Blackouts

Any investor considering bringing capital into our economy (save those moving hot money to take advantage of stock market fluctuations) will likely hold back a few more years. We are due, if we are lucky, to have ample power reserves only in 2018 when new generating capacity comes on line.

Energy security in the Philippines is the bleakest in the ASEAN. All our neighbors have ample power reserves. The best of them have five or six times our generating capacity — and sell electricity at lower prices despite the cost of maintaining abundant reserves.

The prevailing energy situation is our economy’s Achilles’ Heel. Power supply, even at very high cost, is precarious. That is a disincentive for foreign direct investment. Who would want to invest billions in an industrial plant when power supply is uncertain?

Because of policy volatility and bureaucratic delay, we have not installed any major additional baseload generating capacity in nearly a decade.

The only reason our economy has not yet been crippled by outages is that, after large government plants were privatized, the new owners invested good money in making them more efficient. One plant produced 500 MW of power when it was government-owned now produces 600 MW. That is a pattern repeating across the board.

This replicates the efficiency gained by privatizing water utilities in the capital region. Without new fresh water sources, the privatized water utilities are delivering more water to consumers simply by investing good money to reduce leakages in the distribution system.

Last Thursday, the Foundation for Economic Freedom convened a roundtable forum to discuss the complex issues in the power sector. The high-powered forum tackled the policy, engineering, financial and economic aspects of the looming power crisis. The impression I took away from that intense discussion was not encouraging.

One expert convinced all of us about the certainty of blackouts this summer and the next, when demand spikes and the thinning of energy reserves becomes evident. The thinning reserves will force us to use the costliest sources of power.

We all agreed the Supreme Court’s (populist) intervention was unwarranted. It will complicate things and magnify the uncertainties without addressing the structural defects of our power sector.

Government’s decision to drastically lower the price cap on electricity sold through the WESM ensures that no new investment in peak load capacity will be made. Plants supplying power at peak load use diesel and produce power at high cost. Plants using hydro or thermal energy will take 6 to 10 years to build. The decision, done for political effect, will make power shortages certain.

We could not back out of the Electric Power Industry Reform Act (EPIRA). There is no way government can renationalize the industry and doing so will create more inefficiency. Those who threaten to reverse EPIRA are deluding the public.

Conflicted

It is not true that the bidding process for the Mactan International Airport is a done deal. The first major PPP project to actually get to bidding stage now finds itself in very rough waters in the post-qualification stage.

By some quirk in the pre-qualification process, a relatively unknown entity with uncertain financial capacity managed to trump our biggest conglomerates. Among the losing bidders are consortia led by the big boys of local business: First Pacific, Filinvest, San Miguel, SM, the Lopez group and the Ayala group.

The winning bid was put in by the consortium of GMR Infrastructure Ltd and Megawide Construction Corporation. Nobody seems to know who is behind Megawide. GMR, for its part, is associated with the Delhi airport, the Hyderabad airport as well as the Istanbul and Male (Maldives) terminals. Issues relating to corporate financial integrity hound GMR.

The second highest bidder, Gotianun-led Filinvest Development Corporation (FDC), called the DOTC’s attention to what seems to be a blatant violation of the conflict-of-interest rule so clearly laid down in the bidding guidelines for the Mactan project. The rule prohibits a board member or partner of a bidder, consortium member or its affiliates from being directly involved in any capacity in the bid process for another bidder, consortium member or its affiliates.”

This is not an insignificant rule. It is there to prevent collusion among the bidders. Violation for this rule spells outright disqualification.

In her letter to the bids and awards committee for the Mactan project, FDC president Josephine Gotianun Yap points out that the managing director of Malaysia Airports Holdings Berhad (MAHB) sits as director in all four airports managed by GMR. MAHB is associated with First Philippine Airports Consortium, a participant in the Mactan project bidding.

Yap is asking that both Megawide and First Philippine Airports be disqualified in the post-qualification process. Violation of the conflict-of-interest rule is no small matter. Yap expresses confidence “the Philippine Government will preserve the sanctity of the bidding rules since other potential PPP bidders” are keenly monitoring this landmark exercise.

If the conflict-of-interest rule is waived or conveniently overlooked in this case, it will undermine business confidence in the integrity of bidding process for all major projects on the drawing board. There is much at stake here.

When Mar Roxas took over the DOTC, he was criticized for bringing in a horde of lawyers rather than a platoon of engineers and technologists. That horde of lawyers, still entrenched in that underperforming agency, now have an opportunity for redemption.

All those lawyers simply have to do what lawyers ought to do: to ensure that rules are followed to the letter.

Now, finally, all those lawyers planted at the DOTC have a chance to justify their pay.