Action for Economic Reforms

The Philippine Electric Power Industry Reform

Contributed by Nepomuceno A. Malaluan
Monday, 07 October 2002

The privatization path that the Philippine power sector has taken since
the early 1990s is a resounding success for the ADB and World Bank
privatization-is-best mantra. But it is a dismal failure at serving the
public interest. For the privatization of the Philippine energy sector
only meant higher electricity prices for consumers, a high probability
of private market power in the sector, less environmental protection,
less consumer protection, and the legitimizing of wrong policies and
corruption. Such is the logical result of the deadly mix of ADB and
World Bank private sector fundamentalism and an unaccountable
Philippine government.

(The Philippine Electric Power Industry Reform: A Tragedy of ADB and

World Bank Private Sector Fundamentalism and Unaccountable Government)

The privatization path that the Philippine power sector has taken since
the early 1990s is a resounding success for the ADB and World Bank
privatization-is-best mantra. But it is a dismal failure at serving the
public interest. For the privatization of the Philippine energy sector
only meant higher electricity prices for consumers, a high probability
of private market power in the sector, less environmental protection,
less consumer protection, and the legitimizing of wrong policies and
corruption. Such is the logical result of the deadly mix of ADB and
World Bank private sector fundamentalism and an unaccountable
Philippine government.

Reintroducing the Private Sector in the Electricity Industry

The government dominated the Philippine power sector in the past,

particularly generation and transmission. It played a big role in
planning, operation, and regulation. In early 1990s, the country
experienced power outages severe enough to be regarded as a national
crisis. The government then turned to the private sector for solutions.

Using a 1987 Executive Order that allowed the private sector to

generate electricity, and by enacting a Build-Operate-Transfer (BOT)
law in infrastructure projects, the government opened the floodgates
for contracts with private generation companies that we have now come
to know as independent power producers or IPPs. Full privatization
culminated in the signing into law of Republic Act 9136, or the Electric

Power Industry Reform Act (EPIRA) on 8 June 2001. A very comprehensive

piece of legislation, it mandates the full privatization of the
electric Power Industry in the Philippines following the ADB and World
Bank unbundling model.

The ADB and the World Bank Dictum: Privatize or Perish

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The privatization of the Philippine power sector was not an autonomous

act of government. At each step the heavy hand of the World Bank and
the Asian Development Bank guided the government. Both banks are quite
transparent with their agenda. The ultimate agenda for the World Bank,
and to which the ADB agrees, is to create the biggest space possible
for private sector participation in the industry. The template for a
full-scale power reform program stresses: profitability, competition,
privatization, minimal regulation, and a diminished government role.

The World Bank identifies two essential conditions that must be met
before sector reform is attempted in developing countries. First, it
should be generally perceived in the country that reform is desirable.
A big push is when the sector is performing badly in terms of delivery
of electricity, with blackouts and brownouts as its most dramatic
manifestation. Second, carrying out the agenda must be politically
feasible. This involves an assessment of the mandate, strength, and
time to carry out the program that is available to the ruling party..

Together with the local conditions, the World Bank also emphasizes the
importance of the actions of international financial institutions
(IFIs) in advocating sector reform. A developing country's commitment
to the reform process can be influenced, the World Bank says, by a
"carrot and stick" lending structure. Lending for institutional reform
is bundled with lending for investments in the sector. Targets in the
institutional reform loan will be part of the conditions for release of
tranches of the loans for sector investment.

Once a government adopts a policy of allowing greater private sector

participation, the ADB and the World Bank mobilize their machinery,
network and financial resources to assist in policy implementation.
They provide equity and debt, syndicate debt financing, design IPP
contract structures, provide insurance mechanisms, and bring together
project financiers, developers, and sponsors to the negotiating table.

The World Bank and the ADB's steps to push electric power sector reform
in the Philippines is a showcase of faithful adherence to the foregoing
"country assistance strategy". The World Bank started the process by
highlighting the financial problems of the National Power Corporation
(NPC) in its 1988 Philippine Energy Sector Study, and made a pitch for
BOTs. The World Bank then saw the severe brownouts in early 1990s as an
opportunity to push BOTs further, and to propose the unbundling of the
system in a new sector study in 1994. In 1998, the ADB intensified the
pressure by extending a US$300 M loan for the power sector
restructuring program that culminated in the passing of the EPIRA.

