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Urban Studies
DOI: 10.1177/00420980070851082008; 45; 207Urban Stud
Xun Wu and Nepomuceno A. MalaluanMetro ManilaA Tale of Two Concessionaires: A Natural Experiment of Water Privatisation in
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efficiency improvement (Dosi and Easter,2003). In addition, water privatisation was
perceived as a means to end governmentsubsidisation by depoliticising water pricing;public water utilities often priced water andsanitation services at below cost-recoverylevel, creating enormous financial burdensfor governments in developing countries.The political environment during the decade
A Tale of Two Concessionaires: A NaturalExperiment of Water Privatisation inMetro ManilaXun Wu and Nepomuceno A. Malaluan
[Paper received in final form, October 2006]
Abstract
In February 1997, Maynilad Water Services, Inc. and the Manila Water Company,Inc. were awarded concession contracts from Manilas Metropolitan Waterworks andSewerage System (MWSS) and split between them the service areas in Metro Manila. Inthe years thereafter, the paths taken by the two concessionaires diverged dramatically:Maynilad became bankrupt and was turned over to MWSS, whereas Manila Waterhas prospered and is now a listed company in the Philippine Stock Exchange. Theco-existence of two concessionaires in the same city offers a rare opportunity to studythe role of internal factors in the privatisation of urban water systems because the
effects of many important external factors, such as political support, regulatorystructure and unforeseen events, are effectively controlled. The findings suggest thatcorporate governance, financial management and operations management of privatisedwater utilities are among the most important internal factors that determine successof water privatisation in developing countries.
Introduction
The 1990s saw an unprecedented waveof water privatisation around the world.Public water utilities failure to expandservice coverage and improve service qualityprompted municipalities in many developingcountries to turn to the private sector forinvestment capital, technical expertise and
0042-0980 Print/1360-063X Online 2008 Urban Studies Journal Limited
DOI: 10.1177/0042098007085108
Xun Wu is in the Lee Kuan Yew School of Public Policy, National University of Singapore, 469C BukitTimah Road, Singapore 259772, Singapore. Fax: 65 6468 6746. E-mail: sppwuxun@nus.edu.sg.
Nepomuceno A. Malaluan is with Action for Economic Reforms, 40 Matulungin Street, Central District,Quezon City, 1100 Philippines. Fax: +63 2 426 5626. E-mail: nepo@aer.ph.
45(1) 207229, January 2008
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208 XUN WU AND NEPOMUCENO A. MALALUAN
was highly favourable to water privatisationas pro-market politicians rose to leadershippositions in many countries and internationalfinancial institutions were actively promoting
market-oriented reforms in the developingworld through loans and technical assistanceprogrammes (Hall et al., 2005). By the end of2000, at least 93 countries had experimentedwith water privatisation in one form oranother (Brubaker, 2001).
The exuberant enthusiasm for the waterprivatisation, however, was soon subduedby harsh realities marked by renegotiation,
termination and cancellation of privatisa-tion contracts and projects. A World Bankdatabase on infrastructure revealed that,by 2002, 75 per cent of contracts for waterprivatisation in Latin America and the Carib-bean had experienced either renegotiationor cancellation (Gmez-Ibez et al., 2004).In Asia, the rate of water privatisation hasslowed considerably since the Asian financialcrisis, as a number of high-profile water pri-
vatisation projects have been abandoned orcancelled due to disputes over water tariffincreases (Hall et al., 2004).
Some critics have argued that water pri-vatisation is ill-fated because the publicbenefits of water services are inherentlyincompatible with the profit motive of theprivate sector (Estache et al., 2001; Birdsalland Nellis, 2002; Smith and Hanson, 2003).Others have held that water privatisationcompromises access to water as a basic humanright and that it harms the welfare of the poor(Gleicket al., 2002; Scanlon et al., 2004).
Although arguments against water pri-vatisation have gained currency in recent
years, the urgency of the water crises that ledto privatisations during the 1990s remainsunchanged to the present day: more than1.1 billion people world-wide lack safe
drinking water and 2.4 billion lack adequatesanitation (Kessides, 2004). The situation isespecially acute for many rapidly growingsmall cities in developing countries: more
than half of the residents in these cities donot have water connections (Hewett andMontgomery, 2001). Inadequate urban watersupply systems place a greater financial burden
on the urban poor, as a disproportionatelyhigh percentage of poorer households lackaccess to piped water (Johnstone et al., 2001;Marvin and Laurie, 1999). Studies have shownthat unit costs for water from vendors (whooften supply to the urban poor) can be asmuch as 10 times higher than for water frompiped connections (Crane, 1994; Chogull andChogull, 1996).
The importance of access to safe drinkingwater to poverty reduction is highlighted bythe stated intention of the Millennium Devel-opment Goal (MDG) to halve the numberof people without safe water access by 2015.Enormous financial resources are needed toreach this ambitious goal; estimates fromthe World Bank early in the new centuryindicated that developing countries wouldneed US$60 billion for the water sector over
the next 10 years (Haarmeyer and Coy, 2002).It is clearly unrealistic to expect governmentsin developing countries to finance this devel-opment entirely on their own. Private-sectorparticipation will continue to be among thefew options available to municipalities inmany developing countries and especially tothe increasing number of fast-growing smalland medium-sized cities.
Meanwhile, despite the many criticismslevelled at water privatisation, no empiricalevidence has emerged to suggest that fund-ing problems are so inherent in the watersupply sector as to pose insurmountablebarriers to privatisation. In fact, one recentstudy (Galiani et al., 2005) has shown thatwater privatisation reduced child mortalityby 57 per cent in Argentina, with the largestgains in reduction experienced by the poor-
est population. Although some research hasshown that efficiency was not significantlydifferent in private and state-run water oper-ations (Estache and Rossi, 2002; Kirkpatrick
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WATER PRIVATISATION IN MANILA 209
et al., 2004), no empirical study has confirmedclaims that private water companies arenecessarily less efficient than their publiccounterparts or that water privatisation
hurts the urban poor. Given the importanceof private-sector participation to the successof global efforts to alleviate inadequate andunsafe water supplies, it is of paramountimportance to understand where, when andhow water privatisation could be successfullyimplemented.
The voluminous literature on water pri-vatisation offers little information about the
impact of privatised water utilities man-agement practices on how privatisationhas fared in developing countries. Studiesof previous water privatisation cases havetypically focused on external factors suchas political support, institutional structure,design of contract, transparency of biddingprocess, public perception and impacts ofunforeseeable events (Johnstone et al., 2001;Shirley and Menard, 2002). These factors,
undoubtedly critical determinants in thesuccess or failure of water privatisation, arenevertheless external conditions in the sensethat they are outside the control of privatisedwater utilities. We argue here that privatisa-tion involves transformation in ownershipstructure and organisational culture withinwater utilities and that how the transformationis managed at the company level has a directbearing on the outcome of privatisation.
