Ma. Cecilia G. Soriano Member, Board of Trustees

Metropolitan Waterworks and Sewerage System (MWSS)

24 April 2013

Metropolitan Waterworks and Sewerage System (MWSS)

A government corporation created in 1971 by Republic Act 6234 …

MWSS … to own and/or have jurisdiction, supervision and control over all waterworks and sewerage in Metro Manila (17 cities and municipalities), the province of Rizal and 5 municipalities in the province of Cavite. Province of Bulacan added in 1992.

The proper operation and maintenance of waterworks systems to insure uninterrupted and adequate supply and distribution of potable water for domestic and other purposes and of sewerage systems to prevent environmental pollution are essential public services because they are vital to public health and safety. The establishment, operation and maintenance of such systems must therefore be supervised and controlled by the State.

RA 6234 Section 1. Declaration of Policy.

The Realities in the mid-1990s…

Only 58% of population had access to piped water Many poor communities not served Low water pressure Only 26% enjoyed 24/7 water supply Many had water only for 16 hours of the day Water payments were up to 13% of income Non-revenue water 63% of production Many illegal connections and leakages Only 8% had sewerage connections MWSS overstaffed but inefficient MWSS was heavily indebted

Policy and Legal Framework for MWSS Privatization

Proclamation 50 (15 Dec 1986)

1987 Constitution

1990 BOT Law

1992 Power Crisis and PPPs in the Power Sector

1994 Amendment to the BOT Law

Early Proposals for Privatization of MWSS

1995 National Water Crisis Act

Executive Order No. 286 (6 Dec 1995)

Executive Order No. 311 (20 Mar 1996)

R.A. 8041 or National Water Crisis Act of 1995 authorized the President to reorganize MWSS, including the privatization of any or all of its segments, operations or facilities, if necessary, to make them more effective and innovative to address the looming water crisis.

Executive Order No. 286 (December 1995):

Declared the Administration’s framework of governance is “to steer rather than row”. The National Government shall, to the extent possible, encourage the private sector to participate in the delivery of public goods through franchising, concession, management, privatization or other arrangements of the concerned agencies.

Policy and Legal Framework for MWSS Privatization

EO 286 (continued)

Approved the reorganization of the MWSS, having been designed “to streamline and correct dysfunctions in the structure and operations of the MWSS” to enable it to become more effective, efficient, and responsive to the country's need for potable water, as well as to prepare the ground work for its eventual privatization, where feasible.

Executive Order No. 311 (March 1996)

Ordered MWSS to enter into arrangements that will result in the involvement or participation of the private sector in any or all of its segments, operations, and/or facilities .

Policy and Legal Framework for MWSS Privatization

EO 311 (continued)

The involvement or participation of the private sector may include, but shall not be limited to:

Policy and Legal Framework for MWSS Privatization

(i)franchising, concession, management, or other arrangements; (ii)privatization; or (iii)contracts for projects to be implemented under Build-Operate Transfer (BOT) and/or related schemes for the financing, construction, repair, rehabilitation, improvement, and operation of water facilities and projects related to consumers.

MWSS “Privatization” Strategy

Developed by the inter-agency MWSS Privatization Committee and later, the Special Advisory Committee and its Technical Working Group.

Approved by the MWSS Board, the Committee on Privatization and the President of the Philippines.

MWSS would retain ownership of the assets that would be used by the concessionaires for the treatment and distribution of water supply and collection and treatment of wastewater.

MWSS increased tariffs by 38% in August 1996

MWSS reduced its workforce by 30% through attractive early retirement program

Two Concession Areas – East and West of the Pasig River

MWSS West Zone

(60% population)

Maynilad Water

Services, Inc.

(MWSI)

East Zone (40% population)

Manila Water

Company, Inc.

(MWCI)

METRO

MANILA

MWSS Service Areas

EAST ZONE

WEST ZONE

West Zone East Zone

Land Area

(sq. km)

540 1,400

Service Area 17 Cities /

Municipalities

23 Cities /

Municipalities

Total (2007)

Population

8 M 6 M

Population

Served:

1997 =

2007 =

4.3 M

5.60 M

2.00 M

5.40 M

Water

Production

2,400 MLD 1,600 MLD

House Service

Connections

(2007)

Approx.

