The Privatization Model and The Bidding Process

Among all the models for private participation (management contracts, affermages, lease,
joint ownership, etc.), a concession model was chosen. A concession is an agreement where the
responsibilities of operating and maintaining the utility are given to a private company. However,
unlike an affermage-lease agreement, the private company also has the responsibility to finance
investments for infrastructure assets. Also, unlike a divestiture or joint ownership, the ownership
of all assets remains with the contracting authority (the government) while ownership of the all
assets created during the concession period would revert back to the contracting authority once
the concession period has ended. For the MWSS privatization, the city had to be divided into two
zone, a method that was used for the privatization of water in Paris. Paris was also divided into
two zones separated by the Seine River where each zone was operated by a large French water
company. The East bank of the Seine River was operated by Veolia Waters or Compagnie
Générale des Eaux, while the west bank was operated by Suez or Compagnie Lyonnaise des
Eaux. This model was preferred since it would facilitate competition between the concessionaires
where both would try to outdo each other. This model also makes it easier to regulate since either
of the zones could be used as benchmarks. Another advantage of this model is that either of the
concessionaires could serve as backup in case the other should fail. (Dumol,2000)

As such, the franchise area of MWSS was also divided into the eastern and western banks
of the Pasig River (or the East and West zones). The East service area only had 40% of the
population but is relatively richer and more attractive than the West service area since it has,
within its area, the business districts of Makati City, Ortigas and Fort Bonifacio. On the other hand,
the West zone covered 60% of the population but had the larger share of the urban poor. There
were two concerns that came with the splitting of the MWSS franchise area: the bid/tariff
differential and the allocation of the debt. The bid differential problem happens when the winning
bids for the two zones are widely apart from each other that consumers end up paying hugely
different tariff rates. Such problem did occur during the bidding process when the winning bid for
the East zone is less than half of the winning bid for the West zone. This was the result when the
Ayala-International Water Consortium submitted very low bids for the two service areas and was
awarded the East zone. But since a consortium can only be awarded one service area, the
Benpres-Compagnie Lyonnaise des Eaux Consortium, the second lowest bidder, was awarded
the West zone. Although he admitted that it was a big concern during the bidding process, Dumol
would later dismiss such concern as he felt that so long as the water rates go down, regardless
of the differential between the rates in the two zones, there would not be too much opposition.
Chia, et. al., on the other hand, recommended a second-price auction where the lowest bidder
would be allowed to operate at the price submitted by the second-lowest bid. This bidding
mechanism would prevent a firm from submitting a very low bid. As to the allocation of debt, it
was agreed upon that the West zone would carry 80% of the debt because most of the existing
pipes were in this area. While the East zone shouldered the remaining 20% as more capital in
needed in this service area.

From the beginning, it was already acknowledged that an international water operator was
needed in order for the MWSS privatization to succeed, this was due to the fact that no local firms had
enough experience in the water business (as shown in Table 1 most of the local bidders were involved in
order industry like property development, telecommunications, power generation, banking, etc.)
However, the Philippine Constitution demanded that all public utilities must be owned and operated by a
local company and that all its officers must be Filipino. This constitutional provision limiting foreign
ownership meant that a local partner was needed to run the show. (Dumol, 2000) To satisfy the limits set
by the Constitution, while at the same time solve for the lack of expertise by local firms, it was decided
that a bidding consortium may be entered into by a local company and an international operator. In this
bidding consortium, the local private firm, owning at least 60% of the consortium, would stand as the
"sponsor".

The bidding process started with the pre-qualification procedure of all companies, both local and
foreign, based on their financial capacity, perceived know-how, and expertise in large projects. It was
important that local private firms were pre-qualified separately from the international operators. This was
because there were only a few foreign operators who were interested in submitting a bid. Such that, if
pre-qualification was done together the disqualification of a local company would result to the automatic
disqualification of its foreign partner. Planners wanted as many international operators as possible to
strengthen the credibility of the bidding process. On the other hand, the planners feared that if there
were only a few international water operators involved in the bidding process, it would increase the
possibility of collusion or connivance among the bidders. Only then that a pre-qualified local firm is
allowed to enter into a bidding consortium with a pre-qualified foreign water operator.