One plausible explanation for the lack ofscholarly work on the impacts of internalfactors on water privatisation is that it is meth-odologically challenging to assess what theseinternal factors are and how they function.First, it is fairly difficult to disentangle theeffects of internal factors from those of ex-ternal factors, as they are often intermixedand shaped by particular conditions, such
that case studies detailing water privatisationin a specific locality cannot usefully gener-ate definite conclusions about the effects ofinternal factors. Secondly, external factors are
often more visible and thus more tractableanalytically than internal factors, because itis easier to obtain information on externalfactors than on internal factors, which may
not be readily available in the public domain.Thirdly, statistical tools such as regressionanalysis may offer only limited insights oninternal factors because localised peculiar-ities can be hard to quantify and to comparemeaningfully.
The recent history of water privatisation inMetro Manila presents a unique opportunityas a natural experiment to analyse and com-
pare the effects of internal factors on thesuccess of privatisation efforts in an urbancontext. When Manilas Metropolitan Water-works and Sewerage System (MWSS) wasprivatised in 1997, metropolitan Manila wasdivided into two zones and concession con-tracts were accordingly awarded to two com-panies, Maynilad (West Zone) and ManilaWater (East Zone). Because the two conces-sionaires faced the same external factors
for example, political support, institutionalstructure, contract design, transparency ofbidding process and locally shared unforeseeneventsthe analyst can concentrate ondifferences in internal factors and study theeffects of these differences on the success andfailure of water privatisation.
The discussion continues by developingtheoretical linkages between water privat-isation and three internal factors: corporategovernance, financial management andoperations management. An overview of theevolution of water privatisation in MetroManila sets the stage for analysis and com-parison of the performance of the two conces-sionaires after privatisation, in terms of howdifferences in internal factors have contri-buted to the different paths that they tookand the outcomes they experienced. The
final discussion summarises important re-sults of the analysis and addresses theirimplications for water privatisation policyand for innovation in public water utilities.
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210 XUN WU AND NEPOMUCENO A. MALALUAN
Internal Factors and WaterPrivatisation: Theoretical Linkages
Because privatisation of public services such
as water utilities entails complex changes ineconomic, social and even political structures,the process is unquestionably shaped byvarious external factors such as politicalenvironment and regulatory structures. Yetprivatisation also involves transformationsin ownership structure, organisational cul-ture and operations management; how suchtransformations are managed, at the com-
pany level, has a direct bearing on the out-come of privatisation. In the present case,some theoretical linkages can be madebetween internal factors (such as corporategovernance, financial management andoperations management) and the success ofwater privatisation.
Corporate GovernanceCorporate governance refers to the distri-
bution of rights and responsibilities amongdifferent participants in a corporation (theboard, managers, shareholders and otherstakeholders) and the rules and proceduresthat have been adopted for making deci-sions on corporate affairs (OECD, 1999).Three fundamental principles of corporategovernance are accountability, transparencyand responsibility. Improvements in cor-porate governance are an important mechan-
ism by which privatisation may enhanceperformance.
For example, state-owned enterprises(SOEs) often suffer from a principalagentproblem whereby managers cannot be easilyheld accountable for their actions. Privatisedcorporate governance offers the prospect oftighter control of employee performance bylinking job tenure directly to performance
and accountability. Yet experiences in pri-vatisation in recent decades have shownthat transfer of ownership cannot guar-antee improvement in corporate governance
(Dyck, 2001). Nestor (2005) observes that newlyprivatised companies with a widely dispersedbody of owners may fall prey to managerialopportunisma problem that can become
especially pronounced in developing coun-tries where market mechanisms for corporatecontrol have not become well established. Inmany transition economies, weak corporategovernance has been exploited to loot stateresources through the privatisation processitself (Blacket al., 2000).
Some unique features of water privatisa-tion pose particular challenges to corporate
governance. First, because water is perceived asan essential good, privatised water companiesare often subjected to close scrutiny from thepublic, who are likely to expect high standardsof corporate governance. Aguas ArgentinasSA (AASA), the private water company inBuenos Aires, experienced this firsthand:the companys reluctance to employ compet-itive bidding in selecting contracts and itsrefusal to share information about its con-
tractors bred public distrust and growinghostility, not only towards AASA itself butalso towards the Argentine government andregulatory agency (Bosman, 2005). Becauseconsumers are such important stakeholdersin privatised water utilities, these companiesmust adopt a broad concept of corporategovernance that recognises public satisfactionas a primary goal.
Secondly, the very nature of water supplytechnology (which involves high fixed capitalcosts and increasing rate of return) determinesthat water utilities are natural monopolieswhether in governmental or in private hands.Thus market competition as an externalmechanism for effective corporate control isalmost non-existent in the water sector andregulatory agencies are the arbiter of lastresort. However, regulatory agencies often
suffer from information asymmetry and theireffectiveness may be further reduced by thegeneral weakness in regulatory capacity foundin many developing countries.
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WATER PRIVATISATION IN MANILA 211
Thirdly, because of the substantial finan-cial and human resources needed to operateurban water systems, privatised water utilitiesare often formed as joint ventures among
several partners, typically some combinationof domestic and foreign interests. Althougha strategic alliance among these differentpartners is necessitated by political, legal,financial and technical considerations, thepotential for conflicts of interest among themcannot be underestimated. Bad corporategovernance can quickly lead to internalconflicts that may bring out the worst in all
involved (Bamford and Ernst, 2005).The fourth challenge confronting privat-ised water utilities is that water privatisationoften involves conglomerates that controlmany subsidiaries through a complex webof pyramiding and cross-holding.1 Directorswithin these groups often sit on each othersgoverning boards. Resulting effects includelittle independent scrutiny of individualcompany management and considerably
weakened shareholder discipline (Nestor,2005). Controlling shareholders could poten-tially expropriate the benefits of minorityshareholders and other stakeholders throughrelated-party transactions that are likely tobe detrimental to the operations of the pri-vatised water utilities as well as to the publicinterest.
Financial Management
A primary consideration for water privat-isation in developing countries is the needto attract private investments into the watersector, but these private investments oftendo not come cheaply. Newly privatised watercompanies require substantial amounts ofcapital for settling labour issues as well asfor system renovation and expansion, andthey must rely heavily on capital markets
to finance the deficit. However, becausenewly privatised companies are not knownin financial markets and carry the baggageof past public governance, access to credit
is expensive (Ozkaya and Askari, 1999). Inmany developing countries where a domesticcapital market is not well established, theonly accessible sources may be foreign, a very
expensive option because of the substantialamount of risk involved.