700,000

Approx

610,000

Before Aug. 1, 1997 Since Aug. 1, 1997

MWSS Charter

MWSS Charter

PUBLIC PUBLIC

Concession

Agreement Tariffs

Service

Obligations

MWSS MWSS

Concession Framework

Concession Agreement Framework

Asset Management Obligations

“operate, maintain and renew”

Meet Service Obligations

“provision of water supply &

sewerage services”

Expenditures prudently and

efficiently incurred

Concession Agreements and Term Extension Gave the concessionaires the sole right to manage, operate, repair,

decommission and refurbish the facilities in the east/west zone of MWSS’ service area for 25 years, and also bill and collect payments from their customers (assume demand risk)

Service Obligations (with provisions for penalties) Meet water supply, sewerage and sanitation coverage targets Ensure uninterrupted water supply to customers Meet water and wastewater quality standards Meet customer service standards

Investment Obligations Major capital expenditures to commence after 5 years Initial focus on softer and cheaper measures to improve services

Bidding was based on lowest basic charge for water Various provisions for tariff adjustments Regulation by contract, dispute resolution through arbitration Pay concession fees annually and service MWSS debts Raise their own financing, MWSS may choose to help In 2009/2010, term extension for another 15 years from 2022

Overview of MWSS Functional Roles Board of

Trustees

Secretariat Internal Audit

Corporate Office

Regulatory Office

Concessionaire

(Partner/Agent) Concessionaire

(Partner/Agent)

NEW

Concessionaire

MWSS Board of Trustees (BOT) Members are appointed by the President of the

Philippines.

Unless the President appoints someone else, the ex-officio Chairman is the Secretary of Public Works and Highways. He is currently the Water Czar, overseeing MWSS.

MWSS Administrator and Government Corporate Counsel (GCC)* are ex-officio members of the BOT.

Other current members are a lawyer, a banker*, a university president/climate change specialist, a former Undersecretary of Finance*

*Comprise the Concession Monitoring Committee

REGULATION AREAS

Financial Regulation

Technical Regulation

Customer Service Regulation

Legal and Administrative

Chief Regulator

PLAN FOR RESULTS

Indicators with targets are specified for each level of results

MONITOR RESULTS

Defined indicators are used to track achievement of agreed results

BUDGET FOR RESULTS

Budget supports planned national priorities

EVALUATE RESULTS

Evaluation methodology enables assessment of results and informed decision-making

REGULATE FOR RESULTS

Policies, people, processes incentivized to deliver intended results

WATER

SECURITY

Informed Decisions Continuous Learning

Key Performance Indicators : Water Service • Domestic Connections • Continuity of Supply • Pressure of Water Supply • Water Quality at Plant Outlet • Water Quality in Distribution • Sampling Sanitation • Sewerage Connections • Sanitation • Wastewater Effluent Standards

Customer Service (CS) •Response to CS Complaints •Response to Billing Complaints •Response to Requests for New Water Service Connections (WCS) •Installation of New WCS •Response to Disruptive Mains

Business Efficiency Measures : Operating Expenses (OPEX) •Labor •Power •Other Controllable OPEX Capital Expenditures (CAPEX)

Income •Billed Volume •Revenue Collection Rate Non-Revenue Water (NRW)

Monitoring Framework

MONITORING FUNCTIONS: Ensure Compliance with Service Obligations

Service Obligations on Water Supply

• Attain water service coverage targets

• Provide uninterrupted water supply

• Comply with drinking water quality standards

• Connect customers to a water main

• Supply water for public purposes

• Provide water other than through a water main

Service Obligations on Sewerage and Sanitation

• Attain sewerage coverage targets

• Comply with wastewater quality standards

• Connect customers to a public sewer

• Provide septic and sanitation cleaning services

Service Obligations on Customer Service

Standards

• Attain service performance targets

• Comply with customer service standards

• Resolution of customer complaints

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Year III Year IV Year V

East Zone Service Performance Levels

Very Good

Good

Fair

Poor

Very Poor

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Year III Year IV Year V

West Zone Service Performance Levels

Very Good

Good

Fair

Poor

Very Poor

Third-party “public” assessment of the concessionaires’ performance

Strengthens monitoring activities of MWSS Regulatory Office

Initially viewed with apprehension by concessionaries

Now considered a “partnership tool”, early warning device

Public Assessment of Water Services (PAWS):

Regulation

Protect consumers from high prices &

poor services Protect environment

Regulatory Framework

To balance the interest of stakeholders

Provide incentives to firms to invest,

be efficient & earn profits

Roles of Regulation

With provision of water supply and sewerage services being a natural monopoly, effective economic regulation can take the place of competition in maximizing consumer welfare.

Effective economic and resource regulation can also protect the environment and ensure inter-generational equity.

Effective regulation helps to ensure that the objectives/desired outputs of the PPP arrangement are achieved.

TARIFF SETTING FUNCTIONS: Determine tariff to be

charged by the concessionaires

CPI Adjustments (annually)

Extraordinary Price Adjustments

(as necessary)

Foreign Currency Differential Adjustment

(quarterly)

Rebasing Convergence Adjustment

(every five years)

Provisions for Tariff Adjustments Inflation. Annual adjustments based on the Consumer Price

Index are allowed automatically.

