Archive for the ‘Economy’ Category

HERE WE GO AGAIN: THE LOVE-HATE RELATIONSHIP BETWEEN GOVERNMENT AND THE IPPS

Towards the end of 2013, the local utility MERALCO announced that their customers will be getting higher power bills because of higher generation charges during a temporary shutdown of the Malampaya natural gas facility which (unfortunately) coincided with problems with two (2) other plants and forcing the utility to get part of its electricity from the Spot Market[1]. Eager to pounce on negative sentiment that followed the announcement, groups led by certain legislators filed a Petition before the Supreme Court to stop the hike, claiming that MERALCO “colluded” with the generators to fatten corporate profits.  Even the Energy Secretary is talking about capping the amounts that generators can sell their power via the WESM.

If disallowed, MERALCO will be forced to bear the entire amount which represents the increased generation charges. What most people don’t realize is that MERALCO is a wires business[2] and is not allowed to make profit from the sale and purchase of electricity. Generation charges are being collected by MERALCO only as the agent of the generation companies and are considered “pass-through” charges under the scheme of Electric Power Industry Reform Act (EPIRA)[3].  Compelling MERALCO to pay for the higher generation charge is illegal and confiscatory as it will in effect obligate MERALCO to subsidize the power being distributed to its customers and will eat into the only revenue source that it is allowed by law to collect (the wheeling charge)[4].

What about the GenCos? Aren’t these fellows charging too much for the power that they are generating?

The sad truth is that generation companies are not public utilities and are driven entirely by a profit motivation. Government can attempt to curb the IPPs’ appetite but at the end of the day, it cannot force private business to get a haircut or to run plants for less than what they are content with.  While we can all cry “market abuse” to the Energy Regulatory Commission, the fact is that there are simply not enough power plants to effect the downward adjustment of prices.

Speaking of “market abuse,” the condition of the power market is exactly what it ought to be given government’s attitude towards the power sector. During the time of rotating brown-outs in the 1990s, Congress passed the Electric Power Crisis Act in 1993 [5] and all but laid out a red carpet so that Independent Power Producers would put up plants FAST in order to save a power hungry nation from literal darkness. They did but at some cost. And we’re still paying for those notorious take-or-pay contracts.

In 2001, the government solution to this train wreck (via the EPIRA) was to: (a) sell off ailing assets; (b) Unbundle power charges; (c) separate the: (i) Generation, (ii) Distribution  and (iii) Transmission sectors; (d) Reduce cross subsidies and cross-ownership; (e) mandate Retail Competition and Open Access and (f) establish a Wholesale Electricity Spot Market (WESM).

In short, the wise men of Philippine Legislature agreed that the way to arrest and ultimately reduce the price of power was to allow the law of supply and demand to freely dictate the prices.  Controlling generation charges artificially by imposing caps violates the de-regulation spirit of RA 9136, and again highlights the unstable nature of government policy which may prove counter-productive in the long run.

Admittedly, the EPIRA is not perfect. It has not brought about the reduction in power costs that it was designed for precisely because the imperfect provisions of the law have also been implemented less than perfectly. Nonetheless, government should resist the urge to give in to violent reactions calling for radical legislation in place of the current law unless it wishes to go back to the old Napocor regime. For one thing, it is not entirely clear how prices can be controlled by government in an environment where  the supply comes from a very limited pool. More importantly, increased and open competition is a proven formula for reducing prices and should rightfully remain the overarching strategy of national government going forward.  [7].

 

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[1] Wholesale Electricity Spot Market (or WESM)

[2] See Sections 23 and 24 of RA 9136. The DU is allowed to charge for the use of its wires. Of the components of the electric bill, only the “distribution wheeling charges” pertain to MERALCO.

[3] See Section 25.

 [4] Under Section 43 of RA 9136, a Distribution Utility is allowed to charge a rate that allows “[r]ecovery of just and reasonable costs and a reasonable return on rate base (RORB) to enable the entity to operate viably.” See also Section 24, supra.

 [5] Republic Act 7648

[6] Republic Act 9513

[7] More to be discussed in a later article.


PPP for School Infrastructure: Old Dogs Old Tricks

Is there an answer to the classroom shortage?

Depending on who you ask, the Department of Education’s (DepEd) backlog for school buildings ranges anywhere from 30,000 to close to 200,000. DepEd itself pegs the estimate at 60,000 school buildings and admits that it has no way to fill the shortage on the present budget.