Uncertainty regarding regulatory actionsand consumers sensitivity to tariff increasesfurther heighten the risks involved in waterprivatisation projects. Haarmeyer and Mody(1997) describe the evolution of private finan-cing in the water sector as a three-step process.The first step is limited-recourse financing,
which is typically expensive because of riskswithin the sector as well as uncertainties asso-ciated with early development stages. Thesecond step is financing through returnedearnings, once a stable set of rate-payingcustomers has been achieved and confidencein the regulatory process has grown. The thirdstep is bond financing, much cheaper thanlimited-recourse financing but only availablefor utilities with a track record of stable re-
venue sources. Privatised water companiesmight become financially stressed in the earlystages of development, not because they failto achieve efficiency gains but because suchgains fall short of covering the expensivelimited-recourse financing. Prudent financialmanagement from the outset is thus a keyto the success of the water privatisation indeveloping countries.
In preparing bids for water privatisation,potential bidders may suffer from the so-called winners curse by underestimating theeffects of potential risks such as political risk,currency risk and financial risk. This mayimprove the prospects of winning conces-sions, but such bids may become unsustain-able when unforeseeable setbacks arise. Waterprivatisation in Buenos Aires, for example,had been seen as a huge success until, in the
wake of the convertibility crisis between 2000and 2002, the privatised utility found itselfheavily indebted but unable to attract freshcapital to cover contractual obligations.
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212 XUN WU AND NEPOMUCENO A. MALALUAN
Operations Management
Water privatisation involves two crucialactivities at which privatised water utilitiesrarely excel: the transformation of a public
utility into a private company and the man-agement of public expectations. Employeesin public water utilities, as in other SOEs,are often guaranteed life-long employmentand thus are not motivated to improve per-formance. Developing an efficient incentivesystem is an essential part of organisationalrestructuring in newly privatised firms(Ozkaya and Askari, 1999). Employees in the
public sector are also often slow in respond-ing to customers demands because there isalmost no competition to supply the servicesthey provide. Concessionaires ability to buildan organisational culture that promotes acommercial, customer-driven working envir-onment is essential to the success of thetransformation from public to private watercompany.
Management of public expectations is
of critical importance to a privatised waterutilitys survival. Because water is perceivedas essential good, there is often controversyover whether the private sector is fit to operatethe water system. In addition, public waterutilities generally keep prices below costs; theexpectation usually is that privatisation willnot change that. Although this is virtuallyalways an unrealistic notion, how to contend
with imperatives for price increases in theface of unrealistic public expectations is achallenging task. A recent World Bank studydiscovered that most water and sewerage pro-
jects that were cancelled had been confrontedwith conflicts between price increases anddifficulties in collecting from consumers(Harris et al., 2003).
Two useful strategies for dispelling opp-osition to water privatisation are to build
corporate legitimacy and to establish strategicalliances. Although concession agreementsmay contain mandates that privatised watercompanies must establish their legitimacy as
customer-focused companies commensuratewith their private-sector status, such legitim-acy could be challenged because of the naturalmonopoly that characterises water utilities
and because of information asymmetry.Privatised water companies can build cor-porate legitimacy through disclosure tocustomers and image management (Ogdenand Clarke, 2005). In many developing coun-tries, the most likely allies in support of aprivatised water utility would be the urbanpoor who do not have water connections.They often pay several times more than con-
nected residents while suffering from theworst service quality (Johnstone et al., 2001).Privatised water companies can significantlystrengthen their corporate legitimacy byaligning their interests with those amongthe poor who strongly demand coverage forunderserved communities.
In the following two sections, we show thatwater privatisation in Manila offers a rareopportunity as a natural experiment to study
the effects of these internal factors on waterprivatisation.
Water Privatisation in Manila
Comprised of 12 cities and 5 municipalities,Metro Manila has 11 million inhabitants,about 13 per cent of the total population ofthe Philippines, and is densely populated, with
about 16 000 persons per square kilometre.Privatisation of water services was firstproposed in the mid 1990s when MWSS,the state-owned water utility responsible forproviding water and sanitation for MetroManila, had become unable to expandcoverage adequately to a rapidly growingpopulation. By 1996, MWSS was only able tosupply an average of 16 hours of water perday to two-thirds of its coverage population.
Its efficiency as measured by non-revenuewater (NRW)2 and number of staff per 1000connections was the lowest among majorAsian cities (see Table 1).
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WATER PRIVATISATION IN MANILA 213
The urban poor were hurt the most byMWSSs ineffective and inefficient oper-ations. According to a 1995 household survey,poor households that relied on private watervendors paid prices up to 13 times higherthan the rates for MWSS household waterconnections (David and Inocencio, 1998).Furthermore, with water and sanitation ser-
vices priced below costs, MWSS had to relyon periodic government subsidies to serviceits debts, placing a heavy financial burden tothe government.
Water privatisation thus appeared to bean attractive solution to the looming watercrisis. The Ramos administration believed thatwater privatisation could improve operationsefficiency, raise financial resources for waterinvestments and end the need for government
subsidies (David, 2001). In 1995 the WaterCrisis Act was enacted, giving the presidentthe authority to privatise MWSS within one
year. The government wasted no time in layingthe groundwork, which was closely patternedon the example of Buenos Aires. The watertariff was increased by 38 per cent in August1996 in anticipation of pressures for an in-crease during the process of privatisation; inthe meantime, the MWSS labour force wascut by 30 per cent. Both strategies helped toboost private-sector interest in participatingin water privatisation (Dumol, 2000).
International financial institutions wereclosely involved in the privatisation processfrom the very beginning. In 1995, the AsianDevelopment Bank (ADB) provided a tech-nical assistance (TA) grant amounting toUS$582 000 as a part of its UmirayAngatTransbasin Project, to assist MWSS in pro-moting privatisation activities. The Inter-national Finance Corporation (IFC) of theWorld Bank acted as the lead advisor forthe design and the implementation of waterprivatisation.
A critical feature in the design of waterprivatisation in Manila was that the serviceareas in Metro Manila were divided into twozones (see Figure 1), which according to thebidding rule could not be operated by a singleconcessionaire. There were three reasons for
the split: it gave regulators more leverage intheir negotiations with concessionaires; itprovided opportunities for benchmark com-parisons between the two zones; and, thearrangement served as a safety valve, suchthat if one concessionaire got into financialtrouble, the other concessionaire could takeover (Dumol, 2000).
