FVR airs side on controversy over IPP contracts

Over the last few weeks, some erroneous and misleading information and data appeared in various reports and columns in your newspaper and found its way into discussions on issues related to electric power and IPPs. While the need of the day is to focus our joint efforts to provide immediate relief to thousands of poor consumers and to solve the problem on a long-term basis as well as to prevent the recurrence of a similar crisis in the future, in fairness to all concerned and for the benefit of everyone who wants the truth, we find it necessary to respond to set the record straight – and we hope you will give us an equal opportunity to do so.

On allegations that IPP contracts signed in 1997 and 1998 were "midnight" deals.

1. If we examine closely, the laws under which IPP contracts have been entered – R.A. No. 7648 (Electric Power Crisis Act – "EPCA"); R.A. No. 6957 (BOT Law), as amended by R.A. 7718 (Expanded BOT Law), it will be noted that –

i. The authority granted to the President under the EPCA was effective for one year only or up to April 1994. The exercise of such authority was subject to disclosure and publication requirements (all of which were strictly complied with) to ensure transparency. In addition, the President was required to submit a quarterly report to Congress on the implementation of the Act, which he did regularly.

ii. All IPP contracts of Napocor, after the EPCA expired, were executed pursuant to the BOT and Expanded BOT Laws. The Implementing Rules and Regulations ("IRR") of these laws put out by the Ramos Administration mandates a process which requires the evaluation and approval of all IPP proposals by line agencies starting with the NAPOCOR, and including the Departments of Energy, Finance, Environment and Natural Resources, Trade and Industry, NEDA, Bangko Sentral ng Pilipinas and even the Sanggunians of Local Government Units concerned. Final approval in all cases has to be obtained from the Energy Regulatory Board, an independent agency which will determine the reasonableness of the rate to be charged by the proponent based on applicable rules and guidelines.

iii. All BOT projects are subject to monitoring by the Coordinating Council of the Philippine Assistance Program ("CCPAP") which in turn, reports to Congress. All IPP contracts were available in the files of NEDA, DOE, and the BOT Center under the CCPAP.

iv. With this painstaking process of due diligence which takes several months or even years to complete, and the oversight authority of Congress, one would readily see that a "midnight" deal on IPPs would not have been possible.

2. Let us take the case of the Mindanao Coal-Fired Thermal Power Plant Project, which is being called a "midnight deal" by critics because it was signed by Napocor and the proponent (a consortium of State Investment Trust Inc. and Harvin Power Engineering company, one of the biggest engineering company in the world) in late June 1998. What critics do not say, or perhaps did not know, was that:

i. The project was opened for international competitive bidding way back in April 1995 and the proponent won over eight other bidders.

ii. The feasibility study, evaluation and approval process alone took more than two and a half years.

iii. The contract did not become effective upon signing by the parties. It still remains for Napocor to issue a certification to make the contract effective at a later date. And that is not all; after the "need date" of the project is certified, final approval by the ERB (now ERC) is required. To this date this power plant is not operational.

The same due diligence approach was followed in regard to other power plant projects signed in 1997, San Pascual Cogeneration Plant, San Roque Multi-Purpose Hydro Electric Power Plant and the Ilijan Natural Gas Plant, which critics quickly labeled as ‘midnight’ or ‘anomalous’ transactions without ascertaining the facts on the ground. In view of space constraints we are unable to discuss each one of them in detail. However, what should be noted is that most of these plants were not intended to generate additional capacities but for replacement capacities of existing plants which would be shutdown because they were old, inefficient and expensive to run, such as: Tegen, Sucat and Bataan Plants in Luzon, Cebu Thermal and Amlan Plant in Panay and Aplaya Plant in Cagayan de Oro. Moreover, these new plants will not be in operation until after several years in accordance with a schedule provided in the long-range Power Development Plan prepared by the DOE and NEDA which is updated on a continuing basis. As of now, all these aforementioned plants have no impact on the computation of electric power charges to consumers.

On the allegation that the Ramos Administration entered into IPP contracts for power supply in excess of what the country needed.

