters board of directors. The 16.3% equity of the MWSS in Maynilad came from the conversion of the P8.5 billion indebtedness of Maynilad for unpaid concession fees.

The hefty bonuses and allowances

The expose of President Aquino III on the hefty salaries, bonuses and benefits of the MWSS executives and members of its board, calls for a total

46

review and re-examination of the MWSS as a government institution. Compensation of government executives and members of boards of government-owned or controlled corporations, like the MWSS, covering salaries, bonuses and benefits that reach up to an equivalent of 30 months pay annually cannot simply be ignored; more so, because the practice has been going on not only for a year but goes back several years.

This is not to say that government executives, particularly those in government-owned or controlled corporations, are not entitled to high pay and benefits as it would defeat the policy of attracting the best and the brightest to government service. There should, however, be reasonable, fair and equitable criteria and standards for compensation and rewards in government service. It is believed that the Government is not wanting in reasonable, fair and equitable criteria and standards.

The problem is whether they were ever observed or followed in the case of the MWSS. In all likelihood, the sense that the MWSS as a [is] selfregulating institution has spawned a mind-set for the MWSS management and the board that they felt truly free in whatever salary rates, bonuses and benefits to award themselves. In this sense, self-regulation has become synonymous with graft which so easily translated itself to corruption.

Service in government carries with it accountability. This is implicit in government service. One appointed to a government position, including positions in government-owned or controlled corporations, is only too

47

aware that he occupies a position impressed with public interest and public trust. It results that he is only too aware that excesses in the performance of his office and abuses in his handling of public funds and property carry with them accountability and liability. The liability for excessive salaries, bonuses and benefits is implied from the public trust and confidence reposed in him as an executive or member of the board of the government-owned or controlled corporation as the MWSS.

The apportioning of housing units in La Mesa Dam, including sale of La Mesa Watershed Property under MWSS Board Resolution No. 296-2002
This holds true with the conversion by the MWSS management and its board of portions of the La Mesa Dam watershed into private residential lots, their apportioning those lots for themselves and building their residential houses thereon. They know or ought to know the transcendental value of watershed in the preservation and protection of our water sources, which should be one of the primordial purposes of the MWSS. They must have found example from the conversion of the huge Balara Watershed into high priced real estate subdivisions and housing projects after years upon years of slow apportioning [of] the area into private residential lots. The loss of the Balara Watershed by its eventual conversion to pricey subdivision projects should in the first place be the accountability of the MWSS that [as] such conversion must have been facilitated by no less than itself.

48

Now, they are doing the same wrong to the watershed of La Mesa Dam! Verily, the MWSS management and board should be the first to know how the loss of the Balara Watershed now presents a grave threat and real danger to our national water security. Consequently, the act of the MWSS management and board in now converting portions of the La Mesa Dam watershed as what they did to the Balara Watershed into private residential lots and most likely real estate subdivisions and housing projects for themselves constitutes culpable misappropriation and violation of our childrens future, especially their entitlement to good and sufficient water source.

Probable conflicts of interest in interlocking directors and officers of the MWSS and the concessionaires; in the RO

The attention of the Committee has been invited to probable conflicts of interest in the interlocking directors and officers of the MWSS and the concessionaires. The Committee has confirmed that, at one time or another, certain members of the MWSS board were concurrently members of the boards of the concessionaires; ditto, that certain executives of the MWSS (if not, their spouses and/or relatives) likewise concurrently served at one time or another as executives or employees of the concessionaires.38 These facts

38

Committee Hearing of 15 December 2010, submission to the Committee on Good Government by Maynilad of the Summary of Benefits of its Board Members that included Oscar Garcia, who was MWSS Chair at the same time, and Santiago T. Gabionza, Jr. who was also MWSS Board of Trustee. On the other hand Mr. Perry Rivera, Manila Water Vice President admitted in the hearing 08 March 2010 that the wife Mrs.Jojilyn Santos of MWSS former Chief Regulator was at the same time their Librarian in Manila Water

49

would put into serious question the integrity and validity of the acts and resolutions of the MWSS and the concessionaires, such as in, among others, the approval to extend for another 15 years the original term of the CAs long before their expiration in 2022, the rate rebasing exercises, the fixing of water rates and in the manner of the performance by the concessionaires of certain of their contractual obligations, Maynilads non-payment of the concession fees, and the actions taken by the MWSS thereon, measured in terms of how they impact on the public interest and the interest of the Government. Then, too, the hefty bonuses and allowances that the MWSS management and board approved for themselves would take on a different complexion.

