Manila fudge?
Secretary Vincent Perez, head of the Philippine's Department of
Energy and responsible for the current comprehensive reform of the
country's power industry is a popular figure amongst bankers. ?He's
one government official who really does understand the needs of the
international financial markets,? says a project banker with
experience of financing Philippine power assets.
Perez's understanding is easily explained, the Secretary was an investment banker for 18 years, distinguishing himself as the first Filipino partner on Wall Street (with Lazard Frères & Co), as, Managing Director of Lazard Asia in Singapore, and as founder of Next Century Partners, a private equity firm focused on investing in Asia.
But given the current bearish investment climate, Perez will need all his experienced investment promotion skills as his department gears up for the sale of a 25-year concession in National Transmission Corp (Transco) and then the outright sale of the National Power Corporation (Napocor) generation assets.
As the DOE begins the process of wooing foreign and domestic investors for the Transco concession, the final piece in the legislative jigsaw has yet to be put in place: the passing of the bill allowing the Transco franchise to be assigned to private investors. When Project Finance first spoke to Secretary Perez (in late September 2002), he expected the Transco franchise bill to be passed within four weeks.
More than four months later, however, the bill is being held up in the Philippine Congress. Market observers cite a range of problems for the delay: the continued fallout from the Enron debacle, the prolonged global economic downturn, advanced politicking before the 2004 elections and concern amongst senators over who will eventually control such an important piece of economic infrastructure. ?A good number of senators are afraid that a sale now will result in a bargain basement price and a bad deal for the Philippine nation, so they are set on preventing a quick passing of the bill,? says one market observer.
Perez remains optimistic that privatization will happen very soon. ?We still hope to move the process along quickly. We have a plan B which will allow a concession to be granted even without the franchise bill.?
According to one adviser to the government, ?even though Transco will continue as operator of the system pending approval of the franchise bill, the concessionaire will already be able to manage the assets and will have the same economic interest in the interim.?
The concession structure, says the Secretary, is similar to those employed in several other countries, including Argentina and Colombia: ?The winning bidder will have the right to operate the asset for 25 years,? says Perez, ?with a renewable concession period of a further 25 years available.? The ceiling on foreign investment is set at 40%. Although certain political groups in the Philippines have called for Transco to be owned only by Philippine investors, Perez confirms that it is highly likely that a stake of 40% will be sold to a foreign operator.
As is to be expected, the concessionaire must have proven domestic or international experience as a leading transmission system operator. In the case of a joint venture including foreign investors, at least one of the foreign participants should have a proven experience of at least 10 years as a leading transmission operator.
What the Secretary cannot confirm is whether the government will have a so-called golden share. At the moment the president of the Senate is seeking a provision in the Transco bill that will give the government just such a share in the privatized entity. If successful, the government will be able to veto or counter management decisions considered detrimental to the public interest. It would also give the government the means to regulate transmission costs until an effective free market had emerged. ?Financiers will watch this very carefully, it may make funding very difficult,? says a banker.
Those investors buying into Transco will have to invest heavily in the company. As Perez admits, ?the concessionaires will be required to do substantial upgrading of the network.? In total about P126 billion ($2.5 billion) will have to be invested over a 10-year period to expand the system and improve reliability.
The Secretary also acknowledges that interest in the sale has suffered because of the economic environment and other factors. ?So far there hasn't really been much US interest to speak of,? Perez notes. ?Still,? he adds, ?transmission assets are a rare investment opportunity. Very few country-wide transmission companies have been privatized anywhere in the world and as a result, we have got four foreign parties highly interested in the opportunity ? four expressions of interest have been received from Asian firms ahead of a February 28 deadline,? says Perez.
Certain sub-transmission assets (currently owned by Napocor) may be sold off prior to the Transco sale and market sources say that several private-sector Philippine electricity companies, including, Manila Electric Co, San Fernando and Pampanga Electric, have been in extensive discussion with Napocor for about P13 billion worth of these assets. Transco will take temporary control of the sub-transmission assets that cannot be disposed of until a deal is struck to sell the remaining infrastructure.
During the transition phase, as Transco transforms into a private company, it will be responsible for maintaining the reliability and security of the grid. Perez says Transco will have the power to negotiate contracts with power generation facilities that are capable of providing services for this purpose.
Only a matter of months after the Transco concession is awarded, the government is also scheduled to start selling the portfolio of generation assets currently operated by Napocor. Once the sale of gencos is complete Napocor will be left with a portfolio of hydroplants and some geothermal power stations.
