PCIJ Report: Trail of IPP mess leads to FVR

Philippine Center for Investigative Journalism ( First of four parts )

On Oct. 16, 2001, President Arroyo flipped on a switch, inaugurating the first "landing" at the Shell refinery in Batangas of natural gas from the Malampaya field off Palawan.

The gas from Palawan was to travel through a 500-kilometer undersea pipeline to the Shell refinery, and then on to two power plants, also in Batangas, operated by the private First Gas Power Corp. run by the Lopez family. A few months later, part of the Malampaya natural gas supply went to the state-run Ilijan power plant.

By flipping on that switch last October, Mrs. Arroyo signaled the realization of a commitment made by former President Fidel Ramos to the multinational oil firm Shell that the government would buy all the natural gas the company produced from the Palawan field. But Mrs. Arroyo also let loose an additional 2,700 megawatts of electricity to a grid that was already overflowing with excess power – as well as adding a bit more to the ordinary Filipino’s electricity bill.

Under the law of supply and demand, an excess of any commodity should bring down its price. The reverse is true for electricity in the Philippines. An excess of energy generated by the state-owned National Power Corp. (Napocor) has meant higher electricity rates for consumers, largely because of ill-advised contracts it drew with numerous independent power producers (IPPs).

Napocor entered into 48 IPP contracts since 1991, when the country was hit by a crippling power shortage. More than half of these were made during the Ramos presidency.

The PCIJ’s investigation shows that Ramos personally pushed for the speedy approval of some of the most expensive power deals and justified signing more contracts despite warnings from within the government and the World Bank that an impending oversupply of electricity could push up prices.

Documents and interviews with past and present government officials indicate that individuals linked to Ramos lobbied for the approval of some of the IPP contracts, which came with numerous other deals, including lucrative legal, technical and financial consultancies that were given to individuals and companies close to the former president. An earlier PCIJ report found that among the deals tied to IPP projects were insurance contracts in which companies made millions of dollars in commissions alone.

The IPP review committee report, which has not been made public but a copy of which was obtained by the PCIJ, shows how Napocor was being made to pay a variety of fees, often in excess of what it should be paying the IPPs. These payments come in the form of fixed operating and maintenance costs for power plants that were hardly running. In some contracts, the Napocor was paying much more than it should for the electricity generated by the IPPs. In other cases, the IPPs were overcharging capacity fees, or the amount the IPPs collect to recover their investments.

Today, IPP operations are costing the government $14 billion (around P700 billion) every year. This excludes the fuel that Napocor pays for and supplies to the power plants, and which cost it P35 billion last year. Napocor pays IPPs around P4 billion every month for the fixed cost of energy – whether or not the plants actually generated or supplied the electricity.

To recover its expenses in dealing with the IPPs, Napocor passes on the burden to consumers in the form of a purchased power adjustment (PPA). In other words, aside from paying for the electricity he actually consumed, the power consumer must now also pay for the PPA, which is a 30-to-50 percent addition to the average bill.

Mismanagement of Napocor blamed

How the now debt-ridden Napocor got into such a mess — dragging power consumers down with it — can be traced to the mismanagement of the power sector by a succession of presidents since 1986. Rather than craft an energy plan that would meet the needs of the whole population, presidents since Corazon Aquino catered mostly to the needs of big business for power and allowed the private sector to profit from this lucrative industry.

Early last month, an IPP review committee composed of the Departments of Justice and Finance and the National Economic Development Authority (NEDA) submitted a report to President Arroyo reviewing 35 IPP contracts. Of these, the committee found only six to be above-board (four of which were signed during the Aquino administration). All the rest have either legal or financial defects.

In an interview, Ramos said, "We took the long view and made the hard decisions to make sure there is continuity in the effort of energy development in our country. Why should I take the blame?" He also said he provided only the "vision" and "guidance" in setting out the government’s priority energy needs.