It is also submitted that the RO, as constituted under the CAs, is caught in a conflict of interest situation. This is plainly seen from the fact that the budget of the RO comes from the contributions of the

concessionaires. An examination of the various critical decisions of the RO appears to sustain the observation that the RO has been far from independent as to be free from suspicion of acting not in the best interest of the public, such as, among others, the ROs allowing the concessionaires to include the cost of projects still in the drawing board as part of the value of assets which is contrary to the CAs.

Recommendations

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A. Continuing Committee Work

1.

Creation of an Oversight Committee

Even with the three hearings conducted by the Committee, it is felt that at least two more hearings should have to be conducted. With the policy issues identified, it is also the sense of the author of this report that some kind of an Oversight Committee, composed of representatives from the Department of Justice (DOJ), Department of Finance (DOF), National Economic Development Board (NEDA), Department of the Environment and Natural Resources (DENR), COA, the National Water Regulatory Board (NWRB) and resource persons from the Academe like UP NCPAG and other professional groups such as the Integrated Bar of the Philippines (IBP) or the Philippine Constitution Association (Philconsa), should be organized to provide the Committee with valuable inputs on the policy issues unearthed by the Inquiry. The issues identified are, among others, the following:

a.

Whether or not the private concessionairesManila Water

and Maynilad-- are mere agents of the MWSS and therefore not public utilities subject to the 12% profit limitation set by law and exempt from audit by the COA;39

39

Apparently after the March 8, 2011 intense grilling of the RO about Public Utility issues by the Committee, on March 21, 2011, the RO-TWG submitted to the RO-EXECOM its position paper contrary to its previous stand that the concessionaires are public utilities and were not agents of MWSS. There after on 11, April 2011 the Chief RO submitted its Public Utility issue Memorandum to BOT

51

b.

Whether or not tariff or rate setting under a privatized

water and sewerage system maybe validly delegated to the RO and subject only to the approval and confirmation of the MWSS board;

c.

Whether or not costs of projects yet to be implemented or

even mothballed or cancelled projects may validly be included in the tariff or rate setting of the private concessionaires subject to the approval and confirmation of the MWSS; and,

d.

Whether or not watersheds of the La Mesa Dams and all

other dams that are part of the water supply system may be validly converted to private ownership by the MWSS or any Government entity.

2.

A separate special public hearing and expert hearing.

On account of the importance of the present Inquiry touching as it does on matters of transcendental importance to the public, it is the sense of the author of this report that the consuming public should be given an opportunity to be heard. As an initial step, this Report should be published in newspapers of general circulation once a week for two consecutive weeks and copies thereof made available for distribution to the public. Interested parties may be invited to submit their comments and attend the hearings that the Committee may be permitted to hold.

52

It is recommended that the Oversight Committee should conclude all the Inquiry and submit its full recommendations within six (6) months from approval of this Report.

On the basis of the investigations thus far conducted by the Committee, certain actions may already be initiated. Essentially these actions fall into two categories: legislative actions and administrative referrals.

B. Legislative Action
1. GOCC Governance Act of 2011

At the outset, the author of this report is gratified with the signing into law by the President of Republic Act No. 10149, otherwise known as the GOCC Governance Act of 2011. This new law was authored by Senator Franklin M. Drilon (with Representative Bernadette Herrera-Dy as one of the co-authors in the House of Representatives), clearly in response to the Presidents first State of the Nation Address, which exposed the excessive salaries and bonuses of the MWSS executives and members of its board. This new legislation seeks to help government-owned and controlled corporations (GOCCs), like the MWSS, to achieve fiscal responsibility and viability but, equally important, make them significant tools for economic development.

53

A primary feature of this new law is the creation of the Governance Commission for GOCCs (GCG), a five-member commission that will act as the central advisory, monitoring and oversight authority to formulate, implement and coordinate policies affecting GOCCs. The chairperson of this body will have the rank of Cabinet Secretary with the Secretary of Finance and Secretary of Budget and Management as ex officio members. The fourth and fifth GCG commissioners will have the rank of undersecretary. The law specifically provides that the GCG will be attached to the Office of the President.

