An appeal to stop the granting of a National Franchise to the National Grid Corporation of the Philippines

Freedom from Debt Coalition
29 September 2008

The National Transmission Corporation (TransCo) is a Philippine government corporation currently operating the country’s critical power transmission grid created in 2001 by the Electric Power Industry Reform Act (EPIRA). Previously an integral part of the state-owned National Power Corporation (NPC or Napocor), the TransCo assumed all of Napocor’s substation and transmission assets since March 1, 2003.

The grid, which needs about $850 million over the next five years for upgrades and expansion, was valued at P138 billion ($3.3 billion) in 2006 – a “crown jewel” indeed. TransCo’s assets include approximately 21,319 circuit-kilometers of transmission lines including a submarine cable system, 93 substations, and approximately 24,310 million volt amperes substation capacity, and a broadband-ready fiber optics network.

But the value of TransCo goes beyond simply its monetary value. With EPIRA already facilitating the privatization of the three major sectors of the power industry – generation, distribution, and supply – the government’s direct ownership, management and control to TRANSCO is the last line of defense for the Filipino people against the specter of privatization haunting the power industry.

Affirming the national importance of electricity, the Freedom from Debt Coalition (FDC) firmly opposes the privatization of TransCo. We believe that electricity as a critical element of national development and social progress should not be treated as a purely private arena confined to a few powerful groups. Privatizing transmission is the jugular that will once and for all put an end to the government ever being able to play a crucial developmental and balancing role in a sector that, since the passage of EPIRA, has shown its monopolistic nature more often, and more audaciously, than the promised competition.

FDC believes that as a natural monopoly – the sole vital link among major sub-sectors in the power industry  – TransCo properly belongs to the state and must remain under its control. Transmission is an essential service  that requires huge capital investments that must be spread over the economic life of the wires in order for it to be affordable to consumers. As the California market manipulation experience has shown us, control over transmission can be abused to unduly and unreasonably raise prices at the expense of consumers and favored suppliers. Strong regulation and a public-service oriented transmission, rather than a private-profit-oriented transmission, are needed in order to ensure the availability, reliability and affordability of electricity. Cost-effective production and a reasonable return on capital should hold sway over the price of electricity rather than market forces that, given the concentration in the sector, can be so easily abused and influenced. TransCo’s privatization will simply pass on state ownership of a monopoly to a private entity. It does not remove or alter the monopolistic nature of transmission, which, in the pursuit of private profits, can be abused to unjustly raise electricity prices to the detriment of consumers.

I. Why Privatization of Transco is Wrong.

“So why are governments around the world ignoring public opinion? How have governments been persuaded that electricity is just a commodity that should be traded in the market place like pork bellies, rather than an essential service that needs to be controlled and supplied by governments to ensure its availability, reliability and affordability?”

- Prof Sharon Beder, recipient of the World Technology Award for Ethics (2001) and one of Australia's most influential engineers

The TransCo privatization is not only wrong in principle. The sale of the country’s electrical industry backbones has serious practical repercussions and ominous developmental and security ramifications. Let us take stock of these one by one:

Losses to the Government

The government could potentially lose revenues of some P123 billion to P249 billion if it relinquishes the operation of TransCo to the private sector. As a monopoly and with operations covering the entire country, TransCo surely rakes in handsome revenues for the government. It can earn P375 billion for 25 years with its annual income of P15 billion while it will only earn P126 billion ($1=P42) if the concession contract is bidded at $3 billion or P252 billion if bidded at $6 billion.

A related issue to this is who would pay for TransCo’s liabilities. Of course, the winning consortium, the National Grid Corporation of the Philippines (NGCP), can conveniently tap the combined ADB-World Bank $500 million guarantee to their rate application. At any rate, Napocor was planning to pay about P5.29 billion pesos in TransCo-related debts this year and officials said they might have to borrow up to $777 million to be able to do so. Both PSALM and Napocor officials said the proceeds from the sale of their assets would not be enough to cover Napocor's debts, which would make it necessary to consider other options such as swaps and options , resulting to more indebtedness for Napocor and ultimately, for the government and taxpayers.

