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The Congressional inquiry covered the examination of the Metropolitan Waterworks and Sewerage System (MWSS), which has origins that dates as far back as 1878, with the formation of the Manila Water Supply System, then incorporated in 1971 and the eventual privatization of the water and sewerage system via Concession Agreements in 1997.
The 3-session hearings in Congress plus the submittals of investigation documents by concerned individuals covered a wide range of subjects that included, among others: a. The Salaries and Benefits Of Officers and Board Members of the MWSS The Committee hearings confirmed the revelation of President Aquino in his first State Of The Nation Address, that the Officers and Board Members of MWSS were receiving for many years an average of thirty (30) months of salaries by way of bonuses, allowances and benefits, considered scandalous by government standards. b. The Conversion of Portions of Balara and La Mesa Dam for Subdivision Housing The Committee hearings confirmed the conversion and subdivision into housing of portions of Balara and La Mesa Dam to favor employees and officers of MWSS and other agencies of government collaborating with MWSS, such as the Commission on Audit (COA), the Office of the Government Corporate Council (OGCC) and the Department of Public Works and Highways (DPWH) only by mere MWSS Board approval – an act that is considered dubious, legally doubtful and in violation of the Constitution.
c. The 1996 Bidding For Concession And The Eventual Concession Agreements In 1997 That Govern The Working Relationship Between MWSS And The Two (2) Concessionaires – Maynilad Water Services, Inc.(For The West Zone) And Manila Water Company, Inc.(For The East Zone) Covering Entire Metro Manila, Rizal & Cavite Provinces The 1997 bidding that attracted ten (10) bidders with only four (4) finally participating resulted in Manila Water Company submitting the best bid and Maynilad Water Services the second best bid and consequently were awarded the East and West Zones respectively. Only after the bid was awarded, a draft concession agreement surfaced that was the subject of discussion and amendments between MWSS and the awardees. The Concession Agreements are claimed to have originated from England and covered a wide range of items relative to the discharge of the functions by the awardees, the performance criteria, the rate setting and rate rebasing system and the role of the regulatory office as enforcer and comptroller of the Concession Agreements and the fees to be paid by the concessionaires to MWSS. The Concession Agreements, among others, established a performance standard such as: (a) meet 100% 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 with 80% coverage within the 25-year concession period. d. The Default Of Maynilad In The Payment Of Concession Fees Since March 2001, Maynilad defaulted in the payments of its concession fees and volunteered to resign its award and for which it was penalized, after arbitration, by calling on its performance bond amounting to USD150 Million. The default of Maynilad resulted in an award by the Supreme
Court of PHP8.5 Billion in favor of MWSS. However, Maynilad filed for a relief for rehabilitation which resulted in a conversion of the PHP8.5 Billion award to an equity share of MWSS of 16.3% in Maynilad through the intercession of the then President Gloria Arroyo. e. The Substitution Of Maynilad After Default Of A Consortium Consisting Of DM Consunji, Inc. (DMCI) And Metro Pacific Investment Corporation (MPIC) In 2006, a consortium of DMCI and MPIC won in a bid to buy out the 87% share of Maynilad without disturbing the equity share of MWSS. MWSS did not renegotiate its PHP8.5 Billion receivable from Maynilad that was converted to equity. f. Performance Benchmarks Of The Concession Agreements The Committee hearings found the two Concessionaires as falling short of the performance benchmarks of the Concession Agreements. 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% water coverage that 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. g. The Nature Of Work Of The Regulatory Office And Its Performance The Regulatory Office (RO) is a key provision of the Concession Agreements, with the office exercising the power to set performance targets, to examine assets and resources of concessionaires to meet their obligations, to determine water tariff rates based on a formula, to make recommendation on investments and loans that will be incurred by the concessionaires and with the help of outside technical people to determine whether costs have
been prudently incurred, and to protect the interest of the public. The functions of the RO are so broad and powerful that it requires independence, competence, transparency and with great awareness of its public purpose. The Committee hearings found the Regulatory Office of MWSS as wanting in transparency, diligence and independence, particularly in treating rebasing systems as confidential with the public as blind, in not ascertaining the accuracy of assets that have been employed by the concessionaires and in allowing the inclusion of plans and programs that have not been implemented or incurred to be included in the rate rebasing systems resulting in unnecessary increase in tariff rates. h. The Rate Rebasing Factors Each Concession Agreement 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.
i. The Rate Rebasing Agreements Of 1998, 2003 And 2008, and Findings of Dubious, Uncertain and/or Disputed Items The three (3) rebasing agreements had been found by the Committee as faulty, dubious, uncertain or disputable because of the following: 1. The inclusion of the assets of MWSS in the determination of RORB – considering that the assets of MWSS are for supply of water, the assets that should have been included are only those that are for treatment and distribution of water, which are the only aspects that were privatized; 2. The inclusion of the assets of MWSS that had been revalued and had not audited by COA nor verified by the Regulatory Office; 3. The non-verification of assets that are actually in use for the concession, and a determination if they had been prudently incurred, as required in the Concession Agreements; 4. The so-called “innovation” of the Regulatory Office, allowing concessionaires to include investment plans that had not yet been implemented or even already abandoned, without any basis, under the Concession Agreements; 5. The absence of a determination of the Return of Rate Base (RORB) as also required by the Concession Agreements; 6. The crafty avoidance of the 12% limit on investment return or profit imposed on public utilities by relying on a mere pronouncement by a Technical Working Group that came out with a ruling that the Concessionaires are not public utilities but are mere agents of MWSS, which legally dubious. The Committee hearings reveal misfeasance or non-feasance, complicity or neglect in the recommendatory act of the Regulatory Office and the approval by the MWSS Board, all of which resulted in unduly increasing
water tariff rates, unnecessary burdening the consumers and unduly favoring the two (2) private concessionaires.
j. The Key Issue of Whether The Concessionaires Are Public Utilities Subject To Twelve percent (12%) per annum Return on Investments or Rate Base; The Committee stands four-square on established legal doctrines on what makes a public utility. In KMU v. Garcia1, 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 City2, 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:
G.R. No. 115381, 23 Dec. 1994, citing Pantranco v. Public Service Commission, 70 Phil. 221.
