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Manila Water can’t pass corporate income tax to customers in new deal

By Kyle Aristophere T. Atienza, Reporter

MANILA WATER Co., Inc. will no longer be allowed to charge its customers for corporate income tax and implement foreign currency differential adjustments (FCDA) under the new concession agreement (CA) it signed with the government.

Isang revised concession agreement ang nabuo na nagbibigay ng mas maganda serbisyo ng tubig sa Metro Manila at advantageous sa pamahalaan at consumers (We have sealed a revised concession agreement that ensures better water services in Metro Manila and will be more advantageous to the government and consumers),” Presidential Spokesperson Herminio “Harry” L. Roque, Jr. told a televised press briefing on Monday.

In a disclosure to the stock exchange, Manila Water said the revised agreement will allow it to retain the concession for the east zone of Metro Manila until July 31, 2037.

The revised deal is patterned after the provisions of the New Clark City — joint venture agreement (NCC-JVA), which also removed the recovery of corporate income taxes and FCDA.

FCDA is a quarterly reviewed tariff mechanism that allows water concessionaires like Manila Water to regain losses or return gains resulting from the movement in foreign exchange rates. The companies pay foreign currency-denominated loans that are used to fund the expansion and improvement of water and sewerage services.

Manila Water is unlikely to implement the FCDA for the second quarter that was approved by the regulatory office of the Metropolitan Waterworks and Sewerage System (MWSS) last month.

“To mitigate the impact of tariff increases on customers, the Revised CA lowers the inflation factor to 2/3 of the Consumer Price Index (CPI) adjustment and imposes caps on increases in standard rates for water (1.3x the previous standard rate) and wastewater (1.5x the previous standard rate). Instead of a market-driven appropriate discount rate, Manila Water shall now be limited to a 12% fixed nominal discount rate,” the listed company said.

Manila Water said the rate-rebasing mechanism included in the original concession deal will be retained.

“Thus, the rates for water and sewerage services provided by Manila Water shall be set at a level that will permit it to recover over the term of the concession expenditures efficiently and prudently incurred and to earn a reasonable rate of return,” the company said.

Manila Water will also implement a tariff freeze until Dec. 31, 2022 to help consumers amid the pandemic.

“The Undertaking Letter of the Republic is retained but has been amended to exclude the non-interference clause. It now applies only to contracts and obligations existing at the time of execution of the Revised CA,” the company said.

During the Palace briefing, Mr. Roque said under the new deal, all debt and expenditures of the concessionaire must be reviewed and approved by the regulator.

The new contract is “favoring the government, limiting private sector discretion but not necessarily benefiting the public, which should be the core interest in all of these negotiations,” InfraWatch PH convenor Terry L. Ridon told BusinessWorld in a Facebook messenger chat.

Mr. Ridon said the requirement that all debt and expenditures be reviewed and approved by the MWSS-Regulatory Office destroys the nature of the concession as a public-private partnership (PPP), “effectively reducing the concessionaires into mere suppliers or vendors of government.”

“This contradicts private sector independence in investment and operations initiatives, which is a main feature in PPPs,” he said. “Effectively, the government does not only exercise regulatory power over tariff, but also operational control.”

The government should clarify whether the tariff adjustment for inflation at only two-thirds of CPI will now be the standard for all PPPs “as this will similarly run the risk of a constitutional challenge on equal protection,” Mr. Ridon said.

“Is the government taking on the remaining one-third inflation risk, or will it be the private sector?” the former lawmaker said.

“As long as this deal will warrant or make the services of utility companies better (less interruptions, reasonable charges, efficient services) and accountability to government is strictly enforced as mentioned, then the new deal is favorable,” Asian Institute Management economist John Paolo R. Rivera said in a Viber message.

The deal would encourage investment in public utilities if it was proven to be efficient in creating better services for consumers, Mr. Rivera said.

“There were trade offs but terms have been leveled at the very least without sacrificing the economic and financial viability of the water concessionaires,” he said when asked whether the contract was fair to concessionaires.

Meanwhile, Justice Secretary Menardo I. Gueverra said the terms of a deal with water concessionaire Maynilad Water Services, Inc. would likely be similar with that of Manila Water’s.

“The other concession agreement with Maynilad, the negotiations with respect to that will start immediately and we will be proposing essentially the same terms and conditions as those that were contained in the revised agreement with Manila Water. But of course, we recognize the fact na differently situated ang Maynilad compared to Manila Water so there will probably be a lot of discussions also with respect to possible modification of the terms and conditions,” he said during the Palace briefing.

Mr. Duterte last year threatened to file a case of economic sabotage against the water firms after an international arbitration court ruled that the Philippine government must pay Manila Water P7.4 billion and Maynilad P3.4 billion for losses incurred from unenforced water rate increases.

Shares in Manila Water went up 0.12% to P16.10 each on Monday. — with Revin Mikhael D. Ochave

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