Manila, June 25, 2003 By Ted P. Torres (Star) ( Second of three parts ) - Debt-strapped firms represent the major headache for the National Government’s privatization program.

And crucial to the government’s plan of raising fresh funds are valuation efforts, which often end up in the classic damned-if-you-do, damned-if-you-don’t situations. The long shadow of cronyism, which had state allies making transforming government corporations into milking cows, also continues to hound privatization efforts.

Even in the absence of direct theft of funds and assets, the incumbent administration has to contend with mismanagement, on one hand, and a penchant to take legal shortcuts that have turned privatization models into big jokes on the other hand.

Hemorrhaging Napocor

The National Power Corp. (Napocor) represents a major headache to the administration of President Arroyo.

The Power Sector Assets and Liabilities Management Corp. (PSALM) expects $4 billion to $5 billion from the privatization of the agency and its generating and transmission assets, under the National Transmission Co. (Transco). Transco handles the operations and maintenance of Napocor’s transmission assets.

The original schedule called for awarding of rights to privatization by July this year, but energy officials have reset the program to yearend, or next year, or the next administration? That is because the Senate remains reluctant in approving the Transco franchise bill.

PSALM president Edgardo del Fonso says that without it, the would-be owner of Transco could not operate and control the business. PSALM is the entity designated by Republic Act (RA) 9136, otherwise known as the Electric Power Industry Restructuring Act (EPIRA), to carry out the privatization of Transco.

The sale of Napocor’s transmission and generation assets are expected to raise $2.5 billion and $2.3 billion, respectively. Part of the proceeds will repay its mega loan obligations. More important, privatization would free the government from the costs of operating and maintaining the utility’s facilities.

Del Fonso points out that Napocor has been losing approximately P25 billion annually. Any delay in the privatization of Napocor could mean total annual cost of P50 billion – P25 billion in foregone savings due to financing costs and another P25 billion in annual losses.

Under a privatization plan approved by Mrs. Arroyo in October 2002, Transco’s facilities would be privatized through the granting of a concession.

Privatization will be carried out in two phases.

In phase one, PSALM will award a concession to operate, maintain, rehabilitate, expand and finance the nationwide high voltage transmission grid in favor of the concessionaire.

Until the concessionaire obtains from Congress a franchise to operate as a public utility, Transco and the concessionaire will suspend the provisions of the concession agreement relating to functions requiring a franchise. Thus, the hemorrhaging continues.

Phase two will commence when Congress approves a franchise in favor of the concessionaire. At that point, the concessionaire would take over as the grid operator and run the entire transmission system.

With strong opposition figures in the House of Representatives and the Senate, Congress has shown a disturbing ability to hold the executive branch hostage to its agenda, with the energy sector and other key areas being favorite punching bags.

Missed opportunities

The delay in privatization could be, in part, blamed on the inability of Malacañang to elicit congressional support for key fiscal programs. And it is not only Napocor’s privatization that has been delayed.

Late last year, Cerberus Capital of the US, gave up efforts to buy Philippine banks’ non-performing assets (NPAs). Cerberus’ interest was much ballyhooed given a bear market that had few investors lining up for big-time acquisitions.

The delayed passage of the special purpose vehicle (SPV) bill, however, frustrated the firm and other would-be asset management companies (AMCs), prompting it to divert to Thailand $500 million of its $1-billion budget originally earmarked for the Philippines.

The problem of valuation (again!), raised by officials of the Privatization Management Office (PMO), is a valid point, since political wrangling and pressure from cronies have led to a long list of missed opportunities. Hardly the fault of the former Asset Privatization Trust (APT) since it has to live with investors’ reluctance to pay what they perceive to be inflated prices, while government could not be expected to settle for basement prices for fear of a public outcry.

Three years ago the former Committee on Privatization endorsed the sale of the Manila Electric Co. (Meralco) shares to then President Joseph Estrada. He thumbed it down and the government lost the chance to unload it at a price that would have fetched it some P10 billion.

A few years ago, before the stock market, and the Enron and California power crises hit the US, several power giants eagerly awaited the passing of the Omnibus Power Reform Bill, forerunner of the EPIRA. The bill, when passed into law, could have been the biggest privatization program of the government involving the Napocor’s generating and transmission assets.

The EPIRA was later passed, under the shadow of bribery in Congress. But the list of seriously interested investors dwindled, and valuations have been lowered.