G.R. No. 149110, 9 Apr. 2003, citing National Waterworks & Sewerage Authority v. NWSA Consolidated Unions, 11 SCRA 766, 774.
“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 by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.”3
The Committee finds no escaping from the said doctrine by relying on a ruling by a Technical Working Group that was a mere creation of MWSS, and relying on a specious argument that concessionaires are mere agents of MWSS. To allow such a dubious circumvention is a travesty of a very important doctrine that is intended to protect public interest.
k. An Expert's Opinion On What The Rates Should Be, Based On Whether The Assets Of MWSS Should Be or Should Not Be Combined With The Assets Of The Concessionaires For Purposes Of Rate Rebasing, and The Magnitude Of Overcharging Or Of What The Rate Should Have Been Under Different Scenarios An expert’s opinion was sought by Representative Bernadette Herrera-Dy to determine what rates should have been under different scenarios, which include alternatives – including or excluding MWSS, albeit unverified by COA – to determine possible return on rate base and to determine what the rate should have been used given a 12% limit on investment return. The different scenarios considered:
1. The published financial statements of the 2 concessionaires; 2. The annual statements of MWSS even if assets were not audited or verified by COA; 3. All the claimed assets employed by the 2 concessionaires, even accepting intangible assets that include plans or investment programs that had not yet been implemented, much less incurred, and assets that are not tangible, such as future concession fees that had been capitalized; 4. The re-statement of assets after the adoption of a new accounting method, IFRIC 12, in 2006; 5. The cognizance that an extension of the 25-year concession by another 15 years, the expansion of service area beyond Metro Manila and the increase in customers can only diminish tariff rates. Given these analyses, an expert came out with opinions in the report showing consistent overcharging under any scenario by the 2 concessionaires, ranging from moderate to scandalously high degrees of overcharging, depending on the scenario. Reference is made to the many tables in the report showing the resulting return on investments by the 2 concessionaires, and the corresponding estimated overcharging that should be the subject of further examination and audit of, and confrontation with the concerned concessionaire. l. Questions Raised On Why The 25-Year Concession Agreements To End In Year 2022 Was Extended For Another 15 Years Long Before Its Expiry Date; Again, the Committee hearings unearthed the extension of the 25-year concession to another 15 years, long before the expiry of the Concession Agreements for both concessionaires in 2022 without any hearing, public notice nor regard to the performance of the concessionaires during the last 10 or 15 years, as ostensibly mandated in the Concession Agreements
themselves. The Committee never found any compelling reason for such extension, done with some suspicious degree of haste, with no regard to public interest and without the benefit of hearing, notice, much less bidding.
m. Recommendations And Referrals Representative Bernadette Herrera-Dy made recommendations: 1. To continue or complete the hearing within a period of six (6) months; 2. To seek a wider participation by the public in all relevant fora, including the invitation of experts; 3. To ask COA: a. To make a full audit, not just of MWSS, but also of the 2 concessionaires as public utilities, a move that was resisted, if not purposely ignored by the Regulatory Office and the MWSS Board; b. To verify and report on the unpaid receivables of the 2 concessionaires – PHP138.24 Million for Manila Water and PHP1.417 Billion for Maynilad; c. To verify the assets that are employed by the 2 concessionaires or even MWSS that should be used in the rate determination; d. To verify if the costs and investments by the 2 concessionaires had been prudently incurred as required by the Concession Agreements and to do such other work that the RO may not have done since the inception of the Concession Agreements in 1997; e. To re-examine the correctness of the Rate Rebasing Agreement, considering the omnibus power of the COA, the performance and accountabilities of all government institutions, which include public utilities;
4. To refer to the Department of Justice to review the position of the RO, MWSS and the 2 concessionaires, and to rule definitely on whether the 2 concessionaires are public utilities or not; 5. To refer for legislative action the creation of a new water regulatory body that is more independent, with expert and public representation; 6. To direct MWSS to re-examine its position in relation to the Concession Agreements in general, and the rate rebasing systems in particular, in the light of the findings of the Committee; 7. To order the MWSS to immediately cease and desist from continual collection of rates that are irregular, after it had established the correct rates that should be charged based on the findings of the Committee; 8. To order the concessionaires to immediately put in escrow all amounts that had been found to be overcharges, and to direct return or crediting of such to the consumers in a speedy and orderly manner; 9. To order MWSS to direct the concessionaires the immediate implementation of the proper sewer pipe connections to sewerage treatment plants all over and minimize the now prevailing pollution of water ways, contamination of Metro Manila communities and incidence of diseases relating to uncompleted sewerage systems; 10.To order MWSS to conduct a review of the service agreement on the basis of the performance targets specified in the bidding and recognized in the Concession Agreements that should have been done as early as 2008; and, 11.To publish this report in two newspapers of general circulation in the spirit of public interest.
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