TO: PROF.

ROWENA DAROY-MORALES
FROM: AIKEN LARISA O. SERZO, OLA-OSG extern
RE: Water Concessionaires Arbitration Cases and its Implications
DATE: 19 June 2015

PROBLEM
The International Chamber of Commerce issued two separate decisions on two
arbitration cases. The first one is between The MWSS and Maynilad, while the second
one was between MWSS and Manila Water. The two decisions resulted in a seemingly
conflicting and hence exposed the weakness and fickleness of international commercial
arbitration.
BACKGROUND
The water supply of Metro Manila and its surrounding territories are provided by
two private concessionaires Maynilad and Manila Water.
Ayala-led Manila Water provides water and wastewater services primarily to the
east zone concession area covering the cities of Makati, Mandaluyong, Pasig, Pateros,
San Juan, Taguig, and Marikina. It is also in charge of the southeastern parts of Quezon
City and Sta. Ana and San Andres in Manila. In Rizal province, the utility services the
municipalities of San Mateo, Rodriguez, Cainta, Taytay, Angono, Baras, Binangonan,
Jala-jala; as well as the City of Antipolo.
Maynilad, on the other hand, is the largest private water concessionaire in the
Philippines in terms of customer base. It provides water and wastewater services to most
of Manila, parts of Quezon and Makati cities, as well as the cities of Caloocan, Pasay,
Paraaque, Las Pias, Valenzuela, Navotas and Malabon in Metro Manila. Its franchise

area also covers the cities of Bacoor and Imus and the municipalities of Kawit, Noveleta,
and Rosario in Cavite province.
The legal basis behind the grant of authority to Maynilad and Manila Water is the
National Water Crisis Law (R.A. 8041) enacted in 1997. RA 8041 allowed the
privatization of water and wastewater services. Specifically, the law sets out as its policy
that:
xxx
the government shall address the issues relevant to the water
crisis including, but not limited to, supply, distribution,
finance, privatization of state-run water facilities, the
protection and conservation of watersheds and the waste and
pilferage of water, including the serious matter of graft and
corruption in all the water agencies. (emphasis supplied)
xxx
It further provides that:
SEC. 7. Reorganization of the Metropolitan Waterworks and
Sewerage System (MWSS) and the Local Waterworks and
Utilities Administration (LWUA). _ Within six (6) months from
the approval of this Act, the President of the Republic is hereby
empowered to revamp the executive leadership and reorganize
the MWSS and the LWUA, including the privatization of any
or all segments of these agencies, operations or facilities if

necessary, to make them more effective and innovative to

address the looming water crisis. (emphasis supplied.)
Hence, under the legal framework of R.A. 8041, separate Concession Agreements
were entered into by MWSS with Maynila and Manila Water to secure the water supply
distribution and sewage management in Metro Manila and nearby provinces and cities.
The concession agreements between MWSS and Manila Water contain arbitration
clauses. These clauses mandate the referral of the case to the ICC in case of disputes that
are unresolved. Disputes will hence be resolved through consultation or negotiation
before an arbitration panel in which Manila Water and MWSS are represented and with
the International Chamber of Commerce serving as the appeals chair.

LEGAL ISSUE
As early as 2012, the two water concessionaires passed water rate hike proposals
to MWSS. Maynilad and Manila Water wanted to implement higher water rates to cover
foreign currency differential adjustment. These rate adjustments are in keeping with a
mandatory proviso in their concession agreements with MWSS on adjusting tariffs once
every five years.
This five-year rate rebasing system was tucked in the 1997 privatization package
to attract investors and assures them of a mechanism to recoup their multibillion-peso
investments, when the national government was stuck with a heavily-indebted and
bungling MWSS and in desperate need of private concessionaires to take over water
service delivery across Metro Manila.1
1 Paredes, Ducky. MWSS Postpones ICC Decision. Malaya, February 24, 2015.
Accessed June 18, 2015.

In 2012, Manila Water originally proposed a P5.83-per-cubic meter (/cu.m.)

increase in its basic water charge of P25.07/cu.m., but MWSS instead ordered the
company in September 2013 to cut tariffs by P7.24/cu.m. The MWSS decision prompted
Manila Water to elevate the case to the International Chamber of Commerce (ICC) that
same month, triggering an arbitration process.2 The procedure was initiated with MWSS
eventually filing a Dispute Notice with the ICC.
Maynilad in early 2013, submitted to the MWSS-Regulatory Office a business
plan for the five years until 2017, which requires an increase in the companys basic
charges by P8.58 a cubic meter.3
In response to Maynilads proposal, the MWSS issued memorandums ordering
Maynilad to cut rates by Php 1.46 per cubic meter for the five years until 2017 or 49
centavos a year. Disagreeing with the decisions, Maynilad likewise filed a complaint with
the ICC.
In the Maynilad case, the ICC resolved it in favor of Maynilad. The ICC appeals
panel upheld the companys alternative rate rebasing adjustment that would result in a
9.8-percent increase in the 2013 average basic water charge of P31.28 per cubic meter,
inclusive of the P1 Currency Exchange Rate Adjustment that the MWSS incorporated
into the basic charge.4 MWSS deferred the implementation of this award, reasoning that it
2 Feliciano, Claire. "Manila Water Rate Cut after Arbitration." Business World, April 21,
2015. Accessed June 18, 2015 http://www.bworldonline.com/content.php?
section=TopStory&title=manila-water-rate-cut-after-arbitration&id=106551