A two-envelope bidding system was implemented. This bidding approach was replicated
from the Buenos Aires privatization model where a bidder submits two envelopes- one containing
a technical proposal and the other a financial proposal. The technical proposal may contain
certain details on how the consortium plan on fulfilling the contract and may give additional
information regarding their technical capacity. The financial envelopes would contain the business
model of each bidding consortium, their respective capital expenses and operating expenses and,
most importantly, their respective bids. In a two-envelope system, the envelopes are opened and
evaluated separately. Evaluators would first open the envelope containing the technical proposal
and see whether the proposal is compliant or not. A non-compliant technical bid would have its
respective financial proposal returned to the bidder. On the other hand, if compliant, the
evaluators may open the second envelope and would compare the bid against the others. From
there, the consortium with the lowest bid would then be awarded the contract. Additionally, all
bidders must place a bid for both East and West zones but can only be awarded one area. If a
single consortium wins both service areas, then a predetermined formula is used to decide which
zone it will be awarded, the second lowest bidder would win the other zone. In the case of the
MWSS privatization, the evaluation of the technical proposals were done for a period of two weeks
where the evaluators decided that all technical proposal were compliant. The financial envelopes,
which were all placed in a locked safe, was opened in Fort Bonifacio by their respective bidders.
The event was witnessed by a large number of audience that included several members of the
press. This method was used in order to assure the public of the transparency and credibility of
the bidding process. Also, this bidding model has the advantage of being objective since the
evaluation of the technical proposal can be done without being influenced by the bids.

The bidding process was considered as a success as the bids of all consortia were
significantly lower than the pre-privatization water tariff as the bids went as low as 26% of the tariff
in the East zone and 29% in the West zone. The Ayala-International Water consortium submitted
the lowest bids for both service area, bidding P2.51 per cubic meter for the West zone and P2.32
per cubic meter for the East zone. Since a consortium can win only one of the zones, the Ayala-
International Water conortium was awarded the East service area. Then, the West zone was
awarded to the Benpres-Lyonnaise des Eaux consortium as its second lowest bidder. The
Benpres-Lyonnaise des Eaux consortium would later be called the Maynilad Water Services Inc.
(Maynilad or MWSI). The Ayala-International Water consortium, on the other hand, will be called
the Manila Water Company Inc. (Manila Water or MWCI).
 Table 1: Bidding Consortia

Pre-qualified Consortium Business Interest

Metro Pacific Corporation Property development, telecoms, etc.

Anglian Water International

Ayala Corporation Property development, telecoms, electronics,

banking and financial services
International Water (United Utilities of the United
Kingdom & Betchel Corporation of the United
States )

Benpres Holdings Corporation Property development, power generation and

distribution, telecoms, electronics, banking and
financial services
Lyonnaise des Faux

Aboitiz Holdings Corporation Power generation and distribution, financial

services, etc.
Compagnie Generale des Eaux

Source: Fabella, 2006

Table 2: Bidding Results for the West Zone

Consortium Peso bids (per cubic meter) Percentage

Ayala-International Water P 2.5140 28.6333
Benpres-Lyonnaise des Eaux P 4.9688 56.5922
Aboitiz-Compagnie Generale des Eaux P 4.9941 56.8800
Metro Pacific-Anglian Water Int’l. P 5.8738 66.8998
Prior to Bid P 8.7800 100.00
Source: Dumol, 2000

Table 2: Bidding Results for the East Zone

Consortium Peso bids (per cubic meter) Percentage

Ayala-International Water P 2.3169 26.3886
Aboitiz-Compagnie Generale des Eaux P 5.5209 62.8800
Metro Pacific-Anglian Water Int’l. P 5.6638 64.5080
Benpres-Lyonnaise des Eaux P 6.1275 69.7888
Prior to Bid P 8.7800 100.00
Source: Dumol, 2000
References:

2006. Approaches to Private Participation in Water Services: A Toolkit, The World Bank.

Dumol, M. 2000. The Manila Water Concession: A Key Government Official’s Diary of the
World’s Largest Water Privatization. The World Bank, Washington, D.C.

Fabella, R. 2006. Shifting the Boundary of the State: The Privatization and Regulation of Water
Service in Metropolitan Manila. University of Philippines, School of Economics.

Chia, P.L.G., Chua Chako, K., Kim Fat, C. and Toh, K.L., 2007. Economics & Management in
Developing Countries Water Privatization in Manila, Philippines Should Water Be
Privatized: A Tale of Two Water Concessions in Manila. INSEAD.