MARK Dumol was the chairman of the Metropolitan Waterworks and Sewerage System (MWSS) when the state firm was privatized in 1997, and he became then-President Fidel Ramos’ chief implementer of that project that eventually turned over the government’s water business monopoly to two tycoons — the Indonesian Anthoni Salim and the Ayalas.
In his book* published by the World Bank (which pushed and financially supported the project), Dumol pointed out:
“While the total estimated investment was in the range of $7 billion, the estimated equity was in the range of only $200 million, and this was for the two zones. The equity per zone was even less and this would be split between the local and international companies. Most of the investment was actually going to be sourced from the cash flow. Later on, when I explained this to the owner of a relatively large local firm, he was extremely surprised and suddenly became very eager to participate. Can you imagine having a significant share in a company that provided water to Metro Manila for only $10 million?”
Dumol proved to be prescient, and that local company, if it had followed his advice owes him billions of pesos.
Metro Pacific Investment Corp., majority owned by the Indonesian tycoon Anthoni Salim through corporate layers, acquired Maynilad Water Services Inc. in 2006, after the financially troubled Lopez group had to give it up. Salim bid $60 million to get Maynilad and paid for its $31 million debts to MWSS.
That’s about P4 billion, which stock market analysts claim was the total capital that Salim and the Ayalas each invested to acquire their water companies, with half in the form of their companies’ earnings and retained as capital.
The largest estimate of how much the two combined invested as their equity in the water companies is P12 billion. That’s 10 times the P120 billion net profits of the two water companies from 2009 to 2018 and that excludes its loan repayments, paid out of the firm’s cash flow from their captive markets.
Tubong lugaw is an old term used by businessmen to refer to hefty profits by a business that required only a meager capital. But those of water firms are super-profits, which should now be called now tubong tubig, to etch their greediness in our language.
How the heck could they generate so much profits?
First, they are monopolies with a captive market, which practically negates the supposed virtue of capitalism as creating competition, and thereby higher productivity. A tycoon (who is not into monopoly business) asked rhetorically: “What’s the biggest problem of a business?” He answered his own question: “Competition by other businesses. And overnight you could get bankrupt if your competitor is better than you. Are Manila Water Co. Inc. and Maynilad competing with each other? No. They each have their own territories where they are monopolies.”
Second, the water companies have had the power to determine what price they can impose and consumers can do nothing. The oligarchs have captured what was supposedly the independent regulatory body, except in 2013 when the MWSS turned down its demand for hefty increases in the tariff rate, and instead ordered decreases.
But then President Fidel Ramos provided the water companies with a mechanism to overturn a miraculous independence by the regulatory body. The concession agreements had provisions that if the companies don’t like the prices they’re told to implement, they can go to an arbitration panel abroad.
And what constitutes this arbitration panel? One is designated by the MWSS, another by the water company, and the third is by the president of the International Chamber of Commerce — which the mother firms of the two water companies most likely are distinguished members of, and even big financial contributors to.
No wonder the arbitration panels, both based in Singapore, upheld the two companies’ claim that they should be paid P11.2 billion for their losses from 2014 to 2018, after the MWSS refused to approve their rate increase applications in 2013.
Isn’t that absurd? The two companies reported net profits during that period of P67 billion, and they still have the gall to demand that government pay them P11.2 billion to cover for the losses they supposedly incurred?
There is actually one other huge advantage given by government to the water companies: They are shielded from the depreciation of the peso, with the additional costs of falls in the currency’s value passed on to consumers, almost immediately.
Economist Jude Esguerra** in a comprehensive study of the water privatization experience here pointed out: “The mechanism for foreign currency exchange cost recovery reduces efficiency. Now the lengthy waiting period is gone, the costs are passed immediately to consumers. The companies will have no incentives for economizing on buying materials from abroad or in foreign borrowing.”
Esguerra pointed out the water companies’ strategy: “The two companies submitted bids for high service qualities at a low price, and then once the contract was written, tried to renegotiate, to chisel down quality, to scale down and postpone targets, and to exploit the loosely defined regulatory rules for price adjustments.”
And what was the result of all this?
Before privatization, a typical residence consuming 30 cubic liters per month pays P121. Now, adjusted for inflation, its about six times more, P600.
That’s privatization, which means huge private profits are put on top of costs of a basic commodity.
* The Manila Water Concession: A Key Government Official’s Diary of the World’s Largest Water Privatization.
** The Corporate Muddle of Manila’s Water Concessions