Policy of Accommodation in Maynilad Undercuts Fiscal Recovery

Mr. Malaluan is a trustee of Action for Economic Reforms as well as partner at the Quevedo, Malaluan & Lumba Law Offices. This article was published in the Yellow Pad column of Business World, 20 September 2004 edition.

From zero deficit in the year 2000, the Metropolitan Waterworks and
Sewerage System (MWSS) began to post deficits of P3.0 billion, P2.6
billion, P3.2 billion, and P4.5 billion for the years 2001, 2002, 2003,
and 2004, respectively. The singular reason for this reversal was
Maynilad’s refusal to pay concession fees beginning March 2001.
Intended for the main part to service MWSS’s mostly dollar-denominated
debts, the non-payment of concession fees has constrained the MWSS and
the national government to advance the payment for the loans,
contributing significantly to the deterioration of the public sector’s
fiscal position.

This situation dragged on through a combination of legal maneuvers on
the part of Maynilad and a policy of accommodation on the part of
government. Maynilad issued a Force Majeure Notice in March 2001 to
provide a basis for stopping payment of concession fees, culminating in
the serving of notice to MWSS of Early Termination of the Concession
Agreement on 9 December 2002. This forced MWSS to initiate an
arbitration process that took almost one year to resolve. On 7 November
2003, the arbitration award was handed down, declaring that there was
neither a Concessionaire nor MWSS Event of Termination, and that the
Concession Agreement shall remain in force. It ruled further that the
concession fees that should have been paid by Maynilad according to the
Concession Agreement are due and payable. But instead of complying with
the arbitral award, Maynilad pre-empted its execution by filing on 13
November 2003 a Petition for Rehabilitation with Prayer for Suspension
of Actions and Proceedings Against Petitioner before the Regional Trial
Court of Quezon City, Branch 90. This petition remains pending.

Through these maneuvers, Maynilad unduly prolonged the non-payment of
concession fees, as well as prevented the drawing on the US$120 M
performance bond it put up to secure its obligations. The legal
obstacle to the drawing on the bond was removed only when the Supreme
Court, on 21 June 2004, declared null and void an order by the
rehabilitation court enjoining the MWSS from proceeding against the
performance bond.

On the part of the MWSS, what appeared to be an honest attempt to
legally defend its interest at some point started going the opposite
direction. In spite of the opposition to the petition for
rehabilitation that it filed in the rehabilitation court, the MWSS, as
the presidential elections drew near, entered into a compromise
agreement with Maynilad that can only be characterized as a shameless
bailout of Maynilad’s sponsors. This compromise, contained in the
infamous “Amendment No. 2 to the Concession Agreement”, limits the MWSS
drawing to only US$50 M when US$120 M was available, and converts the
remaining accrued and unpaid concession fees into equity in Maynilad,
effectively buying virtually worthless shares. The sponsors are
released from their guarantees to the performance bond.

After the elections, the tide somehow changed again. After the Supreme
Court ruling came out, the National Economic and Development Authority
(NEDA) did not give its endorsement of the compromise agreement, and
the MWSS promptly manifested before the rehabilitation court that it is
withdrawing its concurrence to Amendment No. 2. After a new round of
negotiations, Maynilad, on 9 September 2004, submitted a revised
rehabilitation plan that addressed many of the defects of Amendment No.
2. Specifically, the new rehabilitation plan assumes that there will be
a full draw of the US$120 M bond, and MWSS does not convert any
remaining unpaid concession fees to equity.

Still, it remains doubtful whether the policy of accommodation has
completely stopped. For one, until now there is no indication that MWSS
Administrator Orlando C. Honrade has implemented a board resolution
directing him to draw on the bond for the full amount on or before 30
July 2004, under pain of administrative charges for gross negligence of
duty should the directive not be implemented. For another, it is the
consumers that bear the brunt of the rehabilitation through increased
water rates, even as Benpres walks away with a release from its

At a time when it has admitted a fiscal crisis, the Arroyo
administration must be able to convincingly show that it has abandoned
its policy of accommodation of vested interests, if it is to gain
credibility in leading a policy regime of fiscal recovery. Maynilad is
an important test case. In addition to immediately drawing on the
performance bond for the full amount, MWSS should seriously consider
other remedies available to it outside of the rehabilitation case in
order to stop its financial hemorrhage. One alternative is the exercise
of its right under the concession agreement to initiate early
termination procedures. MWSS itself is of the position that the
Petition for Rehabilitation filed by Maynilad constitutes a
concessionaire event of termination.

The tentativeness of MWSS in protecting its interest is intolerable.
The fiscal problem hangs in the balance. The situation calls for
decisive action, now.

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