The Pros and Cons of a MinPoCor

Recently, there are initiatives to push for the refiling of house bills, which seeks for the creation of Mindanao Power Corporation or MinPoCor, according to a Businessworld report. The new entity will be a government owned and controlled agency (GOCC) that will manage the Agus and Pulangi hydropower plants.
The report cited the interim head of the Mindanao Power Monitoring Committee (MPMC), Glenn Jay Reston saying that the MinPoCor “will help maintain affordable electricity rates in Mindanao and assure that the revenues earned will also be reinvested in the island.”
The House of Representatives of the last Congress passed a consolidated bill on the establishment of the MinPocor. However, the said bill failed to pass the scrutiny in Senate. Under the bill filed in the lower house, MinPoCor will operate as a stand-alone GOCC and will raise funds to operate and maintain the remaining power assets of the government in the region.
Now that the discussion on the MinPoCor has been revived, let us ask the following questions: Is it beneficial to create such a GOCC? What are the pros and cons of having the Mindanao power corporation?
On the one hand, having MinPoCor will address the power crisis in the island. It will be an entity that will focus on the needs of Mindanao’s energy sector. After all, the appalling power situation in the region is a result of the long neglect of the national government through poorly crafted government policies.
To stress this point, a report from the Asian Correspondent said that in 2009, the Philippine Chamber of Commerce and Industry already stressed that the island was in need of additional 100 Megawatts to keep up with the economic activities in the region. Plus, business and industry leaders were already asking the national government to address the need for additional capacity as estimates show that Mindanao will likely suffer from power shortages by 2011 if no new capacity were to be installed.
However, the previous administration failed to heed the calls for the additional base load capacity. It was no surprise then that a full blown power crisis interrupted in 2012, with the island suffering from at least 8-hour rotating black outs.
Given the above slow response of the national government to focus on the power situation in Mindanao, it might be in the best interest of Mindanawons to have an entity that concentrates on the power situation in the region.
However, there is also a downside to the creation of MinPoCor.
Being a GOCC, it is still a government entity and will suffer the same problems of a government monopoly, as well as bureaucratic issues.
The possible lack of funding for MinPoCor could create bigger problems as it could delay the much-needed repairs and rehabilitation of the hydro complexes in the region.
The essence of EPIRA is to privatize the government-owned energy assets. The government, after all, has limited funds for the maintenance and operation of assets. This said, it is probably better for the private sector with deeper pockets to take the commercial, operational and constructions risks of operating and maintaining the power plants. Otherwise, the government will need to borrow additional funds and pay for the interest of borrowing money.
There are various ways of going about the privatization of the hydro plants. In my opinion, the Power Sector Assets and Liabilities Management or PSALM could enter into a 25-year power supply agreements before bidding out the hydro plants. This is to ensure that low prices are kept low despite the privatization for the benefit of NAPOCOR’s existing clients including distribution utilities and industries directly sourcing their power from the said plants. Of course, this will be much more complicated given the implementation of the Competitive Selection Process or CSP but still can be done if the government acts on it.
Additionally, Pete Ilagan, President of the National Association of Electricity Consumers for Reforms Inc has suggested privatization through “cooperativization” where cooperatives will own the assets. According to Ilagan, this will ensure that consumers welfare prevails over the interest of big businesses.
We also have to consider that the creation of a new entity always comes with challenges. For one, the efficiency of a GOCC is questionable. GOCCs work under a framework of a democratic government where there is a separation of powers. A democratic government is, almost by definition, designed to be inefficient – there are strict rules on checks and balances. So, if one desires to have an “efficient” company, going through the GOCC way may not be the answer.
However, one can separate the ownership of an asset like the Mindanao power plants and the management of these plants. As government way of running things is based on a democratic framework– it does not have the discipline of profitability and efficiency that private capital will require. So, therefore, there is a way to compromise: the government can keep the ownership of the assets, but the management, including future investments, can be done by the private sector.
Before opening the management to the private sector, the government can enter into long-term power contracts with all existing customers. The government can, for example, fix the current power rate and maybe index to CPI for the next 25 years. This will ensure two things: the government asset will not compete with private generators and second, low power rates from these hydropower plants are assured for the next 25 years.
The private sector entity that comes in will then face the challenge of improving the efficiency of the assets by rehabilitating them and improving operations and maintenance to have an upside on their investment.
So, this is the challenge of a MinPoCor: have the discipline that the private sector (and consumers) require but operate within a framework of a democratic government. Otherwise, there will be no change in the cost structure nor ability to maintain these plants. It is essential to form a management team for the MinPoCor that is not only knowledgeable and transparent but also can approximate or surpass private sector management efficiency. Otherwise, the reforms needed to push the national government to pay attention to the power problems of Mindanao will remain unsolved due to the problems within the organization.
This is not to say the GOCCs cannot be run efficiently. I have seen some GOCCs and government agencies that are at par with the standards set even for private sector companies. These GOCCs are often those that have had the luck of having someone with a vision of running the GOCC effectively. However, these are few and far in between. As a whole and in the long run, the need to adhere to the principle of separation of powers will wear down on efficient management set in place by different administrations.
So, are the hydro complexes better off in the hands of a GOCC? While some may say the jury is still out, others disagree outright.
According to UP economist, Gerardo Sicat, there are several studies showing the success of privatizing hydropower plants:
“There is growing evidence that the privatization of the hydroelectric power plants in the whole country is working well. With the government being relieved from the task of operating the generating plants, gains in efficiency and in service delivery improvements have become noticeable among the privatized plants.”
So, just how beneficial is the creation of the Mindanao Power Corporation? It’s also advantageous to have an entity that is dedicated to the needs of the island. But on the other hand, the possible lack of funding and management problems may exacerbate the woes of Mindanao’s power sector further. There is a way out – the government can keep the assets and maybe even transfer these assets to MinPoCor.
In summary, one need not privatize the ownership of an asset – it is the management of these assets that may need private sector discipline. Further, to ensure a fair level of power rates, the government can enter into long-term power sales contracts with all current consumers of Mindanao. If the management of these assets is privatized, the private investors should have the incentive to invest in the rehabilitation of the power plants so that its efficiency is enhanced thus giving the investors the upside that they are looking for.
In the end, everyone wins: the Mindanao consumers are happy because their low rates are assured for the next 25 year and the government and the local governments should be happy because the assets are not privatized. The MinPoCor proponents can even lobby to have these assets transferred to MinPoCor. Plus, the private sector is happy because a chance to invest in the power sector is open to them.

References:

http://www.econ.upd.edu.ph/perse/?p=913

http://www.bworldonline.com/content.php?section=Economy&title=mindanao-power-corp.-backers-push-for-law-ahead-of-agus-pulangi-privatization&id=135866

http://www.philstar.com/nation/2015/05/27/1459319/bill-creating-mindanao-power-corp.-passes-house-joint-committee

Energy Book by Myrna Velasco

http://opinion.inquirer.net/83960/better-way-to-privatization

 

 

One thought on “The Pros and Cons of a MinPoCor

  1. Looked at this over the years and found politicians have controlled the access to the hydro projects either by holding up approvals or by buying up the access land or by shere bloody mindedness not to let anything happen re Sen. Osmena who for years held up the progress of the hydro projects. I have a very large corporation from N. America that has asked me to attempt to do a deal whereby they rebuild and put all the hydro’s into first class condition and build the new ones required. What they want in return is the 25 year contract you refer to. No ownership just management control until they recover their investment with a profit of course. Their interest is that they have just taken over a major hydro equipment manufacturer plus they are very big in electrical equipment manufacturing. Your ideas have merit and look attractive my my customer at least.

    David

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