Calling a spade
Business World, 10 July 2013


Had not MWSS figuratively blown a whistle, customers of Maynilad and Manila Water (Concessionaires of MWSS) would not have known that they were being billed for the corporate income taxes being paid by the corporations. Not surprisingly, the reaction was outrage, and the fact that Maynilad was for several years operating at a loss and therefore did not have to pay any income taxes over that period which meant they was nothing to charge the customers with, has not done much to assuage that outrage.

The Concessionaires counter that they have not done anything that was not in the Concession Agreement (CA) they signed with the MWSS. Which is an assertion that can be immediately verified by referring to the document mentioned. So I obtained a copy of the said CA and sure enough, Article 9.4 (“General Rate Setting Policy/Rate Rebasing Determination”)has this to say: “It is the intention of the parties that, from and after the second Rate Rebasing Date, the rates for water and sewerage services provided by the Concessionaire shall be set at a level that will permit the Concessionaire to recover over the 25-year term of the Concession (net of any grants from third parties and any possible Expiration Payment) operating, capital maintenance and investment expenditures efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on the MWSS Loans and Concessionaire Loans incurred to finance such expenditures, and to earn a rate of return (referred to herein as the “Appropriate Discount Rate”) on these expenditures for the remaining term of the Concession in line with the rates of return being allowed from time to time to operators of long-term infrastructure concession arrangements in other countries having a credit standing similar to that of the Philippines.” (emphasis mine).

So if the MWSS accuses the Concessionaires of performing an illegal act, then the MWSS has to be at least equally culpable, because the CA not only was signed by the MWSS, I am given to understand that it was also prepared by the MWSS. Moreover, the CA provides methods for dispute settlement — and this is obviously a dispute — and again the MWSS seems to have ignored consultation, negotiation, and arbitration (an Appeals Panel is formed) as the last resort. That was a cheap shot.

But having had the opportunity to read that CA, one can offer the following observations: The first is that the fact remains that water consumers are paying for the income taxes of the concessionaires who in effect are treating the latter as a cost. And there has to be something wrong with that, because corporate income taxes, if I recall correctly are taxes on profits — defined as total revenues minus total costs. That’s why one talks about net income before tax and net income after tax.

But, say the defenders of passing on the income tax to the customer, it actually all comes out in the wash. Whether the income tax is passed on to the consumers or not, they will still end up paying the same amount. Why?

The answer is that: the concessionaires are allowed an “Appropriate Discount Rate,” or a rate of return that is determined every five years, that assures them that over the 25-year period of their agreement, they will get back their investment — no question, at a predetermined rate of return.

In other words, their undertakings as Concessionaires are absolutely riskless — they have an assured rate of return. What does that mean? If for example, they meet up with an extraordinary expense (like say, during the Asian Crisis, when the peso price of the dollar shot up, and they had borrowed dollars), no problem. They just pass on the additional costs in the form of rate changes. No wonder they have not hesitated to make investments in equipment and infrastructure and improvements (more than $1 billion for one of the concessionaires). They get it back anyway. It is in the CA.

The CA does have a provision with respect to the operating, capital maintenance and investment expenditures of the concessionaires, as emphasized above: they should be “efficiently and prudently incurred.” It would be interesting if the MWSS has, until this time, ever questioned any of these expenditures as having been inefficiently and imprudently incurred.

Don’t get me wrong, Reader. The performance of the two Concessionaires is a vast improvement over the services that MWSS used to deliver to its consumers. One would be an idiot to want the MWSS back as the operator of the water utility.

But that doesn’t alter the fact that these Concessionaires got an excellent deal in that CA. Assured profits? The only question now that remains is — what rates of return have been allowed to them? This, the MWSS should, in the spirit of transparency, reveal. And in the future, the MWSS should spend more of its time ensuring that their expenditures are efficient and prudent.