Now the Transco franchise bill may suffer the same fate, thus threatening the privatization process in the energy sector.


The Philippine government has become notorious for flip-flopping privatization policies. For example, the March announcement that it would put the entire Food Terminal Inc. (FTI) lock, stock, and barrel on the auction block this year, contrasts sharply with the previous privatization attempts to sell only the 100-hectare premises, exclusive of other assets on the property.

"We will try to sell the company itself instead of just the land," Finance Undersecretary Eric O. Recto now says. "The whole thing can be sold."

The government has attempted to sell the FTI complex in Taguig several times in the past, with each attempt ending up as a failed bidding.

The Philippine National Construction Corp. (PNCC), which maintains the lucrative tollways, is also scheduled for bidding this year.

Venus Cajucom, a member of the privatization council that formulates policies for the finance department on disposal of state assets, says they are still looking for the right price tag for PNCC.

Cajucom, who admits "debt issues" cloud PNCC’s privatization, says the government is valuing the firm as if it was still an ongoing concern. The sale may involve prime properties, with the government keeping control of PNCC and its tollway franchise.

But in Malacañang, other voices say the President wants to sell the whole venture, stock, lock and barrel, given the continued hemorrhage of the company.

PNCC problem

The PMO holds about half of the PNCC, according to Presidential Commission on Good Government Commissioner (PCGG) Ruben Carranza. The Government Services and Insurance System owns 24 percent, the Land Bank of the Philippines eight percent, and the PCGG five percent, with another five credited to Marcos crony Rodolfo Cuenca.

Cuenca questioned the legality of foreclosure proceedings on his properties and a High Court judgment favoring him could revert the firm into private hands.

But an attractive price tag on a firm that faces attachments of its properties due to unpaid debts, is a contradiction. A regional trial court in 2001 issued an order allowing Radstock Securities Ltd. to attach a number of real estate properties of the PNCC, as well as its interests in various toll-road joint ventures.

The case stems from a PNCC guarantee, in the days it was known as CDCP, for debts of CDCP Mining to Japan’s Marubeni Corp., which has operated in the Philippines for almost a hundred years. Marubeni later sold its receivables to Radstock, a legally accepted practice worldwide, when it grew tired of failed efforts to collect. The debt, originally valued at ¥5.6 billion or around P2 billion in 1980, has been pushed up by interest charges and penalties to P13 billion.

The arrogant PNCC lost its petition for certiorari at the Court of Appeals, prompting it to seek succor from the Supreme Court, where it is still pending.

Privatization officials say the case would not stop the sale of PNCC assets. Government lawyers have also tried to cast doubts on the size of the debt. But as early as October 2000, the PNCC board confirmed the debt had risen to P10.74 billion as of Sept. 30, 1999.

While the administration tries to downplay PNCC’s debt problem – a factor underpinning state partners’ reluctance to approve privatization – document trails indicate a serious problem.

For instance, the Commission on Audit, reprimanded PNCC in December 2001 for not presenting a real picture of its finances that year and in 2000. Then chief executive officer Luis Sison acknowledged the reprimand but threatened that "should PNCC implement the recommended adjustments, the same would result in a capital deficiency." This, he said, would prompt creditors, stockholders and joint venture partners to file legal claims against the PNCC.

A COA Oct. 2002 report, signed by team supervisor Gemiliano V. Maloles Jr. warned PNCC about its joint venture projects.

Noting that the tollways are PNCC’s bread and butter, Maloles said the joint venture agreements might have almost wiped out PNCC’s value to prospective bidders. He said the agreements could adversely affect the government’s ability to generate substantial cash from the privatization of PNCC.

"The said agreements have effectively converted the PNCC from an operator of the toll facilities of the North and South Luzon Expressways to that of a mere shareholder in private corporation, with very little or no voice at all in the administration of the affairs of the tollways," Malolez emphasized.

"It would not come as a surprise that the highest offer during the (2000) public bidding was only P1.228 billion," he added.

PNCC’s financial statements, COA said, "do not present fairly, in conformity with generally accepted accounting principles, the financial position" of the firm. The COA also noted that PNCC’s financial report since 1999 has included "unbooked liabilities," use of an inappropriate term to refer to accounts that are either liabilities, unrecognized losses and uncollectible accounts and reporting certain assets at appraised values although the depreciation recognized on them is based on cost.

(To be concluded)

Reported by: Sol Jose Vanzi

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