Public-Private Partnerships

Case Study

Efficiency Gains: the Case of Water Services in Manila

by Mathieu Verougstraete and Isabelle Enders (April 2014)

This case study considers the question of whether efficiency gains can be
achieved by introducing private operators in sectors traditionally managed by
public entities.

BACKGROUND
By opting for a Public-Private Partnership
(PPP) model, governments often aim to
achieve efficiency gains. They hope that
private entities will be able to deliver higher
performance than public operators. This
expectation stems from the assumption that
the profit driven nature of private companies
incentivizes them to find ways to reduce
operating costs while increasing the volume of
services.
This case study will try to shed light
on whether the desired efficiency gains
materialized in the case of a water services
project in Manila. The case study will also
touch on whether the efficiency gains are
passed to the consumer through lower tariff
and better services.

MANILA WATER: CASE SUMMARY

In the early 1990s, Metropolitan Manila
suffered from an old and inefficient water
system. Three-quarters of the homes in the
eastern half of Manila lacked 24-hour service
and only 8 percent had sewerage connection.
Almost two-thirds of the water produced was
being lost to leaks, poor metering and illegal
connections.1
In addition, Metropolitan Waterworks and
Sewerage System (MWSS), the government
agency responsible for delivering water and
sewerage services to residents, was heavily
indebted. Hence the necessary investments
for maintenance and services could not be
realized.

Government decision
In 1995, this situation prompted the
Philippine government to enact the National
Water Crisis Act, which set the framework for
fundamental changes in the sector.
The centerpiece of the Governments strategy
was the decision to privatize the operation of
MWSS to improve the quality and coverage
of water and sanitation services, increase
operating efficiencies, and dispel the financial
burden of capital expenditures. The proposed
concession of Metro Manilas waterworks
and sewerage system was one of the largest
around the world, affecting a population of 11
million individuals.
The Government decided to divide the
MWSS system into two geographically
separate concession zones (East: 40% of
the population awarded to Manila Water
Company/ West: 60% of the population
awarded to Maynilad Water Service). Dividing
the area was expected to facilitate the tasks
of the regulatory agency by allowing it to
make comparisons between the two regions
(the same bidder could not win by rules both
concessions). However, this geographical
division made the operation much more
complex to structure with issues such as
network interconnections to address.

Concession terms
Under the terms of the concession contract,
the two private operators were vertically
integrated utility responsible for both water
and sewerage services within the respective

ESCAP supports governments in Asia-Pacific in

implementing measures
to efficiently involve
the private sector in
infrastructure development. This case study
is part of this effort and
promotes exchange of
experience among the
countries of the region
For futher information
please contact:
Transport Division
United Nations ESCAP
Telephone:
(66) 2-288-1371
Email:
[email protected]

extraordinary price increases in case of force

majeure. In addition, there was a five-year
rebasing system, which guaranteed a certain
rate of return to the concessionaires. Such
system was actually based on an Appropriate
Discount Rate to be determined by
the MWSS regulatory office (defined as
the prevailing rate of return for similar
infrastructure projects).3

EFFICIENCY GAINS

of homes in
the eastern half
of Manila lacked
24-h service
and only 8 %
had sewerage
connection

area. They were authorized to collect and

own revenues from water tariffs but have to
pay for operating costs, investments plus a
concession fee to the government (mainly to
service the historical debt of MWSS).

To assess whether efficiency gains have been

realized by adopting a PPP model, there are
two key questions: has performance improved
and have tariffs declined following the entry
of a private operators? These two questions
are tackled in turn below.

Performance Level

Elevating water pressure to 16 pounds per

square inch

As the main reason for privatizing the

operation of water services was to improve
the quality of water services, it is worth
considering whether performance has
improved since the concessions were
awarded. This can be measured via different
indicators.