Extraordinary Price Adjustments. Prices can be changed from time to time due to major unforeseen events, such as the rapid devaluation of the peso, below-market financing from a bilateral or multilateral source, force majeure.

Foreign Currency Differential Adjustment. Quarterly adjustments are made to compensate for foreign exchange losses or gains from foreign currency loans of the MWSS or the concessionaires.

Rate Re-basing. At the start of each five year period, a review of tariffs is made so they can be adjusted to allow the full recovery of costs incurred and earning of a reasonable rate of return.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TARIFFS THROUGH THE YEARS

Manila Water Company: Tariffs from 1997 to 2007

Manila Water Tariff Rates

20.4819.72

18.55

14.0213.88

9.37

4.02 4.37 4.55 4.77

0

5

10

15

20

25

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Peso

per

cu

. m

ete

r

Source: Building Viable Water Utilities: The Manila Water Experience

Virgilio C. Rivera, Jr., Group Director, Regulation and Corporate Development

Manila Water Company, Inc.

Manila Water Company: Capital Expenditures from 1997 to 2007

Manila Water Company: Non-Revenue Water from 1997 to 2007

Reduction in Non-Revenue Water (NRW)

25.2

30

35.5

43.4

50.754

5251

55.2

53

63

20

25

30

35

40

45

50

55

60

65

70

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sep-07

Year

NR

W(%

)

Source: Building Viable Water Utilities: The Manila Water Experience

Virgilio C. Rivera, Jr., Group Director, Regulation and Corporate Development

Manila Water Company, Inc.

Manila Water Company:

Non-Revenue Water in 1997 & 2010

1997

11-30% 31-49% 50% and above

63% 11%

2010

10% and below

Manila Water Company: Water Supply Services in 1997 & 2010

Doubled billed water from 440 MLD to 1000 MLD

3.1 MILLION CUSTOMERS

1997

24 hours 13-23 hours 0-12 hours

26% 99%

2010

6.1 MILLION CUSTOMERS

Manila Water Company: Coverage Expansion Targets

24hrs 13-23 hrs 0-12 hrs above 7psi below 7psi

71% 26% 3% 86% 14%

Water Availability Water Pressure

24 HOURS

LEGEND :

13-23 HOURS

0-12 HOURS

BA BOUNDARY

71%

26%

3%

ABOVE 7PSI

LEGEND :

BELOW 7PSI

BA BOUNDARY

Maynilad Water Services, Inc.: December 2010 (Water Availability and Pressure Map)

2008-2012 2013-2016 2017-2021 2022-2037

2008-2012 2013-2016 2017-2021 2022-2037 TOTAL

Maynilad PhP 5.1 B PhP18.5 B PhP 27.2 B PhP 28 B PhP 79 B

Manila Water

PhP 13.3 B PhP 30.6 B PhP 7.4 PhP 21.68 PhP 73 B

30% 45% 63% 100%

14% 30% 66% 100%

Sewerage Targets and Investments

Overview of MWSS Functional Roles Board of

Trustees

Secretariat Internal Audit

Corporate Office

Regulatory Office

Concessionaire

(Partner/Agent) Concessionaire

(Partner/Agent)

NEW

Concessionaire

MWSS Corporate Office

Owns the assets being utilized by the concessionaires

Provides raw (untreated) water to concessionaires for treatment and distribution

Reviews actual and proposed capital expenditures of concessionaires in light of their performance targets and sectoral and national objectives, priorities and strategies

Gives guidance to concessionaires on water supply and sewerage targets and strategies in light of projected demand and financing options

Develops partnerships with government and non-government bodies for watershed management and knowledge sharing

WATER SECURITY LEGACY

2011-2037

Water Resources

Development, Management

and Protection Sewerage

and Sanitation

Water Distribution Efficiency

Tariff Rationalization

and Business Plan

Review

Communications and Knowledge

Management

Partnership Development

Organizational Excellence

38

PLAN FOR RESULTS

Indicators with targets are specified for each level of results

MONITOR RESULTS

Defined indicators are used to track achievement of agreed results

BUDGET FOR RESULTS

Budget supports planned national priorities

EVALUATE RESULTS

Evaluation methodology enables assessment of results and informed decision-making

REGULATE FOR RESULTS

Policies, people, processes incentivized to deliver intended results

WATER

SECURITY

Informed Decisions Continuous Learning

Evaluation Framework

Need to develop an evaluation framework

Firstly, what likely would have happened or not happened if PPP had not been established?

