In doing good, Manila Water does well

MANILA, Philippines—Why should a big water utility bother with the financially unrewarding effort of installing drinking faucets, in a city jail, of all places?

Or why should the same company—a unit of the country’s largest and oldest conglomerate, Ayala Corp.—bother with installing 24-hour water services in elementary schools near the edge of its area of responsibility?

Offhand, these two projects look unprofitable, yet these are exactly what Manila Water Co. has been doing as part of its overall thrust to improve its service—and profitability—in its concession area in the East Zone of Metro Manila.

Lingap City Jail

Having received reports that some inmates in Mandaluyong City Jail fell ill with diarrhea, the company initiated its Lingap City Jail project and addressed the poor quality of water in the correctional facility that housed hundreds of hardened criminals.

It also upgraded water services in three schools in Marikina, Pasig and Taytay to provide them with round-the-clock supply of potable water benefiting nearly 5,000 teachers, staff members and students under its “Lingap Eskwela” program.

More importantly, these efforts are not just one-shot corporate social responsibility projects but are integral parts of Manila Water’s business strategy that has allowed it to become one of the most profitable water utility operations in Asia, despite the overwhelming number of low-income clients in its service area.

This very phenomenon was extolled recently in a book edited by Harvard Business School professors V. Kasturi Rangan and John A. Quelch, Harvard Research Center executive director Gustavo Herrero, and research associate Brooke Barton.

Serving the poor

“The experience of Manila Water demonstrates that businesses can serve low-income segments profitably,” the book said.

“We believe business models that are designed with the distinct characteristics of the low-income segment in mind and that leverage the community aggressively is able to achieve a competitive rate of return while delivering an important developmental impact in the market place,” it added.

But the picture for Manila Water was not always as rosy.

When the government privatized water services in the capital in 1995, it divided Metro Manila into east and west concession zones, with the Ayala-led consortium (that eventually became Manila Water) winning the bid for the east zone.

Manila Water faced significant challenges from day one, since only two-thirds of the franchise area had water service. Water pressure was erratic and barely a fourth of the population was served on a 24-hour basis.

More alarmingly, over two-thirds of the water that was treated by the existing facilities was classified as “non-revenue water.” This meant the company did not make money from that since it was not billed due to pipe leaks, illegal connections and problems with faulty meters, according to the Harvard book.

Game-changing scheme

To succeed in this venture, it became important for Manila Water to face three challenges. Most households did not have proper water facilities. It was difficult to collect payments from low-income households. Finally, clients tended to cling to the misconception that bulk water sold by vendors in cans were cheaper than piped-in water.

“Manila Water devised a game-changing scheme that overcame the [client] acquisition and collection challenges,” the Harvard book said, by giving communities the option of collective installation and collective billing.

Consumers were given the option of choosing from three options: One meter per household; one meter for three or four households; or a bulk water meter serving up to 40 or 50 households. According to the study, the last two schemes reduced a household’s connection fee by as much as 60 percent, making it more attractive for them to sign up.

And the rest is history.

“It was important for the company to take an integrated perspective to its corporate social responsibility and sustainability programs to ensure total alignment with its core business strategies,” Manila Water chair Jaime Augusto Zobel de Ayala II said in a speech given to the Management Association of the Philippines about the company’s business thrust.

“Manila Water realized early on that the lack of service to low-income segments posed a real threat to the viability of its operations,” he added.

And the company has the numbers that attest to the soundness of this business thrust.

As of the first quarter of this year, Manila Water already has 14,819 water service connections compared to its target of only 8,358—beating its goal by 77 percent.

Best among peers

Ninety-nine percent of its clients experience water pressure of 7 pounds per square inch—the pressure needed for water to push its way up the pipes to a house’s second floor, unassisted by a pump—compared to its target of only 78 percent.

More importantly, 100 percent of all disruptive pipe failures were resolved in 24 hours compared to its target of only 95 percent.

Because of metrics like these, the Harvard book pointed out that Manila Water’s return on capital employed was “the best among a set of peer companies in Asia.”

“Business models designed to prioritize the low-income segment can be profitable and can achieve competitive rates of return while also providing a developmental impact that is both scalable and sustainable in the long-term,” Zobel said.

It proves that anchoring one’s business on serving the poor is a profitable venture. And in the context of Manila Water’s business, this means not only “doing good” but also “doing well.” –Daxim Lucas, Philippine Daily Inquirer