Lopez Holdings

 

The Unadorned Truth about the Maynilad-MWSS Agreement So much highly speculative reports citing preposterous, malicious and unfounded allegations have been aired over the past weeks about the agreement which sought to end the long-running dispute between Maynilad Water Services Inc. and the Metropolitan Waterworks and Sewerage System.


In the interest of truth and justice, and in order to clear the air and allow the public to have an undistorted appreciation of the situation, the following is the unadorned truth about the Maynilad-MWSS agreement.

1. The Maynilad-MWSS agreement is NOT a "sweetheart deal" that "bailed out" the Lopezes.

The agreement completely wiped out the million investment that the Lopez family, through Benpres Holdings Corporation, placed in Maynilad. It totally removed the Lopez family from having anything to do at all with the New Maynilad that would result from the agreement. In the words of Cong. Joey Sarte Salceda, chairman of the House Oversight Committee, under the agreement, the Lopezes "will not receive a single cent from the transaction. Instead, they will suffer total write-offs of P 3.8 billion and lose its 60% control of the company---that sufficiently punishes them for poor business judgment in agreeing to pay 90% of MWSS annual loan repayment--¦"in the amount of 0 million, as opposed to the 10% of the MWSS foreign debt, or million, that the other concessionaire, Manila Water, assumed in 1997.

The alternative to the agreement is the Maynilad rehabilitation plan of November 2003 wherein the Lopezes and Ondeo retain full ownership of Maynilad, MWSS is barred from drawing on the 0 M performance bond, and Maynilad is allowed to pay its outstanding Concession Fee payments amounting to P7.1 billion over a nine-year period.

Even assuming that MWSS can draw the entire US0-million performance bond, that will only result in a substitution of creditors as far as Maynilad is concerned from MWSS to the banks that issued the bond. That does not help Maynilad carry out its mandate of providing clean water to the residents in its area.

2. No Lopez debt is transferred to the government.

There are those who say that the agreement will transfer debts that the Lopezes should pay to the government. This is not the case. No debt that rightfully belongs to the Lopezes or Benpres is being transferred to the government. On the contrary, government will receive cash paid out of the performance bond that effectively updates all Concession Fee payments.

It is also incorrect to say that the consumers and government are being made to bear the losses due to the bad business judgment of the Lopezes. The Lopezes, through Benpres, are bearing their losses to the tune of P3.2 billion in equity investment and another P629 million in advances to Maynilad, all being written off under the agreement.

3. The Maynilad-MWSS agreement is NOT a "midnight deal" that was quickly and secretly hammered out.

The agreement is the culmination of a drawn-out negotiation that started in 2000 during the term of President Estrada, when Maynilad, as provided for under its Concession Agreement, sought relief from the disastrous effects of the drastic drop of the peso (from P26.30 to the dollar in 1997 to as high as P55 to the dollar in 2000). Because of this, the concession fee payments it was making (the 90% or 0 million of MWSS' foreign debt that Maynilad assumed upon privatization) doubled, from P20 billion to P40 billion, forcing it to stop paying this in March 2001.

The negotiation between Maynilad and MWSS continued under President Arroyo, which resulted in Amendment No. 1 in October 2001 that granted Maynilad a three-step tariff increase to allow it to recover its foreign exchange losses. Only two of the three tariff increases, however, were implemented, the third having been deferred by government in July 2002. Since then, Maynilad and the MWSS have been engaged in negotiations and legal wranglings as the two sought to resolve their contrasting positions over the delayed tariff increase, the non-payment of the concession fee, and the attempts of MWSS to draw on the 0 million performance bond.

4. The Maynilad-MWSS agreement did NOT pre-empt the Supreme Court NOR was it made to prevent the collapse of the Lopez business empire as alleged by an unnamed Inquirer source, supposedly because "if the government were to draw from the performance bond, there would be a --˜cross default' of the other loans of the Lopez-owned companies."