The World Bank and the ADB used its "carrot and stick" lending
structure to the hilt. The lending for institutional reforms was
bundled with loans intended for NPC's investments in the expansion of
transmission networks. The 1998 ADB loan was also provided in the
context of a joint standby assistance program with the International
Monetary Fund and the World Bank.

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IPPs: The Curse of Filipino Consumers

The NPC secured the accreditation of more that 40 IPP contracts. Yet,
the new generating capacity provided by the private sector did not come
cheap for consumers and government. The 1994 World Bank study notes
that the average price of some 13 projects it analyzed was 6.52 US
cents/kWh, which the World Bank conceded was "quite high" compared to
the 6.37 US cents/kWh bulk energy tariff of the NPC at that time. This
lower bulk energy tariff already included generation, transmission,
subsidies for rural and smallisland consumers, peak capacity, and
provision for reserve energy.

But bigger costs were to be borne by the government and the consumers
in the longer run. The IPPs were largely petroleum based, with lower
installation costs but higher fuel costs. Not only did government throw
out its energy mix program of relying more on indigenous energy
sources, the consumers were subjected to high fuel price risks in
imported petroleum that consumers assumed through fuel adjustment
clauses for tariffs in the IPP contracts. There is likewise an exchange
risk in pegging the wholesale tariff to the dollar. The government, and
ultimately, the consumers, also assumed the market risk through
generous takeor- pay guarantees. Still, the World Bank concluded that
overall, the risk allocation between the IPPs and NPC is "reasonable".

In the end the longer-term costs caught up with the initial euphoria
over the IPP episode, leaving taxpayers and consumers holding the bag.
In addition to the initial high cost of the IPPs, the Asian crisis also
dramatically upset all the economic growth and foreign exchange
assumptions of the IPPs. This meant much higher fuel costs and
oversupply of electricity capacity. But the investors are fully covered
by the fuel cost adjustment mechanism and take-or-pay guarantees for
which consumers are now paying a heavy price.

Problems in EPIRA

To be sure, there are opportunities for public gain in introducing

greater competition in the industry. The EPIRA's biggest attraction
when it was being deliberated on was the promise of giving consumers
the ability to choose their electricity supplier. The competition is
hoped to result in prices equating to long run marginal cost.

But the competition policy in the EPIRA is shot full of holes that the
assumption that electricity price will equate with long-run marginal
cost is deceitful, if not naïve.

This is so because first, Congress refused calls from public interest

advocates to disallow crossownership of distribution and generation
assets, or alternatively, to require a competitive pricing benchmark
for bilateral contracts between distributors and IPPs for the captive
market. Thus, there is a very clear prospect of vertical market
dominance. Second, because government did not impose sufficient limits
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on horizontal ownership, we face the prospect of having only four

generation companies competing in the system.

But it is not only EPIRA's competition policy that is flawed. The

regulatory regime also has serious deficiencies. First, the power of
the Department of Energy over planning the mix of energy sources has
been severely watered down. In the past when the NPC was an attached
agency, the DOE had the capacity to implement its energy mix program.
Under the present law, DOE's power has been limited to "encouraging"
the private sector to invest in the development of indigenous and
renewable energy sources.

There is also no consumer representation in the ERC. This is consistent

with the World Bank and ADB idea of an "independent" regulatory agency
that is insulated from influence of government, electricity suppliers,
or consumers. There is a need to make an exception for consumers. The
returns to an individual consumer from participating in regulatory
processes (such as hearings) are very small compared to the returns to
electricity suppliers and other industry players. Especially in
countries like the Philippines where there are no strong consumer
groups, consumers are at a big disadvantage. One way to offset this
problem is to have consumer representation in the regulatory body.

Unaccountable Process and Vested Interests

In its case-by-case technique to privatization, the World Bank

identifies the following steps in pushing privatization: (1)
Identification of privatization candidates; (2) Feasibility study; (3)
Privatization plan; (4) Legislation or executive order; and (5) Sale.

