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Wednesday, November 22, 2017 | MANILA, PHILIPPINES
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Date posted: Friday, December 11, 2015 | Manila, Philippines


Dipping into Asia’s waters

FOREIGN EXPANSION is just like a jigsaw puzzle.
Or at least that’s the way Manila Water Co., Inc. sees it, according to the company’s chief operating officer for new business, Virigilio C. Rivera, Jr.

When entering a foreign market for the first time, the water utility picks out a “small and manageable project,” Mr. Rivera said.

Once the small project is completed, the company chooses another contract -- preferably one that fits into the first, much like two pieces of a puzzle -- with the goal of building the entire water supply network, from sourcing and distribution to leak reduction and wastewater management.

“Over time, while you start small, it becomes similar to completing a jigsaw puzzle,” said Mr. Rivera, who authored Tap Secrets: The Manila Water Story, a book the company published in partnership with the Asian Development Bank (ADB).

But then, starting out small is not exactly breaking news, especially for a company that is part of Ayala Corp., a Filipino conglomerate famous for its conservatism. Like its parent, Manila Water hardly makes a move when the stakes are high and the returns uncertain.

Yet in 2008, eleven years after it secured the right to distribute water in the eastern part of Metro Manila, the company felt it was ready to take on the Association of Southeast Asian Nations (ASEAN) region.

To this end, it bid for -- and won -- a $15-million five-year leak reduction and management service contract (later extended by a year) in Ho Chi Minh’s financial district, in partnership with the Saigon Water Corp.

“We needed to get our feet wet and prove to ourselves that we were not only good in Metro Manila; we were also good in the ASEAN,” Mr. Rivera said.

Judging from Mr. Rivera’s candor, the company’s confidence is not misplaced.

After all, 99% of Manila Water’s customers already enjoyed water availability round-the-clock in 2008. Losses from leaks were reduced to 19.6% from 23.7% in 2007. System losses since have gone down to 11%, making it one of the better performing water service providers in the world.

With a million residents, Ho Chi Minh’s District 1, which is the Vietnamese capital’s financial district, covered a location whose size was just a fraction of Manila Water’s concession of more than six million people. For the first year of the contract, the company was paid the equivalent of P16 million.

Despite a smaller scale, the first two years were difficult, said Mr. Rivera.

Besides struggling with language and cultural barriers, Manila Water came up against institutional roadblocks. Mr. Rivera said the proud Vietnamese -- who won the war against the United States in the 1970s -- were not used to other people doing projects for them through management contracts.

But that wasn’t a dealbreaker since Manila Water’s managers adapted well. Mr. Rivera said the company’s Filipino employees “coordinated with ward and street leaders” to find out where the leaks were and plugged them.

More than 40% of the water released into Ho Chi Minh’s District 1 was lost due to old pipes and inaccurate meters. Pilferage was only a small portion of the area’s non-revenue water because the Vietnamese are a disciplined people, Mr. Rivera said.

To locate leaking pipes (which were underground) and identify the inaccurate meters, Manila Water created 119 district metering areas (DMAs), which involved, among others, the installation of “mother meters,” larger contraptions that measured volumes that flowed into individual meters found in households, offices, and establishments.

By putting up DMAs, Manila Water was able to “chop” the network into manageable nodes and allowed it to check “the amount of water that went in and the volumes that flowed out of the smaller meters,” Mr. Rivera said. “The difference between the two would be water losses and we were able to check whether the losses would be commercial losses through inaccurate meter readings or old pipes that had leaks.”

When it completed work on District 1’s leaks in 2014, Manila Water not only met its targets, but also beat expectations. It reduced non-revenue water levels by 130,000 cubic meters a day, three times more than the 37,500 cubic meters required in the contract.

This, Mr. Rivera said, proved that Manila Water has “developed a set of competencies [in the Philippines] that can be leveraged geographically.”

As a result, Manila Water’s success in Ho Chi Minh has prompted Mr. Rivera, also a managing director in Ayala Corp., to develop a framework to “address opportunities in the region.”

When picking a country to invest in, Manila Water looks at its macroeconomic indicators and its growth prospects. The prospective market also has to be open to public-private partnerships (PPPs).

