A power crisis in the making

And so there will be a new bidding for the assets of National Transmission Corp. (TransCo) The last one that attracted only one bidder to actually submit a bid has apparently been declared a failure…for the fourth time. This is just as well. Given the large amount involved and the vital importance of TransCo, maximum transparency is required, something that cannot be possible in a negotiated bid. Anything less could be questioned and end up hopelessly mired in arbitration just like NAIA 3.

It does not help that the local partner of the only participating bidder is generally considered the least financially capable compared to the big guns that took bidding documents but didn’t submit a bid. The Italians should understand that they made a mistake in selecting a local partner, who was once in the cell phone business they did not pursue but made money on it by selling off the franchise. Expectedly, there are doubts they are capable of being committed to the long term, which an investment in a strategic infrastructure like TransCo most certainly is. Will they turn around again? If so, who are we really awarding TransCo to?

The Italians must note that even the local European Chamber of Commerce is in favor of doing a re-bid to ensure maximum transparency. The government must make sure whoever wins the bid must prove beyond reasonable doubt it has the financial capability to undertake the necessary investments in TransCo almost immediately. Also, that the winner must have the stamina for the long haul.

It is also just as well that PSALM takes the time to analyze what went wrong in the past bids and fix the problems so as not to waste time we do not have. They cannot keep on re-bidding and pretend those problems do not exist. Well, on the plus side, it seems PSALM realizes the nature of its problems with the TransCo bids and is doing what it should. That much was made clear by Finance Secretary Gary Teves, PSALM chairman, when he joined us last Monday evening at a meeting of the Foundation for Economic Freedom.

"We consider the failed bidding conducted last Feb. 5 indicative of recurring issues that we need to urgently and effectively address before undertaking another bidding process. We will develop a concrete plan of action and find ways to enhance the value of the asset for the next bidding," PSALM said in a statement.

People do not realize it but the privatization of TransCo is of vital importance if we are to avoid a serious power shortage in Luzon. Government is postponing much needed investments in the TransCo facilities, assigning that task to the winning concessionaire, if we ever manage to get one.

I understand that we could have some pretty serious power supply problems as early as next year. It isn’t because we don’t have the power plants to provide the capacity but more in terms of our ability to move that power from the plants outside Metro Manila to the center of demand. If we take seriously all those bullish projections on economic growth, we could see a repeat of that situation during Tita Cory’s time when our economic takeoff was aborted by lack of power.

TransCo is one helluva profitable monopoly. In 2005 TransCo reported a net operating income of P16.2 billion, a 66-percent return on gross utility revenue of P24.29 billion. Return on equity, or net worth, was 10.89 percent in 2005, down slightly from 12.42 percent in 2004. Return on assets was 8.72-percent down from 11.3 percent in 2004. Insiders believe ROE could be higher, if the usual corruption and waste typical of government corporations are eliminated by a private operator.

So, why are bidders having second thoughts about TransCo?

One big reason is the problem of a congressional franchise. There is no guarantee that whoever wins the bidding will be granted by Congress a franchise to operate TransCo. Getting a franchise from Congress is not only iffy, it is also extremely expensive.

Then there is the regulatory risk. The rules of the game, with reference to the Energy Regulatory Commission, must be made clear and transparent or the regulatory risk would be just too great.

Then, there is the cost of TransCo. The estimated cost of TransCo is anywhere between $3 billion and $4.5 billion. This is why eyebrows were raised when the only bidder who submitted the last time was led by a local partner that the local business community thought was nowhere near the league of deep pocketed rivals like Henry Sy, San Miguel and company.

Worse, the government requires bidders to have 60-percent Filipino participation, 35 percent foreign investors, and five percent technical partner. This is an invitation for a repeat of Piatco/Fraport, given that there are very few local groups who have the deep pockets that Constitutional requirement calls for.

Three groups have expressed serious interest for TransCo. The most formidable is that of Ramon Ang, vice-chairman of San Miguel Corp.; Henry Sy Jr., vice-chairman of SM Investments Corp.; and Butch Campos, who runs the property arm of the giant United Laboratories group. They have a Malaysian company (Tenaga Nasional Bhd) as technical partner and NewBridge Asia as venture capitalist.

The two other interested parties are the group of Ricky Razon of International Container Services, Inc. (ICTSI), with Wilson Sy and Walter Brown as his partners and with State Grid Corp. of China as technical partner; and the group of Ricky Delgado. Delgado has Italian (Terna S.p.a.) partners.

The government is privatizing TransCo in the form of a concession that has a 25-year life, renewable for another 25 years subject to review. Being auctioned is the contract to maintain, operate and expand the nationwide power transmission grid. The government will continue to own TransCo’s assets while the concessionaire will handle the operations and implement the company’s rehabilitation and expansion program. The concessionaire is required to pay upfront 25 percent of the concession fee in US dollars while the remaining 75 percent will be paid via a fixed 15-year annuity profile in pesos.

Unless government is able to privatize TransCo quickly, it might as well consider making some of the much needed investments in the meantime so as not to risk a serious power crisis just as our economy is taking off. It also doesn’t make sense to change the officials of PSALM at this point, as is being rumored, because that would only delay the process as the new officials get up to speed.

Hopefully, the excitement of the May elections does not distract our officials from taking the right decisions regarding this vital infrastructure or there would be hell to pay.

Chinese grapevine

Speaking of TransCo, what is this rumor that a senior official of the Chinese state firm involved in bidding for TransCo is now under investigation for mysterious movement of funds bound for the Philippines? Tsk tsk… sounds like the Ital-Thai Amari deal all over again… specially because it is election season.

All in a day’s work

Here’s Dr. Ernie E.

An old woman was taken to a gynecologist for the very first time. The doctor was very thorough in his examination, and of course the old woman was quite embarrassed.

Finally, the exam was over and the doctor told her to get dressed and come in to his office to talk about his findings.

The old woman listened intently as the doctor gave her the results. She then said she really only had one question for him.

The doctor said, "What is the question you have?"

"Tell me young man: does your mother know how you make a living?"

Boo Chanco’s e-mail address is [email protected]