Consumer Woes

At the receiving end are the consumers. Philippine electricity rates continue to be one of the highest in Asia, second to Japan. Electricity rates are also expected to rise as a consequence of privatization as investors would try to recover their investments the soonest time possible. Economist Maitet Diokno-Pascual of the FDC said that high electricity prices are being used to lure in investors. She said that the situation is due as well to the overpriced excess capacity from the contracts with independent power producers (IPPs) that the Ramos administration entered into during the energy crisis in the early 1990s.   Professors from the University of the Philippines also observe a contradiction between the government’s mandate in the EPIRA to make electricity affordable, with the intention to maximize non-tax revenues through privatization. Placing priority on the latter will result in higher electricity prices, when the goal of affordable electricity must take precedence over the latter.    

There is also the lurking danger that consumers are bound to shoulder a large part of TransCo’s $1.5 billion liabilities. Using the Performance Rate Based Methodology (PBR), the NGCP can actually recover its 25-year $3.95 billion investments within a short 7 to 10 years time PBR means that the NGCP can collect their investments in advance from consumers.

Already burdened by generation and distribution tariffs, consumers would also have to bear the additional burden of pass-on charges from TransCo congestions. TransCo’s congestion problems also translate to pass-on charges to consumer. For example, Energy Secretary Reyes revealed early September 2008 that Transco’s San Jose, Bulacan substation has made WESM prices volatile for the past months.

Workers’ Bane

There is the labor issue, where the job security of 6,000 employees are imperilled. Discussed in a coordination meeting between Transco’s workers union, Mintrea, and the NGCP last 22 July 2008 in Davao City, are the following:

(1)    “Date of NGCP start of operation is November 3, 2008”
(2)    “NGCP has no existing Table of Organization”
(3)    “employees will start working under NGCP but their positions and salaries will stay as it were until the end of the 165 -day transition period”
(4)    and “at the start of the 166th day, employees are considered NGCP personnel and will undergo 6-month provisionary period. Hiring plan is based on what NGCP needs”. [underscoring supplied]

Mintrea employees also said: “MINTREA is currently negotiating the employment terms of all TransCo employees… The present workforce, if deprived of continuing serving TransCo and replaced by others whose roots were not planted and foots not set on the same ground TransCo where are now would be bad for TransCo, worse for the economy and even worst for the entire Filipino people.”

II. Questionable Transactions, Controversial Auction

The TransCo bidding would go down in history as one of the most questionable business transactions. Business and political leaders still gape in awe at the magnitude of the scandal surrounding its privatization. The $3.95 billion Transco privatization deal raises more questions than the $329 million ZTE, P728 million fertilizers and P2 billion swine scam.

The tale of power-play and rent-seeking that surrounded the TransCo sale was preceded by a tumultuous attempt to conduct a bidding. It was the Power Sector Assets and Liabilities Management (PSALM) Corporation that was tasked to dispose TransCo. PSALM is the government-owned and controlled corporation created the EPIRA that was to manage the orderly sale, disposition and privatization of Napocor, with the objective of liquidating all of Napocor’’s financial obligations and stranded contract costs.

It is only after three failed bidding attempts had there been a successful TransCo bid. In the December 12, 2007 auction conducted by the PSALM, the consortium of the State Grid Corp. of China, Monte Oro Grid Resources Corporation (MOGRC) and Calaca High Power offered $3.95 billion and won the bid to operate the country’s electric distribution system for 25 years.

State Grid Corp., owned by the People’s Republic of China, is China’s largest electricity provider. It ranks 29th in the Fortune Global 500 list of the world’s largest companies by revenue this year. MOGRC is 100-percent owned by Monte Oro Resources and Energy Inc., wherein A. Brown Company Inc. (ABCI) has an 18.47-percent interest. Monte Oro has been associated with businessman Ricky Razon, who runs key ports in Manila and abroad and is a key supporter of President Macapagal-Arroyo.

The controversy-marred auction was the biggest Philippine privatization on record, more than twice the $1.6 billion price for the former military camp in Fort Bonifacio. Non-transparency and bias marred the bidding of TransCo. A petition was filed to the Supreme Court by some bidders who were barred from bidding despite being qualified enough.

Outbidded by a “scant” $45 million is the consortium comprising San Miguel Energy Corp., TPG Aurora BV of the Netherlands and TNB Prai Sdn Bhd of Malaysia, which offered $3.905 billion. Two Rivers Pacific Holdings Corporation and its partner Terna-Rete Electtrica Nazionale S.P.A. did not participate in the final bidding while the consortium of Citadel Holdings Inc. and Power Grid Corp of India Ltd. backed out.

