The government’s decision to revoke the concession extension agreements with Manila Water Co. and Maynilad Water Services will undermine investor confidence in the short term, Fitch Solutions Macro Research, a unit of credit rating firm Fitch Group, said Monday.
Fitch Solutions said in a report the revocation of the concession extension agreements exemplified the high regulatory risk which contracts between the government and private organizations were subjected to.
“We believe investors will be concerned over the possibility of similar instances of government intervention which would create uncertainty for their business operations. As such, there is a possibility that foreign direct investments may take a hit in the short term,” the report said.
“This incident also shows that the government has acknowledged the weaknesses in the current contracting process, especially for PPPs,” it said.
Fitch Solutions said investor confidence would gradually improve over the long-term as the Philippines continued to improve on frameworks for public-private partnerships. It said the cancellation of water concessions illustrated that the government was willing to exercise executive power which overrides contractual agreements if it deemed necessary.
“Authorities will be able to gain experience and move up the learning curve and improve on processes and frameworks to allow for fairer, more transparent and flexible agreements in the future,” Fitch Solutions said.
The government awarded the concessions for the provision of water and waste services for Metro Manila to Manila Water Co. and Maynilad Water Services in 1997 and extended the contracts in 2009 by an additional 15 years from 2022.
The lengthy legal dispute between the government and the concessionaires and years of sub-par services which in some cases, led to water crises within Metro Manila, had invoked the attention of the Philippine government.
President Rodrigo Duterte ordered for the concession extension agreements to be stripped and renegotiated this month.
The government had alluded to ‘onerous provisions’ within the existing concession which ‘disadvantaged taxpayers’, as a basis for revocation, review and re-negotiation.
“While this may suggest that such concessions lack robust, well-thought-out provisions and pricing mechanisms as well as provisions which allow for reviews in the event the mechanics and details of these provisions become outdated, similar, though inadequate provisions were actually present in the agreement between MWSS and the two companies,” it said.
“Section 9 of the concession highlights various provisions allowing for the review and adjustment of prices, which Manila Water Co exercised in 2005 as it attempted to hike water rates, only to be stopped by MWSS. Though such provisions exist, it highlights the lack of thorough review of contracts upon expiry, which may have led to authorities agreeing to concession extensions based on ‘onerous’ provision,” it said.
Fitch Solutions said similar agreements signed between the government and private companies might come under the spotlight, as the water concession revocation case paved the way for the review of other, possibly ‘disadvantageous’ agreements, putting long-term financial viability of companies relying on such contracts at risk.
Fitch Solutions said its proprietary project risk index, which measures the risk of carrying out an infrastructure project from a financing, construction and operation angle, showed that the Philippines has one of the largest regulatory risks compared to other major markets in the region.
Based on the “regulation” sub-component of its PRI, which feeds into the wider PRI scores, the Philippines scores 48.2, lower than other emerging South-East Asian markets such as Vietnam (59.4), Indonesia (49.1) and Malaysia (70.2).
“The risks of retroactive changes in government policy and more pertinently, government intervention in deals which had previously been signed between public and private stakeholders, is comparatively higher in the Philippines, which will undermine investors’ confidence, especially that of foreign companies who are less familiar with the Philippine regulatory and business environment, possibly leading to a higher cost of doing business and deterring inflows of foreign direct investment,” Fitch Solutions said.