Key to fixing the economy (Part 2)

In our last column, we talked about how the privatization of just one government owned and controlled company, the National Power Corporation, serves as a key to fixing our economy and ultimately lifting the tax burdens inflicted upon us innocent consumers.

Today, we will discuss other reasons why NPC’s privatization should have happened as soon as yesterday, if not sooner.

Malacañang’s infamous May 1, 2002 labor day promise to lower electricity rates through a reduction and capping of the purchased power adjustment or PPA was calibrated to win popularity. This brought power rates down by a whopping 85 centavos per kilowatt-hour and capped what should have been the automatic adjustment mechanism at a measly 40 centavos per kilowatt-hour.

But lost in the veil of that popularity-winning decision was the fact that capping PPA irresponsibly decoupled the NPC power price from upward movements in world fuel prices and deterioration of the peso.

Put simply, NPC’s prices were no longer reflective of their true costs! Of course the move was wildly cheered by the common "tao" and some shortsighted businessmen as welcome relief to the soaring cost of electricity. But what was hidden from view was that government had to fund this deceptive promise by initially increasing our short-term foreign debt by more than P25 to P30 billion. Each succeeding year the situation remained uncorrected, NPC’s debt all the more spun out of control.

Interest costs devoured close to a third of our national government budget with education, health and infrastructure accounting for measly and ever-shrinking proportions of that same pie. Even more discouraging is the reality that all three summed up to less than two-thirds the amount expended for interest expense last year.

The cost of deluding the public with that single decision was numbing if not stupefying. Yet the absurdity of decisions such as these were not lost on our creditors as the rating agencies continued to downgrade our credit ratings making it even more expensive for us to borrow.

Government’s ill-advised decisions have put the country on a classic downward tailspin.

Repairing the damage was no longer just a simple act of restoring the lost 85 centavos per kilowatt-hour into NPC’s rates. The problem had now grown exponentially. Less than two years later, in 2004, the state-owned firm was asking for P1.98 more per kilowatt-hour!

Today the country is paying the price for that and many other deceptive populist promises made by government. At its height in 2004, NPC’s deficit was almost a third of the Consolidated Public Sector Deficit. And the dreaded EVAT on all purchases of goods and services by any consumer in this country is a direct result of this. The irony being that even the poor who do not have electricity in their homes will end up indirectly paying for and subsidizing the past, present and future electricity consumption of the rich via the EVAT they pay.

Despite the lip-service to privatization, NPC’s leadership seems bent on continuing its foot dragging, ensuring that privatization never happens and instead attempt to consolidate the Mafia’s hold on the power sector.

What NPC’s leadership is trying to imply is that they’re so cheap and efficient that they shouldn’t be sold and privatized. In fact they’ve long been plotting that their empire should be expanded to include private companies like Meralco as well.

Some dark forces are at work here and a government takeover of public utilities like Meralco will be seen as a colossal setback for power reforms in the country and the death of any hope we’ve had for having free markets in the Philippines. Let’s not be fooled by false promises again. This time could be fatal.

Getting our priorities straight

With no solution yet in sight for rising cost of fuel, government should stop paying lip service and do something urgent to support the development of alternative sources of fuel.

Ethanol is one. While government has already taken up specific activities to lay the foundation for the development of the use of ethanol as a gasoline blend in this country, in light of the agreement forged between the Philippines and Thailand in September 2004, much remains to be done.

The most significant progress to date is the passage of the Biofuels Act of 2005 in the House of Representatives, sponsored by Bukidnon Rep. Juan Miguel Zubiri. This pioneering bill mandates the use of ethanol as a mix with transport fuel within two years from its passage into law and 10 percent by the end of the fourth year.

On the other hand, Sen. Miriam Defensor Santiago filed her version of the Biofuels Act in the Senate. While the bill is still pending, the Senate Committee on Energy has given assurances that it will be approved in early 2006.

Prior to this, President Arroyo certified the Biofuels Bill as urgent in line with the 10-point agenda of her administration, in which energy independence is much pronounced. In May 2005, the President launched the country’s National Bioethanol Program to mark the signing of contracts for a P1.5 billion ethanol and power generation plant in San Carlos City, a first in the Philippines.

In addition, she issued EO 449 in July 2005 - reducing the import tariff on ethanol from 10 percent to one percent.

