Secrecy, rush mark tender
of biggest MWSS dam project

First of two parts

THE GOVERNMENT is giving bidders only five working days to initiate a challenge to the unsolicited proposal of San Miguel Corporation – the food-beverage giant controlled by Marcos crony Eduardo “Danding” Cojuangco Jr. – to build the P52-billion Laiban dam in Rizal province, potentially one of the biggest infrastructure projects to be launched by the Arroyo administration.

The precipitate haste by the state-run Metropolitan Waterworks and Sewerage System (MWSS) to seek counter-offers is causing worries among water sector stakeholders that five days is too short to attract credible rival proposals for the dam project that aims to boost water supply in Metro Manila by half.

If no serious challengers would make a bid for the project until July 8, the MWSS’s deadline, it’s a cinch that the multibillion-peso deal will be awarded to San Miguel Corporation that is now chaired by Cojuangco, who has evolved as a key political ally of President Gloria Macapagal Arroyo..

Cojuangco is also chairman of the political party Nationalist People’s Coalition (NPC), which is aligned nearly half-and-half with both pro-Arroyo and anti-Arroyo factions in the House of Representatives.

San Miguel, the country’s top food-beverage conglomerate is rolling out a strategic shift from its core food and drinks business towards heavy industries such as mining, power and infrastructures. It was keen to bid for many of the power assets being sold by the government through competitive bidding but has so far failed to win any.

The Laiban dam project, which is being tendered mainly through a negotiation-based process rather than competitive auction, could be one of its first major infrastructure contracts with the government.

July 2 notice

In a notice published in a newspaper only last July 2 (Thursday), the MWSS announced it was inviting applications for eligibility to submit joint venture proposals for the design, financing, construction and operation of the dam located 70 kilometers east of Manila that aims to boost water supply to the capital region’s 12 million residents and ease potential shortfalls.

The deadline for interested bidders to submit a letter of intent and buy tender documents that cost P1 million has been set for Wednesday, July 8, or just a week from publication of the notice. Bidders who meet the first deadline have just one month or until August 7 to file their eligibility documents, and technical and financial proposals.

Secrecy and a dearth of publicly available information have shrouded the MWSS’s talks with an SMC unit, San Miguel Bulk Water Co. on a joint venture deal to build and operate the Laiban dam. Except for a San Miguel press release last February 9 disclosing it has submitted an unsolicited proposal to MWSS, no further official statements have been issued by either parties on the status of their talks.

Token notice

This is despite the fact that Laiban dam project will be a watershed project, literally. Once completed, it will be the MWSS’s largest single project in its 131-year history.

Except for the token notice that ran in the classified ads section of a newspaper, the MWSS has not issued any press releases or statements at all about its invitation for rival joint venture offers.

In contrast, the timetable surrounding invitations for similar challenges in other unsolicited large infrastructure projects, such as the proposed MRT-7 project, are relatively well-publicized.

The MWSS has done only the barest legal minimum to generate public awareness about the invitation for rival offers. The invitation is not even posted on the water agency’s official web site, a procedure required by the new guidelines on joint venture agreements with the government that took effect in May 2008, or in the government’s electronic procurement system, PhilGEPS.

A check with the MWSS web site on Sunday night showed that the notice of invitation had been posted already, supposedly as of July 1. However, the PCIJ had in fact checked the web site on Friday, July 3, and did not find the document by then.

At press time, Jose Diosdado Allado, MWSS administrator, has not responded to requests for an interview or comment on these matters that the PCIJ posted via email and in follow-up phone calls.

In its cryptic July 2 newspaper ad notice, all that the MWSS said was that it has already “received and accepted an unsolicited proposal” for the Laiban dam project but did not mention San Miguel as the proponent. In truth, by the time the newspaper ad ran, the MWSS has gone beyond merely receiving and accepting San Miguel’s unsolicited proposal.

San Miguel wins

Going by the provisions of the new guidelines on joint ventures, the publication in a newspaper of the MWSS notice inviting rival offers meant that it has successfully completed negotiation with San Miguel on the terms and conditions of the joint venture. If the new bidders fail to make a better proposal, the contract will automatically go to San Miguel. If the new bidders offer a better proposal and San Miguel matches it, San Miguel still wins.

Officials of the two private water concessionaires, Manila Water Co. and Maynilad Water Services Inc., were surprised to learn that talks between MWSS and San Miguel had reached an advanced phase – the third of a three-stage process for negotiated joint venture agreements – because they said they had heard almost nothing about it over the past few months.

