Country Water Actions

Country water actions are stories that showcase water reforms undertaken by individuals, communities, organizations, and governments in Asia-Pacific countries and elsewhere.

Philippines: A Second Chance for an Ailing Utility—The Maynilad Experience
June 2008

Investing on an ailing water utility seems like throwing good money after bad. Will private sector investors take this risk? Logic says probably not, but the successful turnover of private operators for Manila’s beleaguered concessionaire says otherwise. A SUCCESSFUL RE-BID In December 2006, industry insiders were shocked when the bid price for 84% of the ailing Maynilad Water Services, Inc. (Maynilad) was announced. Optimists had anticipated financial bids of no DMCI Holdings present Isidro Consuji more than US$100 receives congratulations after the bids million. After all, the were flashed on stage. company still had over US$200 million in debts, its 540-square kilometer coverage area has seen little service improvements in the past 5 years, and the estimated capital needed to put Maynilad’s operations back on track is somewhere in the vicinity of US$60-80 million. In a surprising turn of events that drew cheers and tears, the winning bid was five times what experts had predicted. The all-Filipino partnership of construction giant DM Consunji Holdings, Inc (DMCI) and telecommunications/real estate heavyweight Metro Pacific Investments Corporation (MPIC) secured their stake in Maynilad for a whopping US$503.9 million. “This is the largest investment in our whole corporate life, and we intend to make it work,” said DMCI president Isidro Consunji. Legal battles, ingenious financial engineering, and convoluted negotiations characterized the five years preceding the re-entry of new private shareholders in Maynilad. UTILITY ON THE ROCKS In 1997, the Philippine Government turned over the operations of state-owned Metropolitan Waterworks and Sewerage System (MWSS) 1 to two private firms, each on a 25-year concession agreement. Maynilad took over the West Zone operations, which then covered over 7 million people in 17 cities and municipalities. Five years down the line, Maynilad wanted out, sending shockwaves throughout the country’s water community.

Financial difficulties arising from the 1997 Asian financial crisis had a lot to do with Maynilad’s decision. Saddled with 90% of MWSS’ debts and with the Philippine peso drastically tumbling against the dollar, 2 most of Maynilad’s revenues were going into debt service. Close to nothing was left for maintenance, much less capital expenditures (capex), and Maynilad was sinking deeper into debt with each day. Maynilad and MWSS tried to resolve the situation by adjusting tariffs to reflect the foreign exchange fluctuations but the change came too late in the day. By end-2002, a nearly bankrupt Maynilad announced that it was returning the concession to MWSS. FINANCIAL ENGINEERING TO THE RESCUE Legal battles erupted with this announcement. After lengthy deliberations, an international arbitration panel ruled that neither Maynilad nor MWSS could terminate the concession. With its debts ballooning to almost US$500 million at the time, Maynilad sought legal protection against creditors and won a minor victory when the local court stayed all claims against it. It quickly lost its edge, though, when the Supreme Court gave MWSS the right to draw on the company’s performance bond. Soon after, all of Maynilad’s other creditors were clamoring for payment. Forced to stay in the concession, Maynilad worked with its shareholders and creditors to figure a way out of the financial quagmire. To manage a capital deficit of over PhP5 billion, the shareholders slashed the par value of Maynilad stocks from PhP100 to PhP1, writing off an equity of over PhP3 billion for Benpres Holdings and over PhP2 billion for Suez Environment. The creditors—MWSS, Suez, banks, contractors and suppliers—agreed to deferred payments, some payable in 2 years and others payable annually until 2013. A US$22.7 million debt-to-equity conversion gave MWSS control over 84% of Maynilad. The complicated process reduced Maynilad’s debt to a more manageable US$240 million.

