PPP’s: Theory & Practice SANPSHOTS: Manila Water Company, Inc. (MWC)

1. Mainstreaming Public-Private Partnerships PPP’s: Theory & Practice SANPSHOTS: Manila Water Company, Inc. (MWC) Anouj Mehta, Senior Infrastructure Finance Specialist (PPPs), Asian Development Bank Bhopal, 26th February 2009

2. Backdrop: Manila • Metro Manila: • Capital of the Philippines and made up of 17 municipalities • Population of over 14 million • Intensely congested in parts – second most populous in S.E. Asia

3. Backdrop: Water Operations • Prior to 1997, responsibility for water and sewrage services rested with: • Metropolitan Water and Sewerage Services (MWSS), a Government Corporation • Poor service performance parameters: • Years of under-investment by MWSS • MWSS was hugely indebted • Grossly inefficient services • Huge Non-Revenue Water as % of production • Severe problem of illegal connections • Low water pressure • Coverage: Only 58% population • 63% Non Revenue Water • 24*7 Water Coverage: 26% only • Poor Heavily Affected: poor piped coverage • Paying upto 13% of incomes, some Rs 1000 per mth

4. Government Response to Water Crisis : Set out clear objectives: • Improvement in quality and efficiency of service. • Expansion of service. • Reduction in water tariff. • End expensive government subsidies. • Promulgation of “National Water Crisis Act” 1995

5. National Water Crisis Act (1995) • Granting of authority to the President to privatise water utilities, including MWSS • CRUCIAL: Expression of political will and commitment • Create public awareness about benefits of “privatization” (reduction in water tariff!). • Criminalization of water theft. • Re-organisation of MWSS • Split Manila service area into two zones (East and West zones) • Introduction of PSP and competition and Takeover policy between zones • Performance Benchmarking encouraged

6. Not “Privatisation” But PPP Approach • It was not privatisation • The government retained ownership of the assets of the MWSS, • but followed a “lease” model to the private companies to improve and operate assets for a fixed period, • and then to be returned to government • Bid process • Aimed to bid out off the rights to operate and expand the water and sewage network system, • With a set of performance targets to achieve, • And with the preferred bidder being the one offering the lowest price of water, for the set performance targets. • Private companies responsibilities were • Raising finance, debt servicing, improving the network and tariff billing and collection

7. Re-organisation MWSS Zone East (40% population) Manila Water Company Inc (MWCI) MWSS Zone West (60% population) Maynilad Water Services Inc (MWSI) METRO MANILA

8. The East Zone Concession Framework • To rehabilitate, expand, & operate the east zone of Metro Manila’s water utility for 25 years, • Targets • increase coverage of water and sanitation services for 5 million people, • Improve continuous water availability, • Meet quality standards and service quality, • Reduce NRW • User tariff set by competitive bidding - the lowest price of water • Manila Water offered to charge just over one quarter (26.39%) of the existing rates • Tariff adjustments provisions. • Regulation by contract (no legislative regulation) • Subject to demand risks

9. Some Striking Features • Staggered works: • Major capital expenditures commenced after 5 years; • Initial focus on softer and cheaper measures to improve services such as replacement of meters and reducing water theft. • Increase in existing water tariff (August 1996) by 38%. Reportedly; • Overdue • Would have been implemented regardless of privatization • Establishment of a Regulatory Office to • Monitor and enforce concessions • Implement rate adjustments • Deal with customer complaints

10. The East Zone Concession Framework: Won By Manila Water Company • Ayala Group (33.5%) • United Utilities (11.7%) • Mitsubishi Corporation (7.8%) • IFC (7.3%) • Employees (2.7%) • Public (37%) Embarked on heavy Capex Program

11. Manila Water Company: Then (1997) & Now (2007)… Source: Building Viable Water Utilities: The Manila Water Experience Virgilio C. Rivera, Jr., Group Director, Regulation and Corporate Development Manila Water Company, Inc.

12. Manila Water Company: Then (1997) & Now (2007)… Water Coverage 2007 5.6 million (99% of population) 1997 3.1 million (58% of population) Customer Base 24 Availability of Water 16 Hours per Day

13. Manila Water Company: Then (1997) & Now (2007)… Providing 24 by 7 Water Supply Doubled billed water from 440 MLD to 1000 MLD

14. Manila Water Company: Then (1997) & Now (2007)… Source: Building Viable Water Utilities: The Manila Water Experience Virgilio C. Rivera, Jr., Group Director, Regulation and Corporate Development Manila Water Company, Inc.

15. MWC: Affordable? • Costs of production might initially increase - modernisation and upgradation, risk capital with initial turn around phase; generally later should drop with productivity enhancements etc • Tariffs reflective of costs will likely increase for a period • Sustained tariff levels • Pricing can incorporate affordable levels for consumers (5% income) • Can incorporate poor focused schemes to allow affordability • Coverage of service, quality and sustained accessibility will benefit over time • Less pressure on government budgets freeing up space for other programmes Monthly water bill much less than 5% income of a low income household (IFC) – affordable (1% of low income household’s income and 1.4% of middle income houshold incomes)

16. MWC: Helping The Poor? Real cost of water under the pre PPP scenario - poor mostly using private low quality trucked water supplies Average Household in East Zone: Price 1000 pesos per month Private Vended Water • Was getting about 6 cu. m per month from trucks MWC Piped Water • Now getting around 30 cu. M per month from pipes Price 300 Pesos per month • Specific Program for the Poor: WATER FOR THE POOR Programme: • Supplying 1.5 m legal connections to slums and cluster areas • Using the community including one metre for a cluster and sub meters which are • Monitored by the community and bills collected by the community also and then • Given to MWC • Prior to TPSB, poor were paying P1000 per cu.m. – almost 11-13% of incomes • Post TPSB, around P10 per cu.m.; less than 5% of the monthly incomes

19. Tariff Adjustment Provisions • Inflation. The regulator allowed for increases according to annual rates of inflation. • Unforeseen events. Companies could change prices once a year due to drastic or other unpredictable events, such as the rapid devaluation of the peso. • Rate re-basing. At the start of each five year period, a review of tariffs could be made so they can be adjusted to reflect “fair returns” for the company agreed in the contract. (cost recovery based tariff)

20. Thank you.