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39 Seventh Street, Goodrich Village, Concepcion U~O' fjI-

07 March 2017
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HON. MARK A. VILLAR

Secretary, Department of Public Works and Highways
As Chairman, MWSS Board of Trustees

Subject: BOT/PPP Contracting - the Best Means In Optimizing Projects & Driving Economic Growth

Dear Sec. Mark V1l1ar:

This is a follow-up of my letter to Asec. Gilberto S. Reyes, Annex A, copy of which was furnished to you
through an email of,09 February 2017. In a reply letter dated 10 Feb 2017,-Asec. Reyes informed me
that he forwarded my letter to the Undersecretary for Planning and PPPtServices on the same date,
for appropriate action.

This follow-up is also relevant to the functions ofthe Chairman ofthe MWSS Board ofTrustees because
three (3) letters on the same subject were already sent suggesting the compelling incentive of BOT/PPP
contract to optimize the Laiban Dam Project, it being the MWSS flagship project since the time of Pres.
Marcos. This project was started in early 1980's but was aborted in 1986 because of change in MWSS
management. The three letters on the subject are attached herewith for your reference:

,'. 1. Annex B - Letter to former Senate President Manny B. Villar dated 21 August 2007.

2. Annex C - Letter to former MWSS Board Chairman Ramon B. Alikpala dated 25 Feb 2011.

3. Annex D - Letter to former MWSS Administrator Gerardo AI. Esquivel dated 25 Feb 2011.

As in Annex A, Annex B underscoreJ:dvantages of a BOT contract, one of which is the self-compelling

force to optimize the project in ordtr to win and make it sustainable. Please be informed that one of
the most important provisions of the MWSS Concession Agreements is Clause 9.4, which stipulates
that only the operating and capital expenses that were prudently and efficiently incurred will be
eligible for re~overy through rate rebasing. Prudence and efficiency are best demonstrated in
optimized projects, which could be achieved only if there is a self-compelling force on the part of the
bidders. Unlike the traditional projects whose capex are being funded from water bills with built-in
component for the cost of projects still to be constructed (similar to pre-selling of condos), only the
delivered/accepted treated water passing the water quality standard will be paid under a BOT contract,
thus literally complying with said Clause 9.4.

Annexes C & D suggested that instead of the then contemplated formulation of a new road map fo
water sources development, a BOTcontract that will compel bidders to optimize the project be crafte .
Said annexes cited the reasons why both concessionaires preferred Design & Build Contract ra e
than BOT contract. They have two attachments, which are annexed to this letter as follows:

. 1'. Annex E - Letter to then Maynilad President Rogelio L. Singson dated 24 Oct 2007

2. Annex F- Comments on the Peer Reviewer's Suggested Revisions on the Draft Report on 10
MLD Taguig Water Supply Project (Phase 2).

Annex E discussed the different ways of optimizing projects, one of which is by implementing.projects
through a BOT contract. History shows that this suggestion was ignored because of vested interest of
one of the principal shareholders. The result is a plant that needed several remedial measures at the
expense of the consuming public, which expenses cannot be passed on to the consuming public under
a BOTjPPP contract.

page 1 of 3
 Annex F explained the need to implement the Proposed 10 MLD Taguig Water Supply Project (Phase
2) through a BOT contractual arrangement but it could not be done so for reason contrary to
optimization. Lately, I was informed that an MWSS policy does not allow its concessionaires to
implement projects through BOT contract. This policy needs a second look because it forfeits the best
way of optimizing projects or of exercising prudence and efficiency as required by the Concession
Agreement.

Also, attached to this letter are the following pertinent suggestions notes that were attached to my
letter to President Benigno S. C. Aquino III sometime in November 2010:

1. Annex G - Suggestions for Optimizing and Accelerating MWSS Water Supply Development
and Rehabilitation Projects (2007 Oct24)
2. Annex H - Suggestions for Accelerating Water and Power Supply Development Projects
(2010Nov24)
3. Annex I - Why BOT Contracting is Much Better than the Traditional Scheme? (2010Nov24)
4. Annex J - Suggestions for Accelerating Economic Development Through Transparency
(2010Nov24)

Annex G highlighted the need to review the interpretation of the MWSS Concession Agreements with
respect to the obligation to develop new water sources in order to meet service coverage obligations
and reliability requirement. This review is very crucial because the wrong interpretation may squander
Laiban Dam", which is the only remaining best water source for MWSS service area and its adjoining
.~ provinces such as Laguna, cavite, and Bulacan.