The mandate of the law to the GCG is clear: it will have to adopt a government corporate standard for the GOCCs similar to the Code of Corporate Governance prescribed by the Securities & Exchange Commission (SEC). While this Code is questioned by some legal quarters as lacking legal basis for the SEC to promulgate, there can be no question as regards GCGs power to adopt government standard for the GOCCs as it is so expressly mandated by the law. It should be stressed in this respect that the GCG is granted unique powers and functions, foremost of which is the power to reorganize, merge or streamline GOCCs, even recommend to the President their abolition or privatization.

2.

Privatization of water and sewerage services.--Privatization of

water and sewerage services may be a step in the right direction toward securing uninterrupted, adequate, potable and safe water and in the

54

provision of adequate, dependable sewerage disposal to the public--both at just and equitable ratesunder a regime of improved governance with strong commitment to social responsibility and transparency. Based on the privatization performance record of close to 15 years, there are certain fundamental structural and complementary changes that have to be adopted if a truly reliable water supply and distribution and effective sewerage disposal systemsat reasonable and equitable rates-- will be brought into reality. The approach starts with the appreciation of water

supply and distributionwhether public or privatebeing essentially a monopoly. There can be no question that water service is fundamentally and essentially a public utility regardless of whether the provider is a government agency or private company.

The GCG just created under the GOCC Act of 2011, once set up and functioning, becomes the appropriate government regulatory agency of the MWSS. The GCG may be minded to include placing the private

concessionaires under the audit authority of the COA, to secure efficiency in the water supply and delivery and proper protection to the consumers, the water sources, especially the watersheds, and the environment. Perforce, the GCG would have to do a thorough examination and evaluation of the structure and organization of the present privatization scheme under the CAs and the institutional framework of the MWSS post privatization towards, if necessary, a total overhaul of the present water and sewerage system, as privatized. This requires legislative action similar to the now

55

proposed Water Regulatory Commission which was certified by His Excellency President Aquino as a Priority Bill.

The Creation of the Water Regulatory Commission in the Philippines (House Bill No. 4137, authored by Representative Bernadette Herrera-Dy and Representative Sonny Angara) emphasized on the following:

a) A Clear 12% cap on return on investment of the Water Service Provider;

b) Commission

on

Audits

(COA)

authority

to

validate

capital

investments and operating expenses of all Water Service Providers for purposes of water rate fixing; and,

c) Water Service Providers are automatically classified as Public Utility subject to Public Service Act and its underlying incentives program40.

3.

The Regulatory Office.Water is essential to life; it is a public

good. Water has vital economic, social and ecological roles to play that it cannot be left to the rigors and unpredictability of market forces alone. It is imperative that water supply and distributionwhether in public or private hands-- should be, as public utility, subject to government regulation for the protection of the consuming public.41

40

UP NCPAG POLICY BRIEF NO 1, submitted to President Benigno Aquino and included in the briefing papers submitted by Representative Bernadette Herrera-Dy to NCPAG.

56

In this respect, the GCG would surely see that one fundamental facet of regulation is the fixing of rates. The regulatory agency is tasked to ensuring that the rates a public utility charges the public are fixed only upon proper application and notice at which the public is notified of the application and afforded the opportunity to be heard on the matter. At the same time, the regulatory agency reckons, among others, with the limitations set by law such as the 12% profit limit. Then, too, proper agencies of the government, such as the Office of the Solicitor General (OSG), are notified of the rate application filed by the public utility for comment and/or opposition so that they may refer the regulatory agency to certain specific provisions of law or matters of policy that must have to be taken into account in approving or disapproving the rate application of the public utility.

The GCG would see that this facet in government regulation is concededly absent with the RO, in that upon the perception that the MWSS is a self-regulating entity, the RO has taken the position that its recommendatory function in the tariff adjustment process is practically plenary looking to the MWSS alone as the final approving authority on tariff or rate fixing. Indeed, once approved by the MWSS, the new tariff rates become effective unless an appeal is taken to the NWRB. There is

41

Notes 23. 30, Cuaresma

57

no notice to the general public of any rate rebasing exercise, and therefore there is no opportunity for any real public hearing at which the consuming public and other stakeholders may be heard.

