ADB: Anti-Development Bank

The Asian Development Bank (ADB) is holding its 45^th annual meeting from May 2 to 5 in Manila. Some 4,000 delegates including finance ministers and central bank governors from ADB’s member-countries; as well as representatives of big business, international financial institutions (IFIs), transnational banks, credit rating agencies, global media, and even so-called civil society are attending the said event. With the theme “inclusive growth through better governance and partnerships”, the event will mark the 15^th time that the ADB has held its annual meeting in Manila. Venues have been arranged at the Philippine International Convention Center (PICC).

The ADB was founded in 1966 and now has 67 members. It’s one of the global financial institutions set up by the industrial powers to fund their programs and projects in backward countries. Together with the International Monetary Fund (IMF), the World Bank and other IFIs, the ADB bankrolled numerous restructuring efforts that aim to liberalize, deregulate and privatize the economies of many countries in the Asia Pacific. These reforms have been implemented through huge and burdensome debts. The Philippines is a founding member of the ADB and has been hosting the bank’s main headquarters since its inception.

ADB’s 45^th meeting is an opportune time for the Filipino people to register its strongest condemnation of the multilateral bank that has been funding numerous anti-poor economic reforms and destructive projects in the country.

Neoliberal offensive in energy

In the Philippines, ADB’s disastrous impact is most felt in the energy sector through the Electric Power Industry Reform Act of 2001 (Epira) and the neoliberal reforms implemented in the sector in the past two decades. The ADB started funding the power sector reforms through loans and equity investments to independent power producers (IPPs) as well as guarantees for bonds issued by the National Power Corp. (Napocor). Due to sweetheart deals with the IPPs, Napocor further went deeper in debt, which the ADB used to justify its total privatization.

As Napocor’s largest creditor, the ADB aggressively pressured the national government to fully privatize the state-owned power firm and enact the Epira. In 1994, it funded a study that eventually became the basis of the then Ramos administration’s blueprint for power sector restructuring. This blueprint took the form of an Omnibus Power Bill that was filed in 1996 that aimed to privatize Napocor and restructure the power industry. The Omnibus Power Bill would later become the Epira, a process that was bankrolled by the ADB’s $300-million 1998 Power Sector Restructuring Program (PSRP). To access the loan, the ADB listed 61 specific conditionalities that the government should follow, including designing content and legislation of the Epira.

Even Epira’s actual implementation is being funded by the ADB. Since 2002, the ADB has approved an estimated $1.3 billion in loans to support the various programs and projects under Epira. These include debts to guarantee the bond issuance and improve the creditworthiness of the Power Sector Assets and Liabilities Management Corp. (Psalm), which Epira put up to oversee the privatization of Napocor, and establish the wholesale electricity spot market (WESM).

Under Epira, electricity bills have soared amid energy insecurity such as the case in Mindanao. According to one study, the power rates for residential users in Manila and Cebu are the first and third most expensive in Asia, respectively. Even the supposedly “cheap” electricity rates in Mindanao are still much more expensive than the rates in more progressive Asian cities like Hong Kong, Beijing, Kuala Lumpur and Seoul. Since Epira was implemented, the rates of the Manila Electric Co. (Meralco) have jumped by 112% while the rates of the Napocor have increased by 95 percent.

Meanwhile, the lack of energy security is the result of government’s abandonment of its mandate to invest in the rehabilitation of existing plants and construction of new ones. Instead of ensuring that there is enough energy supply consistent with a long-term industrialization plan, government used its time and resources to dispose the generation and transmission assets of Napocor as mandated by Epira.

Anti-poor reforms

Aside from the neoliberal restructuring of the power sector, the ADB has also aggressively promoted various privatization and commercialization initiatives including in water utilities, irrigation, dam, and the National Food Authority (NFA), among others. These reforms have resulted in food insecurity and in skyrocketing cost of living.

Privatization is one of the major programs of the ADB in the Philippines, including the public-private partnership (PPP) initiative of the Aquino administration. ADB is the main funder of the Project Development and Monitoring Facility (PDMF), which is government’s revolving fund for feasibility studies for projects under the PPP scheme. The ADB has already committed $21 million for the PDMF.

Furthermore, the ADB also bankrolled a 1993-1994 study that became the basis of the destructive Mining Act of 1995. This program, which liberalized the Philippine mining industry, has paved the way for the further wanton plunder of the country’s mineral resources, the destruction of the environment, and dislocation of communities.

Oppressive debt

Worse, these anti-development and anti-poor programs have been funded by onerous ADB loans. The ADB is now the country’s single largest foreign creditor. As of 2011, the country owes the ADB around $5.84 billion, which is almost 10% of the total foreign debt of the Philippines pegged at $16.71 billion. Among the multilateral creditors, the ADB accounts for more than 50% of the country’s total multilateral debt. All in all, the country has accumulated the fifth largest debt from the ADB, accounting for about 8% of total sovereign lending.

Due to automatic debt servicing, a huge portion of the national budget is being siphoned off by debt servicing, leaving almost nothing for social services. For 2012, for instance, the Aquino administration is ready to spend P738.6 billion for debt servicing, including interest payments and principal amortization. This is much bigger than the P575.8 billion that government is willing to spend for education, social security, health services, housing, land reform, and other social services.

To smokescreen the harsh effects of the neoliberal reforms that it has been sponsoring and the lack of resources for social services due to debt servicing, the ADB – together with the World Bank – is also funding the conditional cash transfer (CCT) program of the Aquino administration. Under the CCT, government provides direct cash assistance of as much as P1,400 to selected poor families on the condition that pregnant mothers will have their regular checkup and school age children will regularly go to class. But aside from being highly temporary and limited, the CCT also further deepens the indebtedness of the Philippines. The ADB is funding the CCT to the tune of $400 million in loans while the World Bank is also lending $405 million for the program.

Strong protest

ADB’s theme of inclusive growth for its meeting this year reflects the main theme of the host government’s Philippine Development Plan (PDP) 2011-2016. Under the PDP, inclusive growth is supposed to be achieved by expanding the domestic economy by 7-8%, which will generate jobs and livelihood and alleviate poverty. But Aquino’s inclusive growth means the implementation of the same policies and programs of liberalization, deregulation and privatization that the ADB – together with the IMF, World Bank and other global imperialist institutions – has long been imposing on the country.

We should not let the ADB meeting pass without registering our strong opposition to its decades of intervention in Philippine policy making and to the many programs that it has bankrolled through odious debts that perpetuate the backwardness of our economy and the poverty of our people. (end)

Mindanao power is more expensive than Asia’s major cities

Mindanao power is more expensive than electricity rates in major cities in Asia but Aquino wants the region to pay more to supposedly address its power crisis (Photo from manilastandardtoday.com)

Mindanao must pay more to end the rotating brownouts, the President declared in his Power Summit speech. The region, said Aquino, needs more power supply but “cheap” power rates are discouraging private investors from building new power plants to meet Mindanao’s growing energy needs.

Pay more

“But how can you entice anyone to invest—and this is the question—if their generating cost is more than their selling cost?” Aquino, in his speech, asked. “The simple truth is: we can have a lot more energy, but we have to provide the incentives for businesses to come here to put up those plants. Therefore, there will be a change in what we have to pay. We will have to pay, perhaps, a bit more… You have to pay more because this is the reality of economics… Everything has its price. We have to pay a real price for a real service. There are actually just only two choices: pay a little more for energy, or live with the lack of energy and the continuation of the rotating brownouts.”

Cheap rates?

Aquino must apologize to the people of Mindanao for blaming them for the power crisis and accusing them of being spoiled by “cheap” power rates. Aquino must apologize for being shamelessly insensitive to the plight of Mindanao where 36% of the country’s poorest families live (based on the latest official poverty statistics released by the National Statistical Coordination Board or NSCB).

