What’s the deal on Maynilad?

The Action for Economic Reforms (AER) yesterday expressed grave concern over the continuing failure of the Metropolitan Waterworks and Sewerage System (MWSS) to draw for the full amount the US$120,000,000.00 Performance Bond posted by the Maynilad Water Services, Inc. (Maynilad) in favor of MWSS. The Performance Bond is intended to secure, among others, the payment of Concession Fees by Maynilad, pursuant to its Concession Agreement for the management and operation of water and sewerage service in the West Service Area. It will be recalled that Maynilad unilaterally stopped paying Concession Fees to MWSS sometime in March 2001, and the unpaid Concession Fees have now ballooned to more than US$180,000,000.00. This amount now far outstrips the amount secured by the Performance Bond. An attempt to draw on the bond in November last year was prevented by an Order issued by Hon. Reynaldo B. Daway, Presiding Judge, Quezon City RTC Branch 90, declaring that the notice of draw issued by the MWSS was violative of a Stay Order it earlier issued in the Petition for Rehabilitation filed by Maynilad.

The Supreme Court removed such legal obstacle to the drawing on the
Performance Bond when it declared on 21 June 2004 the said Order as
null and void.

Lawyers at the Quevedo, Malaluan & Lumba Law Office, counsel for
AER, Bantay Tubig, and individual consumers in the Maynilad concession
area, said that the failure to draw on the bond contravenes the MWSS
Board of Trustees Resolutions No. 2004-189, 2004-190, and 2004-199. The
MWSS in Resolution No. 2004-189 dated 15 July 2004 resolved to exercise
its right to draw on the Performance Bond. This was made more specific
by Resolution No. 2004-190 dated 21 July 2004, resolving to take all
the necessary steps to draw on the Performance Bond for the full
amount. Informed of the non-implementation of Resolution 2004-190, the
Board of Trustees on 28 July 2004 issued Resolution No. 2004-199
ordering MWSS Administrator Orlando C. Honrade to draw on the
Performance 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. Until now there is neither indication nor
confirmation that these resolutions have been implemented and satisfied.

AER pointed out that the continuing failure to draw on the Performance
Bond to satisfy the unpaid Concession Fees of Maynilad has been causing
government and taxpayers undue injury. This, even as Maynilad continues
to benefit from billing and collecting from consumers for water
services. AER’s lawyers noted that the Concession Fees were intended
for the main part to pay MWSS debts. As admitted by MWSS in its
opposition to the Petition for Rehabilitation filed by Maynilad, the
non-payment of Concession Fees has unduly constrained the MWSS and the
National Government to advance the payment of the mostly
dollar-denominated MWSS loans.

AER urged MWSS to reconsider its decision to continue accommodating
Maynilad’s request for continued “good-faith negotiations” for a
compromise agreement in the Rehabilitation case before the Regional
Trial Court. AER said that such negotiations have in the past only
resulted in a compromise agreement, the infamous Amendment No. 2, that
is grossly disadvantageous to government. Amendment No. 2 consequently
failed to get the endorsement of NEDA.

AER’s lawyers, in an earlier demand letter to the MWSS, have asserted
that Amendment No. 2 was unlawful for, among others, imposing an
adjustment of water tariffs without benefit of notice and hearing,
unexplainably limiting the draw on the Performance Bond to
US$50,000,000.00, and MWSS buying worthless shares through a
debt-to-equity conversion.

AER expressed doubts that the ongoing negotiations can result in an
agreement that will cure the substantive defects of Amendment No. 2.
Its lawyers said that MWSS itself, in its opposition to the Petition
for Rehabilitation, was of the opinion that the Petition for
Rehabilitation was “a thinly-disguised attempt by Maynilad to evade
fulfillment of its obligations” and the MWSS expressed fear that the
Petition could be used to “countenance a devious scheme or (as) a tool
to perpetuate a wrong and prolong the agony of long-suffering parties
like the MWSS.” Indeed, the rehabilitation case has dragged for more
than nine months now, and the unsecured, unpaid concession fees
continue to grow by the day.

AER said that in addition to immediately implementing the MWSS Board
Resolutions to draw on the Performance Bond for the full amount of
US$120,000,000.00, the MWSS should now seriously consider other
remedies available to it outside of the rehabilitation case in order to
stop its financial hemorrhage. AER refers specifically to the right of
MWSS under the Concession Agreement to initiate Early Termination
Procedures. AER’s lawyers note that MWSS itself is of the position that
the Petition for Rehabilitation filed by Maynilad constitutes a
Concessionaire Event of Termination under the Concession Agreement. AER
said that the MWSS’ tentativeness in protecting its interest cannot be
tolerated at this time when the government is facing a very serious
fiscal problem. Starting in 2001 when Maynilad stopped paying its
concession fees, Maynilad 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.

Noted:

Filomeno S. Sta Ana III
Coordinator, Action for Economic Reforms

For questions/clarifications/additional information, contact:

Atty. Nepomuceno A. Malaluan
Quevedo, Malaluan & Lumba Law Office
Mobile: 0921-7429191
E-mail: nepo@aer.ph

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