The technique is designed to be unaccountable. It places particular

importance to autonomy in institutional design. Autonomy is the extent
to which "an institution is insulated from outside interference, and
thus from the veto power held by politicians or social groups." It
locates the privatization program at the most powerful center of
government to be able to overcome opposition and manage political
issues effectively. A related implication is that the process is
designed to be non-transparent.

Thus, the public only figures in step three after the policy issues
have been resolved and the legislation or executive order has been
prepared. And the public does not come in from a consultative frame,
but as part of a "communication plan" to build public support. The
public will only have a chance to participate when the policy involves
legislation that requires public hearing. Even here, the opposition is
regarded only as a problem to be managed. The World Bank is not just
fundamentalist, it is also vanguardist.

The assumption that the IFI's are always right, and that the government
always acts in people's best interests would be laughable were it not
so tragic for the public interest. The central power that the
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privatization technique targets is often the most susceptible to vested

interest. In the IPP episode, the recent report by the Philippine
Center for Investigative Journalism points out that then President
Fidel Ramos "personally pushed for the speedy approval of some of the
most expensive power deals". Further, "individuals linked to Ramos
lobbied for the approval of some IPP contracts, which came with
numerous other deals, including lucrative legal, technical and
financial consultancies."

Strong business lobby groups also figured in the passage of EPIRA. At

one point, two members of Congress admitted that they were given money
from an unknown source to push the passage of the Power Bill. The House
did not investigate the exposé.

Challenges

There are three key issues facing public interest advocates on power sector reform.

First, it is in the public interest to make the people and institutions

responsible for wrong policies and corrupt acts accountable. On the IPP
issue, the Freedom from Debt Coalition has started a parallel review of
the NPC's IPP contracts. This initiative needs to be supported and
expanded to cover the contracts entered into by private utilities. In
addition, this review must dovetail with the investigative information
on

vested interests involved in the contracts. There must be some learning

from the IPP experience on the structuring of risk, pricing, and
forecasting.

Second, there is clear public interest in making privatization

transparent and accountable. The hypocrisy of the IFIs needs to be
exposed. More than that, public interest advocates should be able to
take a hold of the privatization process not at some point when crucial
decisions have been made, but at all stages. A privatization process,
even if adopted, need not yield only one result. For example, a look at
four Asian

countries (Indonesia, Malaysia, Philippines and Thailand) shows that

the state utilities assumed different levels of risk. The state
utilities in the Philippines and Indonesia have high risk exposures,
while Malaysia and Thailand have lower risks. No doubt this can be
explained in large part by how the different governments engaged the
process, taking the World Bank and ADB private sector fundamentalism as
a constant.

Third, there is clear public interest in fixing the EPIRA. The law must
be reviewed with a view to addressing the problems in competition
policy, scope of stranded costs, consumer representation, and
environment protection. Public interest advocates must also monitor and
engage its implementation, particularly the impending privatization of
the NPC generation assets and contracts as well as the National
Transmission Company (TRANSCO).
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Public interest advocates will have different views on how to address

these challenges. There might be clear unity on the issue of
accountability and transparency, but there could be divergence in
confronting sector restructuring itself. On this latter issue, we
believe in the complementary roles of market and state planning. Market
instruments, when appropriately used, can serve public interest
objectives. For instance, privatization and deregulation can serve to
break up monopolies or cartels, lower prices, improve product
efficiency, and mobilize investment. The other side is a government
that works for the public good and national development. Privatization
and deregulation is not all opportunity, as the fundamentalist IFIs
would have us believe. Its ugly side is market failure, imperfect
markets, intensifying inequities, and further marginalizing of peoples.
Development planning, social regulation, and institutional intervention
are needed not only to make up for the market's flaws and limitations,
but also to effectively use the power of the state to achieve
socioeconomic goals. In any case, the policy mix must be drawn up with
caution: the process of increasing government's role, or scaling it
down, can be corrupted to frustrate the public good.

This article is a short version of a longer paper with the same

title. The longer paper contains details and data support. It is
available on request from the Action for Economic Reforms.

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