Water/Wastewater Improvements, Manila, …tcdc2.undp.org/GSSDAcademy/SIE/Docs/Vol15/21Philippines States.pdfWater/Wastewater Improvements, Manila, Philippines 183 ... Water/Wastewater

Water/WastewaterImprovements, Manila, Philippines

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P R O J E C T S U M M A R Y

In the 1990s, water and wastewater services in Manila wereunsafe and unreliable and most residents were underserved whileothers had no access to the systems at all. In 1995, theGovernment of the Philippines enacted legislation that allowedManila’s water agency to enter into a public-private partnership(PPP). The idea of using the private sector for water/wastewaterservices came from the earlier successes of President Fidel V.Ramos in mobilizing private resources to solve the Philippines’power crisis in the early 1990s. In 1996, MetropolitanWaterworks and Sewerage System (MWSS) began the processthat led to the signing of concession agreements in early 1997.Metro Manila was split into two zones (East and West) to be runby two different concessionaires. The focus of this case study isthe concession agreement for the West Zone.

In 1997, MWSS signed a 25-year concession agreementwith a consortium that consisted of a private Philippine corpo-ration and an international water company. The Governmenthoped that the concessionaire, Maynilad Water Services, Inc.,would be able to provide western Manila’s population of approx-imately 6 million with an uninterrupted water supply, expandthe water and sewage service coverage, and improve access forthose who were unable to afford piped water.

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182 VOLUME 15: EXAMPLES OF SUCCESSFUL PUBLIC-PRIVATE PARTNERSHIPS

After the contracts were signed,MWSS split into two entities: one tomanage the concession agreements andanother to regulate the concessionaires.Maynilad was responsible for the mainte-nance, operation and investment obliga-tions associated with water/wastewaterservices as well as paying 90 per cent ofthe old debts of MWSS through yearlyconcession fees. The concessionairewould generate revenue by collectingusage tariffs from consumers, so it had agreat interest in regularizing supply andexpanding service coverage. Manila’s res-idents strongly supported the concessionagreement that promised better service atlower rates.

At first, the concession agreementwas effective in increasing residents’access to water and sewerage services, butinefficiencies in the old system, coupledwith external factors and a poor outlineof responsibilities in the contract, put astrain on Maynilad’s resources. Non-rev-enue water (NRW), lost through leakypipes or illegal connections into the sys-tem, caused the concessionaire to forfeitmillions of dollars in revenue each year.El Niño effects reduced Manila’s watersupply and the Asian financial crisisdevalued the Philippine peso, which alsohindered Maynilad’s ability to generaterevenue and pay off debts. In the end,disagreements over contractual obliga-tions led to both public- and private-sec-tor attempts to terminate the contract.

In 2003, an arbitration court decidedthat neither side had the authority to endthe agreement. Since then, MWSS andMaynilad have continued working

together to supply western Manila withwater and sewerage services, but con-sumers have had to pay a large price forthis poorly constructed arrangement.

P R O J E C T O B J E C T I V E S

By the mid-1990s, MWSS realized that itwas faltering in its duty to supply the res-idents of Manila with safe and reliablewater. Under MWSS management, watersupply volumes could not keep pace withpopulation increases. Less than 67 percent of households had piped water andwater was only available for an average of16 hours a day. The lack of water pressureforced many residents to install boosterpumps and storage tanks, if they couldafford it. Sewer services were equallybelow standards, with only 7 per cent ofthe population connected to the system.Ninety-nine per cent of the sewage col-lected was dumped into Manila Bay with-out any treatment, causing major envi-ronmental and civic threats.

Manila’s economically disadvantagedencountered a disproportionate share ofthe hardships resulting from the poorperformance of MWSS. Most of thepoor living in Metro Manila reside insquatter communities, where they wereexcluded from the formal provision ofbasic social services. Often their onlysource of water was through profiteerswho provided low-quality water at sub-stantially higher rates than those chargedby MWSS. This unregulated systemforced the poor to spend as much as 20per cent of their income on water.