In January 1997, in what has been knownas the worlds largest water privatisation deal,competitive bidding was held to privatiseMWSS. Four consortia submitted bids forboth the East and West Zones. In accordance
Table 1. MWSS service compared with other major Asian cities, 1996
City
Population
(millions)
Water
availability
(hrs/day)
Water coverage
(percentage of
population)
Non-revenuewater (NRW)
(percentage of
production)
Staff/1000
connections
Manila 10.6 16 58.7 63 9.8
Singapore 3.0 24 100 7 2.0
Hong Kong 6.3 24 100 36 2.8
Seoul 10.6 24 100 35 2.3
Kuala Lumpur 1.4 24 100 36 1.4
Bangkok 7.3 24 82 38 4.6
Source: Second Water Utilities Data Bank, Asian and Pacific Region, Asian Development Bank,October 1997.
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214 XUN WU AND NEPOMUCENO A. MALALUAN
Figure 1. Service areas of Maynilad and Manila Water
Source: MWSS.
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WATER PRIVATISATION IN MANILA 215
with the rules for the bidding, the Maynilad
Company, a joint venture by Suez and Benpres
Holding (controlled by the Lopez family), was
awarded the concession contract for the West
Zone; the Manila Water Company, Inc., a jointventure by Ayala, United Utilities and Bechtel,
was awarded the East Zone. Both concession
contracts were to last 25 years and the targets
for improvement in service coverage, water
quality, service quality and reduction in
NRW were specified in the contracts. The two
concessionaires in combination were expected
to increase water supply coverage from the
then-current 67 per cent level to 85 per cent by2001 and to 96 per cent by 2006 and beyond.
In addition, the two concessionaires were to
pay roughly US$1.2 billion in concession fees3
over the 25-year period to service the exist-
ing debts of MWSS and to finance the oper-
ations of the MWSS Regulatory Office, which
had been established to oversee the imple-
mentation of concession contracts.
The concession contracts also specified
tariff adjustment mechanisms. Three grounds
were deemed acceptable for rate adjustments:
inflation, extraordinary price adjustment
(EPA) and rate-rebasing. The concessionaires
would be allowed to adjust base rates auto-
matically according to the consumer price
index. Tariffs could be adjusted annually to
recoup the financial effects of certain events
unforeseeable to the concessionaires, such
as sharp devaluation and changes in laws andregulations. A rate-rebasing exercise would be
conducted every five years so that return on
investment, or appropriate discount rate
(ADR), would not exceed a fair return. The
original intention of rate-rebasing was that
the concessionaires would be allowed to
reap efficiency gains during the interval of
two consecutive rate-rebasing exercises; rate
adjustments every five years would ensurethat consumers also shared the benefits of
the efficiency improvement. Unfortunately,
tariff adjustments through rate-rebasing
became a major source of tension and con-
troversy soon after privatisation because
both the level of ADR and the validation of
various assumptions for computing rates
of investment were subject to regulatorydiscretion.
Another critical feature of water privat-
isation in Manila was the extremely low
bids offered by the two winning consortia
especially by Manila Water, which proposed
a base rate amounting to only one-fourth
of MWSS tariffs at the time of bidding (see
Table 2). In fact, the bid was so low that offi-
cials administering the bidding process hadto confirm with Manila Water that it was
indeed the water tariff that was meant, and
not the discount (Dumol, 2000). The overall
impression among the policy-makers was
that the generally low bids reflected both
the inefficiency in MWSS and the private
sectors confidence. In retrospect, although
the low bids ensured an easy sell of the con-
cession agreements to water consumers in
Metro Manila, they planted the seeds for
public outcry about rate increases in the years
following the privatisation process.
Two unforeseen events deeply under-
mined the financial models used by the two
winning consortia in the bidding process,
making them grossly inaccurate. The first
was that just after the concessions were
granted, the Angat Reservoir, from which
98 per cent of Manilas water supply is drawn,had experienced an unprecedented drought;
the amount of water available to the two con-
cessionaires decreased by 30 per cent. The
second was the Asian financial crisis under
which currency devaluation almost doubled
MWSSs dollar-denominated debt service
burden. The financial obligation for the two
concessionaires increased accordingly, as the
concession agreements had stipulated thatMWSS debt service was to be paid for from
concession fees.4 The financial crisis also made
it more expensive for the concessionaires to
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216 XUN WU AND NEPOMUCENO A. MALALUAN
Not surprisingly, the low tariffs that wereto be achieved through water privatisationproved too good to be true (Fabella, 2006);tariffs began to rise gradually through 2001
and accelerated after October 2001, when acontract amendment was granted by theRegulatory Office (see Table 3). In the publiceye and among civil society groups, thegovernment had been perceived as fairlyaccommodating to the two concessionairesdemands. A foreign currency differentialadjustment (FCDA) was granted to allow theconcessionaires to recover automatically from
the foreign currency losses at an acceleratedrate; also, the appropriate discount rate(ADR) was adjusted significantly upwardsin the rate-rebasing process held in 2002. Inaddition to accelerated recovery of foreigncurrency losses and higher ADR, targetsfor expansion and NRW were also adjusteddownwards in the contract amendment sothat the two concessionaires could reducetheir capital expenditure requirement in the
early years of operation.
Table 2. Bids received and winning bids
Bid
Pre-privatisation rate 8.56
West zone
AyalaInternational Water 2.5140
BenpresLyonnaise des Eaux(Maynilad)
4.9688Winning bid
AboitizCompagnie Gnrale desEaux
4.9941
Metro PacificAnglian WaterInternational
5.8738
East zone
AyalaInternational Water (ManilaWater)
2.3169Winning bid
AboitizCompagnie Gnrale desEaux
5.5209
Metro PacificAnglian WaterInternational
5.6638
BenpresLyonnaise des Eaux
(Suez)
6.1275
Note: bids in Php.
Table 3. History of tariff rates before and after water privatisation
Average base tariff Average all-in tariffa
Manila Water Maynilad Manila Water Maynilad
Pre-privatisation 8.56 8.78
Post-privatisation
1997/98 2.32 4.96 4.02 7.211999 2.61 5.80 4.37 8.23
2000 2.76 6.13 4.55 8.63
2001 2.95 6.58 4.78 9.17
2002 4.51 11.39 9.37 19.92
2003 10.06 11.39 13.38 19.92
2004 10.40 11.39 14.00 19.92
2005 13.95 19.72 18.55 30.19
2006 14.94 21.12 19.73 32.34
a
All-in tariff = base tariff + CERA (currency exchange rate adjustment) + FCDA (foreign currencydifferential adjustment) + EC (environmental charge) + VAT (value added tax).
Note: tariff rates in Php per cubic metre.Source: MWSS Regulatory Office.
access the financial market for their capitalinvestment projects, because of the sudden
jump in risk premiums.