3 Domingo, Ronnel. Maynilad hits MWSS refusal to approve rate hike. Inquirer,
March 3, 2015. Accessed June 18, 2015.
http://business.inquirer.net/187709/maynilad-hits-mwss-refusal-to-approve-ratehike#ixzz3dQmaktBq
4 Valencia, Czeriza, Maynilad wins appeal to increase water rates, Philippine Star,
January 6, 2015. Accessed June 18, 2015.
http://www.philstar.com/headlines/2015/01/06/1409919/maynilad-wins-appealincrease-water-rates

would wait for the decision in the Manila Water case. The deferment was allegedly made
in the interest of uniformity. As MWSS Chief Regulator Joel Yu expressly stated in one
newspaper5 interview:
We find it more prudent to wait for the conclusion with Manila
Water before making any tariff adjustments because we dont
want any inconsistencies in the way we conduct our regulatory
mandate, said Yu in a media report. It cannot happen that one
concessionaire can be allowed to recover and the other
cannot ... There should be consistency in the application.
Eventually, the ICC Appeals panel released a decision in favor of MWSS in the
Manila Water case. The decision concludes a three-year rate rebasing process that began
in March 2012 with the submission of a business plan by Manila Water to MWSS and
which resulted in arbitration when MWSS released its tariff determination in September
2013 of a reduction in existing tariffs by 29.47% or an average of Php 7.24 per cubic
meter.6
The final award included a finding that Manila Water is a public utility. By virtue
of this finding, it ordered the exclusion of corporate income taxes (CIT) from cash flows
beginning January 1, 2013 for the determination of tariffs.
Instead of implementing the awards adjudicated by the ICC as final and
executory, MWSS until now has refused to implement them which in turn caused
Maynilad to resort to further arbitration.
5 Paredes, Ducky. MWSS Postpones ICC Decision. Malaya, February 24, 2015.
Accessed June 18, 2015.
6 Manila Water Bulletin, Volume 7, Issue 30, April 2015.

IMPLICATIONS
1. Failure of MWSS to Comply With the Arbitral Awards Questions the Integrity of
Arbitration as a Mode of Settling Disputes
Arbitration, as an alternative means of dispute resolution, has long been accepted
and recognized in the Philippines. It is a speedy and inexpensive way of settling disputes.
Parties are given more elbow room in arbitration as they are free to choose the venue and
the arbitrators. The refusal of MWSS to implement the ICC arbitral awards is
counterproductive and only serves to discourage litigants from resorting to arbitration.
Further, MWSS refusal to comply with the award given in favor of Maynilad
violates the legal precept of giving parties the freedom to contract. Stipulations in
contracts are generally valid unless they are contrary to law, morals, or public policy. A
stipulation providing for a resort to arbitration is binding on the parties. In this case,
MWSS is bound to abide with the arbitration and the succeeding award because this was
expressly stipulated in the individual Concession Agreements. In Maynilads case, this
was expressly mentioned in section 12.5 of the Agreement.
2. Disincentive against potential business investments.
The present administration repeatedly emphasizes the importance of Public-Private
Partnerships (PPPs). It is ironic that a government regulator, the MWSS, is incapable of
fulfilling its contractual obligations. The feeling of insecurity in the business sector is
only amplified by the fact that the government is not doing anything about MWSS noncompliance.

Maynilad has filed a complaint for damages against the MWSS for Php 3.44
billion7 on the strength of the governments Letter of Undertaking or written promise
under the agreement to compensate the concessionaire for rate adjustments that are put
on hold or delayed by MWSS. MWSS inaction will only fuel more disputes and will
increase investors trust in the government.
An article published by the European Chamber of Commerce makes the following
observation:
First, the rules are changed midstream through a PPP,
according to Henry Schumacher, vice president for external
affairs of the European Chamber of Commerce of the
Philippines (ECCP), in an April 8 news report. Second, the
government does not even respect the decision to implement
the arbitration ruling. Why would companies get involved in
business here? John Forbes, a senior advisor at the American
Chamber of Commerce of the Philippines (AmCham), said in
the same news report that, When a Philippine GOCC
(government-owned and -controlled corporation) does not
honor its contract even after an arbitration decision rules
against its position, the investment climate of the country is
harmed.
Moreover, aside from destroying investor confidence in the governments highly-touted
PPPs, this issue is also detrimental to consumers. The lack of additional revenues would
7 http://www.eccp.com/articles-page.php?category=2&article_id=1340#details

force Maynilad to put off planned multibillion-peso infrastructure investments, most

especially those that are designed to upgrade and expand its water delivery services to
cover fringe areas populated by low-income families who still have no water connections
and rely on expensive water sold by vendors for their daily needs.