Privatizing irresponsibility
The government and the Maynilad are denying it ardently with all the corporate poker face they can muster, but as this BusinessWorld story confirms, the long and short of the deal is that the Lopez group is ipso facto relieved of its debt burden:

In Amendment No. 2 to the concession agreement, a copy of which was obtained by BusinessWorld, the state-run Metropolitan Waterworks and Sewerage System (MWSS) effectively released Benpres Holdings Corp. from its commitment to guarantee payment of at least $47 million in Maynilad debts in case of default.

Under the proposed bridge banks term sheet, or Annex F-1 of Amendment No. 2, the new Maynilad shareholders will pay $39 million of the $47 million in seven years at concessional rates of between 1% and 3% over prevailing interest rates. The $8 million will paid within a year at 1% over prevailing rates.

"If these terms are not acceptable to any or all of the bridge banks, then payments to non-accepting banks shall be held by Maynilad in trust for ... Benpres if any or all non-accepting bridge banks recover from Benpres pursuant to Benpres' guarantee," the proposed term sheet provides.

The deal is therefore a bailout in whatever Wittgenstein language game. The people must have water, especially during elections, and at the same time the Lopezes must not lose money. How to reconcile the two? Bill the republic.

The government cannot help but bail out this particular market failure courtesy of Kapamilya because 1) the Lopezes have a humungous clout and, more importantly 2) Maynilad's clients cannot biologically afford to live without water.

This controversy should force us to rethink the wisdom of privatizing utilities in the first place.

The expressed motive for privatization of the utilities--and privatization, in general-- is increased economic inefficiency, with the extension of private ownership and market relations seen as the means to achieve that end. And in most cases, the logic of privatization holds.

Private businessmen, goaded by their rational desire for profits, run businesses more smoothly, efficiently and effectively than government bureaucrats. And with businessmen competing with each other, the result, the logic of privatization holds, is lower rates for better sevices for the consumers. With privatization, Thomas Borcherding's "Bureacratic Rule of Two", "Removal of an activity from the private to the public sector wiil double its unit cost of production," is supposed to be reversed.

So what went wrong in this privatization of Maynilad?

The water distribution was privatized alright, but the government monopolist agency was simply replaced by another monopolist private agent in the private sector. The privatization in this case did not lead to efficiency. What in effect happened was a privatization of irresponsibility. The element of healthy business competition that directs Adam Smith's invisible hand, was not there.

Maynilad has no competitors in the area; there is no other competitor to deliver service if Maynilad were to self-destruct. Public interest therefore, especially in the summer time, cannot allow Maynilad to fail because otherwise the people would simply die of dehydration. Thus, we have the bailout.

There are two other disturbing things about the bailout:

1) Apparently even after the government bails out Maynilad, it would not acquire direct management of the corporation. Exactly who will control Maynilad after the bailout remains a secret.

2) The partner of Benpres, the French water management firm Ondeo Services, cannot help but cry foul because it has already honored some of its Maynilad guarantees. The bailout would free the Lopezes from obligations but, "under the compromise deal, Ondeo will still be required to honor its outstanding guarantees on Maynilad's debts. These obligations include an undertaking to pay the $50 million that MWSS will draw next month from the performance to partly answer for PhP8 billion in unpaid concession fees."

The bailout gives capitalism a bad rentseeking name in this country. Abroad, it gives us a repuation for being bad business partners.