Manila Water Company

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In February 1997, Manila Water Company, Inc. (MWC) won a competitive tender to operate the Metro Manila East Water Supply and Wastewater Service Zone under a 25-year concession agreement by offering the lowest water tariff of P2.32-per-cubic-meter (73.6% lower than the prevailing rate). The city was divided into two service areas (East and West) to promote diversity and comparative competition, with a consortium named Maynilad concurrently winning the West Zone. The East Zone comprised Pasig City, Pateros, San Juan, Taguig, Mandaluyong, a small part of old Manila, most of Makati, Marikina, Quezon City, Rodriguez and San Mateo in Rizal and all of the Rizal municipalities for a total population of 4.5 million and 325,000 connections (71% coverage). In 1997, Ayala Corporation of the Philippines was the largest shareholder in MWC with direct and indirect equity interests totaling 52.7%. United Utilities (UU) of the UK held an 18.6% equity interest in MWCI through a subsidiary while Bank of the Philippine Islands Capital Corporation and Mitsubishi Corporation of Japan each owned a 10.7% equity interest. Employees owned 6.8% of the equity through an employee stock ownership program. In March of 2005, MWC premiered on the Philippine Stock Exchange, selling a 35.2% stake to the public and raising PHP5.35 billion (nearly US$97.8 million) to fund additional capital expenditures. About 70% of the IPO was offered to foreign investors, with nearly two-thirds taken by investors in Asia, about a third by those in Europe and the rest by U.S. investors. Following the public listing, Ayala Corp.'s stake in MWC was 30.4%, while United Utilities held 11.8%, Mitsubishi Corp. 7.9%, IFC 7.4%, Bank of the Philippine Islands Capital 4.6%, and employees 2.7%. The consortium took over operations on August 1, 1997, facing significant coverage and quality problems. By 1995, water service coverage in the Manila metropolitan area was one of the lowest among major Asian cities. Only two-thirds of residents were connected to the intermittent, low-pressure water system and less than 10% were connected to the sewerage system. Non-revenue water was at 56% due to leakages, faulty meters, illegal connections and an inefficient billing system. Sewerage services were even less developed, with less than 7% of households having direct access to the network. MWSS was very heavily indebted. It was also heavily overstaffed and had a history of labor troubles. Under the concession contract, MWC agreed to achieve annually increasing coverage targets for water and sewerage, with annual targets defined by zone. It also had to achieve targets for percentage of water treated (water and wastewater) and achieve continuity of supply (24 hour supply by 2000), pressure, national drinking water quality and environmental standards, and improve customer service quality. Non-revenue water was to decrease from 56% to 32% in the first 10 years. To meet those contractual obligations, it was estimated that MWC had to invest P78.83 billion (US$2.72 billion) over the 25-year concession period (approx. P20.4 billion for Manila's water supply and P58.43 billion to improve the sewerage system) as well as pay an estimated P6.4417 billion (US$222 million) in concession fees. MWC was also required to assume 10% of outstanding MWSS loans. The bulk or P59.6 billion of financing for the project was to come from loans, while another P25.6 billion was to come from equity contributions of Manila Water stockholders. The total investment required to meet the contractual obligation for both the East and West Zones was estimated at P186.3 billion (US$6.4 billion) over the life of the 25-year contracts (of this amount, P106.8 billion was to go to sewerage projects, P68.9 billion for water supply and P10.6 billion for sanitation). To ensure fulfillment of investment obligations, the concession contract required MWC to post a US$70 million performance bond. If the consortium failed to deliver the requirements of the contract, MWSS could withdraw US$10 million of the bond every year, for the first five years. Under the concession agreement, MWC was entitled to the following tariff adjustments: a. Annual standard rates adjustment to compensate for increases in the consumer price index (CPI); b. Extraordinary price adjustments (EPAs) to account for the financial consequences of the occurrence of certain unforeseen events stipulated in the Agreement; and c. Foreign Currency Differential Adjustments (FCDA) to recover foreign exchange losses including accruals and carrying costs thereof arising from MWSS loans and any Concessionaire loans used for capital expenditures and concession fee payments. Tariffs adjustments were subject to a rate adjustment limit as defined in the Concession Agreement. The Company was also allowed a fixed currency exchange rate adjustment (CERA) of P=1.00 per cubic meter (m3). To compensate the impact of the 1997 Asia financial crisis, MWSS exercised its option to implement general Rate Rebasing starting January 1, 2003. In August of 1998, the consortium secured a US$40 million loan facility from Dutch-based ING Bank. In January 1999, MWC obtained a US$25-million loan facility with a syndicate of four banks composed of Banco de Oro as lead bank, China Trust (Philippines) Commercial Banking Corporation, Global Bank and Rizal Commercial Banking Corporation. In June 2002, the German Investment and Development Bank (DEG) provided a US$20 million loan to the company to finance its expansion. By 2005, MWC reported that it had spent approximately spent more than P12 billion (approx. US$220 million) in capital expenditure, largely for pipe-replacement programs resulting in substantial reduction in system losses from 63% to 35.6% as of September 2005. MWC made a record net profit of 2.01 billion pesos, 51% higher than its 2004 income of 1.33 billion pesos, which was 16% higher than in 2003. That compared to revenue of just 500 million pesos in 1997. Connections had risen to 600,000 by 2005 while access to 24-hour water had improved from 26% to 97%. Also by 2005, half of MWC's revenue came from its commercial customers, although they only accounted for 10% of its customer base. MWC’s capital investment program for 2005-2010 was estimated at P20 billion (approx. US$360 million). In 2004, the IFC committed investments comprised of a US$30 million A loan and an equity subscription of US$15 million. In October of 2005, MWC secured a US$64 million loan from the World Bank through the state-owned Land Bank of the Philippines to fund the Manila Third Sewerage Project, which aimed to expand sewerage coverage to 30% over the following five years from about 8%. The loan was guaranteed by the National Government. In April 2009, MWSS granted an extension to Manila Water's concession agreement by another 15 years from 2022 to 2037 and got an approval from Department of Finance in October. And in the same month, UK-based First State Investment Management Ltd. and its units have acquired a combined 5.4 % of Manila Water. In November, United Utilities agreed to sell its 11.67% economic interest in Manila Water to Ayala, increasing Ayala's economic interest in Manila Water to 43.3% from 31.7% In November 2006, IFC's board approved a $30 million equivalent standby Loan/Guarantee facility for IFC’s own account to partially finance MWC’s capital expenditure program for the East Zone estimated at $355 million for the 2006-09 period.