As with Transco, there are ownership ceilings for foreign investors interested in investing in the newly created generating companies, states Perez, but these are set by grid rather than for individual power stations. The Secretary explains: ?a foreign investor will be allowed to own 100% of any particular genco, but can only control 25% of the power output in any one grid (of which there are three).? He adds: ?and as we don't want anyone to dominate the load curve, investors will not be allowed to control the peaking plants.?
There will be a variety of power station types up for sale from geothermal to oil and coal. ?At the moment we are finding different kinds of investors are interested in different categories of asset,? says Perez. But as with the Transco sale, interest in the generation companies has been far from overwhelming. Expressions of interest in the coal-fired power stations have come mainly from China, Indonesia and Malaysia. Interest in the geothermal assets has come from New Zealand and the US. ?The fact that we are not selling any very large power stations (by international standards) helps,? Perez argues. ?No generating company which is up for sale is producing more than 600MW and that makes them affordable, even for regional Asian players.?
Some assets will be sold with obligatory development plans attached. Perez says that three of the older bunker fuel power stations (at Sucat, Limai and Malaya) must be converted to natural gas after their disposal.?
These assets (and the Transco concession) come debt free as all debt once linked to the assets has been transferred to the newly created Power Sector Assets & Liabilities Management Corp (PSALM). PSALM will also receive all the proceeds from the Transco sale (expected to be about $2.5 billion) which will be used to refinance $6.7 billion of debt built up by the state in the development of the country's electricity infrastructure.
Over the next five years, and even after the family silver has been sold, there will still be plenty of opportunities for corporates and bankers in the Philippine market.
Perez says all the Philippine's future power needs will have to be met by the private sector under the Electricity Power Industry Reform Act (which was introduced in 2001).
?We currently forecast demand for 6,500MW of capacity between now and 2010 (assuming 5% to 6% electricity demand growth) but 1000MW of that total is already under commission,? says the government minister. To avoid future power shortages the Department of Energy wants to see construction of the remaining 5,500MW commence from next year.
PSALM's analysis of energy supply and demand in the Philippines points to a more urgent need for new capacity. The recent PSALM study indicates that Napocor's generating capacity could be used up in four to five years. More specifically, the study finds that capacity in the Luzon grid could be used up by 2007 to 2008, while power outages could occur in the Visayas and Mindanao grids as early as 2005 and 2006.
Bankers have previously questioned whether these figures were reliable in the light of the economic slowdown. However the latest official figures (a surprise even to the government) show the Philippine economy growing at 5.8% for the last quarter of 2002. ?With a GDP to electricity demand growth coefficient of 1.4 times, that implies good growth in the overall electricity market,? says Perez.
Perez adds that the government has taken steps to further bolster electricity demand. The Energy Regulatory Commission (ERC) issued an order on October 11 authorizing the implementation of the so-called ?Special Program to Enhance Electricity Demand,? known also by its acronym, (SPEED).
Under the program, qualified industrial and commercial customers of NPC are entitled to fixed SPEED discounts. The government's hope is that the reduction in power rates will encourage business activity helping to jumpstart the economy and in turn raising demand for power.
The program is being implemented in two phases. During the first phase, discounts are given to industrial and commercial customers with a demand of at least 1,000kW. Phase II will provide fixed discounts to customers with a demand of at least 500kW.
The SPEED program took effect as soon as it was announced and will remain in force until the implementation of the Wholesale Electricity Spot Market, or until NPC unutilized capacity has been used up, if that were to happen first.
The volume of the initial discounts is not large, the government's hope being that a small cut will be enough to trigger a much more significant increase in business activity. The program will provide discounts to qualified NPC customers projected to total P377.5 Million for calendar year 2003 and P364 Million for calendar year 2004 (until September 2004) with an estimated sales increase of 1.2 Million kilowatt hours for calendar year 2003 and 0.9 Million for calendar year 2004.
And the ERC has already published the Wholesale Electricity Spot Market (WESM) guideline document which establishes the basic rules, requirements and procedures which will govern the operation of the future Philippine electricity market. Perez notes that the Electric Power Industry Reform Act mandates the DOE to establish the wholesale market within one year of the WESM document coming into effect. ?The wholesale market won't be governed by the DOE itself but by an organization called the Philippine Electricity Market Board. The Power Reform Act also mandates the DOE, jointly with electric power industry participants, to formulate the detailed rules for the WESM.?
Perez says the ERC has completed the unbundling of NPC generation rates and Transco transmission rates ? these were released on June 26, last year. The ERC calculated a rate of return on the rate base for NPC's generating component at 5.89% and 12% for its transmission component giving an overall total company rate of return of 8.24%.