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WATER PRIVATISATION IN MANILA 217
These substantial rate increases and loweredtargets granted by the Regulatory Officenevertheless failed to prevent Maynilad fromdescending into bankruptcy in 2003. The firm
never made a profit during its eight yearsin operation. At the start of its concession,Maynilad had targeted a reduction in NRWfrom 64 per cent in 1997 to 31 per cent in2001; instead, NRW rose to 69 per cent, and,as a result, the volume of billed water wasonly half of the target level. Maynilad stoppedpaying its concession fee in April 2001, despitethe numerous rate increases that had allowed
it to recover foreign exchange rate lossesdue to the Asian financial crisis. The unpaidconcession fees had accumulated to overPhp 6.8 billion by the end of 2003, forcingMWSS to assume short-term loans to servicethe debts. In December 2002, Maynilad fileda notice of termination of its concessioncontract, blaming the government for thefirms difficulties in sustaining business inthe West Zone and seeking reimbursement
of more than US$303 million that the firmclaimed to have invested. Bankruptcy wasformally declared in November 2003, afterthe international arbitration panel ruled infavour of MWSS. Court documents showthat Maynilad had accumulated unsecuredliabilities of Php 17.4 billion against recov-erable assets of only Php 2.4 billion. In 2005,Maynilad was turned over to MWSS under aso-called debt-for-equity exchange, in whichBenpres relinquished its shares to MWSSand other creditors in exchange for unpaidconcession fees and debts.
Manila Water took a completely differentpath. Although its bids seemed to be un-realistically low at the outset and even moreso in light of the unanticipated events thatfollowed, and although it missed some keytargets in the early years after privatisation, the
company performed well financially. Its NRWwas reduced from 58 per cent in 1997 to 35 percent in 2005. Remarkably, the company hadbegun to make a profit by 1999, when water in
the East Zone was selling at a huge discountoff the pre-privatisation rate, and it has beenprofitable ever since. In 2004, Manila Waterposted net income of Php 1.335 billion. On
18 March 2005, Manila Water was listed onthe Philippine Stock Exchange as the firstIPO in the Philippines after the Asian finan-cial crisis.
Internal Factors and WaterPrivatisation in Manila: Mayniladvs Manila Water
Corporate Governance
A striking feature of corporate governancein the Philippines is the concentration ofeconomic power in an extremely smallnumber of family conglomerates. The largestfamily conglomerate controls 17 per cent ofthe nations total market capitalisation; thelargest 10 families control more than 50 percent (Wu, 2005). The interlocking nature of
corporate control within these conglomeratespresents special challenges for discipline inthe corporate sector (Saldana, 2001). Twoof the three largest of these family conglo-merates, Lopez and Ayala, became involvedin the water privatisation in Manila. Lopezcontrolled Maynilad through Benpres Hold-ings, a publicly listed holding company, andAyala controlled Manila Water through theAyala Corporation, another publicly listedpure holding company. Both conglomerateshave used pyramiding and cross-holding tocontrol business interests in real estate, bank-ing, construction, telecommunication andelectricity production and distribution.
The involvement of multinational watercompanies in water privatisation in Manilaadded another dimension of complexity tocorporate governance of the two concession-
aires. Strategic alliances with multinationalwater companies were considered key induce-ments for Lopez and Ayala to participate, asneither had technical expertise in operating
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218 XUN WU AND NEPOMUCENO A. MALALUAN
urban water systems. The possibility arose,however, that problems might develop frommultinational partnerships, owing to differ-ences in management styles and corporate
cultures. A more important consideration wasthat their interests might not always be aligned,especially likely insofar as the participatingcompanies all had other subsidiaries andaffiliates whose interests might in turn beaffected by operational decisions made by thetwo concessionaires.
The concessionaires responses to thesechallenges differed markedly. In Maynilad,
contracts for services and consultancies wentlargely to Suez and Benpres, as well as to theirsubsidiaries or affiliates. For example, amanagement consultancy contract went toLyonnaise des Eaux Philippines (LDEP), asubsidiary of Suez; a programme managementcontract went to Safage Consulting andMontgomery Watson, both affiliates of Suez;service contracts went to First PhilippineBalfour Beatty and to Philippine Steel
Fabricators, Inc., both subsidiaries of FirstPhilippine Holdings Corporation, which isa subsidiary of Benpres Holdings. The sizeof such contracts was often substantial. Forexample, in 2001, when Maynilad decided tostop paying its concession fee because of heavyindebtedness, 11 French consultants werereportedly paid Php 168 million, of whichPhp 110 million was for consultancy services(Santiago, 2002).
Because related-party transactions wereshielded from competitive bidding, Mayn-ilad incurred exorbitant costs. For example,
Maynilads computers were purchased fromIBM France, an affiliate of Suez. Compared withManila Water, the East Zone concessionaire,Maynilad spent, per employee, 80 per cent
more on computers (Diokno-Pascual, 2004).Table 4 shows comparatively higher operatingcosts for Maynilad on almost all categories; theexception, utilities cost, is due to higher pump-ing requirements for Manila Waters servicearea. It is especially curious that Mayniladsoperating costs (see Table 5), especially non-personnel operating costs, actually increaseddramatically while its financial woes were
worsening; one would expect to see exactly theopposite in a financially distressed company.And related-party transactions led to morethan these high operating expenditures: theyaggravated tensions between the two partners(Benpres and Suez) that had plagued thewater privatisation initiative from the verybeginning.5
Manila Water, in comparison, has main-tained an arms-length relationship with
subsidiaries of Ayala Corporation and otherpartners in the joint venture. It has outsourcedto some 75 contracting companies much ofits work for replacing outdated water mainsand repairing leaks; only one of those isaffiliated with Ayala Corporation. ManilaWaters more successful practices in corporategovernance certainly have not gone unnoticed:in 2005,Asiamoneyvoted it the best-managedcompany in the small capital category.
Although a private water companysmanagement determines the quality of itscorporate governance practices, the public
Table 4. Operating costs, Maynilad and Manila Water, 2000
Manila Water Maynilad
Average annual staff wage (Php) 304 673 403 674
Utilities cost (Php/cubic metre billed) 0.37 0.15
Services (Php/cubic metre billed) 0.23 0.26
Chemicals (Php/cubic metre billed) 0.13 0.17
Materials and supplies (Php/cubic metre billed) 0.13 0.17
Source: MWSS Regulatory Office.
