Duterte’s water rants baffle, spook investors

By Jenina P. Ibañez and
Denise A. Valdez, Reporter

A SHAREHOLDER of Maynilad Water Services, Inc. was at a loss as to what prompted President Rodrigo R. Duterte to resume his attacks on Metro Manila’s water concessionaires, after the company last year expressed its willingness to discuss new contract terms with the government.

“I don’t know where the President is coming from because we participated in the bid,” Isidro A. Consunji, chairman of DMCI Holdings, Inc. told reporters on Wednesday.

Although he said it was “good that we’re negotiating,” it would be up to Maynilad’s board of directors whether it would accept the new contract being offered by the government, which Malacañang said on Tuesday had been drafted without “onerous provisions.”

DMCI Holdings has a 25.24% stake in Maynilad, which is led by Metro Pacific Investments Corp. (MPIC), with a stake of 52.8%. Japanese firm Marubeni Corp. has a 20% stake in the utility, while the balance is held by other shareholders.

Mr. Consunji said the previous contract was not drafted by the private sector to begin with, with Maynilad having “zero input” in it.

“It was government who drafted the contract. I think they were advised by the World Bank-IFC (International Finance Corp.). It (contract) was passed through NEDA (National Economic and Development Authority), passed through DoJ (Department of Justice),” he said.

Mr. Consunji, who is also DMCI’s president and chief executive officer, was referring to the time when the government privatized the distribution of water in 1997 in a public bidding won by the Ayalas’ Manila Water Co., Inc. and a group led by the Lopezes’ Benpres Holdings Corp. and its foreign partner.

“The concession was really underperforming, badly managed,” he said, adding that it would have been difficult for the bidder to be bankable “so they had to create a contract provision that will allow the winning party to be able to borrow money.”

Maynilad and Manila Water are allowed to adjust water tariff each quarter based on the performance of the peso against the dollar and the yen as most of their foreign loans are denominated in these currencies.

“I think those provisions were probably made to make sure the concessionaires who [will] win are bankable,” he said.

Maynilad turned out to be unbankable and was taken over by MPIC when the government re-privatized the west zone water distribution in 2007.

On Tuesday, Mr. Duterte said the new contract he was offering to the concessionaires, even if accepted, would not free them from criminal prosecution. Should it be rejected, he said water distribution would be nationalized.

The concession agreements were first signed in 1997 during the administration of former President Fidel V. Ramos. Their validity is until 2022, but in 2009 former Gloria Macapagal-Arroyo approved the contract’s extension to 2037, a move questioned by lawmakers. Mr. Duterte has so far largely lashed out on the private sector.

“I don’t know what specific provisions are being cited. I haven’t read it,” Mr. Consunji said, referring to news reports.

“Hindi kami nag-draft ng contract, ano lang kami, sign on the dotted line (We did not draft the contract, we just signed the dotted line),” he added.

Mr. Consunji said the government’s move sends a negative signal to investors.

“All business[es] siyempre don’t like volatility. Of course, when there is uncertainty, sentiment turns negative. Situation like today creates uncertainty,” he said.

“Uncertainty creates negative sentiment,” he added.

Japanese Chamber of Commerce and Industry of the Philippines declined to comment when asked about the government’s latest move.

But Martin Henkelmann, executive director of the German-Philippine Chamber of Commerce and Industry, said investors want “security of contract.”

“In general, without knowing the details of the contracts of the concession at the time when the concession was given, it is important that companies that are here investing that they have this visibility and security of contracts and they have this reliability,” he said.

Mr. Henkelmann said aside from the contract’s security, it is also important for investors that international arbitration is followed if there is a conflict between the contracting parties. He said international companies take on risks when they invest in large scale concessions.

“If there’s a contract normally it should be in a form that on the long term, you can rely on each other,” he said.

At the stock market, investors are on edge over the next move of Manila Water and the companies behind Maynilad in the coming days.

Philstocks Financial, Inc. Senior Research Analyst Japhet Louis O. Tantiangco said the brokerage is advising investors to stay cautious at the moment, noting uncertainties hound the issue at this point.

“We don’t know the provisions of the contract, if its advantageous or disadvantageous for the firms. Also, we don’t know if the water firms are going to accept it or not. A lot of things are still needed to be addressed,” he said in a text message Wednesday.

Diversified Securities, Inc. Equity Trader Aniceto K. Pangan likewise said investors were “spook[ed]” by the developments, as any uncertainty on companies are taken as bad news by investors.

“Per Justice Secretary (Menardo I. Guevarra), this will undergo negotiation with the concessionaires so as to come up with a good contract that will be amenable to both the end-users, as well as the concessionaires… (But) uncertainties are not (a) good thing for investors,” he said in a text message.

Shares in Manila Water lost 66 centavos or 6.12% to P10.12 apiece on Wednesday. The company’s listed parent Ayala Corp. (AC) also saw a P10 or 1.25% decline in its shares to P790 each yesterday.

For Maynilad investor MPIC, shares took a hit by losing 8 centavos or 2.20% to close at P3.55 each yesterday. Its other listed investor, DMCI, gained 2 centavos or 0.29% to P7 each.

Philstocks’ Mr. Tantiangco said long-term investors with high risk profiles are able to take positions on the holding companies because they are currently at bargain levels.

“What’s good with the holding companies is that if ever things take a turn for the worse, their fundamentals can still be supported by their other subsidiaries,” he said.

For example, AC still has robust businesses in the property, power, banking and telecommunications segments; MPIC has operations in power, toll roads, hospitals and railways; and DMCI Holdings has mining, property, power and construction.

Mr. Tantiangco said given this, AC, MPIC and DMCI are expected to be more resilient during these times, “given that these holding companies have other income streams which could support their fundamentals.”

John D. Forbes, senior adviser of the American Chamber of Commerce of the Philippines, said foreign investors are certainly following the developments regarding the two water concessions.

“There are serious implications for all investors and suppliers in projects involving contracts with the government in regards to how contractual disagreements are manages and on the future supply and cost of water in Metro Manila,” he said.