Nepomuceno Malauan is the corporate secretary of Action for Economic Reforms.

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

On 20 December 2004, the Rehabilitation Receiver submitted her
Rehabilitation Receiver’s Report recommending the court approval of
Maynilad’s September 2004 Revised Rehabilitation Plan. On 28 January
2005, Action for Economic Reforms and its co-parties filed a
comment/opposition to the receivers report, raising the following

  • The plan was a scheme to bail out Benpres Holdings Corporation of
    more than US$130 million in guarantees, using US$60 million in public
    funds derived from the draw of the US$120 million Performance Bond. Not
    only would the use of public funds benefit a private corporation, it
    would have had a negative impact on the financial position of the
    Manila Waterworks and Sewerage System (MWSS).
  • The plan was grossly disadvantageous to the government, as it
    involved the MWSS purchase of Maynilad shares at a grossly inflated
    price. Pointing out an overvaluation in Maynilad assets, we argued that
    instead of buying US$81 million worth of shares at a discounted price
    of US$60 million as alleged by the receiver, MWSS was in fact shelling
    out US$60 million for a company value of only US$22 million.
  • The plan was unconstitutional, as a step in the transaction would
    have resulted in the increase of foreign ownership to more than the 40
    percent limit set by Article XII, Section 11 of the Constitution.
  • Given the Supreme Court ruling in the Piatco case, the plan was
    illegal as it modified Maynilad’s obligations under a publicly bid
    contract to the detriment of the government and the public. It did away
    with the duty of posting a performance bond, and allowed Maynilad to
    reduce its service obligations under the concession agreement.
  • The increase in tariff from P19.92 per cubic meter to P30.19 per
    cubic meter was illegal, for having been 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 29 April 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 agreement. The MWSS through its
Administrator, Mr. Orlando Honrade, signed the agreement, assisted by
the government corporate counsel.

The court, in a hearing on 4 May 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 US$60 million in the 2004 rehabilitation plan to US$
22 million in the latest revised rehabilitation plan. The manner of
payment has also 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 (stand-by letters of credit) banks and Suez. This time,
the US$ 22 million purchase price is exclusively for the equity
interest. The SBLC banks still get their up-front 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 constituional question.

The Bottomline

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.
  • SBLC still gets its up-front 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 up-front

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
re-lend 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
  • 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
Corporation 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.