But Sen. Sergio Osmeña III, who has been investigating some of the IPP contracts since 1995, is harsher in his judgment. "The kindest thing I can say is that this is gross mismanagement. They overcontracted overpriced power plants," he said. The worst he can say is this: "The IPPs probably provided government officials then with ‘incentives’ to allow such onerous contracts… This is tantamount to graft and corruption because under the law, anyone who enters into a contract that is disadvantageous to government should be held liable."

In 1987, Aquino enacted Executive Order 215 that liberalized power generation, which until then was Napocor’s monopoly. The result was a free-for-all: anyone with money could build a power plant. Industries, factories and even shopping malls were allowed to generate their own power. As a result, Napocor and electric utilities like Meralco lost some big customers.

In the meantime, the government ignored Napocor’s pleas for more power plants to service consumers and to make up for the 600 megawatts of power that was supposed to have been generated by the mothballed Bataan nuclear power plant. Thus, the Aquino era ended in literal darkness, with 12-hour power outages.

To solve the problem, Congress in April 1993 gave Ramos emergency powers that allowed him to negotiate IPP contracts and bypass the usually long and tedious process required to bid out government projects. Ramos became known for the phrase "fast-track," used to describe swift approval of contracts and projects.

The contract to rehabilitate the Binga hydroelectric plant in Benguet was the original fast-track IPP deal, the first one Ramos approved using his emergency powers. The contract was awarded to Catalino Tan, a former military supplier known to be close to Ramos. "He was the Dante Tan of the Ramos administration," said Binga employees in a letter they wrote last year to Mrs. Arroyo. The IPP review committee found the Binga contract to be among the most onerous among the IPP deals.

The Ramos administration continued signing IPP contracts even after the power crisis had been considered solved by the end of 1993. Ramos said that the country had to be ready to meet the future demand for more energy.

After emergency powers, the BOT

When Ramos’s emergency powers expired in April 1994, Congress entered amendments to the Build-Operate-Transfer (BOT) law, or Republic Act 7718, which allowed the private sector to construct big government projects. The BOT scheme offered investors a slew of incentives such as tax holidays, profit repatriation, and duty and contractor’s tax exemptions.

The BOT law amendments became effective in May 1994 and permitted private firms to offer unsolicited proposals or projects not in government’s priority list. The unsolicited proposals included the Casecnan multipurpose project in Nueva Vizcaya and the Caliraya-Botocan-Kalayaan (CBK) power project in Laguna, both controversial projects that got substantial state guarantees and subsidies which were questioned by the IPP review committee.

All the IPP contracts came with attractive incentives and guarantees. Every contract was designed to give IPP creditors some degree of comfort in financing ventures that would usually involve huge capital and risks. Most IPPs were funded by foreign loans secured with a form of government guarantee or performance undertaking (PU). This meant that the government would pay for the loans if the IPPs defaulted.

The PU carries the "full backing" of the Republic of the Philippines and is treated as "quasi-sovereign" debt. This enabled power companies to raise funds abroad rather than use their own money. "This, however, does not translate to consumers in terms of savings," said a senior member of the NEDA’s Investment Coordinating Committee. In fact, while the Ramos administration trumpeted the IPP contracts as investments, they turned out to be the country’s future debts.

But that was not all. To lure investors, government agreed to shoulder all the project risks by introducing provisions in the contracts that ensured the IPP’s profitability over a span of 15 to 25 years – whether or not the plant operates.

For instance, most contracts contain a "take-or-pay" provision where Napocor is obliged to pay for most of the power produced by the IPP, whether or not Napocor actually needs it. Most contracts have a take-or-pay guarantee of 70 to 100 percent, meaning that Napocor pays for this amount, even though on average it uses only about 20 to 40 percent.

In some hydro projects like San Roque that combined power generation and irrigation systems, the government also entered into take-or-pay deals whether or not water flows from the river to run the power plant.

Contracts also have "force majeure" provisions that force the government to pay the IPPs even during unforeseeable events such as labor strikes, insurrection, war, calamities and natural disasters.

