“We, the Foundation for Economic
Freedom, congratulate President Rodrigo Roa Duterte and his economic
team for enabling the Philippines to get a ratings upgrade from Standard
and Poor’s Global Ratings to BBB+ from BBB.
The ratings upgrade is attributable to
the administration’s economic reforms, sound fiscal policies, and
prudence in external debt management. Credit must be given to President
Duterte and his economic team led by Finance Secretary Carlos Dominguez
III.
The ratings upgrade will result in
increased investor confidence in the economy, lower borrowing costs for
the government and the private sector, and more investment inflows.
In light of lower borrowing costs to
government and the private sector, the government may wish to consider
shifting away from projects funded by Official Development Assistance
(ODA) and its tied procurement, to ones funded via Public-Private
Partnership (PPP). Overall, PPP Projects will turn out to be cheaper
than ODA projects because of the incentive of the private proponent to
finish the projects on budget and on time, especially with the lower
borrowing costs enabled by the higher S&P ratings.
The administration should also sustain
the ratings upgrade by acting quickly to solve the water shortage,power
shortfalls,and infrastructure bottlenecks.
Moreover, we would like the
Duterte administration to take the ratings upgrade as a challenge to
push for more reforms that will drastically reduce poverty and
strengthen the economy’s structural foundations. In particular, the
administration should focus on agricultural growth, which had been
lagging behind population growth. Its weak performance had been acting
as a drag to manufacturing and the other sectors of the economy, making
the country vulnerable to food price shocks.
The administration should also shore
up the country’s weak export performance in order to contain the
ballooning trade and current account deficits. The country cannot
continue to rely on OFW remittances to finance its negative external
trade position. In the meantime, the administration should also promote
tourism and a stable mining policy regime in order to generate more
dollars to finance the growing capital import requirements of its bold
infrastructure program.”
Allow me to also focus on one risk factor to such success that the FEF became acutely aware of after listening to a recent dinner speaker, Energy Regulatory Commission Chair Agnes Devanadera.
Fellow FEF Fellow Boo Chanco lucidly summarized her “good and brave” remarks on the power situation in his column: “Numbers behind the power crisis,” Philippine Star, May 3. I would disagree with Boo only in his characterization of the situation as a “crisis”. Though it can certainly turn into one unless the various government agencies act resolutely and coherently.
Chair Devanadera’s chart, “On PSA Evaluation”, particularly grabbed my attention. It goes a long way in explaining why we have been having red and yellow alerts lately, beyond the more immediate cause of a “perfect storm”, the occurrence of forced outages of several plants during the peak hours of the high demand summer months. Or as a power sector colleague well explains it — “shit happens” .
Chair Devanadera’s chart shows that there are 454 Power Supply Agreements Requiring Further Action, involving 150 power plants. How long does an evaluation take and how many technical people has the Energy Regulatory Commission assigned to evaluate? Answer : 90-180 days; 14 technical personnel. Clearly, we will be in trouble if Energy Regulatory Commission stays on a business as usual course.
Thankfully, Chair Devanadera is not a business as usual person. FEF Pres. Toti Chikiamco described her as being “very open minded and approachable and with a good grasp of the issues”. Below are some proposals learned from colleagues in the power industry, including FEF Fellow and former Energy Secretary Raphael “Popo” Lotilla, and co-members in the MAP Energy Committee. ( Disclosure: I serve as an Independent Board Director in Aboitiz Power Corporation. )
1) The Energy Regulatory Commission can be more faithful to market based competition principles under the Electric Power Industry Reform Act by moving away from detailed cost based review of every PSA, an impossible task given the backlog and available technical staff. Instead of, or in addition to “the principle of full recovery of prudent and reasonable costs incurred”, it should adopt “such other principle that will promote efficiency as may be determined by the ERC” ( Section 25 of Electric Power Industry Reform Act) . For example, a simple validation of adherence to Competitive Selection Process rules to ensure arms length competitive contracting would be a fairly quick and straightforward alternative approach.
2) The Philippine Electricity Market Corporation ( PEMC) should fast-track the creation of the Power Reserve Market. This will encourage the development of standby power plants. Moreover, together with the ERC, PEMC needs to review the secondary price cap in the spot market as it distorts the true cost of electricity and discourages investment in peaking facilities.
3) The National Grid Corporation should review the required level of reserves, particularly regulating reserves considering the amount of variable renewable energy that is now connected to the grid. It also needs to contract for new capacity for ancillary reserves similar to what is being done by the distribution utilities. Right now, they are “free riding” on existing capacity via set asides without compensation under the Grid Code.
EPIRA is working — additional capacity have been and are being built, and electricity prices have been dropping. Government agencies and private players need to perform their respective roles.
Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the administrations of Corazon C. Aquino and Fidel V. Ramos.
romeo.lopez.bernardo@gmail.com
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