The highly controversial case regarding the Maynilad rehabilitation plan is nearing its resolution. From the public interest perspective, the plan fails to address the concerns of consumers and taxpayers. On Dec. 20, 2004, the Rehabilitation Receiver submitted her Rehabilitation Receiver’s Report recommending the court approval of Maynilad’s September 2004 Revised Rehabilitation Plan.

On Jan. 28, 2005, Action for Economic Reforms and its co-parties filed a comment/opposition to the receiver’s report, raising the following issues:

  • The plan is a scheme to bail out Benpres Holdings Corp. from more than US$130 million in guarantees, using $60 million in public funds derived from the $120-million performance bond. Not only would the use of public funds benefit a private corporation, it would have a negative impact on the financial position of the Manila Waterworks and Sewerage System (MWSS).
  • The plan is grossly disadvantageous to the government, as it involves the MWSS purchase of Maynilad shares at a grossly inflated price. Pointing out an overvaluation in Maynilad assets, we argued that instead of buying $81 million worth of shares at a discounted price of $60 million as alleged by the receiver, MWSS is, in fact, shelling out $60 million for a company value of only $22 million.
  • The plan is unconstitutional, as a step in the transaction would result in the increase of foreign ownership to more than the 40% limit set by Article XII, Section 11 of the Constitution.
  • Given the Supreme Court ruling in the Piatco case, the plan is illegal as it modifies Maynilad’s obligations under a publicly bid contract to the detriment of the government and the public. It did away with the posting a performance bond, and allowed Maynilad to reduce its service obligations under the concession agreement.
  • The increase in tariff to P30.19 per cubic meter, from P19.92, is illegal, for it was done without the required public notice and hearing.
  • The plan provided only for a partial payment of concession fees accruing after the effectivity of the stay order although Maynilad had already accumulated enough cash to make the payment in full.

Aware of these criticisms, Maynilad submitted a new revised rehabilitation plan on April 29, 2005, with a debt and capital restructuring agreement already signed by Maynilad and all major borrowers, except the Development Bank of the Philippines whose board is still deliberating on the matter. The MWSS, through its administrator, Mr. Orlando Honrade, signed the agreement, assisted by the government corporate counsel.

The court, in a hearing on May 4, 2005, has deemed the revised rehabilitation plan submitted for resolution. As far as Maynilad and its creditors are concerned, apart from the need for court approval, the execution of a few remaining conditions and the final documentation, the rehabilitation plan is a done deal.

Material Changes

The latest revised rehabilitation plan comes with certain material changes in response to the issues raised by AER. There has been a change in the valuation of the MWSS purchase price of the 84% interest in Maynilad, from $60 million in the 2004 rehabilitation plan, to $22 million in the latest revised rehabilitation plan. The manner of payment has also been changed. Instead of being taken from the proceeds of the performance bond draw, the payment will be through an offset of concession fees receivables, and in installments.

But the old purchase price comes with a simultaneous reduction of debt from the SBLC (standby letters of credit) banks and Suez. This time, the $22-million purchase price is exclusively for the equity interest. The SBLC banks still get their upfront payment, but through a financial assistance facility from the MWSS to be taken from an MWSS loan from the World Bank. Suez still gets paid part of its credit through a debt-to-equity conversion.

The flow of the transaction has also changed. In the 2004 plan, equity will first pass from Benpres to the SBLC banks, and finally to MWSS. This time, the equity will be purchased directly from Maynilad by the MWSS, thereby avoiding the constitutional question.

The Bottom Line

While we note the accommodation of material changes in the revised debt and capital restructuring, the bottom line remains unfavorable to MWSS and, consequently, the taxpayers. To wit:

  • Benpres still walks away freed from its guarantees;
  • Suez retains the same ending exposure in Maynilad; and,
  • SBLC still gets its upfront payment, although a little less than in the 2004 plan.

The MWSS is left the task of footing the bill to get Benpres off its guarantees and ensuring that the SBLC banks and Suez get their upfront payments.

Specifically, it will put up a financial assistance facility. Further, while not touching the proceeds from the draw of the performance bond, MWSS will be constrained to forego receipt of concession fees to pay for the shares, and it will have to increase its borrowing only to relend to Maynilad. For its financial assistance to Maynilad, MWSS gets paid starting only in 2013 after all the debts from other creditors have been paid. In the meantime, it is obligated to service its debts to the World Bank.
The World Bank Role

It is deplorable that the World Bank – with all its rhetoric about efficiency, market discipline, and good governance – ends up facilitating the accommodation and rewarding bad private sector behavior. Maynilad President Fiorello Estuar’s testimony before the rehabilitation court to present Maynilad’s business plan is an admission of bad management, particularly:

Inadequate basic management processes;

  • Business processes not directed toward viability and accountability
  • Inadequate technology; and,
  • Lack of recognition of the nature of the business.

Yet, the World Bank facilitates the accommodation in the comfort of sovereign guarantees. Lending should be by the International Finance Corp. directly to Maynilad, without the guarantee, and under the same repayment terms in the plan.


Consumers take the biggest hit. They have already been paying the cost of rehabilitation through the tariff increase, even as the service obligations of Maynilad are downgraded under the plan. The tariff increase has been approved without the benefit of notice and hearing, in violation of the consumers’ rights under the administrative code. The tariff is also excessive, as it is based on a rebased rate with substantively different assumptions on operational expenditure, capital expenditure, and service obligation than those obtaining under the rehabilitation plan.