JULY 26, 2009
(STAR) HIDDEN AGENDA By Mary Ann Ll. Reyes - If indeed the Laiban Dam Project of the Metro Manila Waterworks and Sewerage System (MWSS) will provide the next water supply source for Metro Manila, then the need to develop this new water source is of critical importance, if not of extreme urgency.

The current and only source of water for Metro Manila which is the Angat Dam has a capacity of only 4,000 million liters per day, or 1,600 MLD short of the projected 5,600 MLD water demand by 2015.

Our single water supply source is also at risk, because of its age and the presence of the West Valley fault in the vicinity of the dam.

In June 2008, MWSS signed a memorandum of understanding with American firm CalEnergy which conducted extensive due diligence on the Laiban project but the company withdrew and did not submit its unsolicited proposal.

Then in September last year, MWSS inked another MOU, this time with San Miguel Corp. wholly owned subsidiary San Miguel Bulk Water Co. Inc. (SMBWCI) for the conduct of due diligence. On Feb. 9, 2009, SMBWCI submitted its proposal for the project under the name of San Miguel Consortium.

Considering the importance of the project, MWSS pursued a mode procurement known as the joint venture agreement scheme. The same competitive challenge opportunity provided under the BOT law was made available but there were no challengers.

San Miguel’s proposal thus will now undergo post-qualification procedures after which the MWSS board will decide on whether or not to enter into a joint venture with SMBWCI for the Laiban project.

A lot has been said about the proposal, but one of the more interesting debates is about the supposed “take or pay” provision in the draft JV agreement.

SMC president Ramon Ang has said that the project’s detractors are wrong because what is being contemplated is a “take and pay” and not “take or pay.” But as to which one will finally be adopted is still the subject of negotiations between MWSS and SMC. He says whichever is more acceptable or fair may be the one adopted.

So what is this “take or pay” that has received so much negative connotation in the past, resulting in the term being equated with government guarantee?

The Office of the Government Corporate Counsel, in a memorandum to the MWSS board, explains that in the field of project finance, there are generally two types of off-take contracts, which have often resulted in much confusion.

Under the “take or pay” structure, the off-take purchaser makes payment for capacity whether or not the project company actually generates the good or service at the purchaser’s request. This makes the payment obligation of the buyer for the capacity component unconditional.

These agreements, government corporate counsel Alberto Agra notes, are sometimes referred to as having “hell-or-high-water” obligations because even if the project company produces noting or delivers nothing, or even if the project is incapable of producing or delivering anything, the payment obligation exists.

This obligation, according to Agra, results in a characterization of take-or-pay contracts as a form of guarantee.

On the other hand, under the “take-and-pay” contract, the buyer is only obligated to pay if the project company has actually produced and delivered the product or service. If the purchaser does not want to buy the output, it is not required to do so, provided the project company is incapable of producing the product contracted for. It is sometimes called a take-if-offered contract.

In short, under a take-and-pay contract, the purchaser agrees to pay for whatever the project company produces and delivers, while under a take-or-pay contract, the purchaser must pay for the project’s products or services whether or not the purchaser ever takes delivery, or in some cases, even if the products are not produced.

But as it is, Agra emphasizes that there is no law that expressly prohibits MWSS from entering into a “take-or-pay” arrangement, especially since such has gained wide acceptance in so far as the public finance community is concerned. He adds that “take or pay” is not a government guarantee, but merely serves as a quasi-guarantee for the cash flow of the project.

Ultimately, the decision to adopt either a “take or pay” or “take and pay” arrangement is a policy decision which by law is exclusively vested on the MWSS board. And like any contract, the specific terms and stipulations of the “take or pay” contract” shall be mutually agreed upon by the parties, provided that they are not contrary to law, morals good customs, public order, or public policy, Agra pointed out.

So while the draft JV agreement allows for a take-or-pay contract with MWSS as the purchaser of the treated bulk water, nothing is written in stone yet because everything is still under negotiation. And even if a “take-or-pay” agreement is reached, there is nothing inherently wrong with it.

Another bone of contention about this proposed JV between MWSS and San Miguel is the so-called “performance undertaking of the Republic to secure MWSS’ performance of its obligations” under the bulk water sales agreement, including but not limited to payment obligations and buy-out obligations.

The 2008 NEDA joint venture guidelines expressly prohibit direct government guarantees for joint venture arrangements resulting from an unsolicited proposal But the same guidelines failed to define what direct government guarantee is.

Agra says that if this “performance undertaking” will not amount to or result in a direct government guarantee, then there is nothing legally objectionable with its inclusion on the JV agreement.

So what the government corporate counsel in effect is saying is that a performance undertaking is not a direct government guarantee per se. Even the draft JV agreement he points out does not per se provide for direct government guarantee. Nowhere in the JV agreement does MWSS’ possible default or failure to meet the obligations under the agreement result in the national government’s assumption of responsibility for repayment.

In other words, the draft JV agreement, as the parties intended and worded, does not result in a direct government guarantee in favor of MWSS.

In fact, just yesterday, Finance Secretary Gary Teves said that while there has not been any request on the part of the MWSS for a performance undertaking for its obligations under the Laiban project, they have no problem granting such undertaking because of the importance of the project.

The problem with most Filipinos is that are jaded by the mere mention of the words “take-or-pay” and “performance undertaking” that they fail to consider that these two provisions in a government contract are legal and are not inherently wrong. True, these provisions have been abused in the past, but considering the immense importance of continuing water supply for Metro Manila and the fact that government by itself does not have the funds to undertake such a huge project, giving MWSS and San Miguel the benefit of the doubt may provide us the only solution to a looming problem that is just around the corner.

Chief News Editor: Sol Jose Vanzi

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