TRANSPARENCY AT WORK Preparations for the international tender took place between 2005 and 2006. “I think the 90%-10% distribution of debt between the two concessionaires was the original sin of the MWSS concession. We Special Bids and Awards Committee Vicefeared a lack of Chairman Agnes Devanadera and interest in the re-bid because whoever wins Chairman Oscar Garcia open the carefully sealed financial bids. will assume the same proportion of debt,” observed Philippine Solicitor General Agnes Devanadera, who served as co-chair to the MWSS Special Bids and Awards Committee (SBAC) that managed the re-bidding process. “Fortunately,” she added, “the Government recognized this and was open to smoothing the way. For instance, the winning bidder was allowed to retain funds for future capex rather than simply turning over the entire bid amount to the Government coffers.” 3 Conscious of the need for transparency and integrity in the process, the SBAC put in place several key ingredients: clear rules to govern the process, a credible and professional financial adviser who helped structure the bid in a way that deterred non-serious bidders, platforms for regular consultations with bidders, and a steady supply of information to the public. These measures diffused the distrust among the key players and leveled the playing field among bidders. Underpinning them is the solid belief that Maynilad had to be reprivatized. “Re-privatizing isn’t easy. You have government officials enjoying private sector perks for the first time, and it’s no joke letting those perks go,” said Ms. Devanadera. “But,” she added, “from the very start, we knew it had to be done and we worked to make sure everyone involved agrees.” BUSINESS UNUSUAL FOR MAYNILAD The emphasis on transparency and integrity helps explain why the Maynilad re-bidding process has received accolades such as AsiaMoney's Country Deal of the Year and CFO Asia's one of 10 best deals in Asia. But other factors contributed. “I think allowing some financial engineering also gave the Maynilad re-bid an edge,” added Maynilad president Rogelio Singson. “For instance, while so many public tenders impose a high equity from technical partners, this didn’t. And it only required expertise in utilities management— including telecommunications and energy—not specifically water utilities management, which allowed a wider variety of bidders to come in.”
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In fact, another departure from the norm was the variety in bidders. The 11 originally interested in the bid included investment companies and even a law firm. Conspicuously absent were the big water operators—recent trends have shown them gravitating towards build-operate-transfer or management contracts that limit their financial exposure and do not carry regulatory risks. But the interest of unusual players in the re-bid highlights the potential they see in Maynilad. “The 70% NRW is a goldmine,” says Mr. Singson. Currently, Maynilad is losing about 1,500 million liters per day (mld) of potable water. Halving that immediately gives the company additional 750 mld of water for customers. The new management of Maynilad is cultivating this goldmine by creating the first NRW management team in Maynilad’s history and tapping the services of renowned NRW experts. This and the the potential tariff increase from the current rate rebasing exercise will, they hope, triple revenues in 4 years. NEW OWNERS, NEW LIFE When Maynilad’s original shareholders pulled out of the company, naysayers predicted the decline of private sector participation in the Philippines. But the rebidding process showed that if the whole exercise is done Maynilad president Rogelio Singson (right most) at the groundbreaking of a new right, and the potential Maynilad initiative. for better business exists, investors would bet even on an ailing water utility. Exactly a year after the re-bid, the new Maynilad has paid off its remaining debts way ahead of its 2013 deadline and embarked on a PhP33-billion capital expenditure program for 2007–2015. With only 15 years left in the original 25year concession, the new owners are fast-tracking reforms to ensure that they fulfill the terms of the concession and transform their investments into profits. Improving and expanding the network, increasing organizational efficiency, upgrading customer services, and improving IT systems are just some of their initial interventions. The road to Maynilad’s recovery is long, with the outcome still uncertain. But the entrance of DMIC-MPIC into the fray has given the struggling concession a new shot at success. RELATED LINKS Maynilad on the Mend (2008) [ADB paper] Water Champion: Rogelio L. Singson on Maynilad’s New Lease on Life

MWSS has jurisdiction over all waterworks and sewerage system in the National Capital Region and nearby provinces of Rizal and Cavite. The exchange rate plunged from US$1=PhP26 in 1997 to US$1=PhP50 by 1998. 3 The total value of shares, US$22.7 million, plus costs were turned over to MWSS. *This article was first published online at ADB's Water for All website in June 2008: The Country Water Action series was developed to showcase reforms and good practices in the water sector undertaken by ADB’s member countries. It offers a mix of experience and insights from projects funded by ADB and those undertaken directly by civil society, local governments, the private sector, media, and the academe. The Country Water Actions are regularly featured in ADB’s Water for All News, which covers water sector developments in the Asia and Pacific region.

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