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WATER PRIVATISATION IN MANILA 219
sector has ample opportunities to influencecorporate governance practices through thebidding process, regulatory actions and assetownership. Government officials guidingthe bidding process would be wise to paycareful attention to each bidders corporategovernance practices, as these could be anindicator of how that bidder might perform
if awarded the contract. Government can alsoinclude good corporate governance practicesin concession agreements. Mark Dumol, agovernment official who was extensivelyinvolved in the bidding process in Manila,has particularly emphasised the potential ofutilising regulatory tools to constrain badcorporate governance practices:
If I can rewrite the privatization rules, I
would put in tougher provisions against theshareholder-related companies, especiallythe foreign partners, making a quick buckfrom transactions with the local concession-aire company (Landingin, 2003).
In retrospect, benchmark competition estab-lished by having two concessionaires seemsto have worked from the perspective of thepublic. Having two concessionaires oper-
ating in the same city and subject to the samepolitical environment not only helped theRegulatory Office to overcome the informationasymmetry associated with water privatisation
(and with weak regulatory capacity as well),it also offered the concessionaires a yardstickfor assessing and containing the potentialnegative impacts of related-party transactions.Perhaps the most important benefit was thatthe information available through benchmarkcompetition helped to dissipate the publicsanxiety in dealing with tariff increases.
Financial Management
The financial models used by the two conces-sionaires for the bidding in early 1997 wereprepared at a time when foreign capital waspouring into the Philippines, begging forinvestment opportunities. The Asian financialcrisis abruptly and completely changed thelandscape that the two new concessionaires
confronted. Easy credit was no longer avail-able and creditors had become extremelymeticulous in the due-diligence process.
Manila Water made some critical ad-justments to its financial management inresponse to the crisis. First, it focused ondomestic lenders for capital expenditureby leveraging on Ayala Corporations goodreputation and successfully settled for small-size loans from several local banks, starting
at a level of about US$20 million in 1998and gradually increasing in cumulative levelsto US$25 million in 1999, US$55 million in2000 and US$67 million in 2001. Secondly,
Table 5. Comparison of costs in Maynilad and Manila Water
OPEXa/BWVb
(Php per cubic metre)Personnel cost/BWV
(Php per cubic metre)Non-personnel cost/BWV
(Php per cubic metre)
Manila Water Maynilad Manila Water Maynilad Manila Water Maynilad1997 7.20 6.43 4.10 4.93 3.10 1.50
1998 6.15 5.15 2.64 4.79 3.50 2.36
1999 5.12 7.03 2.33 4.65 2.78 2.38
2000 4.79 6.70 2.17 4.17 2.63 2.53
2001 4.52 7.20 1.87 3.48 2.65 3.72
2002 5.06 9.47 2.33 4.30 2.73 5.17
a OPEX: operating expenditure.b BWV: billed water volume.Source: MWSS regulatory office.
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220 XUN WU AND NEPOMUCENO A. MALALUAN
it slowed down its capital expenditure con-siderably as compared with the original bids.Although this resulted in Manila Waters fail-ure to achieve some goals in the early years, the
slowdown may have been a sensible strategyfor protecting the company against substantialfinancial risk before it could use less expensivemeans of financing. Thirdly, Manila Watertargeted the areas that were most likely to pro-duce financial improvements with a limitedamount of capital expenditure, such as innov-ative approaches in reducing NRW.
Manila Waters cautious approach to finan-
cial management paid off. It is remarkablethat the company was able to make a profit asearly as 1999, when the water in East Zone wasstill selling at a significant discount comparedwith the pre-privatisation level. Small butwell-targeted capital expenditure right afterprivatisation allowed the company to solidifyits bottom line, enabling it to secure less ex-pensive financing later on. Manila Waters
capital expenditure has increased significantlysince 2002 (Figure 2), which should help it toachieve its targeting in the years to come.
The same prudence in financial manage-
ment is not evident in the case of Maynilad.It focused on immediately securing a hugeUS$350 million term loan from the AsianDevelopment Bank, European InvestmentBank and a syndicate of foreign commercialbanks with the participation of COFAGE aspolitical risk insurer, for its capital expenditureprojects. This strategy failed as the huge bor-rowing proved to be very difficult to close. The
prospective long-term lenders set stringentconditions and only initially agreed to aUS$100 million bridge loan.
While this should have allowed the com-pany to make strategic capital investments toimprove financial performance, the anticipatedopportunities never materialised. Despitesubstantial capital expenditure, Maynilad wasvery slow to attend to some critical aspects in
Figure 2. Capital expenditures, Manila Water and Maynilad
Source: MWSS Regulatory Office.
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WATER PRIVATISATION IN MANILA 221
improving its financial standing. For example,until 2004 Maynilad did not have a databasethat could provide area-specific estimates ofwater losses due to theft versus losses due
mainly to the bad state of pipes and inefficientmetering (Esguerra, 2006). In the meantime,the negotiation for the full-term loan becameprotracted and the large capital investmentwithout resulting operational efficiencies ledto more accumulated financial losses thateventually bankrupted the company. In March2003, Maynilad defaulted on its payment ofthe bridge loan and closure of the term loan
has inevitably fallen through.Operations Management
The two concessionaires jointly inherited ahighly centralised organisational structurethat retained some of the common charac-teristics of state-owned utility companiesin many developing countries. Most MWSSemployees were accustomed to a systemthat was rule-based and procedure-driven.
Consequently, they performed their jobswith little concern for effectiveness andefficiency (Beer and Weldon, 2000a). Toovercome the difficulties of transforming apublic utility into a customer-driven privatewater company, Manila Water developedstrategies centring on a few core objectives: tobuild a corporate culture focused on honesty,effective performance and customer service;
to create a new organisational structure witha clear chain of responsibility through de-centralised decision-making; to alter workprocedures towards better communicationand co-operation; and, to establish a rewardsystem aligning pay with responsibility andresults (Beer and Weldon, 2000b).
A hallmark of Manila Waters approachto these objectives was its effort to instilltrust and confidence in former MWSS em-
ployees, which was backed with sufficientretraining and support. Instead of treatingformer MWSS employees as a collateralliability in securing the concession contract,
Manila Water management viewed them asinvaluable and indispensable resources forbuilding a strong new company. Rather thanrelying on imported talent, Manila Water
sent these veteran employees abroad fortraining and exposure to relevant operationalenvironments (Chotrani, 1999). Similarly, thecompanys middle and senior managementpositions were mostly staffed by formerMWSS employees, with only a very few toppositions filled by representatives secondedfrom Ayala and its foreign partners. Theemployee-retention strategy took hold:
more than 5 years after privatisation, 95 percent of Manila Water personnel were formerMWSS employees (UTCE and Japan PFIAssociation, 2004).