Concurrently, the Department of Energy identified the development of indigenous energy resources, particularly renewable energy, as one of its top priorities. As part of its Philippine Energy Plan, the department also listed other strategies in achieving 60 percent self-sufficiency level in 2010, such as increasing indigenous oil and gas reserves; increasing the use of alternative fuels; forging strategic alliances with other countries; and promoting a strong energy efficiency and conservation program.

In its efforts to promote the use of alternative fuels, the department has been actively campaigning for the numerous benefits of bioethanol and other forms of alternative fuel in the activities and projects it participates in.

Initiatives of the private sector are equally worth mentioning. Among the prominent groups advocating for the development and implementation of a National Bioethanol Program is the Fuel Ethanol Alliance of the Philippines. The group is composed of representatives from the sugar industry – Sugar Regulatory Administration, Sugar Master Plan Foundation; alcohol industry – Center for Alcohol Research and Development; and the fuel industry giant, Petron. The alliance’s partnership is based on the members‚ common agenda, which is to support energy security, promote environmental protection, and generate employment in the countryside.

Since its inception in August 2004, the Ethanol Alliance has been able to bridge the sugar industry and alcohol industry to promote fuel ethanol. Representatives from the offices comprising the Ethanol Alliance have been meeting since August 2004 to identify the policies that will create the investment climate for and encourage the use of fuel ethanol.

Meanwhile, San Carlos Bionergy Inc. (SCBI) will begin construction of the plant in the first quarter of 2006 to start operations in the second half of 2007, providing 200 industrial jobs. SCBI will build, own, and operate the integrated 100,000 liter ethanol distillery and a nine- megawatt power cogeneration plant in the San Carlos Agro-Industrial Economic Zone. Five megawatts of the power produced will be sold, while four percent will be used for the operation of the plant. The by-products of the ethanol will be used to produce carbon dioxide for beverages

Seaoil, another fuel industry player, has recently made available its newest product E10, a mix of 10 percent ethanol with 90 percent gasoline. In August 2005, the company has started dispensing ethanol-blended gasoline in their retail stations including Eastern Petroleum, Seaoil, and USA 88 to motorists. Thus far, there have been no reports of difficulty in consumption among motorists.

The use of bioethanol as alternative fuel has beneficial effects on the sustainability of our national development programs. Bioethanol promotes energy security, improves environmental quality, and accelerates countryside development. The present fuel ethanol initiative rests on this threefold potential of the resource to give our economy a boost and our overall national life a vitality that is long overdue.

Although energy is an indispensable element in the growth and development of any country, it is unfortunate that the Philippines is heavily dependent on other countries for this crucial resource – 46 percent of the country’s total energy consumption is imported!

It is no wonder then that the increasing prices of petroleum products in the world market constantly put a severe strain on the country’s development efforts. The skyrocketing oil prices coupled with the weakening of the local currency translate easily to constant increases in the price of electricity and transport fuels, and in turn result in higher transport costs, and subsequently, in escalations of prices of major commodities.

The problems emanating from the country’s high dependence on imported fuel are not only economic. They are also related to environment and health. Burning of imported fossil fuels results in the release of toxic chemicals that affect human health. This situation is most evident in highly urbanized areas like Metro Manila and Cebu City where air pollution is caused largely by fuel combustion engines.

The establishment of bioethanol production centers would also boost agribusiness activities in the rural areas, creating opportunities for employment. The development of additional hectares of sugarcane, cassava or corn farms would generate jobs in non-urban areas. Moreover, the new industry will create more indirect employment in the upstream and downstream industry.

With the phasing in of gasoline displacement under the National Bioethanol Program starting from the use of five percent blend of ethanol in gasoline from year 2007 to 2010 and 10 percent blend from 2010 to 2017, a total of 3.7 billion liters of gasoline will be displaced by an equal volume of ethanol over a ten-year period. This is easily a total savings in foreign exchange of $825 millions over 10 years or $82 million per year.

Unfortunately, while the benefits of developing and using bioethanol are obvious, government’s bioethanol program will not take off unless it attracts foreign investments in at least 10 ethanol distilleries which will cost billions of pesos. There is an urgent need for our country to offer incentives and the same levels of protection as Thailand has done and China is doing.

Our government needs to seriously start reconsidering its priorities.

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