The premise that Mindanao has been unjustifiably enjoying “cheap” power rates is totally wrong. True, Mindanao has lower power rates than Luzon and Visayas. Latest available comparative data show that the region has an effective residential rate of P6.69 per kilowatt-hour (kWh). Luzon has P9.84 while Visayas has P8.19. (Data from 18^th EPIRA Implementation Status Report, which may be downloaded here)

Most expensive in Asia

Aquino, however, did not mention one very important fact. Mindanao power is “cheap” only because the country has the highest electricity rates in Asia. In a survey conducted by the Japan External Trade Organization (JETRO), Manila posted the most expensive residential rate (P10.16 per kWh), while Cebu (P8.39) is ranked third (Singapore ranked second with P8.83). JETRO conducted the survey in January 2011 to compare investment-related costs, including electricity, in 31 major cities in Asia and Oceania. (See the table at the end of this article for the complete list; Download the JETRO survey here)

While Aquino is blaming the power crisis on the people of Mindanao for being pampered by “cheap” power, Mindanao is actually paying much more than most major cities in Asia. Did you know that residential consumers in the Autonomous Region in Muslim Mindanao (ARMM), Cagayan de Oro City, Northern Mindanao, and the Davao and CARAGA regions are paying twice the electricity rates of residents in Seoul and Beijing? Except for CARAGA, all the Mindanao regions I mentioned also have more expensive residential power rates than Hong Kong. These areas in Mindanao, plus Cotabato City, Iligan City, SOCCKSARGEN, and the Zamboanga Peninsula all have higher residential rates than major Asian capitals like Taipei, Kuala Lumpur, Jakarta, New Delhi, Bangkok, and Shanghai, among others. All in all, Mindanao is paying an average of P1.82 per kWh more for electricity than the collective average residential rate of the 31 major cities in Asia and Oceania surveyed by JETRO.

I summarized these findings in the chart below, which culled data on residential rates from the JETRO survey and data on average residential rates of private distribution utilities (PDUs) and average systems rates of electric cooperatives (ECs) from the 18^th EPIRA report. The red bars represent Mindanao regions and cities.

Poorest region

Note that Mindanao has an average official poverty incidence of 33.5% of families (the national average is 20.9%). The country’s three poorest regions are in Mindanao – CARAGA (39.8%), ARMM (38.1%), and Zamboanga Peninsula (36.6%). ARMM does not only have the most expensive power rates in Mindanao, it also has (consequently) the highest cost of living (more than P1,287 based on the family living wage released by the NSCB in July 2008) among all regions in the Philippines, while the minimum wage there is just P232 (or just 18% of the cost of living). Amid this condition, the people of Mindanao are being forced to pay for electricity that is way beyond the rates in Asia’s richest cities. Yet Aquino wants Mindanao to shell out more money to supposedly solve its power crisis.

Blame EPIRA

Mindanao has lower rates than Luzon and Visayas not only because it sources its energy supply from cheaper hydropower but also because the region has been relatively and temporarily spared from the privatization and deregulation drive under EPIRA. State-controlled/owned installed capacity in Mindanao is still about 82% of the total (as of 2010 data from the DOE), compared to 18% in Luzon and 36% in Visayas where most power plants have already been privatized and are now controlled by the country’s profit-seeking “power lords”. Furthermore, unlike Luzon and Visayas, Mindanao does not have an EPIRA-created wholesale electricity spot market (WESM), which has only become a venue for price manipulation and speculation by power monopolies, sparking off wild spikes in power rates.

But EPIRA is also to blame for Mindanao’s energy insecurity. While government retained control over most of the installed and dependable capacity in Mindanao, it did not invest in additional capacity to meet the growing power demand of the region. Government abandoned its strategic role to design and implement power development projects consistent with a long-term industrialization plan and instead focused on selling the assets of the National Power Corporation (NAPOCOR) to private investors as mandated under EPIRA.

Reverse privatization

To fully solve the energy insecurity of Mindanao and the rest of the country as well as the problem of expensive electricity, there is no other recourse but for the state to take over. Aquino could no longer use the excuse that doing so will just further bankrupt the government. Despite the EPIRA, NAPOCOR remains trapped in deep debt (read here). So instead of further wasting limited public resources on a flawed energy program – which only made electricity bills more exorbitant and power supply more insecure – government should start reversing the privatization and deregulation of the energy sector. #

Aquino’s 2012 budget: Diretso sa tubo (Part 2)

Aside from creating more profit-making opportunities for private business through the PPP, the 2012 budget is also focused on creating the most favorable conditions for investors. (Photo from mylot.com)

First published by The Philippine Online Chronicles

Continued from Part 1

To fund his Public-Private Partnership (PPP) initiatives, President Benigno S. Aquino III is proposing in his 2012 budget an amount of P8.6 billion for the Department of Transportation and Communications (DOTC) and another P3 billion for the Department of Public Works and Highways (DPWH). The said amounts are for the various PPP ventures of the two agencies, including for the preparation of business cases, pre-feasibility and feasibility studies.

Aquino has tasked the DOTC and DPWH to implement his first 12 PPP projects. PPP Center data show that the DOTC is handling eight projects worth P95.3 billion for the privatization and expansion of the light rail transit (LRT) and metro rail transit (MRT) and another P16.7 billion for the privatization and development of airports in Bohol, Albay, Palawan, and Puerto Princesa. On the other hand, the DPWH is in charge of four projects worth more than P44.9 billion for expressway projects in Luzon.

These projects are on top of the numerous other PPP initiatives that will be handled by the DOTC and DPWH under the medium-term plan of the Aquino administration.

Another major recipient of the 2012 PPP support fund is the Department of Agriculture (DA), which will receive P2.5 billion for right of way, infrastructure, and other related support. The DA and its attached agencies are in charge of 16 PPP projects for medium-term rollout worth at least P55.8 billion for irrigation, post-harvest facilities, and agribusiness ventures, among others.

(Download the complete list of Aquino’s PPP projects here)

PPP for social services

But aside from infrastructure development, Aquino is also expanding the use of PPP schemes to the delivery of social services. One is the P3-billion government counterpart funding to rehabilitate, maintain, and operate 25 regional hospitals. Another is the P5-billion fund for school building construction through PPP, wherein the contractor will undertake the financing, design, construction, and maintenance of classrooms and turns them over to the Department of Education (DepEd) after completion.

In his budget message, Aquino also said that the administration is employing the Multi-Year Obligational Authorities (MYOA) to encourage private participation in the
construction, operation, and maintenance of school buildings, health centers, and other basic government infrastructures. MYOA is an authority released by the Department of Budget and Management (DBM) to enable an agency to enter into a multi-year contract for locally-funded or foreign-assisted projects.

The DepEd has been ordered by the President to pursue PPP projects for the construction of elementary and secondary schools (amount still to be determined) “as public funds are not being able to fully cover the needs of an increasing school population”, according to the PPP Center. DepEd Secretary Armin Luistro has also recently bared his agency’s plan to establish privately-run public schools
supposedly to address critical shortages in the public school system.

Department of Finance (DOF) Secretary Cesar Purisima, on the other hand, said that the government will be bidding out contracts for the construction of 10,000 school buildings within the year. Purisima said the private contractors will build and maintain the school buildings while the government will pay them over a period of time.

Meanwhile, the DOH will handle 11 PPP projects for medium-term rollout worth at least P7.9 billion, including the construction of the Philippine Health Insurance Corp.’s (PhilHealth) building, hospital staff housing facilities, use for commercial operations of hospitals’ unused lands, research facilities and materials, air transport service, commercialization of the Philippine Orthopedic Center, and use of information and communication technology (ICT).

All in all, the 2012 strategic support fund for PPP projects of the DepEd, DOH, DOTC, DPWH, and DA is pegged at P22.1 billion, of which P8 billion are fresh funding for PPPs in education and health.

Budget cuts

While allotting P8 billion and P5 billion in new funding for PPP initiatives in health and education, respectively, the supposedly Diretso sa Tao budget has either frozen or cut the allocation for key items to sufficiently meet the growing public health and education needs.

According to the Coalition for Health Budget Increase (CBHI), for instance, the Maintenance and Other Operating Expenses (MOOE) of five Metro Manila-based special hospitals and 18 local hospitals nationwide have been kept at their 2011 levels. Also, the Personal Services budget of the five special hospitals and of 16 local hospitals nationwide has been reduced.

In addition, the budget for Service Delivery Programs has been cut by almost a billion pesos while the budget for Health Facilities Enhancement Program has been slashed by more than two billion. Also, the subsidy for indigent patients for confinement or use of specialized equipment has been totally scrapped, according to the CBHI. It said that at least P90 billion, or more than P40 billion higher than Aquino’s proposed 2012 allocation, is needed to provide immediate relief to the health needs of the people.