Consequently, the GCG would find that legislative correction is needed to make rate-fixing or tariff adjustment compliant with due process and the imperatives of transparency, fairness and equity. In this regard, it may be considered by the GCG that the MWSS Charter is amended to eliminate its self-regulating authority and power to fix rate be transferred to, and assumed by, the NWRB which shall hear and approve applications for fixing of rates. As an alternative measure, the RO may have to be established not by private contract but by legislative fiat. This way, the RO independence is guaranteed as it ceases to be beholden to the private concessionaires that foot its bill.

Further, it may be necessary that a thorough review either by the GCG or by an independent body is mandated for the total overhaul of the MWSS, cleansing it of its so many antediluvian provisions and bringing the institution into the 21st century.

The GCG may find it urgently necessary to review the CAs to straighten out the kinks that arose and became apparent from the almost 15 years of privatization. One kink is the provision on rate rebasing and the manner the RO and the MWSS have chosen to implement it. For one, as noted above, the use of the Service Concession Assets as a denominator in

58

determining the RORB is erroneous and harmful to the consumers.

The

components of the Service Concession Assets require no cash outlay but just mere estimates based on the companys perception of what should be included.

A case in point is the capitalization of interest cost and borrowings. This means that the company does not recognize all interest and borrowing costs as expenses but rather as part of the concession assets. In addition,

the concession assets are even more bloated by discounting the future concession fees to be paid to the MWSS. The components therefore of the concession assets are imagined cost as estimated by the concessionaires. Put differently, legislation must have to mandate that advanced collection of project costs is against public policy and therefore disallowed and forbidden.

For another, there is no transparency in the rate rebasing exercises and in the tariff or rate-fixing process. The only time the consuming public may come in is when new rates have been approved by the MWSS and appeal is then taken by any affected party or parties to the NWRB.

4.

Standardization of salaries, bonuses and employment benefits. -

With its mandate to adopt government corporate standard for GOCCs, the GCG may include setting the standard of salaries, bonuses and employment benefits of employment in the GOCCs. It may refer to the Civil Service Commission to come up with the appropriate criteria, standards and guidelines to prevent excessive salaries, bonuses and other benefits.

59

5.

Preservation and conservation of watersheds.Legislation must

have to come up with public policies on preservation and conservation of watersheds and apportioning of watersheds for private ownership should be declared a crime in the category of plunder.

C. Administrative Referrals.
As found by the Committee hearings, the following apparent irregular actions of the MWSS may well be subject to review by proper panels that the Office of the President may deem necessary and appropriate to constitute:

1.

Review

of

the

tariff

adjustments

approved

for

the

concessionaires.A panel led by the National Water Resource Board (NWRB) together with a duly organized Waterwatch Coalition NGO Group may be constituted to review the tariff adjustments that have been approved for the concessionaires. The panel may include non-government organizations (NGOs), the academe, business sector, water experts and other

professionals. It must be emphasized that the whole point of privatization is not merely to ensure the provision of adequate and safe water supply; it is also intended to lower the cost of water to the consumers. It will be noted that at the onset of the CAs in 1997, the Maynilad water rate per cubic meter was pegged at P7.21, and Manila Water at 4.02. Now, it is more than P33.32 per cubic meter for Maynilad, and more than P30.34 per cubic meter for Manila Water, charged as basic cost to consumers excluding the add-ons

60

to their monthly water bills for a horrendous increase in water rates over the last ten (10) years. This year 2011, the Maynilad rate is a high of P 47.83 per cubic meter while the Manila Water rate is at a high of P 36.42 for regular household consumers! This is based on the latest water rate

increase as at 30 December 2010 as approved by the MWSS and the RO, per Resolution No. 10-009-CA42 and No 10-008-CA43, respectively.

The panel is invited to consider the discussion above on the computation of the RORB, which led to the conclusion that the water rates being charged by the concessionaires are beyond the average tariff that can be derived using the RORB formula. The RORB formula gives the maximum rate that the concessionaires can charge the consumers. These horrendous increases invite review and evaluation for probable roll back to more reasonable and equitable rates, and, if warranted, the reimbursement to the consumers of their excess payments.

2.

