01 Sep 2011
Water for Life
Jaime Augusto Zobel de Ayala (MBA ’87) helped to transform Manila’s rundown metropolitan water system from an inefficient public utility into a model public-private partnership.Topics:
Issue Focus: Business and the Environment
Sixteen years ago, many of metro Manila’s 11 million residents could only wish for reliable, affordable water service. Nearly two of every three gallons of water pumped through the dilapidated distribution system were lost or stolen. Desperate for a remedy, the Philippine government invited the private sector to take over, a call answered by the Ayala Corporation, one of the country’s oldest and largest business groups.
In August 1997, the Ayala-led Manila Water Company signed a 25-year concession agreement (later extended another 15 years) to operate the water and sewer systems of Metro Manila’s east zone, home to more than 6 million people. Since then, Manila Water has invested over $1 billion in laying 2,000 miles of water lines and building 33 wastewater treatment plants while returning strong profits for shareholders. Equally important, the company has emerged as a model for integrating financial success with social responsibility and environmental sustainability. Jaime Augusto Zobel de Ayala, chairman and CEO of the Ayala Corporation and vice chairman of Manila Water, is an architect of the water company’s successful triple-bottom-line approach to providing millions with a basic necessity: clean water.
Why did you decide to add water and sewer to the portfolio of businesses under the Ayala corporate umbrella?
Ayala has historically aligned itself with the economic goals of the country. An emerging market faces many social and economic challenges, but finding a solution to those challenges has presented business opportunities. Similar to property development, we strongly believe that the delivery of water and sanitation services to the city of Manila significantly affects the quality of life of the public, especially those in marginalized communities. This opportunity to have a developmental impact in the community, coupled with the attractiveness of a well-structured public-private partnership framework for water distribution in Metro Manila, encouraged us to make this investment.
In the process, we were able to change a public utility delivery system that was stuck in a rut of poor infrastructure, low service standards, and operational underperformance. We transformed it into a service operating according to world-class standards.
At the time you took over, 63 percent of Metro Manila’s water was either lost or stolen. Did you have a hard time convincing your board that this was a business with a financial upside?
The task of reducing system loss and turning around a public corporation in disarray was a formidable and risky challenge. There were also risks on the regulatory front, where water-related issues could be susceptible to political pressure. However, we were comfortable that the Philippine government had developed an excellent public-private partnership model that provided the right incentives for investment and the flexibility to attack the problems in service delivery. This was key.
How did you structure Manila Water’s concession with the government to allow you to make a profit?
Our concession agreement is perfor-mance-based and guarantees the reimbursement of our expenditures and cost of capital as long as these are prudent and efficient. The model requires us to accelerate and even advance our capital investments, roll out the network as fast as we can, and connect hundreds of thousands of households efficiently. With over 6 million customers (about 1 million households), the viability of the company can be sustained as long as we remain efficient in our operations and excellent in our service delivery. So far, we have been able to achieve this.
How has Manila Water addressed the water and sewer needs of the poor, who are a major part of your customer base?
Unlike most companies, which disregard lower-income groups because they seem to be an unattractive market, Manila Water took a particular interest in addressing their needs. We saw an opportunity to help uplift the quality of their lives, provide a much-needed service, and, at the same time, make reasonable returns on our investment. It was a conscious effort on the part of Manila Water to provide the same level of service to all customers, including those in low-income communities. These disadvantaged communities were actually paying a great deal more for their water at the time through middlemen who saw opportunity in the lack of service. By disenfranchising these traders, we earned the goodwill of the community and built a loyal market for our service.
Our Tubig Para sa Barangay (TPSB), or Water for Low-Income Communities, became our main vehicle to address poor families’ need for a clean and affordable water supply as well as proper sanitation. Since its launch in 1998, the TPSB program has benefited more than 1.7 million people, accounting for over half of the increase in our customer base since the start of the concession.
Why does Manila Water support the development of local small enterprises?
We believe that as the biggest water and wastewater service provider in the Philippines, we have a major role to play in our country’s economic development. At one level, we do this by improving the nation’s water and wastewater infrastructure.
At another level, we believe that we can build trust and a sense of alignment by jump-starting economic growth in the communities where we operate. We do this by providing business opportunities for small and medium sized contractors and suppliers, helping them develop alongside the company through our Vendor Management program. Since 2007, Manila Water has generated more than 20,000 jobs through these local enterprises.
Similarly, Manila Water gives community-based cooperatives sustainable livelihood opportunities through our Cooperative Livelihood and Development program. This program is more effective than a typical microfinancing program because it lets the beneficiary cooperatives become part of our supply chain. They provide Manila Water with products such as meter protectors, short pipes, and board-ups for our pipe-laying activities and other civil works. In this way, they have Manila Water as a captured market, and more importantly, they can develop their capabilities as an organization and sell their products to other clients as well. Our livelihood program has already given out more than P60 million (nearly $1.4 million) worth of job orders to our community partners, benefiting some 1,000 poor families.
How have you incorporated corporate social responsibility (CSR) into the company’s mission?
CSR has always been at the heart of Manila Water’s business practices. As an organization, we value the importance of sustainability and CSR in addressing customer needs and building trust with the communities we serve. However, we have to make sure that our CSR programs are strategic to our business objectives, especially since we are operating in a highly regulated environment. To do this, we identified three focus areas — water provision to the urban poor, water education, and environmental protection — that reflect the social issues we can address as a water and wastewater service provider. These programs were carefully planned so that they can help us attain the water infrastructure and poverty alleviation targets set in the Philippine Development Plan.
Why does Manila Water need a climate change policy?
Studies show that the water supply sector is one of the most directly affected by climate change. Our policy covers our commitment to (1) account for our carbon emissions and reduce these even as we expand our business; (2) improve operational efficiency and use energy from sustainable sources; (3) develop climate change adaptation and mitigation programs; and (4) do a large-scale watershed management program to ensure sustainable raw water supply.
This policy has guided us to develop environmental initiatives that go beyond compliance with national standards. We also started undertaking innovative programs on wastewater effluent reuse as part of our water recycling efforts, as well as energy-efficient projects to reduce our carbon footprint.
You have been successful in creating private value while contributing to the solution of important social problems. What advice would you give to young MBAs interested in developing careers that resemble yours in that respect?
There should never be a dissonance between genuine CSR and business objectives. The triple-bottom-line approach that Manila Water adopted enables us to drive our bottom line and enhance our financial capability while being socially and environmentally responsible. We think that starting young executives in the front lines of a business like Manila Water gives them a feel for community issues, helps them understand the importance of building trust, and engages them in understanding the importance of proper service to the lives of many who are deeply dependent on the reliability of this service. Governments need private capital to achieve some of their public-sector goals, and private capital, in turn, has the imagination and discipline to implement these successfully and effectively. I believe that using the capitalist model to invest, make a difference in people’s lives, strengthen a community, and find winning opportunities to address a broader set of needs of a customer group while contributing to the economic and social development goals for a country — all these are wonderful ways to build the right mind-set and principles for a career in business.
Class of MBA 1987, Section H