Water monopolies raking in insane profits

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IF after reading this piece, you find nothing wrong in our oligarch-dominated economic system, then your faith in unbridled capitalism is boundless, bordering on the religious.

The monopoly profits of the two companies that supply one of the most basic needs of humans, water, which a state is mandated to provide, in the past ten years to 2018 (for which I was able to get data) amounted to P120 billion, according to their annual reports.

At an annual rate of P12 billion in profits, this monopoly supplying water is one of the most profitable businesses in the country. Some would call that insane.

The two metropolitan water monopolies are first the Manila Water Corp., the biggest stockholder of which, the Ayala family, with 42 percent share, is the quintessence of the Spanish-descended landlord class. Unlike other elites in Asia which led their countries’ industrialization, the Ayalas have stuck to a rent-based business – property.

The rest of Manila Water Corp.’s owners are also the richest in the country and in the world, their investments in the company made through global fund managers and directly through the stock market. The firm is the monopoly water distributor in the metropolis’ eastern area, consisting of 23 cities in Manila and Rizal, including of course as the Ayala would want it, Makati and Taguig, where the two premier business districts are.

Monopoly
The second monopoly—to call the two a duopoly is false, as they don’t compete but have their own territories—is the Maynilad Water Co. Maynilad has the monopoly of water distribution in the western part of the metropolis, covering 17 cities and municipalities, which includes Quezon City and parts of Cavite province.

Scenes from the recent water shortage crisis (top); below, the men behind the water monopolies: the Zobel de Ayala brothers, Salim and his Executive Manuel Pangilinan.

When Fidel Ramos fancied himself to be the president of a country at the level of advanced-capitalist United Kingdom, and privatized– sold off – in 1997 the water business in the metropolis, Maynilad of course went to Cory’s favorite clan, the Lopezes.

When even three regimes’ support of the Lopezes couldn’t save it from a financial crisis, the Lopezes gave up on its concession and had the regulatory body MWSS auction it. The winner was a firm controlled, and owned 53 percent by the Indonesian magnate Anthoni Salim, Metro Pacific, which took in as minority partner the D.M. Consunji group, a construction firm whose recent claim to fame was its construction of a 46-storey condominium that destroyed the visual backdrop of the Rizal monument and changed the best park skyline in the city of Manila.

Maynilad of course is the kind of company that Metro Pacific prefers: a monopoly. Metro Pacific had exploited a Securities and Exchange Commission (SEC) ruling that gave it a technical excuse to violate the constitutional limits on foreign ownership participation in public utilities, so that its collection of companies are almost entirely firms that are monopolies or near monopolies, among them PLDT-Smart, Meralco, and toll roads that include NLEX and Cavitex. (Details of these are in my book Colossal Deception, available at Popular Book Store, Amazon, and rigobertotiglao.com.)

Source: Firms’ annual reports

The volume of water sold by the two companies have grown only at an average annual 1 percent per year, half the metropolitan population growth rate of 2 percent. The two still rely on water from reservoirs built way back in Marcos’ time. Their concession fees paid to MWSS amount to just P1 billion annually, and their capital investments have been in the same magnitude.

Foreign exchange
The two firms are among the very few which are allowed by government to pass on their foreign exchange losses to consumers, which they do quite often, the most recent ones being the P1.56 per cubic meter additional charge to consumers in October 2018 and P0.75 cubic meter in January 2019. They also enjoyed a 10-year tax holiday.

A part of their capital investments are even being passed on to consumers, as in the P700 million cost of Manila Water’s Cardona Water Plant which was collected even before its completion. The firm’s delay in constructing the plant was one reason for the recent water supply crisis in the metropolis.

Unlike most companies which have to compete with other firms—which drives them to become more efficient and to come up with better products and services—Manila Water and Maynilad Water are monopolies.

They extract what is called monopoly rent, or income derived because of ‘mere’ ownership of a limited resource – in this case, government’s grant to them of the exclusive authority to run the water system in the metropolis, which expires, believe it or not, in 2037.

An astute Chinese-Filipino tycoon described a monopoly as a “money printing press.” The owner of a monopoly doesn’t even have to put in more of his money. He’ll just borrow from banks, or issue long-term bonds (as the two water firms have done), as the franchise to the monopoly is as good a collateral as prime real estate; banks would be queuing to lend to them.

Mechanism
There is even a mechanism that practically forces the two water firms to put profits, rather than service, as their priority – the stock market.

The two have been listed in the Philippine Stock Exchange for more than a decade; and the share price is determined obviously not by their service to Filipinos, but by profits, and particularly the amount of their dividends. More dividends mean increased share price – but decreased funds for capital investments that would improve service or, as demonstrated in recently, would have prevented water shortages.

Manila Water has been giving out much of its profits as dividends to its stockholders, which include a lot of foreigners. For the past five years (for which I could get data), this amounted to P11 billion.

Maynilad Water, in the last 11 years, has remitted $1 billion – or roughly P47 billion – in dividends to its mother company First Pacific Co., Ltd. In Hong Kong, according to the latter’s annual report accessible at its website.

Maynilad Water in fact has been one of First Pacific’s best-performing cash cows, its profit contribution in certain years even more than Meralco.

Salim
Isn’t this insane?

The Philippine government gives a firm the authority to run a monopoly to distribute water to Filipinos, at least 50 percent of whom are the country’s poorest. Yet that firm’s income was taken out of the country, increasing the bank accounts of such foreigners as Indonesian magnate Anthoni Salim (the biggest owner of First Pacific) and the Ayalas’ Singaporean partners.

Our poorest who have no choice but to buy the water from these two firms are contributing a lot to the enrichment of these rich foreigners.

There’s another mechanism that forces the two water companies to put profits before service: the compensation structure of their top executives. Manila Water’s top five executives – I was startled to find out from its annual report – are among the highest-paid executives in the country.

The total income of its five top executives led by its CEO Fernand M. de la Cruz amounted to P119 million, or a monthly average pay-check for each of P2 million. However, a big chunk of the P119 million, P42 million, is in the form of bonuses. Do you think their bonuses are determined by an improvement in Manila Water’s services?

 


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