The same thing is true with the education budget. Activist youth group Anakbayan has pointed out that the budget for 50 State Universities and Colleges (SUCs) will be slashed by P583 million. Meanwhile, despite the seemingly huge P31.5-billion increase in the DepEd budget, its allocation can only plug 27% of the backlog in classrooms, 19% of the backlog in desks, and 13% of the shortfall in teachers.

Pro-business budget

The country’s experience with PPP in the past three decades has been awful, to say the least. Various PPP initiatives in the power, water, road, and mass transportation sectors, among others, have all resulted in exorbitant user fees and onerous debts all in the name of assuring the profits of private business. The proposed regulatory risk guarantee of Aquino to further entice the private sector in his PPP program will surely worsen the public cost of privatization.

But even more alarming is the greater intrusion of profit-oriented investors in the most basic social services. The costs of running of hospitals and schools will certainly rise as PPP contractors expect not only to recover their investment but also to earn profits, which distorts the nature and role of public schools and hospitals. The increased cost will either be directly passed on to the patients and students through higher user fees or to the general public through the regulatory risk guarantee, or both.

From a fiscal point of view, PPP also does not guarantee that the budgetary woes of the government will be resolved based on the country’s own experience. Similar outcomes are evident in other countries. A recent study, for instance, by the Washington-based group Project on Government Oversight (POGO) found that the US government actually spends more when it hires private contractors to provide services than when the government itself is undertaking such tasks.

Anti-development

Aside from creating more profit-making opportunities for private business through the PPP, the 2012 budget is also focused on creating the most favorable conditions for investors, particularly in those sectors that the administration deems as growth and employment drivers. They include tourism, electronics export, and business process outsourcing (BPO), among others.

P9.2 billion, for example, has been allocated for access roads to tourist destinations on top of airport projects that will also be pursued through PPP. P500 million, meanwhile, has been assigned to the Commission on Higher Education (CHED) to focus the curricula of SUCs on BPO and tourism as well as agriculture and infrastructure development.

But these priority areas for development have long failed to spur sustained economic growth, much less address the chronic job scarcity and reduce poverty. They fail because they are not anchored on any long-term national industrialization plan that promotes and relies on domestic production and consumption. They have always been driven by what is profitable for foreign investors and what meets the appetite of the global market, specifically of the developed world.

Dole-out for the poor

The only semblance of Diretso sa Tao in the 2012 budget is the P39.5 billion allocated for the controversial Conditional Cash Transfer (CCT) program. For 2012, the CCT targets 3 million households with a proposed budget of P39.5 billion or P18.3 billion higher than this year’s budget. Aquino aims to cover 4.3 million households by the end of his term.

Such massive expansion in scope and budget is not backed by any thorough assessment on whether the program has actually contributed to sustained poverty reduction, not to mention that it is funded by $805 million in growing foreign debt that has long been debilitating the economy and depriving the poor of much needed social services.

As it is, even the target of 4.3 million households is still just a fraction of the ever growing population crippled by joblessness or lack of livelihood amid ever rising cost of living – social ills that ironically are being aggravated by PPP and other flawed development programs that the 2012 budget supports. Thus, the CCT is simply being used by the Aquino administration to sell his proposed national budget as Diretso sa Tao but at its core is Diretso sa Tubo. #

Power lords

San Miguel Corporation cornered 41.3 percent of privatized generating plants and IPP contracts in terms of capacity (Photo from allvoices.com)

(Continued from Part 2)

The restructuring of the power industry under EPIRA facilitated the creation of new private monopolies that lord over not only the distribution but also the generation of electricity. The dominant position of these monopolies, controlled by billionaires in Forbes’ list of richest Filipinos and their foreign partners, is bound to further intensify under Aquino’s public-private partnership (PPP) program.

Privatized power plants and IPP contracts

Out of the 7,665.88 megawatts (MW) in capacity of privatized generating plants and IPP contracts, Danding Cojuangco’s San Miguel Corporation (SMC) cornered 41.3 percent while the Aboitiz group bagged 28.5 percent. Other major buyers include the Consunjis (7.8 percent) and the Lopezes (7.4 percent). American firm AES Corporation accounted for a significant 7.8 percent. South Korean companies SPC Power and K-Water have a combined 5.8 percent. (It includes the Angat hydropower plant that was put on-hold by the Supreme Court.) Five companies accounted for the remaining 1.4 percent.

The costs of these transactions total $6.69 billion. SMC accounted for 35.9 percent of the said amount; Aboitiz, 30.2 percent; AES Corp., 13.9 percent; K-Water, 6.6 percent; Lopez, 5.7 percent; Consunji, 5.4 percent; and others, 2.3 percent. (See Table 1)

In terms of overall generating capacity, the restructured Philippine power sector is now dominated by just three companies – San Miguel Power Corporation (20 percent), Lopez-owned First Gen Corporation (17 percent), and the Aboitiz group (15 percent).

Government through NAPOCOR and PSALM has 30 percent. (See Chart 4) SMC’s rise as a major player in the power industry is truly phenomenal considering that it has only started venturing in the industry in 2008.

These are the same groups that also control the biggest distribution utilities (DUs) in the country. SMC and the Lopez group, for example, control MERALCO with 27 percent and 6.6 percent, respectively. (Manny Pangilinan’s Metro Pacific controls 45 percent.) MERALCO is the largest DU in the Philippines with a franchise area covering 24.7 million (about 25% of the national population) in 31 cities and 80 municipalities. It serves Metro Manila, Bulacan, Rizal, and Cavite as well as parts of Laguna, Quezon, Batangas, and Pampanga.

The Aboitiz group, on the other hand, controls the second and third largest DUs – the Visayan Electric Company (VECO) and Davao Light and Power Company. VECO serves Metro Cebu covering four cities and four municipalities. Meanwhile, Davao Light serves Davao City and Panabo City as well as three municipalities in Davao del Norte. Aside from these DUs, the Aboitiz group also controls Cotabato Light and Power Company, San Fernando Electric Light and Power Company, and the DUs serving the Subic Freeport zone, Mactan export processing zone, and the West Cebu industrial park.

SM tycoon Henry Sy has taken advantage of the EPIRA as well. His One Taipan Holdings (30 percent), State Grid of China (40 percent), and Calaca High Power Corporation (30 percent) control the National Grid Corporation of the Philippines (NGCP). NGCP holds a 25-year concession agreement (CA) with government to operate the country’s transmission system beginning in January 2009.

No transparency or competition

Cross-ownership in distribution and generation, which EPIRA allows, makes claims by advocates of neoliberal power restructuring about transparency and competition in pricing an outright lie. EPIRA’s unbundling of rates, for example, is practically meaningless even if a consumer can see in his or her monthly bill how much he is paying for generation and distribution. Market abuse is not prevented even if rates are unbundled due to cross-ownership. This has been clearly illustrated in the operation of the EPIRA-created Wholesale Electricity Spot Market (WESM).

The WESM, which has been operating in Luzon since 2006, is meant to among others “provide and maintain a fair and level playing field for suppliers and buyers of electricity”. But cross-ownership negates whatever benefits that the WESM is supposed to offer. The intention of the WESM is to make rates more competitive by offering prices other than those set in the bilateral contracts. EPIRA even capped at 50 percent the power requirements that DUs can source from their own generators and the rest they must get from other IPPs and the WESM.

However, the WESM itself is dominated by the same generators that are related with the DUs. IPPs connected with MERALCO, for instance, account for 42.6 percent (SMC with 24.8 percent and Lopez, including Quezon Power, 17.8 percent) of the 11,652-MW capacity registered at the WESM. The Aboitiz group, meanwhile, comprises 13.1 percent. The huge shares of these groups to the WESM-registered capacity make the spot market vulnerable to manipulation and speculation. Case in point was early last year when the price of electricity at the WESM reached an unbelievable P68 per kWh at one point during the height of the El Niño.

The high WESM prices have been blamed by MERALCO for the monthly increases in its generation charge last year. The latest adjustment in MERALCO’s generation charge worth 51 centavos per kWh, announced last Tuesday, is again being blamed at the high increases in the WESM, where rates jumped by P1.89 per kWh. MERALCO IPPs, on the other hand, increased their rates by a smaller 16.2 centavos per kWh.