Manila Water also adopted several innov-ative approaches in operations managementto target NRW. Although improved corporategovernance practices and prudent financialmanagement helped to control operatingcosts and capital expenses, a key to the com-
panys financial success was its persistenteffort towards reducing NRW, which hasdirectly contributed to the revenue increase.Within less than a decade of privatisation,Manila Water reduced NRW significantly,from 58 per cent to 35 per cent of former levels,whereas in the West Zone NRW increasedfrom 64 per cent to 69 per cent (see Figure 3).This dramatic success was mainly due to twoinnovations in its operations management:territory management and the Water for theCommunity programme.
Territory management, a part of ManilaWaters management decentralisation initi-ative, partitioned its service areas in the EastZone into smaller and more manageableclearly defined territories. The East Zone wasdivided into seven business areas, which werein turn sub-divided into a total of 43 oper-
ational districts, termed demand monitoryzones (DMZs). Each DMZ had approximately10 000 water connections and was sub-dividedinto several district metering areas (DMAs),
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222 XUN WU AND NEPOMUCENO A. MALALUAN
each servicing 5001000 connections. EachDMA was to be managed by a territory team
consisting of a territory business manager,DMA officers, meter consumption analysts,site officers and service providers. The terri-tory teams would be responsible for customerservices, monitoring and control of NRW,and new service development; they also wereempowered to make decisions pertaining totheir customers water and wastewater needs,funding and implementation. Because ofthis clear tiered division of responsibilities,evaluation and compensation of employeesand managers could be geared to quality ofperformance. One improvement resultingfrom this structure was quicker response tocustomer demand. Within a few years of itsinauguration, the average time to repair leakswas reduced to 4 days in Manila Waters EastZone (compared with 11 days in MayniladsWest Zone) and 97 per cent of customer ser-
vice complaints were communicated andresolved within 10 days (UTCE and Japan PFIAssociation, 2004). The territory managementsystem remains in operation today.
The Water for the Community programme(Tubig Para sa Barangay), begun in 1997,
focused on extending water supply services toareas containing numerous clusters of lower-income families. Under this programme,several households (typically two to five) canshare one connection and thus split its costof consumption among them. Where suchan arrangement is not feasible, one bulk con-nection is provided to the whole community(up to 100 or more households) and costs ofconnections are shared by all. By 2005, morethan 500 projects in the East Zone had beencompleted under the programme, benefit-ing approximately 850 000 people in poorcommunities (Manila Water, 2005). A uniquefeature of the initiative is that it brings wateronly to the edge of a community, next to a mainroad, where shared meters for a group ofhouseholds, or the entire communitys bulkmeter, can be positioned (see Figure 4). Water
is then billed at the volume passing throughthese meters at the community entry point;it is the responsibility of the community todistribute the water from thence to individual
Figure 3. Non-revenue water (NRW), Manila Water and Maynilad
Source: MWSS Regulatory Office.
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WATER PRIVATISATION IN MANILA 223
households and to protect against leakage andillegal connections. Manila Waters serviceconnections under Tubig Para sa Barangayhave effectively imposed a zero-NRW rule inareas plagued in the past with rampant illegal
connections.Given that private water companies often
encounter political opposition to privatisa-tion in general and to tariff increases in particu-lar, the Water for the Community programmehelps Manila Water to build legitimacy.Because the company has been able to providewater services to poor communities that thepublic water utility had failed to reach, thesecommunities have become political allies in
the companys efforts to reduce opposition towater privatisation. The Water for the Com-munity programme also makes business andfinancial sense for the company. BecauseManila Water in effect imposes a zero-NRWrule on projects under the programme, it hasactually helped to reduce overall NRW byminimising illegal connections, leaks andwater contamination in areas where these
problems are the most severe. The programmehas also played an important role in attractingsupport, in the form of low-interest loansor equity investments, from international
organisations and foreign government donororganisations concerned with supplyingwater to the poor.6 The success of the Waterfor the Community programme suggeststhat public benefits and private-sector profit
motives may not be inherently incompatiblein water privatisation. Perhaps the mostremarkable aspect of this achievement is thatprojects targeted at water supply for the poorwere not specified in the 1997 concessioncontracts.
The situation was completely different atMaynilad. A large number of employees fromBenpres Holdings and its subsidiaries weretransferred to Maynilad, most of them with
no experience in the water sector; incomersfrom Suez took up most of the new companysmanagement positions. Former MWSSemployees felt they were being treated assecond-class citizens in the new company andmorale sank.7 The company did not invest asmuch as needed to upgrade its employeescapabilities; in its first years of operation, an-nual expenditure on such training averaged
only Php 1500 (about US$30) per employee(UTCE and Japan PFI Association, 2004). Thementality, mindset and behaviour of formerMWSS employees who had remained with
Figure 4. Service expansion model for the Water for the Community programme at Manila Water
Source: UTCE and Japan PFI Association (2004).
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224 XUN WU AND NEPOMUCENO A. MALALUAN
the company had scarcely changed from pre-privatisation days.8
Ironically, the idea of territory manage-ment had been initiated by employees at
Maynilad right after the privatisation,9 butthe company had passed over this option infavour of a system-wide approach to dealingwith NRW problems.10 It did not, however,promptly inaugurate a centralised monitor-ing plan for pinpointing leaks in the system:the first reliable and consolidated reporton leakage was not introduced until 2000(UTCE and Japan PFI Association, 2004),
although billions had already been deployedin capital expenditures for laying new pipes.Maynilad also created a programme for
supplying the poor, a Water for the Commun-ity programme (Bayan Tubig). Its expansionmodel was more generous than ManilaWaters: families usually received individualconnections, with meters near their houses(see Figure 5). This arrangement left the linesexposed, so that unconnected households
could tap into the system before the waterreached the meter for connected households.In fact, a connected household could even de-cide to tap its own connection before it reachedthe meter (UTCE and Japan PFI Association,
2004). Thus it comes as no surprise that NRWcontinued to rise in these communities as theprogramme expanded. Maynilad eventuallyhalted Bayan Tubig because of the financial
difficulties the programme had created.
Concluding Remarks
While many of the criticisms levelled at Manilawater privatisation have focused on signifi-cant rate increases and slower-than-expectedservice expansion (Buenaventura et al., 2004;Esguerra, 2003), the performance of privat-isation should be assessed in a historicalcontext. It is true that both concessionairesraised their water tariffs substantially in theirfirst years of operation, but the magnitude ofincrease in part reflects their extremely lowbids: Manila Waters winning bid was only aquarter of the rate before privatisation. Givenunforeseen events such as the Asian financialcrisis of 1997 and the unprecedented droughtthat afflicted Angat Reservoir, it is highly
plausible that MWSS would have increasedits charges to the same level even had it notbeen privatised, or else the government wouldhave had to assume a substantial financialburden.
Figure 5. Service expansion model for the Water for the Community programme at Maynilad.
