The Politicking the Philippine Energy Sector

This is my reply to a foreign client on the state of the Philippine Energy (edited/revised version) and how government actions have been impacting the financial markets. I think it deserves a wider audience…

How can the Philippines attract investments when government is making the joint foreign chambers and the private sector a scapegoat for our problem? How does one attract investments when we have been threatening capitalists?

We supposedly have an Energy Policy (EPIRA) which was meant to deal with Napocor's problem by selling its assets and the liberalization of industry to attract investments.

Now intervention via "patriotism" is threatening to stall if not alter the entire process. Yet there is NO template for a viable alternative scheme! The recent proposals are nothing but patchy stop gap measures!

The administration have been passing the buck to private ownership by accusing them of overcharging the populace because of "greed"/similar to windfall profit tax on oil companies in the US.

On the first place, the "take or pay" provisions of which has been the bitter point of argument is a carryover from the Ramos Regime, where in due haste to resolve the daily 8-hour brownouts, Former President Fidel Ramos executed contracts unduly in favor of IPPs. In short, the policy mistakes of Ramos regime is the object of GMAs ire but directed to the IPPs and distribution utilities. Who signed or implemented this in the first place?

Look at the administration’s present proposals (Businessworld):

“The Finance chief said the task force had agreed to recommend:

-asking distribution utilities to absorb the value-added tax (VAT) on system losses;

-a review of the cap on systems losses to lessen the burden for consumers;

-that state-owned National Power Corp. (Napocor) offer flat rates of P4.11/kWh to Manila Electric Co. (Meralco); and

-ensuring that local government units (LGUs) allocate part of their tax share for lifeline subsidies…

- Renegotiate existing government contracts with IPPs."

It basically highlights TWO features:

one-SUBSIDIES by Napocor and LGUs and

two-asks that private companies (distribution utilities and IPPs) ABSORB Losses! Huh? Our government officials now seemingly think that the role of private institutions is similar to that of public institutions-to provide subsidies to consumers? If the private sector losses money will they be subsidized by taxpayer money??? Hellloooo???

Yet the true story is that NO MATTER what the administration does with such past contracts, it won't solve our energy predicament. It won't lower prices over the long run. Such actions WILL ONLY RESTRICT SUPPLIES! It will only create friction with the investors who will eventually refrain from investing, leading to A REPEAT of the Ramos era Brownouts and the repeat of the entire vicious cycle of supplication when we become desperate. It seems that we have not learned from our past.

Our government has failed miserably in its attempt to centrally plan the industry at a humongous cost of estimated $7.2 billion Napocor debts!

You see, the entire episode is nothing but a Public Relations stunt. And I believe the administration is aware of this and is likely to be a tactically designed political action for unstated political reasons.

In essence, the attempt to prove to the poor that the administration is "doing something", will mean RESTRICTING supply or HIGHER PRICES and or ROLLING BROWNOUTS in the future. Pretending to do something today means WORSENING OUR SITUATION TOMORROW.

Yet the administration knows that taxpayers cannot afford to shoulder any nationalization or continued subsidies of the industry because the Philippines is hobbled by debts, which ironically the industry have contributed immensely. Not to mention that this means higher taxes tomorrow in an already onerous tax regime. Besides, hostility towards foreign principals also means REDUCING ACCESS TO CAPITAL even in the international markets. So if you don’t get financing and restrict supply, what happens next? HIGHER Energy Prices or HIGHER Taxes!

So yes, the Philippines have abundant endemic non electric energy sources (think geothermal-we are second or third in the world in terms of reserves). But no, trying to win the votes or sentiment of the public by creating scapegoats and squeezing profits of energy companies will even do as more harm than good.

So investments are at risks and supply will be a future problem. Politicking which is all about the short term means more poverty and hardship for us.

The lesson here is that government intervention always distorts the distribution process of efficient resource allocation and aggravates the situation than help solves it. Even the privatization of US Senate dining services basically proves how markets function more efficiently than government actions.”