Energy insecurity

Finally, the country’s energy security has remained precarious under EPIRA. The rotating brownouts experienced in different parts of the country last year is a tell-tale sign that the power crisis has not been resolved by privatization. In Mindanao, for example, the power shortage reached as high as 700 MW in March 2010 that led to rotating brownouts of as long as 8 hours daily. Government quickly blamed the El Nño because Mindanao gets more than half of its power supply from hydroelectric plants.

But apparently, the deeper issue is not drought but government neglect. During the Aquino administration, for instance, Mindanao’s power mix was 75 percent hydro while peak demand was 800 MW, according to a former NAPOCOR president. In 2010, DOE data show that hydro accounted for a relatively smaller 51.8 percent of installed capacity in Mindanao while peak demand was 1,288 MW. Thus, the El Niño could not be solely blamed for the shortage since no significant additional capacity has been put in the region. This should have been the job of government but because of EPIRA, it focused on selling the assets of NAPOCOR instead of installing additional capacity.

Even Luzon was not spared from rotating brownouts during last year’s El Niño. Aggravating the low levels in Luzon’s major dams were the uncoordinated shutdowns implemented by privately controlled power plants. They include SMC generation plants Sual and Limay as well as the Lopez plants that use natural gas from Malampaya. The power supply shortfall reached 641 MW, which could have been easily offset by Luzon’s excess capacity and thus avoid the rotating brownouts. But because EPIRA has dissolved government’s role in ensuring power supply, there is no mechanism in place to fill the gap resulting from plant shutdowns.

Ten years is enough

Its proponents argue that EPIRA must be given a chance to work because once fully implemented, the country will surely reap its promised benefits. They cite the impending implementation of the so-called open access and retail competition. Under this system, power consumers will have the opportunity to choose their suppliers. But then again, the industry has already been monopolized by a few players making the supposed option to choose an illusion.

For its part, the Aquino administration and its allies in Congress have worked for the amendment of EPIRA to extend the so-called lifeline subsidy. But it still does not address the exorbitant and rising electricity rates that Filipino consumers are forced to shoulder. Besides, the subsidy is being paid for by other consumers and does not come from the pocket of MERALCO or government.

Ten years of EPIRA is enough. Its defects could not be corrected by simple cosmetic amendments. It is fundamentally wrong to allow the narrow profit agenda of private companies and banks to take over a sector as strategic as the power industry.

EPIRA has resulted in the doubling of power rates and intensification of private monopolies. At the same time, it failed to address the financial problems of NAPOCOR and the country’s energy security. Only NAPOCOR’s creditors and private local and foreign companies have benefitted from power restructuring. For these reasons, there is a clear and urgent need for our policy makers to seriously rethink the law and work for its repeal. (END)

Read Part 1 – 10 years of EPIRA: what went wrong? and Part 2 - The curious case of NAPOCOR debts

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

The curious case of NAPOCOR debts

The deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA (Photo from Kevin Collins on flickr.com)

Continued from Part 1

Proponents of EPIRA made us believe that privatization will solve the financial woes of state-owned NAPOCOR. In fact, the deep indebtedness of NAPOCOR was one of the strongest arguments used to justify the EPIRA. If state coffers are being bled dry by the debts of NAPOCOR, then why not just sell its assets to wipe out its obligations? Obviously, the public was deceived by this simple line of reasoning.

Drain in public resources

Such argument by the then Arroyo administration sounded persuasive for some because government was facing a swelling budget deficit and debt. In 2001, the budget shortfall was P147.02 billion. Including the deficit of other government units, the consolidated public sector deficit was P174.27 billion. Meanwhile, the outstanding national government debt during the period was P2.38 trillion. NAPOCOR represented the biggest drain in public resources. Its 2001 debt of $16.39 billion or some P834.29 billion (at P50.99 per US dollar) accounted for 34.9 percent of government’s outstanding debt. With the EPIRA, the Arroyo administration promised to reverse the situation.

Fast forward to 2011. According to the PSALM Corp., the remaining debt of NAPOCOR as of 2010 is $15.82 billion. Thus, after 10 years, only $570 million have been shaved from the state power firm’s 2001 debt of $16.39 billion. At $15.82 billion or P713.64 billion (at P45.11 per US dollar), the debt of NAPOCOR comprised a still a significant 15 percent of government’s outstanding debt. Meanwhile, the budget deficit ballooned to P314.5 billion in 2010, a new high in absolute terms.

While its IPP obligations have been reduced by $1.63 billion between 2001 and 2010, NAPOCOR’s debt also increased by $1.02 billion during the same period. This implies that IPP obligations have been mainly financed by new debts. (See Chart 3)

Worse, PSALM has already shelled out $18 billion to settle the obligations of NAPOCOR from 2001 to 2010. Of the said amount, $6.7 billion went to principal amortization; $4.3 billion for interest payments; and $7 billion for obligations to independent power producers (IPPs). (See Chart 4) But if government spent $18 billion in the past 10 years, why then did the debt of NAPOCOR was reduced by a mere $570 million?

New debts

PSALM itself provided the explanation. According to it, NAPOCOR contracted new debts in the past 10 years. From 2001 to 2010, NAPOCOR accumulated new debts of $12 billion, on top of its $16.39-billion pre-EPIRA debt. Of the $12 billion, 73 percent represented operational losses while the commissioning of new IPP plants accounted for the remaining 27 percent. PSALM noted that the commissioning of new IPP plants bloated the total financial obligations of NAPOCOR to $22.35 billion by 2003.

The question now is why did officials tasked to privatize NAPOCOR have to resort to more borrowings? Doesn’t it defeat the purpose of power sector reform which is to free up government from its debilitating financial woes?

Under the EPIRA, eliminating NAPOCOR’s debts primarily involves using the proceeds from the privatization of the state power firm’s generation and transmission assets and liabilities. Apparently, this has not happened because earnings from power privatization were not enough to compensate the huge financial obligations of NAPOCOR.

According to the PSALM, government has earned $10.65 billion as of October 2010 from the sale of its generation plants, transmission assets, and IPP contracts. Of the said amount, the largest, $3.95 billion, came from the privatization of the National Transmission Corporation (TRANSCO). The sale of generating plants, on the other hand, yielded $3.47 billion. Finally, the transfer of NAPOCOR’s IPP contracts to IPP Administrators (IPPAs) accounted for the remaining $3.23 billion.

Privatization debacle

However, of the $10.65 billion in total privatization proceeds, only $4.85 billion was actually collected and used to pay for NAPOCOR’s debt. PSALM reasoned that earnings from the privatization of TRANSCO and the IPP contracts will be fully collected in a number of years through a staggered collection scheme. “But in any year when maturing debts exceed privatization collections, PSALM will have no recourse but to raise funds through new loans to pay for maturing obligations,” PSALM said. This explains the $12 billion in new debts incurred by NAPOCOR in the past 10 years.

It appears that the supposed benefits of privatization in terms of addressing NAPOCOR’s financial bleeding will not be felt anytime soon. PSALM said that the debt of NAPOCOR will be significantly reduced only by 2026, with a projected residual debt of $3.78 billion. The amount is exclusively based on privatization proceeds as of 2010 and maturing financial obligations. Depending on future privatization proceeds and earnings from the universal charge, PSALM claimed that it may even liquidate the $3.78 billion before its corporate life ends in 2026.

But it doesn’t mean that NAPOCOR will be debt-free by the time PSALM expires 15 years from now. This will depend on how much government can earn from the privatization of its remaining assets and IPP contracts. If the experience of the past 10 years is to serve as indicator, it seems that there is nothing much to hope in EPIRA even in just mitigating the public sector’s fiscal burden. Why is this so?

NAPOCOR’s financial bleeding

Even prior to the EPIRA, there were already initial efforts by government to privatize the power industry. But even then, officials already knew that power privatization can only be successful if government could package it in the most attractive way for businesses to take notice. One factor going against efforts to privatize the power sector was the small energy market of the Philippines. Being a pre-industrial, backward economy, Philippine energy consumption is not as huge as those of other countries even compared to our neighbors in Southeast Asia.

