Lights out for the power industry
The Philippine Star
09/15/2003

Uh-oh! for the privatization of the state-owned National Power Corp. (Napocor). First, investors junked a $500-million bond issue. Then recently, a bidding attempt to find an operator to manage the Transmission Co. (Transco) assets (a part of Napocor) once again failed.

The Napocor problem continues to strangle the government. To service the power firm’s debt – estimated at $6.6 billion – the Philippine government needs to raise P38 billion annually. This is precious money that is diverted from basic infrastructure spending, and worse, bloats the national budget deficit year after year.

A decade ago, the overall concept was to privatize Napocor by cutting up its various assets and selling them piecemeal to interested parties. After seven years, in 2001, Congress finally passed the Electric Power Industry Reform Act. But since then, nothing much has happened.

Transco – which inherited the transmission assets and is now looking for a private concessionaire to operate the country’s transmission network – continues to be mired in legislative problems, thereby scaring potential bidders. Transco’s expectation to raise $2.5 billion remains a dream.

On the other hand, the Power Sector Assets and Liabilities Management Corp. (PSALM) recently announced it was already all set to sell the Napocor’s generating assets. The optimism is there, but the target foreign investors seem to have shied away.

It is not just Napocor

Napocor’s recent failure to successfully float bonds reflects on the financial credibility of the government-owned power firm. It is perceived to be too mired in debts, and therefore does not inspire potential creditors to lend it more money.

Aside from the backbreaking debts, Napocor is also committed to paying about $9 billion in power purchase agreements to independent power producers (IPPs).

Looking more closely, Napocor’s decade-long effort to restructure its debts is not enticing any sound-minded investor to take a bite. Many now perceive Napocor as a company that is designed to fail no matter what rescue plan is activated.

On the other hand, there may be other more serious issues – not necessarily intrinsic to Napocor’s health – that make investors look away. It looks like it is now not only Napocor’s well being that is scrutinized, but even that of the whole power industry.

Investors once bitten, twice shy

Yes, investors are apparently disappointed with what has been happening in the power sector.

Remember when the Macapagal-Arroyo administration embarked on what was seen as a politically instigated plan to review all contracts with independent power producers (IPPs)? All of a sudden these contracts were labeled as onerous and were being threatened for cancellation or abrogation.

Well, a number of IPPs found they had little choice but to accede to public pressure and government "persuasion." Word however has spread around and a big question mark now hangs on the country’s acceptability as an investment choice for similar long-term projects.

Apparently the IPP-bashing did not sit well with potential investors. Who would like to see a 20-year contract signed and sealed by appropriate government officials questioned after completion and millions of dollars spent?

Fruits of inaction and neglect

Aside from the harassment that IPPs are getting with regards their contracts, a number of power firms are also fed up with the inaction of the Energy Regulatory Commission on rate hike increase petitions. Many of them reportedly have been in limbo for years!

Two months ago, independent power producer Cebu Private Power Corp. declared it would close shop rather than continue losing. Fortunately, the Department of Energy (DOE) was able to get an extension of some sort from the Cebu-based IPP to defer its intent.

Another festering problem is the need to put up more power generating plants in some parts of the country to keep up with the growing demand for electricity. A need identified but not acted upon.

A clear case in point is the impending power shortage in Panay Island, home to Boracay Island, one of the government’s flagship tourist destinations. Based on the energy department’s estimates, Panay’s current power generation capability will not be enough to supply its needs by 2004.

Unfortunately, Panay has very limited hydro or geothermal resources that could immediately be tapped to cover the looming shortage. Its existing transmission facilities likewise are not capable of transporting electricity from other grids with excess power. The sizable amount of investment needed was not planned nor provided for.

With the massive debt problems of Napocor, the ongoing inquiries into supposedly "onerous" provisions in the IPP contracts, and the continued bitching in the halls of Senate, I am inclined to think that potential overseas investors in the Philippine power sector will just take a quick look at us and then walk away.

It seems that brownouts will be the order of the day for Panay next year. The whole country, on the other hand, can expect lights out in the near future, as the Napocor problem remains unresolved.

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