“If [the country] is not open to PPP and if it doesn’t see a role for the private sector in the water industry, that country is no longer considered,” Mr. Rivera said.

This explains why Manila Water set its sights on India -- one of the world’s fastest growing economies, not to mention one of its largest markets -- and entered into a joint venture with the Jindal Group in February 2011.

But the partnership called the JITF Manila Water Development Co. Ltd. was short-lived.

In September of that year, Manila Water said it was selling its shares to Jindal, a move that will “allow both Manila Water and JITF Water to freely pursue any business activity in India.”

One of the lessons learned from the company’s Indian foray was the choice of partner.

“You need to select good, local partners,” Mr. Rivera said. “It’s very important at the outset to align risk and return expectations. These should be clear and at the top of the mind of the parties."

Manila Water’s ex-partner in India “was probably more aggressive because it was local,” Mr. Rivera said. “In our case, we were cautious because we were a new entrant.”

Its India experience also taught Manila Water to identify and avoid what Mr. Rivera considers as “institutional voids,” defined as “government policies that are unclear” and “agencies that are still evolving and are still enhancing their capacities to embrace new models.”

While the Vietnamese government is “receptive to rate adjustments,” India is “still trying to adopt that as a policy,” Mr. Rivera said.

“Water is not a national matter in India; it is a state issue and the state and the bureaucracy will determine the policy framework,” he said, adding that not all countries are “open to appropriate pricing of scarce resources like water.”

Similarly, Manila Water abandoned plans to acquire majority control of PT PAM Lyonnaise Jaya (PALYJA), which, together with Indonesian government-led PAM Jaya, operates a water concession in Western Jakarta.

In October 2012, Manila Water was supposed to acquire 51% of Suez Environment’s stake in PALYJA but the share purchase agreement failed to secure Indonesian government approval.

“Water in Indonesia is very political, just like in any other country,” Mr. Rivera said, but added that the country remains on Manila Water’s radar screen.

These setbacks notwithstanding, Manila Water expanded its foray into Vietnam.

From 2011 to 2012, the company through its Singapore unit, the Manila Water Asia Pacific Group, completed acquisition of substantial stakes in two bulk water suppliers in Vietnam -- a 49% stake in Thu Duc Water B. O. O. Corp. and a 47.35% interest in Kenh Dong Water Supply and Joint Stock Co.

As a result, Manila Water, besides substantially reducing leaks in Ho Chi Minh’s District 1, has acquired bulk water suppliers -- pieces of the one big “jigsaw puzzle” that the company intends to put together.

The acquisitions have made Manila Water the biggest foreign direct investor in Vietnam’s water sector, Mr. Rivera said.

As of June this year, the Vietnam operations contributed P160.695 million or 5.17% to the company’s annual net income.

“As long as we are welcomed in a country and we can find the right partner, we think that geographically expanding the concession model or parts of that concession model is an interesting investment strategy that we have adopted for the past five years,” Mr. Rivera said.

While Manila Water will still focus on “building its integrated business model” in countries like Vietnam, it is looking at other Asian countries to provide more revenue streams and even partner with other companies under the Ayala group.

“Ayala Land, Inc. and Manila Water could collaborate to develop a subdivision in Malaysia,” Mr. Rivera said.

That possibility is not far-off.

After all, Ayala Land itself -- just like Manila Water -- is seeking to expand outside the Philippines.

And if that collaboration does get under way, it will allow Ayala Land to take charge of development above ground and Manila Water to pursue work under it.

In turn, several pieces may easily fall into place, resulting in a bigger, more formidable “jigsaw puzzle” for the Ayala Group.

Not bad for a water utility that started out with a small project.

ERRATUM: On the print version of the Top 1000 publication, Mr. Virgilio C. Rivera was mistakenly referred to as Vicente. Our apologies to Mr. Rivera.

Mr. Basilio is opinion section editor of BusinessWorld. He previously covered the Philippine water sector for another newspaper.
*Send e-mail to 'Boojie' at rabasilio@bworldonline.com or follow him on Twitter @scribblerjack.

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