To remedy the concern over a small market, government had to offer incentives and other benefits that will guarantee the profits of private investors. IPPs, for instance, were offered a guaranteed market that was much larger than the actual electricity consumption of the country through take-or-pay contracts, on top of other benefits. These guarantees and perks were the underlying reasons for NAPOCOR’s financial hemorrhage.

Legitimizing onerous contracts & debts

Alas, EPIRA even legitimized these burdensome and unjust contracts and debts. To entice investors, Section 32 of the law mandated the government (and ultimately, the taxpayers) to automatically assume P200 billion in financial obligations of NAPOCOR.

Section 68 of EPIRA did mandate the “thorough review” all IPP contracts by an inter-agency committee headed by the Department of Finance (DOF). It also tasked the committee to take necessary actions in cases where contracts are found to be grossly disadvantageous or onerous to the government. Implementing this provision, then President Arroyo ordered a review of 35 IPP contracts. In 2002, the DOF-led review committee said that a total of 27 contracts have financial issues. A financial issue pertained to an instance when the government agency that entered into the contract agreed to shoulder financial obligations “beyond what is necessary”.

But instead of rescinding these financially onerous IPP contracts, government opted to simply renegotiate them. PSALM claimed that the renegotiations have resulted in some $1.03 billion in savings for the government Such savings, however, were not the result of striking out the take-or-pay provisions in the contracts, which remained even after the renegotiations. The reported savings mostly came from IPPs reducing their nominated capacity, or the capacity that government agreed to pay for whether electricity is actually produced or not. The renegotiations were done not to substantially rewrite the contracts. On the contrary, discussions were carried out by PSALM officials with the IPPs within the parameters set by the contracts.

Consumers’ burden

Even worse, EPIRA mandated that all the costs resulting from these contracts be borne by the hapless consumers. Section 34 of the law states that “a universal charge to be determined, fixed, and approved by the ERC shall be imposed on all electricity end-users”. The universal charge shall be collected for, among others, the recovery of so-called stranded debt and stranded contract costs of NAPOCOR.

Section 4 of EPIRA defines stranded debts as any unpaid financial obligations of NAPOCOR which have not been liquidated by the proceeds from the sales and privatization of its assets. On the other hand, stranded contract costs refer to the excess of contracted cost of electricity under eligible contracts (i.e. those approved by the ERC as of December 2000) over the actual selling price of the contracted energy output of such contracts in the market. Stranded contract costs are basically the take-or-pay capacity payments that will not be offset by the privatization of the IPP contracts and thus will still be shouldered by NAPOCOR.

In June 2009, PSALM had filed petitions before the ERC to recover almost P470.87 billion in NAPOCOR stranded debts and almost P22.26 billion in stranded contract costs for the Luzon grid. The recovery of stranded debts translates to a rate hike of 30.49 centavos per kilowatt-hour (kWh) based on a recovery period of 17 years. Meanwhile, the petition to recover the stranded contract costs in five years will translate to a rate hike of 9.20 centavos per kWh. PSALM filed another set of petitions in June 2010 to recover stranded debts for 2010 (projected at almost P54.90 billion), equivalent to almost 86.77 centavos per kWh. It also proposed to recover in three years stranded contract costs for 2009 estimated at almost P26.69 billion, equivalent to 18.79 centavos per kWh.

Fortunately, the ERC dismissed these petitions last November 15, 2010. The dismissal, however, was not because they had no basis (EPIRA allows such recoveries through the universal charge) but due to PSALM’s failure to submit supporting documents and information. In fact, the ERC decision clearly stated that the dismissal was “without prejudice to the re-filing of the same after conforming to the pertinent ERC regulations”. The relief for consumers is indeed just temporary. On or before June 30 this year, PSALM is expected to file another set of petitions to recover NAPOCOR’s stranded debts and stranded contract costs. Reportedly, PSALM is filing for 12 to 15 centavos per kWh-hike in the universal charge. (To be concluded)

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

EPIRA was the result of intense pressure from NAPOCOR creditors led by the Asian Development Bank (Photo from finchannel.com)

Last June 8, the Electric Power Industry Reform Act (EPIRA) of 2001 or Republic Act (RA) 9136 marked its tenth year of implementation. A day before, utility giant Manila Electric Company (MERALCO) announced that it is again hiking its generation charge by 51 centavos per kilowatt-hour (kWh). The rate hike underscored how EPIRA has harmed consumers with exorbitant electricity rates, which have now become the highest in Asia. Indeed, EPIRA is considered one of the most notorious legacies of the despised Arroyo administration that was even accused of bribing Congress just to get EPIRA passed a decade ago.

But Mrs. Arroyo and her allies in the legislature are not solely to blame because EPIRA was not just a product of internal and independent policy making. Rather, it was the result of intense pressure from the creditors of the National Power Corporation (NAPOCOR) who were wary that the heavily indebted state firm will not be able to pay them back. NAPOCOR lenders, namely, the Asian Development Bank (ADB), World Bank, and the Japan Export-Import Bank (JEXIM) and Overseas Economic Cooperation Fund (OECF) withheld committed loans for NAPOCOR unless EPIRA was passed. At the same time, they promised additional lending for the privatization and deregulation of the power sector. (JEXIM and OECF merged in 1999 to form the Japan Bank for International Cooperation or JBIC.)

Credit rating agencies also put pressure on the bankrupt government to pass the EPIRA while investment banks acted as privatization consultants. These institutions represent foreign corporate interests who also pushed for the passage of EPIRA to widen their profit-making opportunities in the Philippines through the privatization and deregulation of the power industry. Therefore, these foreign banks and corporations are as accountable as the Philippine government for the mess created by EPIRA.

Pre-EPIRA intervention

In fact, the restructuring of the power industry and the role that these creditors played did not begin with Arroyo’s EPIRA in 2001. EPIRA was in reality the culmination of neoliberal power reforms long pushed by multilateral creditors. Initial efforts started in 1987 during the administration of the late President Cory Aquino with her Executive Order (EO) No. 215. This EO allowed private sector participation in the construction and operation of power plants in the country. In 1990, Congress passed RA 6957 or the BOT Law that authorized the financing, construction, operation, and maintenance of infrastructure projects by the private sector.

These policies formed part of neoliberal structural adjustment pushed by the IMF and World Bank starting in the 1980s in poor countries facing a debt crisis like the Philippines. Among the stated objectives of structural adjustment was to supposedly reduce government deficit and spending through, among others, the privatization of state assets and functions. The ADB had supported these privatization efforts in the early 1990s through loans and equity investment to independent power producers (IPPs) as well as guarantees for NAPOCOR bonds.

Compounding the fiscal woes of government was the deteriorating power situation in the early 1990s, which government responded to with more privatization. In 1993, former President Fidel Ramos was granted emergency powers to enter into negotiated contracts with IPPs for the construction of power plants through the Electric Power Crisis Act or RA 7648. Then in 1994, RA 7718 which amended RA 6957 was enacted to further promote the participation of the private sector in infrastructure development, including power generation.

However, the ADB in a 1994 study (as cited in Sharma et. al., “Electricity industry reform in the Philippines,” Energy Policy, 2004) noted that despite these efforts at privatization, the power crisis continued to worsen. It argued that there was a need for further privatization because NAPOCOR, despite ending its monopoly in generation, still retained its monopsony position. Furthermore, domestic capital was considered insufficient to meet the long-term capital requirements of the industry while legal restrictions on foreign ownership were hampering investment.

Power restructuring program

As early as 1994, the ADB, NAPOCOR, Department of Energy (DOE), and Department of Finance (DOF) had already initiated policy dialogue concerning NAPOCOR’s difficulty in funding necessary generation and transmission projects “and the need for a radical change.” By 1996, an Omnibus Power Industry Bill was filed at Congress to privatize NAPOCOR and restructure the industry. The bill did not gain ground but was later re-filed in 1998 as the ADB approved a $300-million loan to fund the Power Sector Restructuring Program (PSRP) that was co-financed by the JBIC with an additional $400 million. EPIRA was the direct product of this $700-million loan from the ADB and JBIC.