The Monte Oro-led winning consortium incorporated into the National Grid Corporation of the Philippines (NGCP) and applied for a franchise with Congress. The NGCP is 60 percent owned by Filipinos and 40 percent by Chinese investors. It has an authorized capital stock of P2 billion and a paid-up capital of P500 million. The President and CEO of NGCP is Walter Brown. Its Chief Technical Officer is Mr. Qiantu Ruan. Walter Brown has close ties with Diosdado “Buboy” Macapagal Arroyo, the brother of Pres. Gloria Macapagal-Arroyo.

The consortium is required to pay 25 percent of the winning bid 30 days after securing the congressional franchise with the balance to be spread in 20 years. The amount will be used by the government to cover portions of Napocor’s $7.2-billion debt.  The TransCo workers’ union, Mintrea, fact sheet said that TransCo’s sale was “a sweetheart deal” for NGCP because it stands “to earn between P18 billion and P20 billion in net profits annually.”  

Curiously, PSALM’s current president is Jose C Ibazeta, a close business associate of Enriquez Razon Jr. and Disosdado “Buboy” Macapagal. It can be remembered that Razon acted as the treasurer of President Arroyo’s TEAM Unity senatorial slate in elections last May, while Macapagal, an investment banker, is Pres. Arroyo’s brother.

In the Senate, Senator Jamby Madrigal explained last year (December 2007) that if the Monte Oro consortium wins the bid for TransCo, the transmission and distribution of energy resources would be monopolized by the Aboitiz Group, which is already involved in power distribution and generation. She said that “[a]s early as Oct. 27, 2006, this bidding was already tainted when Mrs. Gloria Arroyo met with the president of State Grid of China – Mr. Liu Zhenya. At that time, State Grid of China already made known its interest in bidding for TransCo and Malacañang named Monte Oro Grid Resources as its partner… This bid should not even start because it’s highly anomalous.”

III. Security concern: TransCo as a national digital broadband backbone

Worse, with TransCo privatization, it is not just simply transferring the monopoly/control of this strategic utility from the government to private. Placing the 21,319 circuit kilometers transmission lines nationwide with broadband capacity under a private operator is a national security concern. As one lawmaker quipped: “It is important that whoever controls Transco must be loyal to the Nation.”

The problem is not just that the 21,319 circuit kilometers transmission lines nationwide will be run by private sector — but that a foreign government, China, will practically co-manage it. It virtually transfers the control of the switchboard from the Philippine government to the foreign government via a foreign company – the State Grid Corporation of China, which is owned by the People’s Republic of China.

Cong. TG Guingona asserted in his privilege speech last January 2008 that TransCo was worth more than $3 billion. According to the lawmaker, La Costa vice-chairman Bobby de Ocampo, stated that La Costa was intent on bidding at a minimum of $6 billion had it been allowed to participate. He said that the TransCo bidding is the “purchase of two government assets for the price of one electric power transmission and a national broadband backbone”, because “the same electricity transmission grid has fiber optics that is being used as a communications backbone,” he explained.

The broadband capability of TransCo is confirmed by economist and ADB consultant on power, Emmanuel “Noel” de Dios, regarding the National Broadband Network (NBN) controversy:

“It is important to note that there are in fact, already two such functioning backbones (As a matter of fact, there are already two other backbones under government control, but which are unused, the French protocol backbone under the office of the press secretary, and that of the National Transmission Company (Transco). This only underscores the redundancy of the NBN project).”  [underscoring supplied]

Incidentally, the aborted NBN project was also transacted between a Chinese corporation and the Philippine government. The $329 million NBN project funded by the Chinese Export Import (CEXIM) Bank is supposed to be implemented by the Department of Transportation and Communication (DOTC) with the Chinese firm Zhong Xing Telecommunication Equipment (ZTE) Company as the contractor. Attached with the NBN project, is another aborted project, the P26.48-billion Cyber Education Project (CEP) also funded by the CEXIM Bank.

With these two mega-projects at the forefront, the extent of Chinese interest on investing on strategic and backbone infrastructures then became a matter of investigation for some news investigators, notably Ricky Carandang who linked the sudden spurt of Chinese Official Development Assistance (ODA) and loans to the Joint Marine Seismic Undertaking accord between the Philippine and Chinese governments. The so-called “Spratly Deal” reportedly threatens to relax our claim to the oil and natural gas-rich islands.

