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Fiascos: Manila, Philippines

In December 2002, after five years of controversy, Maynilad Water (co-owned by Suez and a wealthy Filipino family) decided to terminate their water contract in Manila. The contract was ended when Maynilad was unable to pressure the regulator to approve its requested rate increase. Approval had been granted for six previous rate increases and countless other contractual obligations had been re-negotiated away since the contract was signed. Debt-ridden and unable to raise more capital, Maynilad Water’s credit-worthiness was at stake. The company’s operating expenses were more than 40 percent higher than projected, although major investment and performance targets were never met. In the aftermath of the Asian financial crisis, the company repeatedly demanded coverage of its foreign exchange losses. While a good many of Maynilad’s demands were granted, eventually the regulator said "no" and Maynilad Water, assessing their rates of return to be inadequate, pulled out.

The 25-year lease agreements in Manila were the biggest water privatizations in the world when they took place in 1997. The Metropolitan Waterworks and Sewerage System (MWSS) granted the rights to operate and expand water and sewerage service to Manila Water (co-owned by Bechtel and the Ayala family) and Maynilad Water (co-owned by Ondeo/Suez and the Lopez family). Government elites and the World Bank have been determined to tout the privatization as a success story. After five years, the two companies claimed that more than 2 million more people were connected to the water system. Government regulators dispute that number. Civil society groups have criticized the non-democratic and non-transparent nature of the privatization process, the rate hikes (which include an adjustment tied to exchange rate losses), the unmet promises of rehabilitation and expansion of water services (especially to the urban poor), and weak regulatory and oversight practices.

Advised by the International Finance Corporation (IFC), the private sector lending arm of the World Bank, Manila sought to privatize MWSS in the mid 1990’s. When Suez entered Manila in 1997 it was with a promise to lower rates and expand the infrastructure for the 7.5 million households the concession covered. The promise was to provide water for 4.96 pesos. While the government claimed this price was guaranteed until 2007, in reality the contract had several mechanisms permitting "extraordinary price adjustments." Other promises included 100% infrastructure coverage by 2007, US$7.5 billion new investments over 25 years. Unaccounted water would fall to 32% in 2007 and the city would save US$4 billion over 25 years.

Only a year into the contract, Maynilad asked for the first rate increase. In 2001, the price rose to 6.58 pesos with subsequent hikes to 10.79 pesos, 11.39 pesos and 15.46 pesos. In a Christmas press release, the Asian Labor Network stated the following:

"The additional cost of water will ensure a bountiful New Year to Maynilad and Manila Water. But, an ordinary Filipino family will now have to forego an additional 87 to 147 pesos a month. In effect, Maynilad and Manila Water with the full blessing of MWSS have deprived the Filipino family of three full meals or three kilos of rice. The ordinary vendor will now have to surrender one full day of income to pay for the cost of water. To poor families who can only afford instant noodles the water increase might mean they cannot eat for two days."

Shortly before Maynilad took control MWSS retired almost 2,000 workers to lower costs and 6 months into the contract 750 workers were laid off. The Lopez family, whose business empire extends to the major media, ensured that propaganda favored Maynilad.

But, Maynilad continued to seek contract re-negotiations, including continual rate increases, postponement of its obligations to meet investment targets beginning in the fifth year and postponement of targets to decrease unaccounted for water. Technically, this should have caused Maynilad to forfeit its performance bond, but the company used legal action in local courts to block the government’s access to the performance bond. Probably the most controversial contract re-negotiation involved the pass through to consumers of foreign exchange losses. This ensured that Suez could continue to use its major foreign corporate suppliers and consultants (rather than local sources) while billing consumers to cover for the effects of peso devaluation.

In the end, Maynilad cancelled the contract when the regulatory commission rejected an additional rate increase to 27 pesos. When Maynilad decided to exit, control of the waterworks reverted to MWSS. Maynilad claimed that the city had not met its obligations and brought the dispute to the International Chamber of Commerce. The case is scheduled for hearing in May 2003. Maynilad is seeking US$303 million in compensation from the government. In addition, MWSS will now have to take on $530 million in loan payments to creditors. The residents of Manila will pay the costs of these additional debts.

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