In Manila, the hybrid regulatory structure offered the great promise of compensating for drawbacks in both contract and discretionary regulation. In the design phase, the priority appears to have been reducing regulatory and political risks within the constraints imposed by the institutional structure. Thus, the contracts specified the initial tariff and had detailed provisions on tariff indexation, but the principles and processes of rate rebasing were very vague. Regulatory risks were reduced by the dispute settlement mechanism, whereby disputes were taken out of the hands of local courts and entrusted to an international arbitration panel, whose decisions were final.
The contracts were the central regulatory instrument in the first rate rebasing. Here, the regulatory office referred to the concessionaires' own business plans as the benchmark for performance. But by the time of the contract extension and the third rate rebasing, tensions inherent in the role of a regulatory agency in the hybrid structure were acutely apparent. And, by this time, the regulatory office had begun to define its own role more broadly as providing continuing incentives for the concessionaires to operate efficiently. The office also tried to fit the contract terms to its own interpretation of key parameters, such as the appropriate discount rate and "prudent and efficient" spending.
The regulatory office's capabilities have evolved considerably since it was set up in 1997. In the first rate rebasing, the office essentially contracted out major regulatory tasks by using external consultants to provide technical inputs and analysis. A notable feature of the regulatory office's development has been its move away from its original role as merely a contract monitoring agency to becoming a full-fledged, autonomous regulatory agency. This is both a necessary and desirable process if a regulatory system is to continue to exert pressure on firms to operate efficiently over the life of PPP contracts.
The limitations of the hybrid structure were also evident in the renegotiation of both contracts and their 15-year extension. In these episodes, the regulatory office positioned itself as the contracts' guardian and opposed changes in major provisions. But it was ultimately unable to block the government's short-term incentives. The renegotiation of contracts is not always opportunistic of course (Brux 2010), but the potential costs to the consumer are significant. Consumers effectively subsidized the financial irresponsibility of Maynilad's original owners. Delaying the termination of the contract through the amendments raised costs to both the consumer, directly in tariffs and indirectly through foregone service improvements, and the government, which was unable to recoup the unpaid concession fees. It is difficult to estimate the cost of extending Maynilad's concession by 15 years, but it seems likely that the competitive effect of rebidding could have allowed considerable efficiency savings to be passed on to consumers.