These allegations are utterly ridiculous simply because Benpres Holdings Corporation has in fact been in debt restructuring discussions with its creditors since June 2002. The full amount of Benpres-guaranteed Maynilad debt, including the US0-million Performance Bond, has always been part of these discussions. Maynilad, though, remains liable to the Performance Bond bank creditors for any amount drawn.

5. Maynilad did NOT mismanage the West Zone concession.

In the words of Maynilad chairman Oscar M. Lopez, "we are not leaving a desolate and financially unsound company as the misinformed wish to believe, and definitely, there was no mismanagement of the water utility."

Despite the financial difficulties which Maynilad faced, it was able to pay 0 million of the 0 million in foreign debts (or concession fees) which Maynilad assumed from MWSS at privatization, increased treated water production from 1,600 million liters a day (mld) in 1997 to 2,246 mld as of December 2003, added 194,098 new individual household connections (74,266 in urban poor communities), and expanded water service coverage from 63% in 1997 to 85% as of December 2003.

While it is true that Maynilad's Non-Revenue Water (NRW, water that is produced but not billed) is currently at 69%, one factor that greatly contributed to this was the fact that bid documents in 1996 identified only 2,500 kilometers of pipelines in the West Zone. When Maynilad took over the West Zone, however, it discovered that there was actually 3,700 kilometers, or 50% more, of pipelines. Timely tariff relief would have allowed Maynilad to raise the necessary resources to address this new discovery.

As far as tariff is concerned, the East Zone's current rates are at least six times the original bid while the West Zone's is only four times. While the debt burden given to Maynilad is 10x that of the debt burden of the other concessionaire (US0 million for Maynilad and US million for Manila Water), the inequity in tariff explains in large measure the differences in performance.

6. Maynilad did NOT overcharge its customers as alleged through the collection of the Foreign Currency Differential Adjustment (FCDA) and Automatic Extraordinary Price Adjustment (AEPA).

In truth, the MWSS Regulatory Office allowed Maynilad in October 2002 to raise rates to P26.75 per cubic meter (from P19.92 per cubic meter) to be implemented in January 2003 which Maynilad did not implement because this was subject to matters already under arbitration. Maynilad merely continued collecting the FCDA and AEPA which is even less than what MWSS was authorizing Maynilad to collect. Maynilad, in effect, was undercharging.

7. The Maynilad-MWSS agreement is the best arrangement that could be worked out of a worst situation, allowing all direct parties to "share in the pain."

The agreement represents the best arrangement that can be reached to settle the long-running dispute between Maynilad and MWSS without violating the law and without compromising national interests.

Maynilad could have pursued the rehabilitation case in court. But that would mean a protracted legal process which could last for years. At the same time, water service could be compromised. Instead of waiting several years for the rehabilitation plan to take its course, Benpres decided it was better to compromise with government to ensure service continuity.

In their report to the MWSS Board of Trustees on the arrangement, Justice Undersecretary Manuel Teehankee, legal counsel of MWSS, and Jaime C. Laya, special advisor of the MWSS, cited the need for "the project sponsors and creditors to move forward and reach a fair and amicable settlement of pending issues. The circumstances of each party differ as to risks, rights and objectives. It has not been easy to reach an agreement acceptable to all concerned and, in the end, what proved possible was give-and-take, in the realization that a failure in agreement would be more costly to all parties, to the public and to the government. The terms and conditions have been designed so as to balance the pain and benefits, and so as to fit within the projected cash flows of Maynilad."

There are those who are urging the government to just terminate the concession and take over Maynilad without dealing with Benpres and Ondeo. Aside from the prolonged legal battle that would surely ensue, there are other risks facing the government:

  • finding a qualified replacement operator to assume the concession under the unattractive financial circumstances which forced Maynilad out of the concession;
  • payment of an "Early Termination Amount" to Maynilad as per concession agreement;
  • takeover costs, including the assumption of Maynilad's debt service by MWSS and the government;
  • potential service disruption; and,
  • potential, immediate, unpredictable increase in water tariff.

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Lopez Holdings Corporation 
16/F North Tower, Rockwell Business Center Sheridan, Sheridan St. corner United St., 1550 Bgy. Highway Hills, Mandaluyong City, Philippines

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