Water/Wastewater Improvements, Manila, Philippines 183

Additionally, the lack of immediateaccess to safe water and proper sanitationled to increased illnesses among the poorand a reduced ability to work.

Part of the MWSS challenge of inad-equate water supply stemmed from thefact that 63 per cent of water pumpedinto the network was lost through oldleaky pipes and illegal connections.Addressing these infrastructure problemsrequired significant funds, which theGovernment of the Philippines did nothave. Another problem was inefficiencyand performance problems that resultedfrom overstaffing within the agency.MWSS employed 9.8 staff members forevery 1,000 connections, compared to1.8-2.4 staff per 1,000 connections incomparable countries. Many of the staffmembers were political appointees, andtheir salaries drained funds that couldhave been used for maintenance andexpansion of the system. Finally, overtime, the Government had borrowed$800 million from various lenders toinvest in MWSS. As a result, the agencybecame heavily dependent on Governmentsubsidies and equity infusions to service itsdebt obligations. Repaying the loans withinterest, coupled with continuous subsidies,placed a heavy burden on the Governmentbudget. The MWSS tariff level and collec-tion rate were not even adequate to supportits operating and maintenance expendi-tures, let alone repaying its debts.

The Government recognized the dif-ficulty of resolving these long-term prob-lems within its limited budget andbureaucratic institutions. The primaryobjectives of the PPPs, therefore, were

to improve the efficiency of the MWSSoperations by providing an uninterruptedwater supply, expanding water and sewer-age/sanitation service coverage, decreasingnon-revenue water (NRW) and improvingaccess for those unable to afford pipedwater. It was also anticipated that theenhancements to water service would pro-mote productivity, generate environmentalbenefits and improve hygiene.

P R O J E C T D E S C R I P T I O N

PA R T N E R S

Structure requirements were establishedfor those consortiums that wished toplace bids. The concessionaires had to bePhilippine companies and the water utili-ties were to be managed and operated byPhilippine nationals. More than 50 percent of the shareholdings should bePhilippine-owned, broken down into 10per cent for employees, 20 to 30 per centfor the main sponsor and 20 per cent forthe other local investors. Foreign share-holding had to be held at a maximum of40 per cent. Finally, a consortium wouldhave to bid for both of the concessions(East and West Zones) but could winonly one.

The open bidding process was basedon a two-envelope system containingtechnical and financial proposals. Thetechnical proposals were opened imme-diately while the financial proposals wereopened 15 days later. The proposals wereaccompanied by performance bonds of$120 million for the West Zone and $80million for the East Zone. Bids were made


against the existing tariff of 8.78Philippine pesos per cubic metre.Maynilad Water Services, the consortiumthat won the concession for the WestZone, was a partnership between aPhilippine corporation and a Europeanfirm with extensive experience in water/wastewater management and concessions.

MWSS is a Government-owned cor-poration in Manila. Formed in 1878, itserves an area nearly three times the sizeof Metro Manila, which includes 6 citiesand 31 municipalities of Metro Manilaplus Rizal and parts of Cavite Province.As part of the concession agreement,MWSS would retain ownership of thefixed assets and would transfer operationand management facilities to the conces-sionaires along with responsibility forfuture investments such as water sourcedevelopment, treatment, distribution andprovision of sewage facilities.

IM P L E M E N TAT I O N EN V I RO N M E N T –LE G I S L AT I V E A N D AD M I N I S T R AT I V E

There were two key enactments thatpaved the way for the water concessionagreement in Manila. The Build-Operate-Transfer (BOT) Law of 1993 enabled pri-vate-sector participation in public worksactivities. In 1995, the PhilippineCongress passed the Water Crisis Act,which gave the President the legalauthority to establish a water/wastewaterconcession. In August 1996, theGovernment was forced to increase waterrates by 38 per cent in an attempt toestablish financial viability for MWSS,

but the increase was not sufficient toaddress the long-existing problems.There was strong public support whenthe concession scheme was introduced,under which the bidders promised tocharge lower rates for better service.