Part of the problem is that the DepEd model for constructing school buildings has always been one of traditional government procurement (i.e., government bids sites to its accredited contractors and pays for them pursuant to terms contained in a supply agreement). This prevents the department from going beyond its allotment and confines it to DPWH designs which are not only outdated but also expensive.

Last year, we introduced a different channel to the Department when our clients submitted an unsolicited proposal for the erection of 300 school buildings in Regions III and IV-A under the Build-Operate-Transfer (BOT) Law. Instead of “acting” on the proposal as the law requires however, the Department archived the proposal and invited private sector to participate in the PPP for School Infrastructure Program (PSIP). This program essentially allows private sector to submit bids for one, two or all three contract packages comprising approximately 10,000 school buildings in pre-selected areas in Regions I, III and IV-A under a Build-Lease-Transfer arrangement spanning 10 years.

There’s be a bit of vicarious nitpicking involved on account of the fact that our consortium desisted from submitting pre-qualification documents at the last minute due to unresolved issues on certain financial aspects of the PSIP. Fortunately, this frees us to discuss some of those very same issues here.

One of the principal concerns for our consortium was the absence of a government guaranty, especially considering the long payout period. The obligation was backed only by a Multi-Year Obligation Authority (MYOA) – a written recognition issued by the Department of Budget and Management that the agency concerned is authorized to enter into a forward obligation but which stops short of a guaranty. The banks were hesitant to backstop the consortium on this kind of security because the obligation was still budget dependent and there was no assurance that Congress would appropriate the amounts needed to finance the lease for a sustained period exceeding the term of the current administration.

At the same time, we felt that government imposed requirements on the contractor which were unrealistic and even illogical. For instance, that the project is based on a BLT arrangement backed by strict performance guaranties means that the transaction is purely turn-key and that non-delivery risk is virtually zero for the government. Yet the DepEd imposed ultra high capitalization requirements and construction experience thresholds which eliminated all but the biggest construction contractors and required smaller players to “rent” the bigger names for the purpose of pre-qualifying. The irony of it is that the big, traditional construction contractors may by themselves not be equipped to handle the delivery of 10,000 schoolrooms spread over  3 geographical regions in one year because the exercise is not at all akin to construction of a large structure in a single (or practically single) site. Rather, the project calls for rapid fire manufacturing of the building blocks, logistics, planning and massive deployment.

Despite all these inconsistencies however, the PSIP is essentially a good idea long in coming and one has to root for the project’s success notwithstanding private loyalties.  But having seen the bureaucracy up close, it’s difficult to shake the feeling that we are still a long way from 60,000.

 

 

 


The First Hundred

The overarching strategy appears to hinge on the promotion of Public-Private Partnerships (or PPPs). Other than the fact that this is by no means an innovation, infrastructure development by itself is not a recipe for bringing the country out of its status as the perennial bridesmaid of Southeast Asia into the club of the sought after. There are tough choices to be made regarding population control, balancing the budget, peace and order plus of course, the manner and degree of aggressiveness in fighting corruption. Hard decisions require deft political handling and large political capital. While there is still hope, the President has to make these choices soon before his coin runs out.


PPPs and Risk, Part 1

Finally, opening the floodgates to indiscriminate government guarantees is short-sighted and counter-productive. At the end of the day, the increased cost of a government guaranty against regulatory risk will be borne by the tax payers. Since most PPP contracts will outlive President Aquino’s administration, he should be wary about putting his signature on a piece of paper which will doom his successor (and the one after that) to additional fiscal burdens, especially where the benefit is not clear or the need is not immediate.


Who’s Holding the Purse? The Line Item Veto and other Fun Facts Part I

The true “power of the purse” does not arise from the requirement that all revenue bills must originate from Congress as stated in Article VI, Section 24 of the Constitution. Rather, it lies in the dynamic created by the concept that the President must ask Congress for money. Thus, more than the authority of Congress to institute revenue measures, the true nature of the power shows itself in the authority of Congress to WITHHOLD money from the President.


What It Will Probably Take Part II: More on Including the Poor in the Equation

Theoretically, higher income per capita should offset the effects of either a lower minimum wage or a moratorium on wage increases. Stated otherwise, a lower legislated minimum wage would cease to be relevant when a larger part of the workforce is doing higher level jobs and are therefore earning way beyond any floor set by government.


What It Will Probably Take Part 1: Inclusion

At the end of the day, people will not sign on to any plan to overhaul the economy if they don’t see more food coming to their table or if the food is not coming soon enough. This is significant because that plan may ultimately involve reforms that are designed to increase country competitiveness by liberalizing trade laws or lowering the cost of Filipino labor.