According to the ADB, the PSRP will create competitive electricity markets, restore NAPOCOR’s financial sustainability, and achieve operational improvements and increased efficiencies. The loan was meant to help finance the adjustment costs of privatization such as the take-or-pay contracts with the IPPs and excess debts upon NAPOCOR’s privatization – or what will be called as stranded debts and stranded contract costs under EPIRA. Aside from the loan, the PSRP was also accompanied by two technical assistance (TA) grants from the ADB worth $1.32 million for a study on electricity pricing and regulatory practice as well as a consumer impact assessment.

The PSRP was part of a standby arrangement in 1998 between the Philippines and ADB, World Bank, and IMF. The World Bank’s commitment to the standby arrangement was a fast disbursing loan package of $500 million while the IMF standby facility was worth $280 million. Under the standby arrangement, the Philippine government committed to implement among others further fiscal reforms, financial sector and structural reforms, and strengthening the corporate sector, which included as a critical component power sector restructuring.

Access to the PSRP was structured in a manner that ensured strict compliance to a total of 61 specific conditionalities identified by the ADB in the loan program. These conditionalities were jointly designed by the ADB, World Bank, and JBIC. The $300-million ADB loan was divided into three equal tranches with the first tranche released upon loan effectiveness and compliance to 13 conditionalities while the second tranche was targeted for release in 1999 upon compliance to an additional 8 conditionalities (including the approval of creditor banks of NAPOCOR’s restructuring and privatization plan and passage of EPIRA), while the third tranche was targeted for release in the second half of 2000 upon compliance to a further 7 conditionalities (including the promulgation of EPIRA’s implementing rules and regulations). The rest of the conditionalities were expected to be complied with during the implementation of the program.

However, the passage of EPIRA was delayed and the ADB conditionalities were not met on time. Consequently, the second and third tranches of the PSRP were withheld by the ADB until the conditionalities were implemented by the Philippine government. The second tranche was released in December 2001 and the last tranche in November 2002.

In early 1999, NAPOCOR disclosed that its creditors had warned to cut-off new loans until the privatization of the state-owned power firm was implemented. The World Bank, for instance, indicated that it will no longer support NAPOCOR until the year 2000 while the OECF had advised that no NAPOCOR project will be included in its loan packages. The ADB, meanwhile, had imposed a “very strict” condition of 8% return on rate base (RORB) – a measure of profitability – for NAPOCOR to ensure access to loans. [“No new Napocor loans (Precarious condition worries foreign lenders),” BusinessWorld, March 26, 1999] It was estimated that over $1 billion in fresh foreign loans were riding on the passage of EPIRA. [“Int’l credit groups unsure about tack on Napocor loans,” BusinessWorld, April 13, 2000]

Pro-business lobby

Aside from the foreign creditors, other imperialist institutions had also added to the pressure to privatize NAPOCOR and in some cases even pushed for specific provisions that eventually became part of EPIRA. Credit-rating agencies like Moody’s Investor Service, Inc., for example, had made the privatization of NAPOCOR a pre-requisite for a credit rating upgrade for the Philippines. [“Napocor privatization needed for Moody’s credit rating upgrade,” BusinessWorld, December 13, 1999]

US-based investment banks Credit Suisse First Boston and Arthur Andersen, meanwhile, pushed for government to retain the debts of NAPOCOR instead of passing them to generating companies to make privatization more attractive. These same investment banks advised legislators not to abrogate the onerous purchased power adjustment (PPA) because it will “damage the country’s reputation in the international financial and political arenas.” [“Transparency necessary in Napocor privatization,” BusinessWorld, August 31, 2000]

Credit Suisse, which government tapped to develop a privatization plan for NAPOCOR, also pushed for cross-ownership in generation and distribution in contrast to the then power reform bill that banned all forms of cross-ownership. [“Legislator says Napocor sale consultant exceeded mandate,” BusinessWorld, August 18, 2000] The unbundling of rates supposedly for transparency as well as the dismantling of all forms of subsidy “as rapidly as possible” because “they send incorrect pricing signals in a free market and create economic inefficiencies” were also among the specific provisions in the EPIRA pushed by the Credit Suisse group.

Foreign investors had also publicly called on government to pass the EPIRA without delay. British power firms, for example, warned government that delays in the legislation of EPIRA were turning off investors. They also openly lobbied for cross-ownership, which was one of the debated issues then at Congress. These British firms were among the hundred or so foreign companies – mostly American and Japanese – that had expressed interest in the privatization of NAPOCOR. [“British investors ask gov’t to accelerate Napocor sale,” BusinessWorld, April 5, 1999]

Bankrolling EPIRA implementation

These creditors continue to fund the restructuring of the power sector even after the passage of EPIRA. The ADB, for instance, approved in December 2002 a partial credit guarantee (PCG) of up to $500 million equivalent in Japanese yen bonds to “help meet the cash flow requirements during the initial stage of privatization.” Specifically, the PCG was used to guarantee the bond issuance of the newly created Power Sector Assets and Liabilities Management Corporation (PSALM). EPIRA established the PSALM to oversee the privatization of NAPOCOR.

Also in December 2002, the ADB approved a $45-million loan for the establishment of the wholesale electricity spot market (WESM) and upgrading of critical transmission lines and substations, including a TA worth $0.8 million. JBIC co-financed the project with $45.5 million. It was followed by another TA from the ADB in 2004 worth more than $1 million to boost the confidence of private investors in the EPIRA by enhancing the efficiency of the Energy Regulatory Commission (ERC) and provide financial and technical advice to PSALM for privatization of the NAPOCOR.

So far, the largest power reform loan from the ADB after EPIRA’s enactment was the $450-million Power Sector Development Program (PSDP) approved in December 2006. In its August 2010 Completion Report, the multilateral agency said that the “ADB developed the PSDP to deal with the largest sources of the fiscal imbalance in the public sector caused by losses among the public power agencies. The PSDP was seen to reduce the losses at the (NAPOCOR) and make the (PSALM) more creditworthy, and to create the necessary conditions for the privatization of major power sector assets.”  In February 2007, JBIC provided co-financing for the PSDP worth $300 million bringing the total debt to $750 million.

PSDP’s specific objectives were (1) provide financial assistance to the government, through a program loan, to help meet part of the costs of power sector restructuring; (2) create the necessary conditions for substantial progress in privatization; (3) boost confidence in regulatory performance; and (4) smooth the transition to competitive markets. Part of the first objective is to help the national government finance the P200 billion in NAPOCOR debts that it absorbed under the EPIRA. In other words, government is servicing the debts of the state-owned corporation through additional debts.

Aside from bankrolling the implementation of EPIRA, the ADB also provided loans to private corporations involved in key privatization projects. In 2007, for example, it extended a $200-million loan to the Masinloc Power Partners Company Limited (MPPC), owned by the US-based AES Corporation, for the acquisition and rehabilitation of the Masinloc coal-fired thermal power plant. The 600-MW Masinloc plant was one of the largest privatized NAPOCOR-owned power plants. Incidentally, the ADB also provided $359 million in loans and Y12 billion in partial credit guarantee to NAPOCOR to build the Masinloc plant in the 1990s.

Meanwhile, Filipino taxpayers are not only burdened by the debts that bankrolled EPIRA. We are also oppressed by exorbitant power rates, energy insecurity, etc. that resulted from the neoliberal restructuring of the industry imposed on us by foreign institutions.

Read the “Ten years of EPIRA: What went wrong?” series

Part 1 – on electricity rates

Part 2 – on NAPOCOR debts

Part 3 – on monopolies and energy security

10 years of EPIRA: what went wrong?

People's organizations, research and consumer groups, and other stakeholders will hold a forum with lawmakers to review the impact of the 10-year old EPIRA (Poster from Bayan Muna)

On June 8, Republic Act (RA) 9136 or the Electric Power Industry Reform Act (EPIRA) of 2001 will mark its tenth year. Former President Gloria Arroyo signed EPIRA amid strong opposition from various sectors. The manner in which the law was passed also controversial. There were claims of bribery involving half a billion pesos that the Arroyo administration allegedly handed out to members of the House of Representatives (HOR) to speed up the passage of EPIRA.

Proponents touted EPIRA as the answer to our power and fiscal woes. But after ten years, the country has now the most expensive electricity in Asia. Price manipulation besets the industry. Rotating brownouts plague Mindanao. And the National Power Corporation (NAPOCOR) remains neck-deep in debt.