State officials were not familiar withestablishing concessions for water sys-tems, so they hired the InternationalFinance Corporation (IFC), part of theWorld Bank, as a consultant. IFC was thelead adviser that assisted the Governmentin choosing between concessions or thesale of assets. It was in accordance withthe IFC recommendation that MWSSdivided its service area into two zones.The set-up was initiated to guarantee thatif one concessionaire failed, the othercould take over the operations, prevent-ing service disruption. It was also a way toensure that the Government could have abenchmark that it could use to assess theperformance of the other concessionaire.

Additionally, MWSS was dividedinto two independent government enti-ties. MWSS Corporate Office (alsoknown as Residual) and its Boardremained to carry out limited manage-ment and facilitation roles, which includeoversight of the concessionaires’ exerciseof MWSS powers, carrying out account-ing and notification functions, andadministering domestic and foreign loansrelating to existing projects. Another keyfunction is to manage retained assets,including the ongoing development andeventual operation of large-scale watersupply expansion projects.


The MWSS Regulatory Office wasestablished to monitor and enforce com-pliance by the concessionaires of thecontractual obligations under the conces-sion agreements, implement rate adjust-ments, arrange for public disseminationof relevant information, respond to com-plaints against concessionaires and prose-cute or defend cases before an AppealsPanel. It also set the improvement targetsthat the concessionaires strive to achieve.The Regulatory Office comprises thechief regulator and four other regulatorsto take charge of technical, financial andcustomer service regulations as well asregulations regarding administration andlegal matters.

Once Maynilad began operations inManila’s West Zone, the firm altered poli-cies in an effort to increase its customerbase and decrease financial loss due toNRW. Under the original MWSS policy,the poor in main squatter areas weretechnically not eligible to apply for waterconnections because they did not ownthe land where their houses were located.Maynilad, encouraged by the experi-ences of other countries, which showedthat serving poor communities can makegood business sense, coupled with therequirements of the agreement to expandthe system, made three policy changes.First, it simplified the application processand no longer requests a property titlefrom applicants. Second, it allows con-nection fees to be paid in instalmentsspread over a two-month to a three-yearperiod for those with limited funds.Finally, Maynilad developed specialwater supply programmes for poor com-

munities, including shared meters andpublic water points, which deliver bulkwater to an entire community. Thesepolicies reduced the cost of connectionsand paved the way for regularizing illegalconnections in squatter communities,which in turn reduced NRW and benefit-ed the concessionaire.

FI N A N C I A L AG R E E M E N T

Maintenance, operation and investmentobligations were all contracted out to theprivate concessionaires. The companies’payments of equity investments, per-formance bonds and various fees wereintended to free the national governmentfrom subsidizing MWSS, which hadbeen the practice for so many years.Local and international partners arerequired to maintain an equity share of 20per cent for the first five years and 10 percent thereafter. The initial cash equityinvestments for the West Zone were setat $100 million. A performance bond, tobe renewed annually, was set at $120 mil-lion for the West Zone. This bond was tobe maintained for ten years, then reducedat each successive rebasing date. Thepenalty for non-compliance with theconcession agreement by the concession-aire would be deducted automaticallyfrom the performance bond.

In addition to maintenance, opera-tions and investment in infrastructure, theconcessionaires were expected to pay acommencement fee of $5 million each tocover the fees for the IFC consultationand a yearly fee of 50 million Philippinepesos ($1 million) each to the Regulatory


Office and provide the yearly budget forthe residual MWSS, estimated to be 200million Philippine pesos ($4.25 million).Concession fees are used to repay MWSSdebts with the Asian Development Bank,the World Bank and other leading institu-tions. Maynilad shoulders 90 per cent ofthe total debt repayment, while the con-cessionaire for the East Zone pays only10 per cent. The rationale for this may bethat a majority of the MWSS loan moneywas used to finance projects in the heavi-ly populated West Zone. Alternatively,this distribution of the debt repaymentmay serve to make investments in theEast Zone more attractive since that areais less densely populated and had lowcoverage, thus needing more capitalinvestment and providing fewereconomies of scale.

