How Public-Private Partnerships (PPPs) Transformed Water Management: Challenges and Story of Success

The National Water Crisis Act (NWCA) of 1995 laid the foundation for this transformation.  The key features of the act were: to create a Joint Executive-Legislative Water Crisis Commission to study the water supply and distribution system and to Reorganize the Metropolitan Waterworks and Sewerage System and the Local Waterworks and Utilities Administration. Under the NWCA, the government, through MWSS, had the authority to engage the private sector to provide financial resources and operational expertise to overcome years of underinvestment and inefficiency.  MWSS issued an international call for bids to manage, operate, and invest in water services. Global and local firms competed for the contracts, with the winning criterion being the lowest tariff bid (the rate they would charge consumers). The two 25-year concessions were awarded t to  Manila Water Company, Inc. (East Zone) and Maynilad Water Services, Inc. (West Zone) The Manila Water Company, Inc., a joint venture involving Ayala Corporation, Bechtel Enterprises Inc., United Utilities, and later Mitsubishi. 

The privatization of Metro Manila’s water services is often cited as a case study in water sector reform. It showcased both the potential benefits of involving the private sector in infrastructure development and the challenges of balancing profitability, affordability, and public service delivery.

Surprisingly, the concession provided the creation of a regulating body tasked to monitor and assess the concessionaires’ performance based on pre-determined standards consisting of the service obligations of the concessionaires to the public. It should have been separated but due to the existing regulatory framework, this separation did not happen. The only threshold for the evaluation of the performance of the contractor’s was the pre-determined standards set out in the contract.  Under the concession agreements, the private operators in Metro Manila were held to strict pre-determined standards to ensure measurable improvements in water services. These included expanding water supply coverage to reach all households, with a focus on underserved areas, and significantly reducing non-revenue water from pre-privatization levels of up to 70% to below 30%. Concessionaires were required to maintain a minimum water pressure of 7 psi and provide 24/7 water access, alongside ensuring compliance with the Philippine National Standards for Drinking Water to deliver safe and potable water.

The introduction of Public-Private Partnerships (PPPs) in infrastructure and public service delivery evolved as a solution to bridge gaps in public funding and improve service efficiency. However, there were number of challenges such as legislative barriers, capacity building, stakeholder resistance, financing and investment etc. 

1. Legislative Barriers. 

After the Manila Water Concession contracts were signed, legislative challenges arose to ensure effective implementation and long-term sustainability of the agreements. These included ambiguities in regulatory oversight, conflicts over tariff adjustments, and evolving legal interpretations of the contracts. The primary regulatory body, the Metropolitan Waterworks and Sewerage System (MWSS), faced difficulties in balancing its dual roles as a regulator and a contract administrator, leading to concerns about impartiality and the enforcement of performance standards.

Conflicts over tariff increases became a recurring issue, particularly as concessionaires sought adjustments to cover rising operational costs and fulfill their investment commitments. Public opposition to these increases often prompted legal disputes, with courts being involved in interpreting the contract clauses related to rate adjustments and profit ceilings.

Furthermore, the evolving political landscape occasionally introduced policy shifts and legislative actions that threatened the stability of the concession agreements. These challenges underscored the importance of having a robust and adaptive legal framework to address disputes, ensure accountability, and maintain public trust in the privatization process

Institutional challenges were also present. Multiple agencies with overlapping mandates created confusion and delays in the decision-making process, making it difficult to streamline operations under a single concession agreement.

2. Capacity Building Barriers.

Capacity-building barriers in Manila’s water management included limited technical expertise and institutional capacity within regulatory bodies like MWSS, hindering effective oversight and enforcement of performance standards. Insufficient training and resources for local agencies created challenges in managing complex PPP agreements, ensuring compliance with contractual obligations, and adapting to evolving legal and operational frameworks. Additionally, overlapping mandates among multiple agencies led to inefficiencies and delays in decision-making, while the lack of stakeholder engagement mechanisms contributed to resistance and slowed progress in implementing reforms.