What were the objectives/intended outcomes of the PPP, for each stakeholder and as a whole? To what extent have each of them been achieved? What factors contributed to or hindered their achievement? Are the contributing or hindering factors temporary or permanent? How can the hindering factors be addressed?

Evaluation for Consumers For water consumers, effects will vary depending on

their previous source of water or level of service.

– Formerly Levels 1 and 2, consider time saved and used to earn money vs. cost of the piped water

– Formerly water tanks or bottled water, compare costs

– For Level 3, benefits of uninterrupted (24 hours) and reliable service (esp. for commercial and industrial users)

Health and environmental benefits for consumers and non-consumers, from both water supply and sewerage

Evaluation for Investors For water service providers/concessionaires

– Financial benefits from their CA

– Indirect benefits to their other businesses (real estate development, both residential and commercial)

For financiers (local and foreign, private and ODA)

– Financial benefits (safe and profitable return of their investment)

– Indirect benefits to their other business or development concerns

Evaluation for Gov’t Stakeholders

For MWSS,

– Was concession the right PPP option?

– How could the bidding process have been improved?

– How can the Concession Agreements be improved?

For Metro Manila and covered provinces,

– economic benefits including investments and jobs, LGU revenues

– environmental impacts (good and bad)

Evaluation of Results By DPWH and NEDA (planning and implementation)

– contributions of MWSS and its concessionaries to the infrastructure program of the country

By DOH and DENR (intended and unintended impacts)

– health impacts (good and bad)

– environmental impacts (good and bad)

By DOF and DBM (financing and budgeting)

– little or no more need for subsidies or additional equity

– higher revenues and dividends to NG

– contingent liabilities?

Evaluation of Results By DOJ-Office of Competition (avoiding harmful and non-

competitive business practices) – the extent to which regulation has been able to take the place of

actual competition in keeping tariff levels within reasonable bounds

By Commission on Human Rights (compliance with national commitments to the United Nations)

– the extent to which the MWSS and its concessionaires have been helping the country respect, protect and fulfil the human right to water and sanitation

By water-sector NGOs and POs (access and affordability) – the extent to which the MWSS and its concessionaires have

been making water supply accessible, affordable and reliable – competition of domestic water supply with other uses of water

(fishing, farming)

Evaluation of PPP For the country,

– involvement of the private sector in the provision of water supply, sewerage and other public services

– can be used as a successful model for water supply and sewerage services in areas outside MWSS coverage area

– can provide lessons for PPPs in other sectors, particularly on the need for strong political will for transparency, accountability and independent and effective regulation

President of the Philippines

NGOs and POs Research Institutes

Academe

DPWH, DOF, DOJ, DBM, DENR, DOH, NEDA, PPP Center

MWSS Board Regulatory Office Corporate Office

Manila Water Co.Inc. Maynilad Water

Services Inc.

WATER

SECURITY

Conclusions and Lessons Learned Very difficult to balance interests of all stakeholders

Need political will/non-intervention/integrity at the top (Office of the President)

Need honest, competent, confident, passionate regulators and Board members (with private sector experience or extensive experience dealing with the private sector)

Need strong support from government agencies (DPWH, DOJ, DOF, DBM, NEDA, PPP Center, DENR)

Need pro-active participation of NGOs and POs

Need continuous capacity building and dialogue among all stakeholders including private sector investors

Need moral, technical and financial support from international organizations and development partners

Conclusions and Lessons Learned Monitoring

Performance targets and indicators should be established and made known in the beginning of the PPP process.

Performance monitoring should be done by regulators and, whenever possible, also by reputable third parties.

Performance monitoring results should be made available and accessible to all stakeholders.

Regulation

Regulation should be conducted with vigor, rigor and attention to detail.

Regulation should aim to enhance Value for Money.

Conclusions and Lessons Learned Regulation

Public consultations can provide useful inputs to regulators and facilitate public acceptance of regulators’ decisions .

Evaluation

The performance of regulators and public sector partners should be evaluated in light of the stated objectives of the PPP and existing laws and government policies.

The design and implementation of the PPP arrangement should be evaluated in light of its stated objectives and to learn lessons that can be used to set up new PPPs.

The evaluation results should be made publicly known.

PLAN FOR RESULTS

MONITOR RESULTS

BUDGET FOR RESULTS

EVALUATE RESULTS

IMPLEMENT FOR RESULTS

NATIONAL DEVELOPMENT

GOALS

Informed Decisions Continuous Learning

Acknowledgements for Pictures and Slides: Justice Raoul Creencia, OGCC Atty. Zoilo Andin, MWSS CO Atty. Emmanuel Caparas, MWSS RO Atty. Cristina Millan, MWSS Anouj Mehta, ADB Manila Water Company, Inc. Maynilad Water Services, Inc.