CO N T R AC T PR OV I S I O N S

As agents of MWSS in the provision ofwater and sewerage services, MWSStransferred to the concessionaires thetenancy to land and operational fixedassets as well as exclusive rights to pro-duce and treat raw water; transport, mar-ket and distribute potable water; and col-lect, transport, treat, dispose and eventu-ally reuse wastewater, including industrialeffluent discharge into the sewerage sys-tem. Contracts were awarded through atransparent bidding process based on atariff reduction. Before bids were accept-ed, a detailed document was circulated,informing potential bidders of specificcontract provisions:

• The concessionaires were not to

adjust rates, except for inflation,during the first 10 years of theconcession. Any subsequentadjustments were subject to reviewand approval by the Government.

• There would be room for extraordinary price adjustments(EPAs) in very specific or force-majeure situations.

• Upstream water treatment plantswere to be managed and financedby the concessionaires.

• Long-term debts were to beretained by MWSS but servicedby the concession fees paid toMWSS.

• Ninety per cent of the capitalcosts would be assigned to theconcessionaire operating in theWest Zone.

Customer tariffs, in this case, areincreasing block tariffs with a “lifeline”tariff below cost for the first block inorder to subsidize poorer customers. Theconcession is structured for the achieve-ment of gradual performance targets, setfor such parameters as water and sewer-age coverage in terms of percentage ofpopulation served, percentage of waste-water to receive primary and secondarytreatment, percentage of water and sew-erage network to be renovated, maximumpercentage of unaccounted-for water,service expansion and quality of service(i.e., water pressure, continuity of supplyand water quality). Under the concessionagreement, whatever is transferred,acquired or built by the concessionairesshall remain in the ownership of MWSS


and all such assets will revert to MWSSupon termination or expiration of theagreement. According to expansion man-dates, by the end of the contract, 98 percent of those living in Manila wouldreceive safe drinking water and 66 per centwould have access to proper sanitation.

In order to alleviate some burden fromthe concessionaires, the Governmentestablished certain tax incentives. Theconcessionaires were granted a six-yearincome tax holiday, a preferential tariff of3 per cent on capital equipment importsand tax credits on locally fabricated capi-tal equipment until the end of 1997. Theyare also exempted from local governmentand franchise taxes and the Value AddedTax (VAT) on the supply and distributionof water but not on the provision of sew-erage and sanitation, which carries a 10-per cent VAT. The contracts provided forthe rebasing of rates every five years,which involved a detailed review of pastcash flows and projection of future cashflows to determine how much the conces-sionaires would be able to charge forwater that would be based on the appro-priate discount rate of the investments.

IM P L E M E N TAT I O N ME T R I C S

After Maynilad assumed operations inthe West Zone, substantial improvementswere observed. The number of waterconnections increased from 449,234 inAugust 1997 to 573,194 in 2002. Thepercentage of those receiving serviceincreased each year despite subsequentpopulation increases, and by 2002, 75 percent of residents in the West Zone had

access to water service. Average wateravailability increased to 21 hours per day,while the average water pressureincreased from 3-5 psi in 1996 to above 8psi in 2002. Water quality continuallyexceeded the prescribed standards andMaynilad was able to reduce the staff-to-connections ratio to 4 staff per 1,000connections. They were also able toachieve all of these improvements whilereducing water rates by 74 per cent. Eventhose households in depressed areas,which could not afford in-house connec-tions, benefited in terms of reducedprices and greater convenience since acloser water connection was usuallyinstalled somewhere in their community.Water consumption increased from thetypical 2 cubic metres per household permonth (for households buying from ven-dors) to 22 cubic metres per month perconnection through the concessionaire’swater programme for poor communities.Sewerage connections in the West Zoneincreased to 19 per cent of residents.

Both the East and West Zone conces-sionaires have access to the Angat River,which provides 97 per cent of the rawwater for Manila while the remaining 3per cent comes from groundwatersources. When Maynilad took over oper-ations in the West Zone, it offered itscustomers various services. Individualconnections are the most convenient andcheapest form of water access. Eachhome within the service area is chargedthe same rate for water and usage is regu-lated through a metered system.Maynilad waved the previous land titlerequirement and allowed connection fees


to be paid in instalments. Still, many ofManila’s poor could not afford this typeof connection. Group taps becameanother option for consumers. Two tofive households are covered by one tapand one mother metre while sharing thecost of usage. It is also possible to installsub-metres to help divide up the groupcost. This type of connection provides aconvenient water source but allows multiple families to share the burden ofconnection fees.