Uninterrupted 24-hour service within five

years

Water service

At the same time, they were responsible for

expanding the network to meet ambitious
performance targets, including:

Immediately complying with Philippine

national drinking water safety and water
effluent standards
Providing universal water coverage within
10 years and 83 percent sewerage and
sanitation coverage within 25 years.
To achieve these targets, it was estimated that
$7 billion of investment would be needed
over the contract period.
Under the concession agreement, the
ownership of the asset base was retained by
MWSS, and all additional assets invested by
the concessionaires shall be turned over to
MWSS at the end of the concession period
(a compensation mechanism was foreseen in
that regard).2

The service coverage improved considerably

as both concessionaires increased
dramatically the number of water service
connections (the number of connections
almost tripled between 1997 and 2013).4
Today, Manila Water provides water 24/7 to
99% of the population in its service area and
approximately 97.8% of Maynilad customers
enjoy 24-hour uninterrupted water supply.5

Figure 1 : Gains in service continuity in Manila6

Tariff procedures
Since the award of the concessions, tariffs
have been set by the Board of MWSS upon
recommendation of its regulatory office.
Procedures for tariff adjustment were
nevertheless defined in the concession
contract including annual adjustment
for inflation as well as the possibility of

Manila Water: (green 24h, yellow 13-24 h, red 0-12h)

Such improvements in productivity and

service continuity are consistent with the
experience from other countries following the
introduction of management contracts (see
Figure 2).

Figure 2 : Gains in service continuity7

Water losses
The level of water losses has decreased
significantly since 1997: from 45% to 12%
for Manila Water in the Eastern Zone and
from 66% to 39% for the Western Zone
concession Maynilad (2013 figures).8 The
pace of progress was however much slower
than planned, as most reductions were only
achieved in recent years.
Again, similar reductions of water losses have
been experienced in many countries following
the introduction of private water service
companies as confirmed by several empirical
studies.9,10,11

Sewerage and Sanitation

The initial concession contracts foresaw
ambitious targets for increasing access to
sewerage services which would have required
huge capital investments. These targets
have, however, not been achieved and were
drastically reduced in early 2000 to lower
the operational and financial pressure on
the concessionaires, as well as to avoid tariff
increase which would have been unacceptable
to customers.

Tariff Development
The expectation is that the efficiency gains
would be passed to the users via lower tariffs.
The following paragraphs will therefore look
at how water tariffs have evolved over time in
Manila.

Initial drop
The selection criterion for awarding the
concession contracts was the lowest average
water tariff bid.
To increase the chance of having a large
discount on water tariff following the
introduction of private operators, long overdue

tariff adjustments were made prior to the

bidding phase (tariff went up by 38 percent).
Having a large tariff rebate as a result of the
bidding process was very important to ensure
that the deal would be accepted by the
public.

Considerable
improvements
were achieved:
connections
almost tripled,
24-hour service
The bidding results were actually beyond the
most optimistic expectations as one of the
availability is
bidder proposed a base rate amounting to
widespread and
only one-fourth of MWSS tariffs at the time of
water losses
bidding (see Table 1).12
decreased by
Table 1 : Average base tariff (Philippines Peso per cubic metre) around 30%

However, these very low bids raised the

question of whether a loss-leader strategy
was applied (i.e. a private consortia offer
highly competitive bids with the objective
of securing a concession and recouping any
short-term losses by renegotiating a tariff
increase at the first possible opportunity).
An empirical study reviewing more than
1000 concessions in the Latin-America
and Caribbean region has actually shown
that renegotiations, defined as a significant
amendment to the concession contract, are
very common and can occur quickly after the
award. This is particularly true for the water
and sanitation sector were renegotiations took
place in 74% of concessions studied after
an average period of 1.6 years following the
award.13 This is actually what happened in the
case of Manila.

Tariff renegotiation
Financial difficulties quickly emerged after
the award of the concessions. In particular,
the Asian financial crisis had a significant
impact. The Philippine peso devaluation
almost doubled MWSSs dollar-denominated
debt service burden which had to be covered
by the concessionaires.
To alleviate these difficulties, a contract
amendment was granted in October 2001
to allow tariffs to be adjusted more rapidly
following exchange rate fluctuations.14 Hence
the tariffs increase began to accelerate after
that date.