Source: UTCE and Japan PFI Association (2004).
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WATER PRIVATISATION IN MANILA 225
Although the system expansion still fallsshort of what is specified in the concessioncontracts, the two concessions had increasedconnections by 30 per cent during their first five
years of operationa feat that MWSS wouldhave taken 30 years to achieve on the basis ofits historical performance. Impressively, muchof that expansion occurred in economicallydistressed areas, directly benefiting the urbanpoor who had formerly relied on more ex-pensive water supply alternatives.
Worker productivity increased significantlyafter privatisation. Consolidated figures for
the two concessions show that number ofstaff per 1000 connections dropped from 9.4in 1996 to 4.1 in 2003. Both concessionairesmanaged to resolve overemployment frompre-privatisation levels through early retire-ment programmes, with little or no socialdisruption in the corporate setting.
Our investigations show that generalisedconclusions about water privatisation inMetro Manila should not be ventured with-
out carefully differentiating between thetwo concessionaires. There are pluses andminuses in the external factors surroundingwater privatisation in Manila, some of whichare related to intellectual discourse beyondthe scope of this essay; but Manila Watersmore successful experience compared withMaynilads suggests that studies focusing onexternal factors alone may be too limited.Water privatisation without improvementsto management systems for the privatisedutilities severely reduces the chance of success,even under favourable external conditions.On the other hand, Metro Manilas experienceshows that innovative management practicesin privatised water utilities can help to over-come obstacles introduced from the externalenvironment.
Our analysis suggests that decisions regard-
ing internal factors such as corporate govern-ance, financial management and operationsmanagement were key factors in the divergentpaths taken by the two concessionaires after
privatisation. First, while both concessionairesinvolved family conglomerates (Lopez andAyala) and multinational companies (Suez,United Utilities and Bechtel), corporate gov-
ernance practices differed considerably be-tween the two from the outset. For example,Maynilad generally awarded managementand technical consultancies to subsidiariesof its French (Suez) and Filipino (Benpres)partners. Such related-party transactionswere partly responsible for internal conflictsreported between the two partners, but alsoled to higher costs for start-up and enhance-
ment operations. Manila Waters trajectory,involving few dealings with related parties,avoided such problems.
Secondly, the concessionaires differentfinancial management practices were criticaldeterminants of their success in the yearsfollowing privatisation. In adjusting to theAsian financial crisis, Manila Water wentfor smaller loans at the beginning targetingoperating efficiency and service improvement,
and then gradually scaled up borrowing toproduce a virtuous financing cycle of invest-ment and efficiency improvement. Althoughthis strategy deviated from Manila Waterscontractual commitment to capital expend-iture, it shielded the company through theturbulent years immediately following thecrisis. Maynilad, by contrast, did not makesimilar adjustments and large capital invest-ment without resulting operational efficienciesled to more accumulated financial losses thateventually bankrupted the company.
Thirdly, the concessionaires relative successwith water privatisation was linked to theirattention to two critical factors that have sel-dom been managed well: the transformationof a public utility into a private company; and,management of public expectations aboutthe services the utility is pledged to deliver.
One key to Manila Waters overall success wasthat it catered its operations managementtowards these two considerations from thevery beginning. Employees transferring from
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226 XUN WU AND NEPOMUCENO A. MALALUAN
MWSS were perceived as having valuableprior experience and were given training toadapt to the new privatised organisationalculture and to its innovations, some of which,
such as territory management, were designedto improve employee performance. ManilaWater has also been sensitive to objections towater privatisation and has made concertedefforts to dispel such opposition throughinitiatives such as its Water for the Communityprogramme. In comparison, Maynilads ap-proaches have been less well conceived. Forexample, management and employees im-
ported from outside the pre-existing publiccompany often had no experience of watersupply utilities and lines installed in poorneighbourhoods were not designed to preventunauthorised taps.
The results of our exploration of the effectsof internal factors in water privatisationhave several important policy implications.Analyses that ignore the importance of suchinternal factors may lead either to over-
subscription to the general notion of privat-isation or, conversely, to underestimationof its potential for water supply solutions.Privatisation will not automatically bringefficiency gains unless privatised companiescan allocate substantial resources towardsreorienting internal organisation and oper-ations; but to reject privatisation outright,on the basis of inherent incompatibility be-tween the private sector and water business,may deprive the public of a valuable option.
Our emphasis on internal factors is notintended to imply that public policy cannotplay an active role in shaping the outcome ofprivatisation. On the contrary, there are ampleopportunities for governments and the regu-latory agencies to influence private corporatedecisions on internal factors through thebidding process, through regulatory actions
and through asset ownership (in the case ofconcessions).
We also point out that the importance ofinternal factors to the quality of performance
by water concessionaires in Metro Manila, thesubject of our study here, offers some encour-agement to municipalities struggling withfailing public utilities and an unfavourable
external environment for water privatisation.By learning from the best practices of privat-ised water utilities, public utilities can envisionand achieve improvements in water servicesthrough internal restructuring within thepublic context. The current slowdown in pri-vatisation does not mean that public waterutilities should remain unchanged. ManilaWaters successful tactics show that innov-
ation in internal management, especiallyattention to performance incentives and re-wards for experienced personnel, can helpto close the gaps in water services to theurban poor.
Notes
1. Pyramiding is defined as owning a majorityof a stock of one corporation that in turnholds a majority of the stock of another, aprocess that can be repeated a number oftimes; cross-holding is defined as a companyfurther down the chain of control havingsome shares in another company in the samebusiness group (Claessens et al., 2002).
2. Non-revenue water (NRW) refers to waterthat is not billed because of leakage throughholes in the pipes, illegal connections or meas-urement problems due to faulty meters.
3. The concession fees were split 90:10 between
Maynilad and Manila Water, reflecting theutilisation ratio of capital from MWSS bor-rowings prior to the privatisation. It wasexpected that Manila Water (East Zone) wouldincur higher capital expenditure becauseit included new development areas whereconnections were yet to be installed. Few con-nections were envisioned for the West Zone(Fabella, 2006).
4. The heavier burden fell to Maynilad becauseof the 90:10 split in concession fees.
5. Interview with a senior manager in Maynilad,July 2006.
6. Interview with Mr Tony Aquino, CEO of
Manila Water, May 2006.
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WATER PRIVATISATION IN MANILA 227
7. Interview with a senior official in the MWSS
Regulatory Office, July 2006.
8. Interview with Ms Macra Cruz, Deputy
Administrator of MWSS, July 2006.
9. Interview with Mr Tony Aquino, CEO ofManila Water, May 2006.
10. Interview with a senior manager in Maynilad,
July 2006.
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