* -. DI RECT- TH E WOR L D BAN1K The Manila Water Concession A Key GovernmentOfficials Diary of the Worlds Largest WaterPrivatization MARK DUMOL 20766 July 2000 ........................ LA 3EST DIRECTIONS IN DEVELOPMENT The Manila Water Concession A Key Government Official's Diary of the World's Largest Water Privatization Mark Dumol THE WORLD BANK WASHINGTON, D.C. ©2000 The Intemational Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street N.W. Washington, D.C. 20433 All rights reserved Manufactured in the United States of America First printing July 2000 The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated orga- nizations, or to members of its Board of Executive Directors or the countries they represent. 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All other queries on rights and licenses should be addressed to the Office of the Publisher, World Bank, at the address above or faxed to 202-522-2422. Mark Dumol has been the Chief of Staff of the Secretary of Public Works and Highways of the Philippines from 1993 up to the time of the printing of this book. He holds a Mechanical Engineering degree from the University of the Philippines and is an MBA candidate of the Ateneo de Manila University. E-mail address: [email protected] The cover photo was taken on January 23, 1997, during the ceremony for the opening of the bids for the MWSS privatization. The photo shows the sealed bid envelopes being inspected by representatives of the Commission on Audit, the Development Bank of the Philippines, and the four bidders. MWSS Administrator Angel Lazaro III is also shown displaying one of the bid envelopes before dropping it into a transparent container. Library of Congress Cataloging-in-Publication Data Dumol, Mark, 1957- The Manila water concession: an insider's look at the world's largest water privatization / Mark Dumol. p. cm -- (Directions in development) ISBN 0-8213-4711-X 1. Water utilities--Philippines--Manila--Finance. 2. Municipal water supply--Economic aspects--Philippines--Manila. 3. Privatization--Philippines--Manila. I. Title. II. Series. HD4465.P54 D86 2000 363.6'1'0959916--dc2l 00-032000 Contents Foreword .................................................. vii Acknowledgments .............................................. ix Acronyms and Abbreviations .................................... xi Introduction .................................................. 1 The Philippines-A Brief History ................................. 3 The Metropolitan Waterworks and Sewerage System (MWSS) ....... 5 The Philippine Democratic Framework ............................ 7 Early Offers to Privatize MWSS and the Decision to Privatize ....... 9 The Malaysians' Offer to Privatize MWSS ........................ 9 The President ................................................ 10 Second Proposal to Privatize MWSS ............................ 11 Third Offer to Privatize ....................................... 11 Early Research on Water Privatization ............................ 12 The Commercial Counselor of the French Embassy ............... 12 Lyonnaise des Eaux ........................................... 13 Macao .................................................. 13 The U.K. Model .............................................. 14 Buenos Aires Documentation .................................. 14 The Need to Privatize ........................................... 16 Procurement ................................................. 16 Personnel .................................................. 18 Financing .................................................. 19 Elephants Can't Fly ........................................... 19 Financing the Cost of the Advisers ............................... 21 The Need for Advisers ........................................ 21 French Assistance ............................................ 22 The Search for Additional Grants ............................... 23 Bridge Financing ............................................. 23 iii IV THE MANILA WATER CONCESSION How to Secure and Finance Advisers ........................... 23 Water Crisis Act .............................................. 25 The International Finance Corporation ........................... 27 First Contact ................................................ 27 Negotiations ................................................ 28 The Contract ................................................ 29 Appointment of Angel Lazaro III ................................31 The Legal Basis .............................................. 33 Executive Orders 286 and 311 ..................................33 The Bidders Question the Legal Basis of the Bidding .............. 36 Participation of Foreign Firms ...................................38 Need to Reduce the Labor Force .................................. 40 Need to Have Bids Lower than the Existing Water Tariff ........... 42 Splitting the Franchise Area into Two Zones ...................... 45 Tariff Escalation Procedures ..................................... 50 Tariff Escalation for Toll Roads ................................. 50 Dilemma of the MWSS Tariff Escalation Formula ................. 51 NERA Rate Rebasing Concept ................................. 51 NERA Proposal to Use CPI as the Escalation Index ............... 52 The "Appropriate Discount Rate" and Objectivity ................ 53 The ADR as Project Return .................................... 54 The ADR and Retroactive Adjustments ......................... 55 The Regulatory Office ........................................... 56 Takeover of Existing Projects .................................... 58 Capital Expenditures toward the End of the Concession ............ 60 Ownership and Use of Assets .................................... 61 Consequences of Termination ................................... 63 Joint Venture Agreement ........................................ 65 CONTENTS V Trip to Buenos Aires ............................................ 66 Handling the Media ............................................ 67 Hiring a Local over a Multinational Firm ........................ 67 The "Bidding War"............................................ 67 The Media and Transparency .................................. 67 Transparency ................................................... 69 The Approval Process .... 72 Early Thoughts .... 72 The MWSS Privatization Committee .... 72 The MWSS Board .... 73 The Special Advisory Committee .... 73 The Committee on Privatization (COP) .... 76 The Prequalification, Bids, and Awards Committee ("Bid Committee") .... 77 The Technical Working Group of the Bid Committee .... 77 Contract Negotiation and Signing .... 78 Summary of the Approval Process .... 79 The Bidders ...... 80 The International Water Operator .... 80 The Local Lead Firm .... 82 The Prequalification Process .... 82 Bid Submission ........... 85 Meeting the Deadline .85 Custody of the Bids .86 Arrival of IC .87 Planning the Procedures for Bid Submission .87 January 4, 1997-The Temporary Restraining Order .88 January 5-The Day Before .89 January 6-Bid Submission .91 Bid Opening .93 The Evolution of the Technical Proposals .93 Preparations .93 January 21 .94 January 22 .95 January 23-The Big Day .95 Court Of Appeals' Temporary Restraining Order .99 VI THE MANILA WATER CONCESSION Approval by the President ........................... 101 The Media and the Political Battle ........................... 102 A Frenzy ........................... 102 Too Good to Be True ........................... 105 Senate Hearings ........................... 105 Positive Media Reaction ...................................... 106 Closing Date ......................... 110 Delays .... ...............................................110 Turnover ................................................111 Interconnection Agreement ..................... 113 The Source of the Problem . .................................... 113 Disagreement ............................................... 114 Arbitration ................................................. 114 Labor Opposition Prior to Closure .............................. 116 The Timing of the Bidding ..................................... 119 The Service Targets, the Financial Model, and the Low Bids ....... 121 How Do I Privatize My Local Water Company? ................... 123 Define the Problem .......................................... 123 List the Constraints .......................................... 123 Identify the Preferred Privatization