Maynilad provides bulk supply con-nections to community-managed waterconnections as well as to private waterdistribution systems. Community waterassociations run small water distributionsystems with an individual metre and theirown billing and collection system. Thistype of connection requires strong com-munity support. Usually the suppliercoordinates the project with a barangayofficial (a barangay is the smallest politicalunit in the Philippines – several barangaysmake up a town). The officials explain theproject, convince the community to regularize illegal connections and extendnecessary support to the supplier. Privatesubcontractors are also allowed to pur-chase bulk water and invest in a distribu-tion system. This provides clean water ina convenient location to those without anindividual connection, but the consumersare forced to pay a higher price than whatMaynilad charges.

The Bayan Tubing (Water for theCommunity) Programme provides waterto depressed communities in Manila. Anunderground line is installed up to the

entrance of the neighbourhood. The restof the network is either above ground, onthe ground, partially covered or attachedto a wall (fig. 1). These lines go up to abattery of meters from which each usermakes its own plastic connection aboveground. The public connections areinstalled by the concessionaire at nocharge to the consumer and the con-sumers gain access to the system by reg-istering for one of the taps. With thisflexible technical option, householdsbenefit from the low cost and conven-ience of individual connections withouthaving to pay the large connection fee.The supplier benefits because illegal con-nections can easily be seen and the costof the system is relatively low since indi-vidual connections do not have to beburied underground. Payment default isvery rare since the cost is low and house-holds are satisfied with the service.

One of the largest obstacles Mayniladhad to overcome was the problem ofnon-revenue water (NRW). NRW wasnot a key performance indicator in theconcession agreement, but was used inthe financial bids to estimate future earn-ings. The bid documents stated that theWest Zone had 2,500 kilometres ofpipes, but a later study of the network

Figure 1 A water-flow ceremony, one ofthe special programmes for the needy.


revealed the actual length to be nearly4,000 kilometres. Originally, Mayniladbelieved that the fastest way to fix theproblem of NRW was to decommissionold pipe lines and lay down new ones.The additional cost of replacing an unan-ticipated 1,500 kilometres of piping ledto the abandonment of this plan. In 1997,67 per cent of water was lost as NRW; by2002, NRW had increased to almost 70per cent. It is believed that the increase inNRW may be partially attributed to theincreased availability of water and greaterwater pressure, which have resulted ingreater amounts of leakage and stolenwater. Due to NRW, the concessionairelost an estimated 36 billion Philippinepesos ($785 million) in revenue withinthe first five years of operation.

CO M M E N TA R Y

ME T H O D S F O R OV E R CO M I N G

IM P E D I M E N T S

NRW and an additional 1,500 kilometresof pipe were not Maynilad’s only prob-lems. From mid-1997 to mid-1998, ElNiño effects reduced Manila’s bulk watersupply by 40 per cent. This affected theamount of water that Maynilad couldprovide to its customers, further reducingrevenue. When the Asian economic crisishit in 1997, Maynilad was already sad-dled with $720 million of the foreigndebt of MWSS. At that time, internation-al aid for water infrastructure was on thedecline worldwide. The concessionairewas forced to rely on foreign financing,which heightened its foreign-exchange

risks. The Asian crisis devalued thePhilippine peso from 26.30 Philippinepesos to the dollar in 1997 to 55Philippine pesos to the dollar in 2000.Because MWSS debt was being repaid toforeign lenders, the change in exchange-rate value led to an increase in the con-cession fees that Maynilad owed toMWSS.

