Selling Spree Starts

After a slow start, PSALM bids out a big one

The Electric Power Industry Reform Act passed in 2001 mandated the privatization of power plants under National Power Corporation (NPC) in order to facilitate the construction and maintenance of the country’s additional power generating capacity. Three years after the passage of what was billed as a landmark law, the selling spree is just barely starting.

The Masinloc coal-fired power plant is now under new ownership

The Power Sector Assets and Liabilities Management Corporation (PSALM) -- the agency tasked to facilitate the privatization of NPC’s assets -- has made a modest start on its power plant privatization agenda. Initially, PSALM targeted to privatize at least 30% of NPC’s power plants by end-2004. However, PSALM privatized six power plants in 2004 or only 11% of the total number of power plants.

In the first half of 2004, PSALM bid out the 3.5 megawatt (mW) Talomo power plant in Davao for US$1.37 million while the 1.6 mW Agusan hydro-electric power plant was privatized for US$1.5 million. The 1.8 mW Barit power plant in Camarines Sur was also privatized for US$480,000. In September 2004, PSALM bid out the 0.4 mW Cawayan power plant in Sorsogon for US$410,410 and in November, the 1.2 mW Loboc hydroelectric power plant in Bohol for US$1.42 million. The five power plants were bid out for a total amount of US$5.2 million (about P291 million), a tiny fraction of NPC’s P200 billion debt.

The first significant plant to be privatized through a successful bid was the 600 mW Masinloc coal-fired power plant. An Australian-Filipino consortium – YNN-Pacific Consortium – surprised the markets with a winning bid for the Masinloc power plant of US$561.74 million or about P31.5 billion, making it the sixth and largest power plant to be successfully privatized through bidding. YNN-Pacific Consortium surpassed bids tendered by First Generation Holdings Corp., Trans-Asia Power Generation Corp., Malaysia’s YTL Power, Japan’s Marubeni Corp., US power firm Mirant Corp., and Korea Electric Power Corp.

The privatization of Masinloc is significant for two major reasons. First, it gave a glimmer of hope that the successful privatization of NPC’s power plants and the proceeds would help turn around NPC’s financial condition. Second, the successful bidding of an asset as large as Masinloc helps raise investors’ confidence in government agencies such as PSALM in dealing with the private sector. In short, the Masinloc deal is the most significant achievement of PSALM and the entire power sector in 2004.

The Masinloc deal, however, has not gone unchallenged, a frequent malady of Philippine privatization deals. Several Senators – who else? – alleged irregularities in the awarding of the privatization contract to YNN-Pacific Consortium. Senator Joker Arroyo said that YNN-Pacific was a bogus company and that the bid requirements prepared by PSALM did not contain any specific requirements or criteria on who could bid. As such, there was no solid basis on evaluating the track record of the prospective bidders.

In defense of the Masinloc deal, PSALM President and CEO Raphael Lotilla retorted that the government’s interest in the sale of the Masinloc plant is well protected by a US$9 million bid security tendered by YNN-Pacific Consortium which was one of the requirements for participating in the bid. Lotilla said that once the notice of award has been issued and the winning bidder refuses to accept the award, government will keep the US$9 million bond posted by the winning bidder. Lotilla further stressed that the Masinloc power plant will not be transferred to YNN-Pacific Consortium unless they have paid at least 40% of the bid price.

Rescinding the Masinloc deal without good reason would indeed be disadvantageous to the country’s interest as it would undermine investors’ confidence in the government’s capabilities to do business with the private sector. Moreover, rescinding the contract would threaten the country’s power supply stability in the future if the Masinloc power plant’s operation is hampered by its non-privatization.