Conflict of interest: interlocking directors and executive

officers of the MWSS and the concessionaires; conversion of debt to equity in Maynilad; hefty bonuses and allowances of the MWSS executives and members of its board. A panel led by the DoJ or the Ombudsman may look into the probable conflicts of interest arising from the interlocking directors and executive officers and spouses and relatives up to the fourth civil degree of consanguinity or affinity of the MWSS, the concessionaires and the RO. If
42

Approved Resolution 10-009-CA, Maynilad Water Services, Inc. Petition for Standard Rates. Approved Resolution 10-008-CA, Manila Water Co. Inc. Petition for Standard Rates.

43

61

it is established that there is indeed interlocking directors and executives between the MWSS and the concessionaires and RO, such fact would put into serious question the integrity and validity of the acts and resolutions of the MWSS and the concessionaires. This will include the actions on, among others, the approval to extend for another 15 years the original term of the CAs before their expiration in 2022, rate rebasing exercises, fixing of rates and the performance by the concessionaires of certain of their contractual obligations, Maynilads non-payment of the concession fees, and the actions taken by the MWSS thereon, measured in terms of whether the actions have been grossly disadvantageous to the Government and the public interest.

The panel may also look into the ROs dependence on the concessionaires for its budget as provided for under the CAs as another area of conflict of interest. This dependence of the RO apparently impacts negatively on its independence in light of its recorded performance. It is submitted that the RO, as constituted under the CAs, is caught in a conflict of interest. An examination of the various critical decisions of the RO appears to sustain the observation that the RO has been far from independent as to be free from suspicion of acting not in the best interest of the public, such as, among others, the ROs allowing the concessionaires to include the cost of projects still in the drawing board as part of the value of assets which is contrary to the CAs.

62

The panel may have to similarly examine and see to the undoing of the conversion into equity in Maynilad of the latters P8.5 billion indebtedness to the MWSS approved by then President Macapagal-Arroyo. This is

impermissible as it poses a real conflict of interest. The payment of the P8.5 billion indebtedness of Maynilad should have been made a precondition to any extension of the CA with Maynilad. It is incestuous for MWSS to be a

stockholder of an entity it is regulating. Consequently, it is imperative that the conversion to equity of Maynilads P8.5 billion indebtedness to the MWSS should be rescinded and undone.

Then, too, the panel would have to look into the approval by the MWSS board and management of the hefty bonuses and allowances for themselves, which concededly is a cut and dry case of conflict of interest. The hurtful effect of this action to the people renders the investigation by the panel of utmost urgency. Should the panel determine that a crime has been committed, it may have to recommend the prosecution of those who are guilty thereof. Considering the magnitude of the excessive salaries, bonuses and other benefits, the panel may have to look into the probability that the crime committed may not simply be Estafa or misappropriation of public funds, but plunder.

3.

The extension of the CAs for another 15 years long before the

expiration of their original term in 2022. A panel led by the DoJ or the Ombudsman may look into the validity and propriety of the extension of the

63

CAs for another 15 years long before their term expiration in 2022. It should be noted that the contract performance by the concessionaires leave much to be desired as in truth both concessionaires have failed in the performance of their contracted service obligations in providing: (i) uninterrupted, 24hour water service to all connected customers within 3 years, meeting the standards set by the DoH; and 100 percent water coverage in their respective zones within 10 years, and (ii) a waste water program that dramatically improves public health and environmental conditions, and therefore are in breach of the CAs.44 Both concessionaires are in default in the payment of the concession fees. As at end of 2008, Manila Water owed P138.24 million, and Maynilad, P1.417 billion, in concession fees. It must be stressed that as far as Maynilad is concerned, from 2001 to 2004, its unpaid obligations in concession fees totaled P8.5 billion, which it doggedly failed and refused to pay. Indeed, Maynilad resorted to all dilatory schemes and maneuvers. First, the matter had to be brought to arbitration, which Maynilad lost. The arbitral award directed Maynila to pay the P8.5 billion award within 15 days of the award. Maynilad brought the matter to the Supreme Court, where it again lost. Once more, Maynilad refused to comply with the final decision of the Supreme Court. Thereupon, Maynilad availed of corporate rehabilitation proceedings where it was able to have the then President Macapagal-Arroyo
44 MWSS RO Comment on Extension was submitted to the Board of Trustees and to former and MWSS Administrator Allado, however, it seems the paper was disregarded. Environmental Pollution Penalties being assessed by DENR to Maynilad and Manila Water of P 200,000.00 per day due to serious violations on sewerage and sanitation up to this time are continuously being ignored by MWSS, Maynilad and Manila Water.