By 2001, the debts of Maynilad hadreached 14 billion Philippine pesos ($300million). That same year, the companywas operating at an annual net loss of 1.1billion Philippine pesos ($24 million).Maynilad was forced to stop paying con-cession fees in March 2001 because it hadrun out of funds. Additionally, it request-ed that MWSS initiate a price increasefor service. In December 2002, one of theconsortium’s partners filed for an earlytermination of its concession agreementwith an arbitration court. The partnerclaimed that MWSS had committedbreaches of its obligations under the con-cession agreement as the basis for earlytermination. Specifically, they arguedthat bidders for the West Zone had bidwith the understanding that an addition-al 300 million litres a day of bulk waterwould be available by the end of 1999through the Laguna Lake water supplyproject at no cost to the winning conces-sionaire. In 2001, the National Economicand Development Authority cancelledthe much-delayed project because ofhigh cost and environmental factors.There were five other vital concessionprojects that MWSS also failed to com-plete. The petition argued that the inabil-ity of MWSS to meet its obligations


under the concession agreement prevent-ed the concessionaire from performing itsobligations and left the company inheavy financial debt. Additionally,Maynilad alleged that MWSS had failedto conduct a fair and objective rate rebas-ing exercise in October 2002 when it didnot consider the viability of the conces-sion. Maynilad assumed that the agree-ment was officially terminated inFebruary 2003 and the consortiumrequested $303 million in compensationfor its investments.

However, MWSS insisted thatMaynilad had no right to terminate theconcession agreement and, instead, filedits own petition to terminate the con-tract. To support its claim, MWSS main-tained that the concessionaire stoppedpaying concession fees, failed to reduceNRW and breached the concessionagreement when it failed to maintain theBNAQ-5 aqueduct, construct BNAQ-6aqueduct and infuse $80 million in equi-ty. In its defence and counterclaim,Maynilad denied that it was contractual-ly obligated to reduce NRW or to investan additional $80 million in equity. Thecompany further claimed that it had infact performed its obligation to maintainand repair the BNAQ-5 aqueduct andthat it was under no obligation to con-struct BNAQ-6 since the need for theconstruction of the aqueduct was due tothe poor construction of BNAQ-5, whichwas the responsibility of MWSS.Maynilad admitted to withholding con-cession fees but claimed it was because ofthe contract breaches committed by

MWSS. MWSS argued that the rateincrease granted during the October2002 rebasing period should have provid-ed the company with additional revenueand the ability to recommence conces-sion payments. It also chastised Mayniladfor overestimating revenues, underesti-mating costs and failing to cushion itselffor some fall in the dollar-Philippine pesoexchange rate.

In November 2003, the arbitrationpanel decided that neither MWSS norMaynilad could terminate the concessionagreement. The panel ruled that since ithad no role in the contract negotiatingprocess and neither the bulk water supplyprojects nor service target adjustmentswere included in the contract, they couldnot rule in favour of the concessionaire.As to the rate rebasing process, the arbi-tration panel agreed with the companythat there was a mistake in the MWSSinterpretation of the phrase “cash flows”,which led to an erroneous disallowanceof a substantial amount that Mayniladshould have been allowed to recover. Inregard to the claims of MWSS, the panelfound that Maynilad could not be held tobe in breach of its obligations withrespect to the BNAQ-5 aqueduct, that itwas under no obligation to provide $80million in funding support and that theNRW problem could not be character-ized as mismanagement or breach of theconcession. However, the panel did orderMaynilad to pay all delinquent fees(including interest) owed to MWSS. Thearbitration panel also authorized MWSSto draw on the performance bond should


the company fail to remit its concessionfees within 15 days. The panel stated thatthe parties undoubtedly have problems intheir internal relations but they must findextrajudicial solutions to them.

