[MUSIC] Today, I'm in Singapore at the Lee Kuan Yew School of Public Policy at the National University of Singapore. And our guest is professor Araral, Associate Professor and Vice Dean and Senior Fellow at the Institute of Water Policy here at Lee Kuan Yew School. Ed is from the Philippines and has followed the Manila water privatization closely over the years, and he's kindly agreed to talk to us about the Manila privatization case. So it's great to be here. >> Thank you, Dale. >> Thank you so much for agreeing to talk with us. Maybe we could start Ed, and have you give us your synopsis of the sort of narrative that you tell your students here at the LKY School about water privatization in Manilla. >> Well, the Manilla water story is a great story. It's great because most cases of privatization has been ridiculed and generally they have failed. But Manilla is an exceptional case, so I guess you couldn't generalize that the water privatization has failed because Manilla water is a very good example. It's been 20 years, it hasn't been returned, it hasn't been privatized. People are happy with it. People are paying the bills. Performance is very good. So Manila Water story's a counter factual to the conventional story that privatization doesn't work. >> Yeah, good. We discussed with Long Ching about the public hostility to privatization in Jakarta. >> In Jakarta. >> Yeah, the devil shift. >> Right. >> So was there a public hostility in Manila, and if so how was it overcome? >> There's always a hostility, the leftist movement would always say no. But they didn't have any public support. And after 20 years, they just gave up. >> You mean the left. >> Yeah, the left, the left. >> Yeah. >> It's their job to always criticize whatever the government would do. But in general, people loved this. Because this water is affordable, 24 hours, it's clean. It's better than the situation in 1996, so all this criticisms have been muted because it's just performance. >> Yeah, maybe you could tell us a little bit about the initial decision to split the service area into the east and west zones. And what you think about that in retrospect, is that a good strategy for other places? >> Right, well Manila is a huge, one of the largest megacities in the world. And so they thought that you could not just have one single operator. And those who designed this program they wanted some benchmark comparison competition so they split the city. Does it make sense geographically? Maybe, so they split the city east and west, and maybe because of the main lines. What were the main lines are and that make sense from a commercial perspective in terms of the volume of customers on both sides, so yes. Well, the east side worked, the west side failed in the first part. >> Right, so now manilla water has both sides, right? >> No, it's another company >> Another company? >> But this time it's a local company. The original company that won the west side was a French company. >> Impress? >> No, no, a French. It was a French company. With some small partner and when the crisis hit. >> The financial crisis? >> Financial crisis hit in 1997, and because of their different management style. They call it French management style. It didn't work so they just left. They handed back their concession agreement. >> So this duopoly option is something that if you feels works over the years? Not necessarily duopoly, it's more competition on the market. It's still a monopoly in the east side, monopoly in the west side but there's some enough incentives for them to behave. Not just pure monopoly, because they are also regulated on performance indicators, the government is watching them. And they are driven to perform, so they're not really a monopoly in the sense that they will rip you out. They're not really privatized in the sense, they are privatized on name, but in performance they could deliver what the public is expecting them to do. >> Yeah, so how would you describe the role of leadership and the success of the Manilla privatization case? I mean in we have a kind of single individual. >> Excellent. >> Yeah, this kind of identified with the success. >> Right, right, right. I think leadership is central to this case similar to. I would say the CEO, the founding president CEO of Manila Water who built this, he stayed on the job for ten years, for ten long years. Stayed on the job for ten long years. And it mainly filled water privatization a lot, you ask how long this take, maybe a year, a year or two. Their management styles do not fit. I think to succeed, you need to have a missionary leadership style with long term vision committed to make the system work. You cannot have a short term business oriented guy go and fix it. It's not, it's got to be a life long work. >> Do you think it's important that it's a local? >> It is, it is. >> It is in Manila. >> It is, just look at the experiment, east and west. Same countries, same legal system, but Manila Water is Filipino. The other one was French. The French left the first sign of trouble. The locals had the same problem, the same El Nino water drought, same crisis. But then the locals said, we are here for the long term, we're not going to run. Our reputation is important for us. So they'd stay gone despite all the troubles while the French. Because they have to please their stake holders, their business cycle, they have to pay dividends. And they don't want to face all these political risk, so they ran away. So yes, local is very important and I suspect most successful water utilities, they're run by local. Those who failed, they ran by foreigners. >> I guess one of the things that I puzzled over is, one of the lessons I drawn from I mean, it always how hard it really takes a lot of persistence. And so why was it that everybody was involved in the Manila privatization was so committed to making this work? >> Well one, the