IV. TransCo, Global Privatization Mania, and the Predatory Regime

At present, the full-scale privatization of electricity in the Philippines is now nearing completion. Majority of the NPC power plants are already being sold while the establishment of so-called “market competition” in Luzon are now moving towards the islands of Vizayas and later on in Mindanao.

Where did the Philippine power privatization frenzy come from?

In order to answer this, we have to understand that privatization is not just a local phenomenon. There is such a term called “Washington Consensus”, coined in 1989 by John Williamson, which basic policy prescriptions involved government spending cuts, privatization of government services and assets, and deregulation of business activities – all in the name of free markets, competitiveness, efficiency and economic growth. It was adopted willingly in many developed nations and imposed on developing nations by the World Bank and the IMF as conditions of their loans. Ultimately, it is an idea that places faith in market mechanisms in resolving the national and global-level fiscal and economic quagmires.

With the Washington consensus, the public sector was deemed “bloated and inefficient.” Publicly-owned and state-regulated electricity monopolies were claimed to be so wasteful and inefficient that private companies competing in a free market could save enough money to both cut prices and make a profit.

It is unfortunate for the proponents of the consensus, that their rhetoric had largely remained unfounded, and had even been used for pure private gain. In the power sector, for example, the cumulative evidence of one hundred years of electricity provision all over the world proved that publicly-owned electricity enterprises have consistently provided electricity at no greater cost than privately-owned enterprises and often for prices that were far less than those charged by private companies.

To quote Professor Sharon Beder (June 2005), recipient of the World Technology Award for Ethics (2001) and one of Australia's most influential engineers:

“The privatisation of electricity is not something that citizens have demanded nor wanted. In general, there has been very little public participation in electricity reform decisions and as the consequences are observed, there have been many bitter protests against electricity privatisation. Popular uprisings have occurred in Argentina, India, Indonesia and Ghana. Protests have halted privatisation proposals in Peru, Ecuador and Paraguay. In the Dominican Republic several people were killed during protests against blackouts imposed by privatised companies. In South Africa thousands marched during a two day general strike to protest privatisation, which they labelled ‘born-again apartheid’. In Papua New Guinea students were killed when thousands rallied against the planned privatisation of government services including Elcom, the electricity authority. Even in China, workers protested the sale of a power plant in Henan province to a private company and threatened to ‘block the state highway and lie on the railroad while the trains run over us’.  

Today, no less than the former Senior Vice President and Chief Economist of the World Bank sharply criticizes neo-liberal prescriptions that promote modern day privatization schemes. Joseph Stiglitz, also the recipient of the Nobel Memorial Prize in Economic Sciences (2001), stressed last July 2008:

“The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation. For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top… Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well. Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory.”

In the Philippines, after more than seven years of implementation of EPIRA, the anti-monopoly and pro-competition provisions of the said law remains very weak. This not to mention the poor protection and inefficient regulation the consumers are getting from the Energy Regulatory Commission (ERC).

This, plus the current state of the Philippine political economy, paved the way for an enhanced “electricity oligarchies” in the whole of power industry. High level rent seekers are riding on the crest of the global privatization mania to corner much of the loot. The predatory regime is behaving like a Mafia organization anew in this scandal.

The high level of corruption, the rampant rent-creation and rent-seeking activities of the elite, even prompted no less than Supreme Court Chief Justice Reynato Puno comment that the greed of a few families has made it difficult for most Filipinos to enjoy the good life. “These families,” he says, “have perpetuated their stranglehold on our country’s wealth, dynasty after dynasty. There is no end to their greed, no border to their covetousness.”

V. Conclusion

The issue has spilled onto the political plane, beyond Senate technical legalese. We can only hope that Senators who are opposed to TransCo privatization uncover the whole truth behind the controversial bidding of TRANSCO and reverse the privatization process.

Considering all the arguments raised above such as the inefficient regulation, weak provisions on the anti-monopoly and pro-competition of EPIRA, unabated power rates increase, national security concern and the ugly state of power play we have been witnessing as a product of privatization – letting go of the very “heart” of the whole power system should not only be a question of legal obligation, simply because it is one of the major requirements of the power sector reform program of the government. More than anything else, it is our moral responsibility to protect the interest of the Filipino against the continuing ill effects of private investors drive for profit in the electricity industry.

The Freedom from Debt Coalition believes that the ownership, control and management of the transmission lines should remain in public hands. This is our last line of defense against the onslaught of privatization as we continue to work for a genuine power reform law that can provide us with an affordable, clean, sustainable and renewable energy.

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