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

 

 

Privatizing the Agus and Pulangi Hydropower Plants: An Alternative

Published in Mindanews.com March 7,2015

http://www.mindanews.com/mindaviews/2015/03/07/commentary-privatizing-the-agus-and-pulangi-hydropower-plants-an-alternative/

For those of you old enough to remember, I was appointed to the National Power Corporation (NPC) Board in 1992 by then President Fidel V. Ramos (PFVR) with an unwritten mandate of finding a permanent solution to Mindanao’s power woes. I ended up running the entire company, mandated to solve the power crisis then and find a long-lasting solution to the power crisis not only for Mindanao, but for the entire country.

For the record, I did try to find a long-term solution to Mindanao’s power woes. The current STEAG Coal-fired power plant (in Misamis Oriental) was the last contract I signed a few days before I retired in June 1998. I fought hard for that plant to the point that many politicians, including our very own who are enjoying the benefits of that plant, said it was a “midnight” deal. Of course, hindsight has a 20/20 vision; Mindanao enjoyed a far more stable power supply with the STEAG plant in spite of the crisis that crops up every now and then.

Discussions back then hovered around the creation of Mindanao Power Corporation, a discussion still very much alive today. Of course, privatization and liberalization issues for the Mindanao grid were hot topics in the past, as it is today. That is a topic I may write about another time. Today, in the solitude of my present life as a private citizen, I cannot help, but with a wry smile, think about the complexities of making certain decisions today like the privatization of the Agus and Pulangi complexes.

The Power Sector Assets and Liabilities Management (PSALM) Corp. said it will proceed with the sale of the Agus and Pulangi plants after the approval of its board last year. In previous interviews, PSALM President Emmanuel Ledesma Jr. said that the sale is due in 2017 — the earliest sale date. He also added that an amendment to the EPIRA is the only way to prevent the sale of the hydro power plants.

Can PSALM privatize Agus and Pulangi plants according to its timeline? In fact, should PSALM privatize the plants according to the government’s current plan?

Probably not. For one, those who oppose the privatization of the power plants of Mindanao are many and they raise valid points. There are many who will push for the private sector’s participation in the sector and I would be one of them. If I have hesitations about this current plan, it is because I know there is a better way of privatizing the plants. Hence, much more thought must be put into the plan.

It is a very big challenge privatizing the Mindanao hydropower complexes.

The hydro plants with a combined capacity of 982 megawatts installed capacity is too large to sell to a lone owner. Having the plant owned by a single entity will result in a near monopoly market structure —a situation that the government must avoid since the essence of EPIRA is to promote fair competition among players.

If PSALM does not sell the entire power plant to a single entity or owner, and then it would be forced to sell the plant in parts or in blocs. This too, seems problematic since breaking up the complex will complicate the water management of the entire complex. The Agus complex is essentially a single complex with cascading power plants downstream from Lake Lanao. It is essential for the operations and maintenance activities of the plants to be optimized and synchronized. This will make the operations complex, and the financial contracts even more complicated.

Is there a viable option in privatizing the Agus and Pulangi Plants, one that will keep the interests of the consumers in mind without sacrificing the efficiency of private sector funding and management? I believe there is a possible option, one that we had planned for Mindanao during our time in government.

Privatizing the hydropower complexes must always bear the consumers’ interests in mind, far above the interests of the private investors and the government’s. This is a policy that should be paramount in the privatization of any government monopoly. In the case of Mindanao, the question is this: how can the Mindanawons of today enjoy the benefits of the Agus and Pulangi hydropower complexes in the years to come?

A few weeks before I retired from NPC in 1998, I implemented a power sales policy in NPC where I sold, proportionately, the output of Agus to all the consumers of Mindanao at some fixed rate for the next 20-odd years. The purpose was to “lock in” the low price of hydropower by way of a contract. Unfortunately, only Davao Light then took on that offer; only Davao consumers benefited from this undertaking.

