Duterte’s Water War Foe Seeks Cover Through Sale

Ayala Corp, under fire from the president, sells interest to connected tycoon

The Feb. 3 decision by the beleaguered Ayala Corporation-led Manila Water Company to sell 25 percent of the company to one of the country’s richest men, Enrique “Ricky” Razon Jr, appears to be a prudent move to seek cover from the unrelenting hostility of President Rodrigo Duterte, sources in Manila say.

In a statement to the Philippine Stock Exchange, Razon’s Prime Metroline Holdings said it had agreed to acquire 820 million common shares in the company for PHP10.7 billion (US$210.27 million). Ayala remains a shareholder with 38.6 percent of the company, which Duterte for months has accused of concluding an allegedly onerous concession agreement with the government. 

The story says far too much about the Philippines, whose economy was nearly destroyed by cronyism and venality during the Marcos years and remains so today. Once again, the country is led by a strongman who – as Marcos did – has decided he could abrogate a legal contract he didn’t like. Nor is Duterte alone. Both Gloria Macapagal Arroyo and Benigno S. Aquino III also tore up legally executed contracts. 

Duterte, however, is a case unto himself, seeking to drive independent news operations including the popular news website Rappler and ABS-CBN, the country’s most prominent news and entertainment network, out of business. He is also at war with Ayala Land over allegations of corruption over the lease of land at the University of the Philippines, charging “massive corruption.” He has used laws including the sedition act to threaten opposition forces and has kept his most trenchant critic, former Justice Secretary Leila de Lima, in preventive detention on drug charges that human rights organizations regard as spurious. 

“The Razon buy-in (of the water company) is that the Ayalas are purchasing some degree of political protection,” a well-placed political analyst told Asia Sentinel. “Razon is no enemy of the president, but he is not particularly an ally either and operates with a pretty wide degree of independence. He is rich enough to be one of the few power players that the president will be unlikely to cross.”

Another risk analyst with long experience in the country called the sale a “bold move by the Ayalas. Ricky Razon is now one of the country’s richest men. What you won’t find in the general public conversation is that he has very close ties to Gloria Arroyo. Of course, GMA is a close political ally of Duterte’s so it will be interesting to see how this plays out. Given current patronage realities, I can’t imagine this deal not being ‘blessed’ by [Finance Secretary Carlos] Dominquez, who effectively runs Duterte’s economic policies. This smells of a political deal to me.”

Duterte has been on a rampage over the water company, which along with the Pangilinan-led Maynilad Water took over Manila’s shambolic water system in 1997. Public anger has grown over water shortages triggered by drought in both 2018 and 2019. The president has accused the Ayalas, who head the country’s oldest corporation, and the Pangilinans, of “economic sabotage” over water rates. 

Both Manila Water and Maynilad Water, however, secured major victories before the Permanent Court of Arbitration in Singapore, which ordered the Metropolitan Waterworks and Sewerage System to pay losses stemming from rejected water rate hikes going back to 2015 in Manila Water’s case, and previously to Maynilad Water Services for similar losses from March 2015 to August 2016.

That enraged Duterte, who has repeatedly called Ayalas and Pangilinan “sons of bitches” and offered to throw them in jail. Both companies have since adopted deer-in-the-headlights postures in an attempt to placate the president.

When then-President Fidel Ramos ordered the privatization in 1997, the sprawling metropolis’s water system was nearing disaster. The two companies poured resources into infrastructure to put the system back together in what at the time was called “a celebrated case of a working public-private partnership” that has been repeatedly cited for its transparency and design of the bid process. The two companies are purifiers and distributors who distribute water for the government waterworks company. 

Manila Water has pointed out that it was the government under Ramos that unilaterally determined the terms of the water agreements. They were bid on a take-it-or-leave-it basis, the company argued, and Manila Water offered the government the lowest fee, giving it control of the conurbation’s East Zone. Maynilad won the concession agreement for the west zone.

Subsequently, Manila Water said, it spent more than PHP166 billion (US$3.27 billion to install 5,500 km of pipes, built 2 new filter plants, 32 new reservoirs, 113 pumping and booster stations, 40 additional wastewater treatment facilities and quintupled the size of the sewer network, expanding water service to cover 93 percent of the area, serving more than 7 million people. 

“This includes an additional two million customers from the poor and marginalized sector, who used to buy vended water in buckets or pails delivered by vendors in pushcarts,” the company said in a prepared release.

Repayment of borrowings and of stockholder equity, let alone interest and return on equity over the original period meant a big jump in customer billings. Government authorities recommended that then-President Arroyo extend the concession period by 15 years, allowing capital recovery to be spread out over 40 years.

“The best I can come up with is this: the President felt he was dealt a bad hand through no fault of his and has not been properly briefed on the background and history of this water PPP,” according to Romeo L. Bernardo, writing in the Manila-based Business World on December 15.

Bernardo, vice-chairman of the Foundation for Economic Freedom and GlobalSource Partners Philippine Advisor and former finance undersecretary during the Corazon Aquino and Fidel Ramos administrations, is a former trustee of the government’s Manila Water and Sewage Service. He declined to be interviewed, but pointed Asia Sentinel to the Business World article as representative of his position.

The previous government, he said, hadn’t invested in raw water, resulting in the water shortages, and tariff rates weren’t adjusted based on a flawed re-interpretation of the treatment of corporate income taxes that resulted in government losing in international arbitration, which now this administration has to pay.

“To deliver safe drinking water to the taps in our homes requires investments in storage and treatment facilities and underground distribution networks. These investments that yield high economic and social returns are not free,” Bernardo wrote. “The reality is that it takes billions of pesos of investments to bring clean potable water to our homes. And, unlike businesses that have declining costs with volume, water is the opposite. As the concessionaires try to connect farther communities in hilly areas with sparser populations, unit costs go up, especially with increased demand for sewerage service which, incidentally, costs three times that of freshwater to put in place.”

In fact, he wrote, the average Return on Invested Capital (ROIC) has been 8 to 10 percent annually during the past five years, which is comparable to water concessions in other emerging market countries and hardly onerous.