In addition to the discussion in Item 1 of Annex G, another defect of the current interpretation is that
the MWSS as the tenderer will be the buyer ofthe bulk water. MWSS will then be selling the bulk water
to the concessionaires, who are not parties to the BOT contract, and who might not be willing to buy
the bulk water as tendered by MWSS. Under the proposed interpretation, the MWSS concessionaires
will be the tenderer and buyer of the bulk water, thus simplifying the transaction and removing the
attendant administrative cost, which will be passed on to the customers.

Going back tothe optimization proper ofthe Kaliwa-Kanan-Agos River System as future water source
for MWSS and its environs, copied below is Table 4.3 of the 2005 update of the MWSS Water Supply
Master Plan showing the ranking of the different development options of the said river system .

.Table 4.3 - Cost Estimates for Water Source Combinations (a~ 2005 prlces)2

5,110 2,016,233 0364

2 KaIiwa low Dam . Agos Dam 3.000 1,740,872 0.393

3 3,000 1.101,372 0.383

.4 3.330 1,913,381 0.372

5 1,616,882
Solll'ce: 2003 ~on W"~Cft De, I~tot fIIeCro (NIppon Koei eM HJS) ~ to:ZOOS
prien t4.7" pw num fwloc:al coD, 2.2"4 pw _11'I tot ~ CiOMa)

1_ The diversion tunnel of this project was already done, some residents to be affected were already paid and
the relocation sites was also in the advanced stage of development when the project was suspended.
2 _ From Water Supply, Sewerage and Sanitation Master Plan for Metro Manila, Voll- Summary, Nov. 2005

page 20f3
 It will be noted from Table 4.3 of the Water Supply Master Plan, that Option 1 (Laiban Dam + Kanan
Dam) has the lowest unit cost, which means that it is the most economical. This is due to the higher
water elevation (by about 32.5 m) of Option 1 treatment plant over the other options. This higher
elevation has an economic value of about -P16 billion per annum @ P8 per KWH. Another way of
presenting the economic value of the higher water level elevation is the lower capital cost of the
distribution system, which means that the optimization of the said water system should include the
design of the water distribution system. This imperative supports the idea that the responsibility for
optimizing the development of future water sources should be lodged to the concessionaires. The
review function of MWSS may be exercised to make sure that the public is amply protected; that the
BOT contractor will be required to optimize the project; and that there will be continuity or successor
to the parting parties in case of termination of the concession agreement.
" I

It was gathered by the undersigned that Option 1 is being abandoned in favor of a 600 MLD Kaliwa
DaM Project because of the escalating cost of paying the residents to be affected who were awarded
land titles despite the fact that the area is reserved for water supply. This means that of the 5,110 MLD
total capacity of Option 1, 4,510 MLD or 88% of this national wealth will be squandered if the
constructionof Laiban Dam will be postponed again. This would be so because of the growing number
of illegal settlers in the reservoir area. This also means that the economies of scale, which is one aspect
of project optimization discussed in Item 2 of Annex Ewill be forfeited.

To reduce the cost of the project it is suggested that the award of land titles for lots within the
~ watershed area under Presidential Proclamation No. 573 of then Pres. Marcos be revoked for being
illegal and those responsible for the award. be prosecuted. This should be one of the government
participation in this PPPproject.

To further reduce the unit cost of water from the project, it is suggested that the MWSS service area
be expanded to cover some cities and municipalities of Laguna, Cavite or that the MWSS
concessionaires be allowed to sell bulk water to cities and municipalities outside MWSS service area.
This proposal is another way of optimizing the project, which will minimize idle capacity and thus
minimize water tariff.

With the strong leadership of President Rodrigo R. Duterte, the opposition to the project by some
NGOs can be converted to positive actions by doing the following:

1. The residents to be affected can be employed by the BOT contractor in reforesting the
watershed and in operating the enlarged fishing area .
. 2. Satellite campus of a state university, hospitals, and community amenities can be built in the
relocation sites:
3. The workers in small scale mining industry now operating in the river system can be enhanced
by requiring the BOT contractor to gather the boulders downstream of the dam site where the
workers can have bigger income.

Without the project, it is expected that the deforestation of the reservation will be intensified by illegal
loggers, charcoal makers, and 'kaingeros'.

Very truly yours,

. Gaurino

Cc: Gen. Reynaldo V. Velasco (Ret) Ph. D.

MWSS Administrator '

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