Renewable energy - reality check

Business World
Introspective

The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.

My attention was caught by a news article reporting a billion-dollar renewable energy (RE) loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that most of the $1-billion loan will be focused on supporting solar, wind and biomass power projects. I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.

The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kilowatt-hour (kWh), biomass and wind around P10. This compares very poorly with the current grid rate of P4.50 per kWh - anywhere from two to five times true cost now.

So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty- free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.

The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public's power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kWh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.

Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB- supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P5,000/month contract for a dozen years.)

The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won't be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge - so no advantage in rushing.

These solar and wind technologies are already being subsidized by those who can afford them - taxpayers and consumers in developed countries helping their firms in these emergent technologies - in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers. Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs - in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)

If we don't support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity - and calling for caution in embracing these fashionable, but for now, costly, distractions.

Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is a board director of the Institute for Development and Econometric Analysis.

A PPP success story

Business World
Introspective

Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.

Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.

During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.

As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.

What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.

Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.

This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration 
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.

Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.
What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.

All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.

Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.

Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.

This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.

Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.

The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.

Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.

There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.


Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.For comments and inquiries, please e-mail us at idea.introspective@gmail.com.

"A PPP success story"

Business World, Introspective

Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.

Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.

During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.

As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.

What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.

Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.

This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration (http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.

Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.

What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.

All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.

Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.

Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.

This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.

Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.

The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.

Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.

There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.

For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.