Current Level
The tariffs, in real terms, started to exceed
pre-concession levels (from 2002 for the

Despite an inital
drop, tariff
quickly started
to exceed preconcession levels

West Zone and 2005 for the East Zone / see

Figure 3). In 2012, tariffs were around 50
and 100 percent higher compared to the preconcession period.
This pattern contradicts the expectation that
a more efficient company would be able to
provide cheaper services.
Whether the tariff increases could have been
avoided without the privatization of operation
or not is actually unclear. A recent study from
the World Bank, using a sample of almost one
thousand public and private water utilities
in the developing world, found no statistical
difference in average tariff levels between
utilities under PPPs and those under public
management (provided that the latest were
run under a tariff regime that promoted full
cost recovery).15
In the case of the Manila Water project, the
argument is that MWSS would most likely
not have been able to achieve the level of
service provided by the two concessionaires
without at least increasing the tariff to the
same level (or receiving public subsidies).
One of the reasons is that the productivity
level of MWSS was below the one reached
by the concessionaires. For example, before
the introduction of private operators, MWSS
was overstaffed with 13 employees per 1,000
connections, which was two to five times more
than similar water utilities in the region.16
The private concessionaires managed to
improve that level by a combination of
staff reduction and expansion of customer
base. As a result, Manila Water company
had, for example, 1.4 employee per 1,000
connections by 2010.17

CONCLUSION AND OUTLOOK

It is possible to conclude that significant
improvements were been achieved from the
use of the PPP model for water services in
Manila. Given the operational track record
of MWSS, it is unlikely than these efficiency
gains could have been done without the
introduction of private operators.
On the other hand, the project has faced
difficulties: the tariff formula had to be
revised quickly after the award, progress
on sewerage services has been lower than
expected and prices went up after an initial
drop. One of the concessionaires (Maynilad)
even went bankrupt and public funding had
to be provided to ensure service continuity
before a new owner could be found.18
Despite these issues, it is fair to say that
this case study confirms that efficiency gains
can be triggered through the introduction
of private operators. This conclusion is also
in line with empirical studies from other
countries.

End Notes
Infrastructure Advisory Services (2010): Philippines:
Manila Water. Washington, DC: IFC.
1

Rivera, V. C. Jr. (2011): The business of water: going

the corporate way the case of Manila water. Water Practice & Technology Vol 6 No 4. IWA Publishing.
2,17

Dumol, M. (2000): The Manila Water Concession.

A Government Officials Diary of the Worlds largest Water
Privatization. Washington, D.C: World Bank.
3,16

4,8
5

MWSS Regulatory Office website accessed on April 2014.

Maynilad website accessed on April 2014

Abon, A. V. (2012): Manila Water Concession Case Study.

PPP Days 2012. Regional and Sustainable Development
Department Asian Development Bank.
6

Marin, P. (2009): Public-Private Partnerships for Urban

Water Utilities: A Review of Experiences in Developing
Countries. The World Bank.
7,9

Figure 3 : Water Rates Development

Andrs, L., Guasch, J. L., Haven, T. & Foster, V. (2008):

The Impact of Private Sector Participation in Infrastructure:
Lights, Shadows and the Road Ahead. Latin American Development Forum Series. Washington, DC: World Bank.
10

Gassner, K, Popov A.& Pushak, N. (2008): Does

Private Sector Participation Improve Performance in Electricity and Water Distribution? An Empirical Assessment
in Developing and Transition Countries. PPIAF Trends and
Policies Series. The World Bank. Washington, DC: PPIAF.
11,15

Wu, X. and Malaluan, N. A. (2008) : A Tale of Two

Concessionaires: A Natural Experiment of Water Privatisation in Metro Manila. Urban Studies. 45(1) pp. 207229.
12,14

Guasch, J.L. (2004): Granting and Renegotiating

Infrastructure Concessions. Doing it right. Washington,
DC: The World Bank.
13

14

Source: Maynilad website accessed on April 2014

For further information please see Kim, J.-H.and J. Kim

(2011): Case Studies from the Republic of Korea Attachment: Global Country Comparison of PublicPrivate
Partnership, KDI and ADB
18

Please note that this case study has been issued without formal editing