Why privatization and PPPs work

Orlando Oxales, Fellow of the Stratbase ADR Institute and Lead Convenor of CitizenWatch Philippines

Perhaps for those who have experienced it, memories of the 1990s water crisis flashed back when households in Metro Manila early this year started experiencing service interruptions. Those who were lucky enough only saw their taps run dry for several hours every day; for others, it was days or even weeks on end.

While both crises were horrible, they were not equal. The one that plagued the capital two decades ago saw millions of consumers burdened by the inconvenience of very expensive water that had to be delivered by trucks and pumped by hose into containers in their homes. Every member of each household had to do their part and share in the burden of the messy but necessary chore. What made it worse was the bleak overall situation: less than half of households in Metro Manila then had good supply, that is, water that ran all day and at the ideal pressure.

The privatization in 1997 of the Metropolitan Waterworks Sewerage System (MWSS) fixed the problem. This lesson has to be underscored especially amid calls from certain sectors following this year’s crisis to again nationalize water distribution in Metro Manila. Such calls are totally irrational, and flies in the face of the very real examples that time and again has shown privatization and public-private partnerships (PPPs) work.

Following the privatization and reorganization of MWSS, conglomerates Maynilad and Manila Water have improved access to and now provide 24/7 water supply in their respective zones. Today, 98 percent of the West Zone has good water supply where only a third had before MWSS was privatized; for the East Zone, it’s 99 percent, up from a dismal 26 percent prior.

One of the more confusing issues being thrown around and added to the mix, is the Supreme Court decision earlier this month imposing a P1 billion fine each on Maynilad, Manila Water and MWSS for failure to provide water treatment plants in Metro Manila.
Yet, concessionaires are just following business plans approved by their regulators. In a 2011 Supreme Court case, the Court allowed the concessionaires to complete their sewerage program until 2037 because the five-year compliance set by the law was unfeasible. This makes perfect sense because building a sewerage system in Metro Manila is riddled with complexities. To mention a few: construction must be done in phases because of physical constraints on the ground (imagine the traffic gridlocks if road excavation were done simultaneously), lots are not readily available, permits are delayed with local governments, and informal settlers further will definitely complicate the situation.

An argument also goes that both firms are allegedly cheating consumers because they do not have water treatment facilities but still collect fees for these. But since the start of concession in 1997 until 2019, Maynilad has spent a total of P46.7 billion on sanitation, wastewater and watershed management, P8.68 billion more than the P38.07 billion it has collected for the period.

The advantages of privatization and PPPs—the transfer from the public to the private sector of certain enterprises or industries—bears repeating here. First, state-owned firms are subject to political prioritization because they rely on the national budget. Not the case with private firms, which operate with ready access to capital to maximize opportunities and readily address market conditions.

Second, risks are drastically reduced because the liabilities are properly distributed to parties that could deal with them best, that is, private firms handle risk management, while the state addresses policymaking and regulation of the sector.

Third, privatized enterprises or industries always adopt the best business practices because these are crucial to their viability. Hence, they specialize. They apply new technologies to boost efficiency and productivity. More important, they adhere to established standards to maintain efficiency and productivity by making sure their clients, as well as their regulators, are satisfied.

Privatization and PPPs success stories are not limited to water distribution. Bonifacio Global City, a former government property used by the army, which now is a primary financial and lifestyle district in the heart of Metro Manila, housing business headquarters, residential apartments, and recreational centers. Bonifacio Land Development Corporation won the bid to develop the area in 1995.

The list goes on: the construction and operation of NLEX, SLEX, SCTEX, TPLEX and the PSALM power projects. All of these are now providing better quality public services to millions of Filipinos every day.

For some speculative observers, there may be parties now implementing a black playbook to discredit the status quo and create a perception that a third player is needed to meet Mega Manila’s growing bulk water demand. This naughty idea simply does not make sense because the real problem is to build new infrastructure to tap new sources of fresh water, not the distribution which I think is now in very capable hands.

Decades of the country’s experience with privatization has taught very valuable lessons. Among them, that certain utilities cannot be managed by the government on its own; it should thus stick with regulation.

In the end, what is also clear is that concessionaires of public utilities are already highly regulated. The country’s approval process is already notoriously the most bureaucratic and most complex in the world. To be awarded a project strategically critical to the public is a gargantuan feat that only the most qualified and experienced should rightly be allowed to operate.

 

 

This article was originally published in his weekly column, “Open Thoughts”, in Manila Standard.

 

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