Both companies were not told exactly how San Miguel’s proposed joint venture agreement with MWSS will affect their concession agreements with the water agency, their operations as well as water tariffs.

“I just hope there is no take or pay provision in the agreement that will require the concessionaires to buy water from the joint-venture entity whether we need it or not,” says Rogelio Singson, Maynilad president. “That will increase the water rates even more.”

Already, talk is rife among MWSS insiders that San Miguel’s proposal entails a cost of P20 per cubic meter of water from Laiban dam, which is expected to be ready for commissioning by 2015. The MWSS has not responded to a request for comment about the impact of the project on water rates.

These concerns underscore some of the risks and weaknesses of unsolicited public-private partnership proposals. Some of the country’s most contentious infrastructure projects such as the Ninoy Aquino International Airport (NAIA) Terminal 3 began as unsolicited proposals. The Supreme Court eventually thrashed the NAIA 3 contract, which also eventually triggered several graft cases against officials and investors involved.

Procurement experts are wondering why the MWSS accepted unsolicited proposals for Laiban dam, which has been on the government’s drawing board for decades. Unsolicited proposals are usually meant for new projects that the government has not yet enrolled in its development plans.

Restarted project

San Miguel’s unsolicited joint venture proposal is the latest attempt to restart the project that MWSS began back in 1979 but abandoned 10 years later in 1989 after incurring costs of close to P700 million.. The government of then-President Corazon Aquino, who led the people-power revolt against the Marcos dictatorship in 1986, opted to increase the capacity of MWSS’s existing water sources rather than build new ones.

Arroyo, who came to power in 2001, has been trying to revive the project to address current and future water shortages as water use in the national capital region rises from 4,000 million liters a day now to 6,000 million liters a day by 2019.

According to the MWSS, water demand in Metro Manila already exceeds 5,000 million liters a day but available supply is only 4,000 million liters, resulting in intermittent water services in many parts of the metropolis. Thousands of households still rely on trucked water that is several times more costly than piped water.

As early as 2003, the government included Laiban dam among three new water supply projects to be covered by an Asian Development Bank (ADB) technical assistance to help the MWSS do the preparatory work ahead of a request for a loan from the regional lender.

The technical assistance would have helped MWSS prepare environmental impact assessments as well as plans for the relocation of some 3,000 families to be displaced by the project.

However, the Philippines later removed Laiban from ADB assistance cover after China started to offer bigger amounts of official development aid that was cheaper and had fewer conditionalities or social and environmental requirements.

ZTE row fallout

In January 2007, the Arroyo government backed out of a $70-million loan agreement it was about to sign with the ADB for the Angat water optimization and aqueduct improvement project and instead decided to borrow from China.

At about the same time, the government began talks with the Export-Import Bank of China on a $910-million loan for Laiban dam project. The lender designated a Chinese state firm as contractor and supplier for the project. Shortly thereafter, the National Economic and Development Authority (NEDA) approved the Laiban dam project.

But a kickbacks scandal surrounding the aborted $330-million government supply deal with a Chinese telecommunications company for the National Broadband Network (NBN) project prompted Arroyo in September 2007 to freeze a number of China-funded projects. Talks with China on the Laiban dam project were scuttled, a fallout from the public outcry against the NBN-ZTE controversy.

Early last year, CalEnergy, an American company that also runs the Casecnan irrigation and hydroelectric power project in northern Luzon, entered into a memorandum of understanding with MWSS to conduct joint studies on the Laiban dam project. The firm said it will use the studies as input for deciding whether or not to submit an unsolicited proposal to build the dam.

MWSS and CalEnergy, whose parent company in Des Moines, Iowa is controlled by Warren Buffet’s Berkshire Hathaway, came close to announcing a deal. There was talk of a possible signing during one of Arroyo’s visits to the US. For still unexplained reasons, however, CalEnergy decided not to push through with the proposal.

Shortly after CalEnergy dropped out of talks with MWSS, San Miguel stepped in and submitted an unsolicited proposal in February 2009.

Five months later, San Miguel and MWSS successfully completed negotiations on the terms and conditions of the joint venture agreement. It remains to be seen if San Miguel’s proposal will survive the challenge from rival bidders – assuming there are quick-footed and moneyed investors willing to get into the action in a rush, or by Wednesday, July 3, to be exact. – PCIJ, July 2009