However, approvals are again needed from the Philippine political establishment before the unbundled transmission and distribution wheeling charges become enforceable. For full retail competition and open access to the electricity market to happen both this approval and initial implementation of a cross-subsidy removal scheme (to remove existing intergrid and intra-grid cross subsidies) are required.
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Perez's understanding is easily explained, the Secretary was an investment banker for 18 years, distinguishing himself as the first Filipino partner on Wall Street (with Lazard Frères & Co), as, Managing Director of Lazard Asia in Singapore, and as founder of Next Century Partners, a private equity firm focused on investing in Asia.
But given the current bearish investment climate, Perez will need all his experienced investment promotion skills as his department gears up for the sale of a 25-year concession in National Transmission Corp (Transco) and then the outright sale of the National Power Corporation (Napocor) generation assets.
As the DOE begins the process of wooing foreign and domestic investors for the Transco concession, the final piece in the legislative jigsaw has yet to be put in place: the passing of the bill allowing the Transco franchise to be assigned to private investors. When Project Finance first spoke to Secretary Perez (in late September 2002), he expected the Transco franchise bill to be passed within four weeks.
More than four months later, however, the bill is being held up in the Philippine Congress. Market observers cite a range of problems for the delay: the continued fallout from the Enron debacle, the prolonged global economic downturn, advanced politicking before the 2004 elections and concern amongst senators over who will eventually control such an important piece of economic infrastructure. ?A good number of senators are afraid that a sale now will result in a bargain basement price and a bad deal for the Philippine nation, so they are set on preventing a quick passing of the bill,? says one market observer.
Perez remains optimistic that privatization will happen very soon. ?We still hope to move the process along quickly. We have a plan B which will allow a concession to be granted even without the franchise bill.?
According to one adviser to the government, ?even though Transco will continue as operator of the system pending approval of the franchise bill, the concessionaire will already be able to manage the assets and will have the same economic interest in the interim.?
The concession structure, says the Secretary, is similar to those employed in several other countries, including Argentina and Colombia: ?The winning bidder will have the right to operate the asset for 25 years,? says Perez, ?with a renewable concession period of a further 25 years available.? The ceiling on foreign investment is set at 40%. Although certain political groups in the Philippines have called for Transco to be owned only by Philippine investors, Perez confirms that it is highly likely that a stake of 40% will be sold to a foreign operator.
As is to be expected, the concessionaire must have proven domestic or international experience as a leading transmission system operator. In the case of a joint venture including foreign investors, at least one of the foreign participants should have a proven experience of at least 10 years as a leading transmission operator.
What the Secretary cannot confirm is whether the government will have a so-called golden share. At the moment the president of the Senate is seeking a provision in the Transco bill that will give the government just such a share in the privatized entity. If successful, the government will be able to veto or counter management decisions considered detrimental to the public interest. It would also give the government the means to regulate transmission costs until an effective free market had emerged. ?Financiers will watch this very carefully, it may make funding very difficult,? says a banker.
Those investors buying into Transco will have to invest heavily in the company. As Perez admits, ?the concessionaires will be required to do substantial upgrading of the network.? In total about P126 billion ($2.5 billion) will have to be invested over a 10-year period to expand the system and improve reliability.
The Secretary also acknowledges that interest in the sale has suffered because of the economic environment and other factors. ?So far there hasn't really been much US interest to speak of,? Perez notes. ?Still,? he adds, ?transmission assets are a rare investment opportunity. Very few country-wide transmission companies have been privatized anywhere in the world and as a result, we have got four foreign parties highly interested in the opportunity ? four expressions of interest have been received from Asian firms ahead of a February 28 deadline,? says Perez.
Certain sub-transmission assets (currently owned by Napocor) may be sold off prior to the Transco sale and market sources say that several private-sector Philippine electricity companies, including, Manila Electric Co, San Fernando and Pampanga Electric, have been in extensive discussion with Napocor for about P13 billion worth of these assets. Transco will take temporary control of the sub-transmission assets that cannot be disposed of until a deal is struck to sell the remaining infrastructure.
During the transition phase, as Transco transforms into a private company, it will be responsible for maintaining the reliability and security of the grid. Perez says Transco will have the power to negotiate contracts with power generation facilities that are capable of providing services for this purpose.
Only a matter of months after the Transco concession is awarded, the government is also scheduled to start selling the portfolio of generation assets currently operated by Napocor. Once the sale of gencos is complete Napocor will be left with a portfolio of hydroplants and some geothermal power stations.
As with Transco, there are ownership ceilings for foreign investors interested in investing in the newly created generating companies, states Perez, but these are set by grid rather than for individual power stations. The Secretary explains: ?a foreign investor will be allowed to own 100% of any particular genco, but can only control 25% of the power output in any one grid (of which there are three).? He adds: ?and as we don't want anyone to dominate the load curve, investors will not be allowed to control the peaking plants.?