owner of Manila Water, Ayala Company, is a well respected 200 year old. So they have a very good application. >> They aren't going anywhere. >> They were not going anywhere, they have a very good reputation. It's in their interest to fix the water problem, because they're in the property business. They were into water business before and their CEO, they had the chairman said, we're not in this business just for the water itself. Because property and water, they go together. Without water the property values go down. So it makes sense for them, from a business model to make sure that the water supply works. Because property values go up when service is good. So for them, even if this a crisis, they would stick onto it because they're in a property business. Those who are only in the water business, when the water business gets into trouble, they run away. So yes, so the long term perspective is very important. Understanding the local culture, how to manage the local people, the nuances, how to deal with a staff that you inherit from the privatized utility. The French, they don't know how to handle the locals. They just impose they own French model of doing things, and then they can compare with the other side. The other side, the employees are treated well. The other side, they were mishandled. So what do you have? The people- >> That's culture. >> That's culture, management style. >> Management style. >> So one is a foreigner, the other one is a local brand, respected. They respected their people well. They didn't fire them. They rehabilitated them, they retrained them, rewarded them. Everybody bought into this new entity, and then they succeeded. >> So that's actually, from my understanding, that's different than what happened in Jakarta. >> Yes, definitely. >> Let me go back to your point about property values. And I'll head another way of making profits in this, in terms of property development. Do you think that was one of the reasons they bid so low on the initial contract? I mean it was a surprise how low they bid in 97, right? >> They bid so low for many reasons, but of course, they also want to win. Maybe in their business model, they could do it this way. They're an engineering company, they're a construction company, but they don't have experience in water, all right? They could have gotten their hands burned by bidding low. And then maybe because they're confident about their business model. >> On the property side, or both? >> Both, not just on the property side. They also have malls, they have banks. And if you have banks, you have a deep, deep, deep pocket. >> They weren't worried about financing. >> And local financing. >> Yeah. >> So the key for their success, many reasons, but one is their financing model. The French borrowed with foreign currency, the Ayalas used local currency. So when the crisis hit, the French were left having to pay double their foreign borrowing. So they were hit by character risk, while the Ayalas used their own equity, used their own capital. They have some capitalization from the Japanese. But in general, their capital financing model survived the crisis. >> Interesting. >> Yeah. >> One of the things I've puzzled over in the years is the role of the cost of service and the success of some privatization efforts. Manila probably has some of the lowest cost of service anywhere in the world. To what extent do you think that mattered in terms of the success of the Manila water privatization effort? I mean, if you'd been in a place where cost of service would have been double, would it still have succeeded? >> Yeah, a large part, of course, is the privatization would succeed if you can promise 24/7 clean water, affordable, and the poor taken care of. If you have those, you will succeed, whether it's government or private sector, it doesn't matter. So the fact that they managed to reduce their non-revenue water from 63% to 11%, that saved them a lot of money. They managed to reduce their personal cost from 9.8 per 100,000 people to 1.1. That saved them a lot of money. And then plus their capital financial model is affordable. And then they replaced all the leaking pipes, and then they save a lot of water into this. As they build up, then the net effect is an affordable water service. That's why they're still in service after 20 years, up and down, they're still doing great. And they went for an IPO a few years ago, and they made a lot of money because it's a good brand name. You don't lose money in water. I bought some stocks and it tripled. >> [LAUGH] >> And simply because of the good management of the company. So with that IPO, their liquidity base increased. Their cost of capital went down, and they can afford to keep their water service. And they look at water as a service, not as a terminal profit. Unlike other pure water companies, they extract their short-term revenue because of this dividend cycle. But for these guys, their core business is property, and water is an ancillary service that they have to do. So their long-term perspective, their financing model, the way they look at things, their drive for efficiency, plus they're local, their reputation, all of these add up. A lot of the problems that you mentioned, that Manila Water solved, we see in other parts of the world, especially South Asia. >> Mm-hm. >> Do you see that there are lessons for South Asia and the Manila Water experience? If so, how would you describe them? >> Yeah, their principles, whether its principles are applicable would depend on the context But I think the first lesson is good economics is good politics. You don't promise free water. In India, they promise free water. But every politician promises free water. But because water is public tap, anybody can promise free water. But the problem is there's no clean water, it's not 24/7, and it's not piped, and it's not guaranteed. All the politicians