1. FVR explained in simplest terms, how his Administration determined the power supply requirement of the country on a medium to long-term basis:

i. The Medium Term Development Plan of the Ramos Administration had three basic objectives: to reduce the poverty level, raise the per capita income and to bring up the economy to a competitive level paving the way for the Philippines to enter Newly-Industrializing Economy (NIE) status as of the advent of the 21st Century.

ii. The starting point is our country’s population of 65 million in 1992, with an annual growth rate of 2.4 percent.

iii. In accordance with universally accepted standards, to uplift the quality of life of each Filipino, GNP growth rate per year should at least be at about double the population growth rate. Thus the annual GNP growth rate of five percent to six percent was set as the target.

iv. Based on time-tested norm, endorsed by the World Bank and Asian Development Bank for developing countries, electric power capacity expanded at about 1.5 times or twice the GNP growth rate for the same period. Among the factors considered here is the backlog in power capacity, the five to seven years gestation period in setting-up of a power plant, and our socio-economic potential to keep in step with our highly competitive Southeast Asian neighbors, instead of being the perennial tail-ender.

v. These projections and data were publicized and are matters of record. No one, including the critics today, raised any objection or considered them inaccurate or wrong. Ten years after, "Monday morning-quarterbacking" became the order of the day and many "analysts" and columnists who have to fill their spaces for the day, find everything either faulty or unsound.

vi. Indeed, the Ramos Administration attained and even surpassed projected GNP growth. The BSP Real Growth Chart showed a GNP growth starting at 1.6 percent in 1992, 5.3 percent in 1994 and 7.2 percent in 1996.) Consequently, during FVR’s Administration, the projected electric power capacity requirement matched closely with actual power demand.

vii. While our economy was adversely affected by the Asian financial crisis of 1997 and the 24-month El Niño drought of 1996-1998, the Philippines was the least damaged among its Southeast Asian neighbors (see BSP report on Jan. 1999) in view of public infrastructures, economic reform laws and the overall policy framework which were already in place and had the potential to recover faster than our East Asian neighbors more severely hit by the financial crisis.

viii. During the administration of former President Joseph Estrada, the following occurred and these are matters on record: there was massive capital flight from our country; the unemployment rate rose; the Philippine Stock Exchange almost collapsed from a high of 3170 index points at end 1996 to less than 1000 index points in late 2000; the Philippines’ credit rating was downgraded from "stable" to "negative" (which means that credit from multilateral organizations are not available or if so, at higher rates and under strictest terms and conditions); the peso-dollar exchange rate went up to more than P55 to one US dollar, foreign investors bypassed the Philippines in favor of our neighbors including Thailand, Malaysian and Vietnam (The range of peso to $ exchange during the Ramos term was from P26.30 to P42.00).

ix. All these meant lost opportunities in investment and industry and while our neighbors recovered, and by capturing Foreign Direct Investment (FDI), were quickly back with GNP growth rates of seven percent to eight percent in 1999 and 2000. The Philippines was left out and returned to the tail-end position. This translated to a reduced demand in power capacity.

x. The economic planners of the Ramos Administration made their projections on economic growth and power capacity requirements and formulated a medium and long-term development plan, on the assumption that the next administration would continue to provide stable leadership, set clear directions for and manage the country’s economy in a prudent and responsible manner. That the succeeding President, Joseph Estrada could not provide any of those, was obviously something that they did not foresee.

On the so-called "take or pay" provisions in IPP contracts.

1. When the Ramos Administration started in 1992, the power crisis, then at its peak, was dragging down and exacting a heavy toll on the economy, jobs and livelihood. With no funds or financing to build power plants, the new administration had to turn to and tap the private sector to put up the facilities.

2. The usual pricing approach in IPP contracts (not only in our case but in most IPP contracts worldwide) is based on a two-part tariff: The first part – the energy charge, is a variable payment based on net amount of electricity in kilowatt hours delivered by the power producers to the buyer. The second part – the capacity charge is designed to recover the capital or fixed costs of the power plant.

These charges have adjustment mechanisms linked to certain economic indicators (such as Consumer Price Index, Foreign Exchange Interest Rate, Peso/Dollar Exchange Rate, etc.). The aim is to give the power producer assurance that their costs will not go haywire and their own debt payment schedules will not be thrown into disarray because of certain factors beyond their control. This is the feature that makes the power plant project viable. Without it, no bank or financial institution will finance the project and without financing, no power producers will build the plants to provide the power. This is one of the realities which our decision-makers who were not exactly negotiating from a position of strength, had to face.

3. It should be emphasized that the IPP power plants are BOT projects and what is actually being paid for is the recovery cost of the plant or the capital invested by the proponent, spread over the contracted take-or-pay energy. Thus, the wrong impression that we are paying for energy not delivered. Nonetheless, these payments are not wasted because ownership of the plant goes to NPC(becomes government property) after the prescribed cooperation period. (No different from a car bought on installments where one pays the amortizations whether the car is used or not. The amortization payments are not considered wasted, because the buyers eventually ends up owning the car.)

Thank you for giving us the space in your newspaper.

Atty. FRUMENCIO A. LAGUSTAN
FVR Spokesperson