This time around, PSALM must enter into Power Supply Agreements or PSAs with a life of 25 years before it starts selling the hydro plants. This time, this should benefit all existing customers of NPC – electric cooperatives, private utilities, and directly-connected industries. The reason is simple: PSALM should avoid the pitfalls of the government in previous privatization deals where the government sold plants individually without any PSA. Doing this will result in either of the following situations: a) prices will go up immediately after privatization; and/or b) government sale price will be low. Either way, the government and consumers will be the losers in the equation.

The PSA must be signed by all of the NPCs existing customers at the current price with escalating prices based on the consumer price index (CPI) to reflect inflation. This makes the price of the generated power by the power plants determinable in the next 25 years. This makes the economy of Mindanao more stable with relatively determinable costs. Having this type of a PSA where the price is stable will bring down over-all risks of the Mindanao economy and can contribute to a higher GDP growth for the island.

In particular, this will benefit small and medium enterprises (SMEs) that tend to suffer more than large multinationals in times of uncertainty. Studies have shown that stable and predictable prices have a positive effect on the over-all GDP growth of economies. This will, again, be a topic for another time. Suffice it to say that having a long-term PSAs will benefit everyone – for the government and the investing public, the price is easier to determine and establish. For the consumers, they are protected against price spikes in the long-run and will benefit from the stable price that can come from the hydropower complexes.

As for the water management issue, the best option for PSALM is to first obtain the services of an independent water management body that will oversee the protocols of water management. This way, there will be an independent body that will allocate and manage the water based on safety, security, and economic dispatch protocols. And because the PSAs for the complexes have already been signed, there is no need to even have several small “Agus” power companies competing against each other for customers. Asus can have one company efficiently managing the entire complex and Pulangi can have another private company.

Now the bidders will only have to compete based on their capability to rehabilitate and maintain the power plants. Technical competence backed up by experience will drive the bidding which will make the bidding more interesting and beneficial for Mindanao consumers. The current NPC employees with proper financial and management support can very well run these plants. They are the most experienced and competent in the region today.

With this proposed structure, the government now has an option of privatizing the complexes in various ways since the cash inflow is also predetermined for the coming years. For those of us who are familiar with project finance, the structure lends itself to non-recourse financing. Translation: privatization will no longer require investors with large balance sheets because debt financing can be raised through the established PSAs. This means competition for the privatization will be more intense, hopefully increasing the price that investors will be willing to pay for the assets.

In fact, one can think of a scheme where these assets can be sold by way of share sales reminiscent of the way Petron was sold in the past. In that scheme, ordinary Filipinos were able to own shares through SSS and GSIS financing. Privatizing the Mindanao complexes will even be better and easier because of the PSAs – valuation is easier, making financing even easier. One can design a privatization plan where allocation of shares can be done so that every qualified investor in in Mindanao can own a share in these plants.

We have studies done in the past that showed that consumers can actually afford to buy shares from privatized NPC power plants. Every time we pay our electricity bill, a portion actually goes to the capital recovery of these power plants. So why not allocate a portion of this bill to payment of shares? The shares can then be listed in the Philippine Stock Exchange contributing further to the liquidity of the shares and most likely enhancing even further the value of these shares.

I started by saying we studied the different options of creating the Mindanao Power Corporation. We, in fact, went beyond this. We studied the feasibility of creating a market in Mindanao. We eventually ended with this conclusion: given the economic structure of Mindanao, a competitive market may not be feasible. Placing Mindanao as part of the over-all Philippine electricity market may not also be politically feasible; Mindanao has the ability to survive as an autarky in power. The need to physically connect to Luzon or Visayas was not necessary.

These were studies done close to two decades ago. Whether the findings are still valid today may be interesting to re-visit. Maybe, just maybe, the hydropower complex’s privatization may form the roots of a Mindanao Power Corporation. A Mindanao Power Corporation owned by Mindanawons? A great possibility indeed! Just a thought.