There will be a variety of power station types up for sale from geothermal to oil and coal. ?At the moment we are finding different kinds of investors are interested in different categories of asset,? says Perez. But as with the Transco sale, interest in the generation companies has been far from overwhelming. Expressions of interest in the coal-fired power stations have come mainly from China, Indonesia and Malaysia. Interest in the geothermal assets has come from New Zealand and the US. ?The fact that we are not selling any very large power stations (by international standards) helps,? Perez argues. ?No generating company which is up for sale is producing more than 600MW and that makes them affordable, even for regional Asian players.?
Some assets will be sold with obligatory development plans attached. Perez says that three of the older bunker fuel power stations (at Sucat, Limai and Malaya) must be converted to natural gas after their disposal.?
These assets (and the Transco concession) come debt free as all debt once linked to the assets has been transferred to the newly created Power Sector Assets & Liabilities Management Corp (PSALM). PSALM will also receive all the proceeds from the Transco sale (expected to be about $2.5 billion) which will be used to refinance $6.7 billion of debt built up by the state in the development of the country's electricity infrastructure.
Over the next five years, and even after the family silver has been sold, there will still be plenty of opportunities for corporates and bankers in the Philippine market.
Perez says all the Philippine's future power needs will have to be met by the private sector under the Electricity Power Industry Reform Act (which was introduced in 2001).
?We currently forecast demand for 6,500MW of capacity between now and 2010 (assuming 5% to 6% electricity demand growth) but 1000MW of that total is already under commission,? says the government minister. To avoid future power shortages the Department of Energy wants to see construction of the remaining 5,500MW commence from next year.
PSALM's analysis of energy supply and demand in the Philippines points to a more urgent need for new capacity. The recent PSALM study indicates that Napocor's generating capacity could be used up in four to five years. More specifically, the study finds that capacity in the Luzon grid could be used up by 2007 to 2008, while power outages could occur in the Visayas and Mindanao grids as early as 2005 and 2006.
Bankers have previously questioned whether these figures were reliable in the light of the economic slowdown. However the latest official figures (a surprise even to the government) show the Philippine economy growing at 5.8% for the last quarter of 2002. ?With a GDP to electricity demand growth coefficient of 1.4 times, that implies good growth in the overall electricity market,? says Perez.
Perez adds that the government has taken steps to further bolster electricity demand. The Energy Regulatory Commission (ERC) issued an order on October 11 authorizing the implementation of the so-called ?Special Program to Enhance Electricity Demand,? known also by its acronym, (SPEED).
Under the program, qualified industrial and commercial customers of NPC are entitled to fixed SPEED discounts. The government's hope is that the reduction in power rates will encourage business activity helping to jumpstart the economy and in turn raising demand for power.
The program is being implemented in two phases. During the first phase, discounts are given to industrial and commercial customers with a demand of at least 1,000kW. Phase II will provide fixed discounts to customers with a demand of at least 500kW.
The SPEED program took effect as soon as it was announced and will remain in force until the implementation of the Wholesale Electricity Spot Market, or until NPC unutilized capacity has been used up, if that were to happen first.
The volume of the initial discounts is not large, the government's hope being that a small cut will be enough to trigger a much more significant increase in business activity. The program will provide discounts to qualified NPC customers projected to total P377.5 Million for calendar year 2003 and P364 Million for calendar year 2004 (until September 2004) with an estimated sales increase of 1.2 Million kilowatt hours for calendar year 2003 and 0.9 Million for calendar year 2004.
And the ERC has already published the Wholesale Electricity Spot Market (WESM) guideline document which establishes the basic rules, requirements and procedures which will govern the operation of the future Philippine electricity market. Perez notes that the Electric Power Industry Reform Act mandates the DOE to establish the wholesale market within one year of the WESM document coming into effect. ?The wholesale market won't be governed by the DOE itself but by an organization called the Philippine Electricity Market Board. The Power Reform Act also mandates the DOE, jointly with electric power industry participants, to formulate the detailed rules for the WESM.?
Perez says the ERC has completed the unbundling of NPC generation rates and Transco transmission rates ? these were released on June 26, last year. The ERC calculated a rate of return on the rate base for NPC's generating component at 5.89% and 12% for its transmission component giving an overall total company rate of return of 8.24%.
However, approvals are again needed from the Philippine political establishment before the unbundled transmission and distribution wheeling charges become enforceable. For full retail competition and open access to the electricity market to happen both this approval and initial implementation of a cross-subsidy removal scheme (to remove existing intergrid and intra-grid cross subsidies) are required.
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