We are taught that investing in water concessionaires is a sound investment proposition due to the perpetual demand for water and wastewater services. The need for more water-related infrastructure prompted the government to extend the water concession agreement between the Metropolitan Waterworks and Sewerage System (MWSS), DMCI Holdings Inc (DMC), Manila Water Company (MWC) and Metro Pacific Investments Corporation (MPI) from 2022 to 2037. But investors were shocked when the MWSS revoked the extension of the water concession agreement after the Department of Justice (DOJ) stated that it had no legal basis while several provisions had been found to be onerous and disadvantageous to the government. Most notable were the provision against government interference in water rate setting and the provision against possible losses in the event of government interference. DOJ argued that these onerous provisions were the reasons why the Singapore-based Permanent Court of Arbitration ruled in favor of the water concessionaires and ordered the government to pay them an estimated P10.8 billion to cover the foregone revenue as a result of government refusal to increase water rates. Threats of expropriation and charges of plunder forced the water concessionaires to delay the water rate hike, abandon the arbitral tribunal award and renegotiate the water concession agreement. We do know that the willingness of the water concessionaires to cooperate would be advantageous to the government but what we do not know is whether investor confidence could recover from a regulatory debacle. The damage was done and investors would consider government contracts as a high-risk factor. Although the intention is to renegotiate government contracts with onerous provisions, the government should uphold the sanctity of contracts. Breaking the rules and changing the game would increase the Country Risk Premium (CRP) that could have adverse impact on valuation calculations. CRP is the incremental required rate of return which results from the increased risk inherent in an emerging market investment. Investors sold down the water concessionaires and based on the 52-week high and low share price performance, DMC decreased by 61.9% from P13.00 to P4.95, MWC decreased by 82.3% from P28.25 to P5.01 while MPI decreased by 49.1% from P5.28 to P2.69. Although the share prices bounced back from the 52-week low we expect them to consolidate in a narrow trading range until the water concession agreement is sorted out. Unless the regulatory environment becomes stable, investing in water concessionaires is an unsound investment proposition.