64

approve the conversion of its P8.5 billion indebtedness in concession fees to equity. Still and again, from to 2005 to 2008, Maynilad has accumulated arrears of P1.4 billion in concession fees. The point raised by Representative Milagros Magsaysay on why the CAs were extended long before their term expiration in the face of the above defaults of the concessionaires should be well taken and which the panel may consider in its review. The panel may look into the feasibility of recommending to the President of the Philippines the cancellation of the CAs for such consistent defaults of the concessionaires, including the extension of the CAs for another 15 years long before their term expiration.

4.

Review of receivables of the MWSS.The same panel may

review the receivables from the concessionaires and it may include determining the reasons for the failure of the concessionaires to comply with their pecuniary obligations to the Government under the CAs and why the MWSS took no action towards rescinding the CAs. Similarly, the panel may come up with proposed policy guidelines on the financial liabilities of the concessionaires, including providing for measures in the event of default of the concessionaires on their financial obligations under the CAs.

5.

Undoing of the conversion of portions of the La Mesa Dam

watershed into private residential lots and real estate subdivisions. -- The same panel may find it urgent and imperative that the conversion of portions of the La Mesa Dam watershed into private residential lots and real

65

estate subdivisions should immediately be undone. This includes the setting aside and nullification of the MWSS Board Resolution No. 296-2002 that authorized the sale of portions of the La Mesa Dam watershed to MWSS employees, and such other resolutions or acts that mandate the conversion of portions of the watershed into private residential lots and real estate subdivisions. This should also include referral to the DoJ this matter of conversion of portions of the La Mesa Dam watershed into private residential lots and real estate subdivisions for probable criminal investigation and prosecution.

6.

Review of all loans and funding for projects.A panel led by the

DoF (or the GCG, if already organized and functioning) may have to be constituted to conduct a thorough review of all loans and funding for projects of the MWSS. The review may have to cover a full audit of the loans and projects as implemented toward determining and formulating proposed public policy guidelines for future loans and projects. At the same time, the review should cover evaluation of the loans and projects that went awry and determining the accountabilities of the implementing officers and private parties towards prosecution, if necessary. Under the CAs, MWSS is not allowed to participate or guaranty or borrow for and in behalf of the concessionaires.45 7. The panel may consider seeing to MWSS immediately stopping

advance collections of costs of unimplemented projects allowed by the RO in

45

Article 7, Concession Agreement, page 36.

66

the past rate rebasing exercises to both concessionaires46, compute all other excessive water rates charges allowed by the RO outside of the regular rate rebasing period in the past47 and have all these moneys immediately placed in escrow for refund later by the concessionaires to the water consumers. These were voiced out in a Manifesto dated 11 February 2011 and indignation rally before MWSS by water consumers48.

Quezon City, 6 July 2011. Respectfully submitted,

REP. BERNADETTE HERRERA-DY Representative Bagong Henerasyon (BH) Party-List Member-Congressional Oversight Committee on Water House of Representatives

46

MWSS- RO submitted to MWSS board their recommendation on 10 December 2010 for downward tariff adjustments for two (2) unimplemented projects. This was followed up by Addendum to said Memorandum on 16, March 2011 as ROs Recommendation to the MWSS Board of Trustees for the Concessionaires to cease and desist from collecting tariff on Laiban Dam and the 15cms. Said Addendum was accompanied by details of Estimated Advance Collections of Concessionaires as submitted by Tariff Control and Monitoring Department which at that time showed to have accumulated to about P4 Billion.

47

A sample of excessive rate (overcharging of customers) allowed by the RO, outside of the regular rate rebasing period and its corresponding documents are submitted by the former RO Cristeto Dinopol, Jr. , which dispute documents dated 12 April 2006 and 21 March 2006 respectively, were apparently disregarded by the MWSS Board of Trustees, and apparently went ahead with the upward water price adjustment. This is contrary to Terms of Reference Paragraph B) Tariff Adjustment of Bidding Documents for the new sponsor of Maynilad that state NO Rate Rebasing unless MWSI is out of the Rehab mode not later than June 30, 2007.
Manifesto dated 11 February 2011 and photos of consumer indignation rally were submitted to the Committee.

48

67