3. Stakeholder Barriers. 

Stakeholder resistance to the Manila Water Concession Agreement was marked by significant concerns from various groups. Labor unions feared job losses and reduced benefits, as privatization threatened employment in the previously state-run Metropolitan Waterworks and Sewerage System (MWSS). Public discontent grew over proposed tariff hikes, with many citizens worried about the affordability of water, particularly for lower-income groups. This resistance was amplified by political opposition, with some lawmakers arguing that privatization was akin to selling off essential public resources and undermining government control. Furthermore, consumers were skeptical about private operators prioritizing profit over service quality, leading to a lack of trust in the new system. These challenges were managed through transparent communication, regulatory oversight, and gradual adjustments to tariffs, with public-private dialogues helping to alleviate concerns and ensure the long-term viability of the concession model.

4. Financing. 

The financing barriers in the Manila Water Concession Agreement primarily stemmed from the difficulties in securing sufficient private investment for large-scale infrastructure improvements in the water sector. One major barrier was the high upfront capital required to improve and expand the water distribution and sewerage systems, particularly in a context where past inefficiencies had reduced investor confidence. The concessionaires needed significant financial backing to upgrade aging infrastructure, reduce non-revenue water, and extend services to underserved areas, but the potential for low returns in some regions of Metro Manila made financing more challenging.

Additionally, the need for clear and stable financial structures to manage risks such as inflation, foreign exchange fluctuations, and unexpected costs created further obstacles. Ensuring that the pricing model was attractive to investors while still keeping water affordable for consumers required balancing the financial needs of the private sector with social equity concerns. There were also issues around guaranteeing returns for investors, especially when tariff increases faced political resistance, creating uncertainty in the financial environment.

Financing was also complicated by the regulatory framework, which was evolving and needed to align with the needs of private investors. The political risk, particularly regarding changes in government policy or sudden regulatory adjustments, was another factor that made securing financing more difficult. This resulted in the need for international lenders and development banks, including the World Bank and the Asian Development Bank, to step in with funding support and risk mitigation tools.

One of the most notable financial crises occurred after a dispute with the government over tariff hikes and contract terms. In 2019, the government decided to cancel the extension of the concession agreements for Maynilad and Manila Water, citing “onerous” contract provisions that were seen as unfavorable to the public. This decision sparked concerns of bankruptcy, as Maynilad had around ₱42 billion in debt, with loan agreements stipulating that any changes in the concession contracts could trigger immediate loan repayment. This financial pressure led the company to suspend essential capital expenditure projects, which were critical for expanding water supply and wastewater treatment infrastructure​

In addition to this financial crisis, Maynilad faced difficulties with its tariff structure, which was a source of tension between the private operator and the government. The dispute over water tariff increases became a significant issue when the Permanent Court of Arbitration ruled in favor of Maynilad, ordering the government to pay compensation for lost tariff adjustments. This decision added to the already challenging financial situation, with political and public opposition further complicating the privatization model​. 

Between 2003 and 2006, Maynilad Water Services Inc. faced a corporate crisis that led to the reversion of ownership from the original private consortium to the government-run Metropolitan Waterworks and Sewerage System (MWSS). This turmoil stemmed from financial challenges tied to the 1997 Asian Financial Crisis, which sharply devalued the peso and inflated the cost of foreign loans, coupled with operational inefficiencies like aging infrastructure and high non-revenue water (NRW) levels. In 2007, the concession was rebid, and new owners took over, bringing fresh management approaches that starkly contrasted with their predecessors, particularly in NRW reduction. This transition highlights the financial risks for private concessionaires and the critical role of effective management in addressing systemic inefficiencies. The new owners of Maynilad, who took over in 2007 after the rebidding of the concession, implemented significant reforms that revitalized the company. They introduced more robust financial management, invested heavily in upgrading the aging infrastructure, and adopted innovative strategies to reduce non-revenue water (NRW). Under their leadership, NRW levels dropped significantly, improving overall efficiency and water supply reliability. The company also expanded coverage, enhanced customer service, and modernized operations, demonstrating the transformative impact of effective private-sector management in addressing long-standing challenges. This turnaround highlighted the importance of strategic investments and operational excellence in overcoming financial and infrastructural hurdles.

MWSS Privization Contract Award Pictures

CONCESSION AGREEMENT