want to say it's free, and they win the election. But this is a terrible thing to do. >> I want to go back to the Devil Shift in Jakarta and the story. I mean, do you see a way of overcoming the hostility in South Asia? >> Yeah, first they should change the foreign concessionaire because it's much hated. After 20 years, no service, and a lot of concession, a lot of protection. And still, much of Jakarta is still not having water, compared to Metro Manila. >> Mm-hm. >> If they just bring the guys who run Metro Manila, Manila Water brings them to Jakarta and do the same thing that they did in Jakarta, Jakarta would have the water now. >> So I guess one lesson for South Asia that I hear you saying is that the foreign operators are going to have political problems. They need- >> You need to have local operators, property developers, a long-term perspective, trusted brand, committed. You don't fix the water in three years. You need somebody who will stay there for ten years. Political space should be given to them. Their financial model should be well thought of. There should be no sweetheart deals with these companies. But at the same time, you have to understand that they are putting a lot of risk into this. Therefore, the regulator should also understand this. >> You mention the regulator, maybe we can talk about lessons for regulation from the Manila experience. What can you tell us that we've learned about the role of or designing a regulatory institution? >> Right, in the Philippines, there was no credible regulator. So the concession contracts were regulated on a contract basis, regulation by contract. So all the standards, performance metrics, mechanisms for conflict resolution, all the things that regulators will do, they're all stipulated in the contract, number one. But having a good regulatory framework is not enough. There's got to be a very good personal working relationship between the concessionaire and the regulators so that they can kink out areas of conflict. And there will always be a lot of conflict because of political changes, political preferences. It's been 20 years, the old politicians who signed this are no longer at the table. And there will be tensions here and there. There's got to be mechanisms. And at the end of the day, there's got to be conflict resolution mechanisms that is acceptable to both parties, in the case of the Philippines, international arbitration. There's got to be ironclad performance guarantees, and if they don't deliver, they have to pay. And if there's some conflict, if the government walks out of the contract, there's got to be a trust fund, where the government compensates the regulatee about the damages by changing its mind, right? And all of those elements are present in the Manila agreement, which explains the difference why it succeeded, and why other companies failed. So this is a lesson for not only South Asia, but the rest of the world. >> You mentioned that we're almost 20 years into this concession, so I guess we've got not so many more years to go. Do you see Manila Water changing its behavior as it comes to the end of the concession? I mean, are they confident that they'll get another contract? >> They anticipated this, such that ten years ago, they already renegotiated from 25 to 35. >> Uh-huh. >> They know that In the original business model of 25 years, the cost is still very high. And it's not viable for the company because of many, many reasons. So the government ten years ago agreed to extend their concession agreement to 35 years. To meet all this financial requirements, mitigate the risks, and also for them to fix the sanitation problem. A different story. >> Let me ask you about the sanitation problem. >> Right. >> You know the water problem typically is not as hard to solve as the waste water collection and treatment. What is Manila doing now? Manila Water doing now on the waste water? >> It's taken some time to fix this. It's in their contract but as I said, delivering water is a lot easier than- >> Right. >> Fixing the sewer. It took them awhile because you know, number one there's no revenue in a sewer, it's a cost- >> Uh-huh. >> It cost a lot. Until you know some activists sued them all the way to the Supreme Court to force the government to fix this problem. Because Manila water has just been sewerage because there's no proper sewer system throughout the metropolis. Now that the supreme court has ruled that yes, the governments mandate to do this, now they're under pressure to fix this. >> This hasn't happened yet. Not yet but they are fixing it. They look out some loans. They've been studies done. They're looking at independent water treatment models, but that is the easy part. The problem is that there's a lot of informal settlers in Manila who are not part of the concession agreement. There's nothing that you can do about them, then they throw their garbage in the street, in the river banks and all of this would flow back to Manilla bay. So even though Manilla water would be successful in putting up treatments plants and all this stuff, there's still a lot of unserved areas for the sewer. So you don't know how much how effective they are in this. But in terms of investment they are already on their way themselves completing their KPI performance indicators in the sewer part. >> Mm-hm, what about water pricing and tariff design. What have we learned from the Manila case about rate rebasing? And how would you describe the politics of the raising tariffs over time? [INAUDIBLE] In Manila. >> When the system was designed, they got World Bank [INAUDIBLE] and saw that's all over the world. And they applied the principle of don't politicize the tariff. Rebasing should be predictable every five years, and you got competent people to study this and you allow for dynamic pricing like inflation indexation, currency risk and then the base cost of the price. So that made the concession attractive, because all these external risks have been incorporated in the price. >> So you would say that the public has >> Not really reacted all that negatively to the price increases. >> Well there were. The left would always complain about this and said that the company should absorb currency risk. Companies should absorb political risk but of course, it doesn't make the sense for the company to absorb political and currency risk. Or maybe the currency risk not so much because they use local capital, so that they not to much expose with the current series. But, what made the people accept this is what was the situation before. 