Maynilad Water Services

cancelled

In February 1997, Maynilad Water Services Inc. (MWS) 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 P4.97-per-cubic-meter (43.3% 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 Manila Water Company (MWC) concurrently winning the East Zone. The West Zone included the cities of Bacoor, Caloocan, Cavite City, Imus, Kawit, Las Pinas, Malabon, Muntinlupa, Navotas, Noveleta, Paranaque, Pasay, Rosario and Valenzuela for a total population of 6.3 million and about 500,000 connections (63% coverage). In 1997, Maynilad Water was 60% owned by the local Benpres Holdings Corp. and 40% by Suez Lyonnaise des Eaux (later SUEZ) subsidiary Ondeo of France. The consortium took over operations on August 1, 1997, facing 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, MWS agreed to achieve annually increasing coverage targets for water and sewerage, with annual targets defined by zone. The company was required to supply water on a 24 hour basis to at least 71% of the population by the end of 2001. The company was then to expand water service coverage from 71% to 98% of the population covered under the concession area. Sewerage and sanitation services were also be extended from 11% to 93%. Non-revenue water was to decrease from 56% to 32% in the first 10 years. To meet those contractual obligations, it was estimated that MWS had to invest P106.9 billion (US$3.69 billion) over the concession period as well as pay an estimated P24.5273 billion (US$846 million) in concession fees. MWS was also required assume 90% of outstanding MWSS loans. 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 MWS to post a US$120 million performance bond which would be drawn down if the company was not able to keep up with the investment and service targets specified by the contract. 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. By December 2002, Maynilad Water Services was facing serious financial difficulties, loosing money every year. According to the company, such situation was caused by the impact of the financial crisis in Asia which devaluated the local currency significantly, the nino phenomenon which reduced the available supply of water, and breaches of MWSS’ obligations under the concession agreement, particularly in expanding the supply of bulk water. The financial crisis affected significantly to MWS because it absorbed 90% of MWSS dollar denominated debts. Those loans were obtained at a time when the foreign exchange was P26=$1. After the Asian crisis, the peso slipped to P40:$1 and eventually to more than P50:$1. According to other reports, other three key factors affecting the financial performance of the company were: failure to deal with the problem of non-revenue water, failure to improve operational efficiency, and failure to get fresh loans to ensure a good cash flow. To compensate the impact of the Asia crisis as well as el nino phenomenon, Maynilad got an “amended agreement” with MWSS which allowed Maynilad to increase its tariff rates by P4.21 a cubic meter from October 2001 to December 2002 to recover foreign-exchange losses. In 2002, Maynilad requested the cancellation of its concession and transferring the operation and obligations to MWSS. Such request was refused by MWSS. The dispute was to be brought to the International Chamber of Commerce. In November 2003, the international arbitration court ruled that the concession agreement between the two entities was in "full force." The arbitration court ruled that there were "no grounds" for the bid of the Lopez firm to have the concession terminated. In March 2004, the Justice department announced that it had reached an agreement with Benpres, which entailed the conglomerate writing off its holdings in Maynilad. The agreement meant the conversion of about P8 billion in unpaid concession fees of Maynilad into equity, with state regulator MWSS taking Benpres's 61% stake in the water utility. Ondeo was to implement a partial write off, with its equity slashed to 13% from 40%, while Maynilad employees and creditor-banks were to own the remainder, ultimately giving MWSS an 84% stake. The government, through MWSS, would draw on the entire US$120-million Maynilad performance bond to answer for unpaid concession fees and loans. Maynilad would also pay P10 billion (approx. US$183 million) in debts owed to foreign and local banks. The plan also called for the government to take over Maynilad from Benpres and temporarily allow it to assume the identity of a government-owned and -controlled corporation. The agreement was implemented in April 2005. As part of that agreement, MWSS was to borrow US$31 million from the World Bank for capital and operating expenses, but agreement had not been finalized by end 2005. In 2005, the government planned to re-tender the contract in the near future. According to Maynilad's lawsuit against MWSS, it had invested US$303 million in the water distribution since 1997. MWC obtained funding from many multilateral agencies. In mid-1998, the European Investment Bank (EIB) approved a US$55 million loan to help finance the upgrade and extension of the water supply and sanitation in West Manila. In March 2000, Maynilad received a US$100 million bridge loan from a consortium of banks led by Citibank in anticipation of the company securing long term financing of US$350 million. Of the US$350 million, ADB provided US$45 million through a direct loan and US$126 million through its complementary financing scheme, while EIB contributed US$59 million, and the commercial banks supplied the remaining US$120 million with insurance coverage from COFACE. In September 2000, the company was also granted a US$120 million 3-year letter of credit facility arranged by Chase Manhattan Asia, Citibank, and Credit Lyonnais. None None