What went wrong? The long and short of it is that EPIRA is a wrong policy.

Brief background

EPIRA provides the legal framework for the privatization of NAPOCOR and deregulation of the power industry. The state-owned power firm used to own and operate generation plants and transmission facilities. It also held supply contracts with independent power producers (IPPs), or private companies allowed by the Power Crisis Act of 1993 (RA 7648) and BOT Law of 1994 (RA 7718) to build and operate generation plants. Under EPIRA, the Power Sector Assets and Liabilities Management Corp. (PSALM) was set up to privatize the NAPOCOR’s generation and transmission assets including its IPP contracts.

The passage of EPIRA was a conditionality set by the creditors of NAPOCOR for it to access additional loans. Among its largest creditors were the Asian Development Bank (ADB), World Bank, and Japan Bank for International Cooperation (JBIC). These creditors were worried that NAPOCOR, with its worsening financial problems, might not be able to pay them back. The pressure from these creditors provided the impetus for EPIRA’s enactment.

After 10 years, PSALM has already privatized 91.7 percent of NAPOCOR’s generation assets in the Luzon and Visayas grid. It has also privatized almost two-thirds of energy outputs under IPP contracts nationwide. Transmission was privatized as well via a 25-year Concession Agreement (CA) between government and the National Grid Corporation of the Philippine (NGCP) in January 2009. As of October 2010, remaining assets for privatization include three generating assets (1,740.10 megawatts) and eight IPP contracts (2,026.32 MW).

Soaring rates

For consumers, the most obvious impact of EPIRA is the escalation in their monthly electricity bills. From 2001 to 2010, for example, the average residential rate of the Manila Electric Company (MERALCO) has increased by 112.5 percent. The generation charge of NAPOCOR for the Luzon grid has also risen by 86 percent during the same period. (See Chart 1)

 

Rates have soared because EPIRA allowed the continued collection of the notorious purchased power adjustment (PPA).The PPA was a pre-EPIRA cost recovery mechanism so that NAPOCOR can increase its rates and pay for its ballooning obligations arising from its take-or-pay contracts with the IPPs. Take-or-pay basically means that NAPOCOR will pay an IPP for a fixed capacity regardless if such capacity was used or not. For consumers, it means that they pay for electricity that they did not even use.

Under EPIRA, the PPA was just replaced with other means of cost recovery. One is the generation rate adjustment mechanism (GRAM) which NAPOCOR recoups every quarter although the amount must be approved first by the Energy Regulatory Commission (ERC). Meanwhile, DUs that have their own IPPs like MERALCO can automatically recover every month the change in generation cost thru the Automatic Adjustment of Generation Rates and Systems Loss Rates (AGRA).

Aside from GRAM and AGRA, consumers are also being burdened by the Incremental Currency Exchange Rate Adjustment (ICERA). Thru the ICERA, hapless end-users of electricity shoulder the losses of companies arising from fluctuations in the foreign exchange. To illustrate, if the cost of imported oil or coal used by generation companies went up because the peso- dollar exchange rate rose, the increment will be paid for by the consumers. Like the GRAM, ICERA is recovered quarterly and needs ERC consent.

Consistent with the neoliberal agenda of EPIRA, the ERC adopted the performance-based regulation (PBR) in determining the rates of DUs. Before, DUs use the return on rate base (RORB) that pegged rates on “reasonable” return on the assets actually used in distributing electricity. The PBR, on the other hand, adheres to the principle that “good utility performance should lead to higher profits.” Thus, PBR allowed DUs to charge rates based on projected investments and operating expenses related to electricity distribution. Since using the PBR in 2009, MERALCO saw its distribution charge go up by 70.5 percent from its previous rate that used the RORB formula. (See Chart 2)

(Continued here)

LRT, MRT fare hike: no other recourse but to protest

Today’s (February 4) public consultation on the LRT and MRT fare hike organized by the Light Rail Transit Authority (LRTA) and the Department of Transportation and Communications (DOTC) confirmed two important issues.

First, that the fare hike is indeed meant to pass on a bigger share of the debt burden to LRT and MRT commuters. The presentations of the technical staff of the two government agencies confirmed, in so many words, what we have been saying all along. Current fares are enough to cover the core expenses of operation and maintenance. But the onerous terms contained in the contracts created huge and even unnecessary debts for government.

Download the Powerpoint presentations of the LRTA here and the DOTC here.

Consider, for instance, the slides below which I lifted from the Powerpoint presentation of the DOTC on MRT. The first slide shows that the total income of the MRT in 2010 was P1.916 billion, of which P1.904 billion were generated from passenger fares.

However, as shown in the next slide, MRT expenses reached P8.52 billion during the same year which the DOTC said resulted in a government subsidy of P6.6 billion to bridge the shortfall in revenues (that was only P1.92 billion).

The next question is what makes up the P8.52 billion in expenses? The third slide below breaks down the P8.52 billion (the figures in the slide add up to P8.52 billion) and shows that operating costs comprise only 7.6 percent of the total and maintenance costs comprise only 13.9 percent. A huge 61.1 percent represents the Equity Rental Payment, which refers to DOTC payments for the 15 percent return on investment (ROI) that government guaranteed private investors in their Build Lease Transfer (BLT) agreement. Another 13.6 percent represents debt payments that government also guaranteed in the BLT.

The LRTA presentation on LRT 1 and 2 tells the same story about the so-called losses and subsidies that government wants to reduce by making commuters pay more. The slide below shows that the consolidated revenues of LRT 1 and 2 in 2010 was P3.089 billion but spent P2.928 billion for operation expenses. The LRTA also spent P3.556 billion for interest payments and others resulting in a net loss of P5.902 billion.

Add to these expenses the amortization of principal worth P2.341 billion and capital expenditures of P648 million, as shown in the slide below, further pushing the LRTA deficit in 2010 to P8.927 billion, which government claims is the cost of subsidy. In other words, of the P8.927 billion in so-called subsidy, P5.269 billion or more than 59 percent represents interest and principal payments for loans.

If you consider that almost 8 out of 10 LRT and MRT commuters are ordinary workers and employees and students, passing on an increasing portion of these debts, which include onerous loans, through a fare hike is a major, major injustice.

Secondly, LRTA administrator Rafael Rodriguez also confirmed that the public consultation is optional and therefore has no real bearing on the decision of Malacañang to increase the fare in LRT and MRT. This means that despite the opposition of those being consulted, students in this particular case, the LRTA and DOTC, as ordered by President Aquino, can still proceed with the fare hike anyway.

The consultation ended with the expected “We will study your concerns”, which was the gist of the closing statement made by DOTC Undersecretary for Rail Transport Glicerio Sicat. He also said that they will consider the option of lowering the increase and giving fare discounts because of the concerns raised by the students. This, however, dismissed altogether the issues of onerous debts, mass transport as public service, privatization as the driving motive behind the fare hike, and other major policy issues that were raised during the open forum.

Therefore, the commuters have no other option now but to continue and further intensify the protests until the Porsche-driving President backs down on his decision to raise the fares.

Public consultation on LRT/MRT fare hike starts today as Pangilinan offers to buy MRT for $1.1B

Servicing debts through higher user fees will cancel out the social and economic gains from LRT/MRT

One of the most basic questions that we have been asking DOTC and LRTA officials is what constitutes their estimated full cost fare of P35.77 for LRT 1, P60.75 for LRT 2 and P60.03 for MRT. Sadly, we have not been given a detailed and exact answer (the closest is the rule of thumb that 85 percent of cost in large infrastructure projects is made up of debts) in our several dialogues with them. Even the documents that have been given us do not provide the answer. Thus, we have only made assumptions on what comprises the full cost fare (for instance, read here and here) based on data made available to us by the authorities.

The full cost fare is one issue that we hope to finally get a detailed answer from the LRTA and DOTC in the public consultation on the LRT and MRT fare hike today (February 4) and tomorrow. (Bayan and other groups are participating in the consultation. You may download Bayan’s position paper, which will be submitted to the LRTA during the consultation, here.) If you’re wondering why this is so important, it’s because the crux of government’s argument for a fare hike is that they could no longer continue “subsidizing” the gap between the current fare and the supposed full cost fare.