All of the contracts are quoted in US dollars so that all exchange-rate fluctuations are borne by the government. Thus, Napocor’s obligations to IPPs ballooned from P170 billion in 1996 to P244 billion in 1997, the year of the Asian financial crisis.

The expanded BOT Law also allowed so-called "enhancements" as additional sweeteners, where the government would take over certain responsibilities of the IPP during the project implementation. These included providing the plant site, right of way, transmission lines, and even provisions to refund tax payments, as in the case of the P13.4-billion Casecnan hydroelectric project.

‘IPP deals sweetest’

While most of these provisions are present in IPP contracts in other countries, the Philippine IPP deals are the sweetest of all because of the fuel-cost guarantee, which requires Napocor to supply and pay for fuel used in running the plants. Twenty-seven IPP contracts have such provisions. In 2001, Napocor paid P35 billion for fuel alone, more than three times the P11 billion it spent in 1998.

In a November 1994 study on the power sector, the World Bank noted that the fuel-cost guarantee – "not used in other countries" – enabled an IPP to avoid the financial risks resulting from fluctuations in the world fuel prices and in the exchange rate. Since Napocor’s fuel importation is tax-free, the IPPs also save on taxes.

That World Bank report came out two months after Ramos officially declared that the power crisis was over. Contained in the report was an implicit warning that power rates may rise if the government continued to enter into more IPP contracts that would mean excess power.

The World Bank questioned the ambitious projections of the government on economic growth and power demand from 1994 to 1998. It also warned that the power generated by private utilities’ IPPs (like those of Meralco) could duplicate those of Napocor and create an overcapacity.

"The… factors create considerable uncertainty in power demand," warned the Bank in its report. "For instance, substantial overcapacity, particularly under take-or-pay conditions, would require considerable tariff increases that would be unpopular with the public."

Yet the Ramos administration went on to sign 12 more IPP contracts from 1995 to June 27, 1998, a few days before turning over the presidency to Joseph Estrada. In 1995, it even set out a 30-year Philippine Energy Plan (1996-2025) that served as a formal invitation for more foreign investors in the energy sector. The plan was later revised to extend up to 2035.

According to Ramos, he was "merely providing for the future" of a country that he envisioned was on its way to becoming an Asian tiger. He denied getting any warning about an impending excess capacity. "I never saw any letter of that kind and I was not advised in that manner by my energy people," he said.

Dante Canlas, who was NEDA deputy director-general at the time, said that it was only in 1997, when Napocor presented its Power Development Program, that Malacañang realized how severe the oversupply was.

But some Ramos officials had already been sounding alarm bells. According to the minutes of an April 1994 NEDA meeting, Department of Energy (DOE) officials asked Napocor to either defer the scheduled commissioning of the 1,000-megawatt Sual, Pangasinan coal-fired plant "or decrease the plant’s capacity" because Meralco was also planning to buy the same amount of energy from its own IPP. NEDA and DOE officials were worried about an oversupply.

Napocor, however, insisted on operating Sual as scheduled, saying that the state power firm would retire its power barges and old power plants anyway. But even after Sual was operational, Napocor didn’t retire its barges and it even signed contracts to rehabilitate decrepit plants.

In the same month the World Bank study was released, Napocor entered into a 10-year contract with Meralco, which agreed to buy 3,500 MW of Napocor’s electricity until November 2004. Meralco president Jesus Francisco said it was then Napocor head Francisco Viray who "requested us to enter into this agreement… in compliance with a directive from the World Bank."

"Since Napocor is a very big borrower, it was pressured by the World Bank to make sure they have a buyer for the electricity they will generate," said Francisco. "We didn’t see any reason for entering into this agreement but we wanted to cooperate with the government."

That would not be the only time the Ramos government turned to Meralco to take up the excess energy that Napocor had already contracted. Ironically, former Ramos energy officials now blame Meralco for the oversupply situation and the rising PPA. But Meralco also took advantage of Napocor’s shrinking market and the lucrative IPP contracts it bagged from the Ramos administration to justify high PPA charges. (To be continued)