Since 2003, Maynilad has continuedto provide water to the West Zone “tothe extent necessary to serve the publicinterest”. However, this continuation ofservice by Maynilad has come at a hugecost to consumers. From 1997 to 2004,water rates increased by 275 per cent.Even with the increased revenue generat-ed by higher customer tariffs, Mayniladhas not paid concession fees since 2001.Because of Maynilad’s refusal to pay con-cession fees, the Government has beenincurring new loans to avoid defaultingon the maturing loans of MWSS, whichremain in the Government’s name.Moreover, MWSS had to spend 230 mil-lion Philippine pesos ($5 million) for thelegal services that it employed during theearly termination dispute. Since 2004,MWSS and Maynilad have discussed aplan for the quasi-reorganization of theconcession that ensures settlement of alloutstanding concession fees owed toMWSS and continuous service provisionof water to consumers through a finan-cially healthier Maynilad. The plan callsfor the write-off of the shareholder equi-ty and receivables due to shareholders tocover accumulated losses; a partial con-version of debt-to-equity; debt restruc-turing; and a partial draw against the per-formance bond. Most recently, this dealhas been shrouded in allegations of cor-ruption between Government officialsand powerful local interests.

KE Y PO I N T S F O R SU CC E S S

O R FA I LU R E

Although a number of objectives weremet, such as expanding services to all sec-tors of the population, there are obvious-ly serious and ongoing problems with theagreement between the public and private sectors.

One problem was the transfer of allfinancial risks to the private sector. Whileboth parties agreed to this arrangement,subsequent events clearly indicate thatthere should have been a means for risk-sharing, e.g., a means of allocating therisk of currency fluctuation. Furthermore,the disproportionate allocation of thepublic debt, with 90 per cent of the loadon the West Zone concessionaire, addedto this problem. The two sectors, know-ing that the Government’s debt wasfinanced in foreign currency, should havebeen able to work together to soften theblow of the Asian financial crisis.

An all too common problem encoun-tered in PPPs is inaccurate inventory ofpre-agreement infrastructure. The con-tract should have included some provi-sion to address the post-signing findingthat there were 4,000 kilometres of exist-ing pipelines instead of 2,500 kilometres.Even though it was pre-concession infra-structure that was faulty, full financialburden had already been transferred tothe concessionaire. Without a means ofrectifying this discrepancy, the financialproblem caused by NRW was drasticallymagnified. Additionally, the Governmentdid not provide any support for theenforcement of illegal tap closures.


Another underlying problem was thelack of a true working relationshipbetween the public and private sectors.A PPP requires a mutual understanding ofeach partner’s capabilities and limitations,both politically and financially. In thiscase, there appear to have been a numberof assumptions about the other’s ability tomeet certain responsibilities, but therewas not a clear and open dialogue on howto address challenges as they appeared.Furthermore, while the public sectorneeds to protect the interests of its con-stituents, the private company needs theability to adjust rates to reflect the cur-rent market situation. In this concessionagreement, MWSS had full control of tar-iff increases, which hindered Maynilad’sability to respond to changes in the project’s financial environment.

Finally, the decision by theGovernment to award contracts based onthe lowest bid instead of feasibility hurtthe partnership. An IFC report showedthat the company’s targets for NRWreduction, and therefore revenue genera-tion, were unrealistic, yet Maynilad’s bidwas accepted by the IFC and MWSS.The inability of the concessionaire tomeet predicted targets, coupled with thetax breaks granted by the Government,meant less revenue collected by the public sector.

While the concession model can workwell in developed economies, it is morechallenging in developing economies,especially when large portions of public

debt are transferred to the private partner.Part of the problem lies in revenue fore-casts, which often prove to be overly opti-mistic. Simultaneously, unexpected opera-tional challenges (as noted with the inade-quate inventory of infrastructure and fail-ure to provide access to additional watersources) can compound the net revenueproblems with this form of partnership.For a concession contract to be successful,these sorts of contingencies should beanticipated and addressed by the PPPagreement. However, such contingenciesmay render an agreement unfeasible for aGovernment with limited financialresources. For this reason, there isincreased use of the affermage model ortowards partnerships that are infrastruc-ture development agreements such asbuild-operate-transfer or design-build-operate partnerships.

While the Manila project cannot becalled a success, there are substantial lessonsthat can be learned from this experience.

FI N A L NOT E

In early 2007, the Government of thePhilippines conducted a bidding processto transfer the ownership of Mayniladand restructure portions of theGovernment debt. More time and experi-ence will be necessary with this newstructure to determine the degree towhich many of the previous problemshave been addressed.

Documents

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