11% that a lot of people don't have clean water that's only 16%, that's 16 hours a day. So even though the price has moved up, people are still willing to pay for clean affordable, reliable water as long as it is affordable within your household. Some people complain that suddenly the rates went up but then they realize that they need to conserve water. >> And incomes have gone up over time. >> Incomes have gone up. They need to conserve water. They need to fix that leaks,and so on and so forth. So after 20 years people have gotten used to this kind. But they did not impose this high pricing tariff at the start. What they did was they were given five years. They all absorbed all the initial start up costs. >> Through the concession agreement and through cheap loans from donors and that such that, in the first five years with all the capital cost were put in, they were >> Not in a hurry to immediately charge the customers. >> because they have this long term vision. >> Long term vision, right? And like the other companies there, have to report on a dividend basis. And therefore they want a quick return. But for these guys, because they have the long tail, good financing model, they said let's show that the water comes first and if people are happy with 24-hours clean, reliable water, we gradually increase it and people will understand it. Don't impose a shock-pricing. I think this is a very important lesson for any utility reform. If you show that your service works and it's reliable, it's affordable, people will pay for it. >> Improve the service first. >> Improve the service first before you [INAUDIBLE]. The problem is >> Foreigners are seen to be greedy and they run at the first sign of trouble and privatization is associated with the dirty word profit, so people don't trust these guys. Whatever they say, people don't trust these guys. >> Yeah. >> Yeah. >> So has the success in Manila spilled over to other cities? >> Unfortunately not. [LAUGH] It's difficult because >> What's happening in the rest of the Philippines? I mean >> In the rest of the Philippines? >> Yes I mean is the private sector >> Engaged in other, [CROSSTALK] >> Yeah, yeah, yeah. Not in this large scale. Because Manila is exceptional, because it's got 15 million population. And their other cities are just 1 million. So the concessioners in Manila didn't bother to go through. They have some smaller concession agreements, but these are small cities, a millio, a million and below, so you don't have the economies of scale. >> You know economies of scale was a million, that's. [LAUGH] >> [LAUGH] Not when you talking about seven million. >> Yeah. >> Right. But the Manila model has been widely talked about, it once so many awards. >> Uh-huh >> That no, they want concession in Vietnam, in Ho Chi Minh, they are asking if Jakarta government would allow them to run and by all the French but I think the Jakarta Government is still thinking about this because again, you know because again they think foreigner, not sure. But here, is a reputable evidence that these guys can run water and they don't want. But of course, when they go to Jakarta, they don't have properties there. They need to partner with the local, trusted property developer and then they run the water part. >> Yeah. But, I still want to come back to these other cities in the Philippians. I mean. >> Right. [CROSSTALK] >> The situation >> Not this bad. Situations [CROSSTALK]. >> In Davao, there's another family riding the water business. They avoid this. The one in Cebu, it's only because the Ayala's would enter it if it makes a business case from a vertical integrated property in water. But they don't have a lot of property in that city. There's no business case for them. They're not just into the water part, it's an integrated business model. >> It's a bigger plan. >> Bigger plan, that's right, that's right. >> Let me ask you a last question about the possibility of return to public ownership in Manila. Paris has now moved back to public ownership after years of private sector involvement. Is there a political movement in Manila to return it all to public sector. >> Well the left would always want it to happen but they're very minority, they're not vocal, they don't have the case. I don't see it happening within the concession time of the remaining 20 years. Why would government take it over? It's just running well. They're paying dividends, people are happy, the poor have water. Why should government take it? It's running. If it ain't broke, why fix it? >> Well that may be a great note to end on. Thanks so much, [CROSSTALK] >> All right, [CROSSTALK] >> Great seeing you. [CROSSTALK] >> Great, great. Well I hope your viewers would get the main message that Privatization is not a dirty word. It's the corporatization, how it is done. So, although I know that privatization has been written off as it won't work for the water sector, it has worked in Manilla, but you cannot also dismiss the fact that certain governments can also run a pretty good water utility in the case of Monpan. So, it's not privatized where it doesn't matter who owns it public or private is the way that it is run. >> Great, thanks so much. >> All right, okay, then. [SOUND]
