The Real Nature of MWSS Privatization Program: Crony Capitalism

Like in the contemporary movies, in the world of politics, life is shown as either existing in black or white, or a choice between good or evil or taking sides between oppressor and the oppressed.

Media’s populist moralism can be seen in today’s headlines where supposed iniquities has been committed by private sector concessionaires, whom had been alluded to as 'greedy' since these firms profit from society by passing their costs to the consumers.

From the inquirer.net

A long list of expenses, including those for foreign trips, entertainment and recreation as well those for advertising, gifts, flowers and other tokens for all occasions, had been passed on to customers of the two water concessionaires in Metro Manila and nearby areas, according to a consumer advocacy group.

The Water for the People Network (WPN) said these expenses were on top of the P15.3 billion in income taxes that Maynilad Water Services Inc. and Manila Water Co. had passed on to consumers from 2008 to 2012.

WPN said the two concessionaires “have effectively turned water service into a profitable business while consumers shoulder the burden of onerous charges and taxes.”

Sonny Africa, executive director of Ibon Foundation, one of WPN’s convenors, called on regulators to disallow the recovery from consumers of such expenses and to thumb down proposals for rate increases.

“We are sure these same items are included in the business proposals of Maynilad and Manila Water for the next rate rebasing (cycle),” Africa said.

Maynilad wants a P5.83 per cubic meter increase in its basic charge while Manila Water plans to raise its rates to P8.58/cu. m. from 2013 to 2017. The concessionaires are allowed to seek an increase every five years.

Maynilad currently charges P48/cu. m. and Manila Water, P38/cu. m.

The Metropolitan Waterworks and Sewerage System (MWSS) allowed the recovery of income tax through tariffs in a resolution issued in 2004.

And so it seems.

Lost within the controversial article is the foundational relationship between the principal, Metropolitan Waterworks and Sewerage System (MWSS) and two water concessionaires

In another article, the Office of the Government Corporate Counsel (OGCC) recently clarified that these concessionaires are “agents of a public utility” and not public utilities. 

The fact is that the MWSS is a creation of the Philippine Congress via REPUBLIC ACT No. 6234 in 1971 and is regulated by the 5-man Board of Trustees, three of whom including the Chairman are appointed by the Office of the President but with the consent of the Commission of Appointments.

The government agency’s General Manager is also appointed by “the President of the Philippines with the consent of the Commission on Appointments”. Assistant managers are also appointed by the board, “with the approval of the President”.

In 1997, MWSS had been transformed into an agency empowered to privatize the provision of water services via RA 8041 via the Water Crisis Act.

The price setting function by MWSS have been determined by the Board of MWSS, where a sitting majority comprises appointees of the President

According to Wikipedia.org

Water tariffs in Manila are adjusted on the basis of four mechanisms:

First, tariffs are adjusted automatically on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Initially this mechanism was applied with a lag, but after a contract amendment it is now applied every three months.

Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index).

Third, tariffs are adjusted every five years to guarantee a certain rate of return to the private concession holder (rate rebasing). The company's performance vis a vis regulatory targets is also considered in determining the tariff.

Fourth, extraordinary price adjustments can also be granted, but only in spefific circumstances such as a change in law or force majeure.

Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.

In short, the pricing mechanism by the highly politicized water industry has not been set by the markets but according to the interests of the political leaders.

Nonetheless, legalistically the regulator and the people running MWSS have all been protégés of the President. 

Thus, it seems a logical corollary that these private contractors would have to be in good or cordial standings with today’s political leaders or else…lose their political-economic privileges 

This is a neat example of the functional relationship of public partnership partnership (PPP).

As I previously wrote,

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

And considering the politicized nature of these public utility sub-agencies, aside from regulatory limitations on profit, as I pointed out in the case of Meralco (bold original)

In a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.

So whatever alleged padding of expenses as enumerated by the article appears as natural offshoots to the politicized nature of operations between, on the one hand, the MWSS and the Office of the President, and on the other, the privileged private sector contractors.

What has been seen as privatization program has in reality been a form of rent seeking crony capitalism. This can also be described as the localized version of privatization of profits and socialization of losses.

Contra media, such imbalances has hardly been about good or evil but about the (anti-competition-protectionist) political-legal-institutional framework from which the domestic political economic environment operates on.

Changing concessionaires or increasing regulations on them will hardly alter the essence of their relationship.

Of course the alternative or the populist innuendo has been to ‘socialize’ water services.

But there is no such thing as free lunch as subsidized water or subsidized anything else would have to be financed by higher taxes and inflation (loss of purchasing power). 

Moreover, subsidies lead to waste, misallocations, and eventual shortages. Indonesia’s recent riots, for instance, has been due to the lifting of unsustainable subsidies on oil which has brought about huge unwieldy fiscal deficits.

In my view, the answer to cheaper water is to de-politicize the industry by encouraging competition by abolishing legal obstacles, and by promoting decentralized and spontaneously driven self-organized governance system (Common Pool Resources)

Obviously mainstream would have none of them.