The latest batch of documents that we were able to get from the LRTA yesterday through its corporate secretary Atty. Hernando Cabrera still does not give the answer despite our very specific request. The documents include, among others, the breakdown of subsidies that the LRTA received from the national government from 2006 up to the approved amounts for 2011. These subsidies total P12.85 billion but are for expansion projects and, I assume, not the subsidies that the LRTA and DOTC refer to when they computed the full cost fare. Or I might be wrong. And if this is the case, transport officials will have more explaining to do – why will they charge to the commuters the cost of expansion projects? Anyway, this also shall be brought up during the consultation. (See Table 1)

Another is the income statement of the LRTA from 2006 to November 2010 (the 2009 and 2010 figures are unaudited). The income statement supports our contention that what the Aquino administration wants to pass on to the commuters is the debt burden of the LRT and MRT and not simply the shortfall in the costs of maintaining and operating the trains. For instance, the total rail (from passenger fares) and non-rail (from rental, advertising, etc) revenues of the LRTA from January to November 2010 is P462 million more than what it spent for operation and maintenance (O&M). Revenues from passenger fares alone are P272 million higher than O&M. (See Table 2)

Interest payments and bank charges, on the other hand, reached P1.72 billion during the said period. Amortization, bad debts, and others added another P955.32 million to the expenses of the LRTA. These expenses offset the rail and non-rail revenues resulting in net losses for the LRTA of some P2.22 billion. But as I have repeatedly argued, these are not actually losses in the business sense but public investment. They are loans that government borrowed in order to enable the economy and the people achieve new or additional capability. Servicing these debts should be done through taxes (and if they’re onerous like in the case of MRT, should be renegotiated) and not through higher user fees which what government plans to do. Servicing these debts through higher user fees will cancel out the social and economic gains that the LRT and MRT create.

Meanwhile, it seems that the fare hike, which could reach as much as 100 percent, and the President’s offer to guarantee so-called regulatory risks for major public-private partnership (PPP) projects have succeeded in stoking investor appetite in LRT and MRT privatization. Just three days ago, news came out that the Metro Pacific Investments Corp. (MPIC) of Manny Pangilinan has already formally written Finance Secretary Cesar Purisima offering to buy government’s 71 percent stake in MRT for $1.1 billion. MPIC already controls 29 percent of MRT which it bought from Fil-Estate Corp.

Pangilinan’s bid is indeed tempting for the cash-strapped Aquino administration since the offer is reportedly enough to settle government’s outstanding debt in MRT. But it is bad news for the commuters who will ultimately shoulder this debt through even more exorbitant fares in the future.

MPIC itself reportedly said in its letter to Purisima that fares could go up to as high as P100 if government will bundle MRT and LRT 1 for privatization because the investor will have to pass on the cost of servicing the lines’ debt obligations of about $2.6 billion to the commuters.

DOTC executive report on LRT/MRT fare hike: some initial points

DOTC study confirms that the LRT/MRT fare hike is meant to bolster Noynoy's public-private partnership (PPP) scheme

The Department of Transportation and Communications (DOTC) has provided a copy of the Executive Report on LRT/MRT fare restructuring. They also sent Chapter 8 of the Mega Manila Public Transport Study of 2007 which details the profile of LRT/MRT users.

This report is supposedly the same document presented to Pres. Aquino and his Cabinet economic cluster and became the basis for the Executive’s decision to increase the fare in LRT/MRT by as much as 100 percent. It validated the main points that we have already raised on the fare hike issue. For instance, it confirmed that the fare increase is meant to attract private investors. The report said that: “The proposed LRT fare adjustment is expected to… send clear signal to private sector investors that regulatory risks will be minimized in future public-private partnership projects”.

(You may download the Executive Report here and the Transport Study Chapter 8 here)

Social and economic benefits

Dated October 27, 2010, the report noted that although not profitable, the LRT and MRT play a vital social and economic role. In its opening paragraph it said: “Most urban railway systems in the world are not financially viable, but are implemented for their socio-economic benefits. Our Manila Light Rail Transit (LRT) systems promote the use of high-occupancy vehicles, thereby reducing traffic congestion on the corridors served, local air pollution and greenhouse gases emissions. Besides the substantial savings in travel time cost of LRT riders, the LRT systems reduce infrastructure investment in Metro Manila road expansion”. (emphasis added)

However, these socioeconomic benefits were not factored in by the DOTC study in determining the need for a fare hike. For instance, the savings of government from less air pollution and GHG emissions (i.e. public health budget) and less pressure for road expansion (i.e. public infrastructure budget) should have been computed to get the net losses or even gains from operating the LRT/MRT. The economic value accruing from reduced traffic congestion and considerable savings in travel time cost should have also been calculated to know additional potential benefits for government such as increased tax revenues.

Farebox ratio

Instead, the study merely looked at the cost of operating the LRT/MRT system which is mainly financed through passenger fares, government subsidies, and commercial development at stations and advertisements. It said that the farebox ratios or the proportion of the fare revenues to the total operating and maintenance (O&M) expenses are “projected to fall below 1.0”. This means “greater government subsidies to cover O&M costs”, said the study. It estimated that without a fare hike, government will be forced to increase its subsidies from P13.85 billion in 2010 to P17.06 billion this year.

A farebox ratio of 1.0 means that fare revenues cover 100 percent of O&M. The study did not say the basis of its projection that the farebox ratio will fall below 1.0. But in the past four years, the farebox ratio has averaged 1.39 for LRT 1 and 1.01 for LRT 2 which means that collections from passengers cover more than 100 percent of O&M. This provides more statistical evidence to our argument that fare revenues can cover O&M but the total costs are bloated by debt.

Non-rail revenues

The study also admitted that “Compared with urban railway lines in neighboring countries, our LRT lines are not generating substantial revenues from commercial development and advertisement”. But the DOTC did not further explore the option of raising collections from tenants and commercial establishments and advertisers that use the railway infrastructure. A study by the Japan Bank for International Cooperation (JBIC) disclosed that LRT’s non-rail revenues comprise a paltry 2.6 percent of total revenues. In neighboring countries, non-rail revenues account for 20 percent.

I asked a DOTC official why increasing the non-rail revenues to at least approximate the 20 percent benchmark is not being seriously considered. He said that substantially increasing the non-rail income of LRT/MRT will require some investment from government to develop commercial spaces. Put another way, government chose the easy route by placing more burden on commuters through a fare hike.

Alternative transportation

The study said that minimum wage earners are among the most affected groups by the proposed fare increase. But it assumed that “Minimum wage earners will likely shift to cheaper alternative modes such as jeepneys and regular buses”. Under the new fare structure, regular and aircon bus fares will be lower than an LRT/MRT ride unlike today where it is cheaper to take the train. This was actually used as one of the justifications for the fare hike. For government, it is unreasonable that the fare in LRT/MRT which is a more efficient mode of mass transportation is cheaper than the fare in public buses and jeepneys.

But the DOTC failed to mention that the fare in road-based public transport modes has been increasing due to unabated oil price hikes and failure of government to stop the overpricing of the oil companies. Also, following government’s logic, does it mean that every time private jeepney and bus operators asked for a fare hike because of high pump prices, the Light Rail Transit Authority (LRTA) will also have to automatically increase LRT/MRT fares?

Impact on commuters

Aside from minimum wage earners, the study said that the fare hike will also heavily affect “students who are not granted fare discounts on LRT lines”. It claimed, however, that such impact “could be eased by the grant of 15-20% fare discounts”. As for MRT users, the DOTC said that while they face the steepest fare hike, “they are expected to afford the increase in fare with their average personal monthly income of P13,560 or 1.5 times the minimum wage in Metro Manila”. But still, fare discounts and the relative capacity of commuters to afford the higher fares do not legitimize the unwarranted fare increase.

The overall ridership of LRT/MRT is characterized by a high level of low-income and vulnerable groups that makes the fare hike anti-people. The Mega Manila Public Transport Study says that 68.1 percent of LRT/MRT users during weekdays earn below P10,000 monthly and a significant 15.3 percent earn nothing at all. Ordinary employees/workers comprise 48.8 percent of LRT/MRT ridership during weekdays while students account for 31.5 percent. Unemployed workers account for 9.5 percent. (See Charts)