Manila Water Privatization: Universal Service Coverage After the Crisis? (Draft)

The first five years of the operations of the Metro Manila Water Concessions brought disappointing results. Investments and promised efficiencies did not materialize. The original bid tariffs were revealed to be unrealistic and there were indications of this even at the onset. The Asian financial crisis contributed to the difficulty of achieving performance targets in both concessions, but that only constitutes a small part of the explanation for the failures.

The rate re-basing exercise in 2002 marks a crucial turning point. The East Zone Concession was given a new lease on life through significantly raised tariffs; as a result it has become bankable and confident of achieving its scaled down targets. The West Zone Concession company remains unbankable and awaits corporate rehabilitation.

The bankability of the concessions is the most important factor in achieving the promised universal service coverage in water supply. The paper shows that bankability was made difficult by the inability of the bidders to assess ex ante the true state and potential productivity of concessionaire assets. It was also made difficult by the knowledge of the bidders that renegotiation is likely in case profits are negative and by the existence of many vague provisions in the contract that seemed to provide windows for political bargaining over contract terms and rules. It is not obvious that there was a way to avoid these information problems, especially in the much cases such as the older West Zone Concession with its many unplanned settlements.

The East Zone Concessionaire, however, has also introduced innovative engineering and social methodologies for extending services in urban poor communities of Metro Manila. These approaches move towards mitigating the plethora of commercial risks and costs encountered in bringing services to poor communities of informal settlers. The guaranteed returns on investments and the subdued incentives for making a profit that have been designed into the original concession contracts bid well for the willingness of the East Zone Company to venture into poor communities. The bankability of the East Concession business plan may that was made possible by the early resetting of tariffs and performance targets may yet nudge the Concessionaire into service expansion practices that were unthinkable during the first five years of financial difficulty. Many limitations remain – key among these are i) the high costs of connections, especially in areas that are not yet in the current business plan of the concessionaire ii) the need to properly calibrate and regulate the tariffs imposed by the East Concession through its bulk sales to mini-distribution systems and iii) the need to address the uncertainty in the cost recovery among pioneer, third-party providers in areas that the concessions will not be able to serve in the medium-term period.