Manila, June 26, 2003 By Ted P. Torres (Star) (Conclusion) - Former chairman of the Asset Privatization Trust (APT) Gonzalo T. Santos Jr. once pointed out the enormous problems in privatization. He chided the state for not clearly spelling out the benefits of privatization.

In a review of the privatization process, Gonzalo pointed out: "The Philippine government is often its own worst enemy in carrying out privatization, despite the fact that the program has had a prominent place in national policy for nearly a decade. Many legislators lack a clear understanding of the process, which makes them overly critical of pricing procedures and the manner of disposing of assets. In addition, the courts sometimes demonstrate an undue bias in favor of defaulting debtors."

He stressed the need to review government policy with a view toward setting priorities. For example, should the government be more concerned with disposing of assets or with maximizing revenue during privatization?

The former APT executive noted: "In the Philippines, some 11 different government entities have a hand in the privatization process. The result, inevitably, is a lack of uniformity in approach. The Cabinet-level Committee on Privatization oversees the process but, by itself, can neither undertake the marketing of assets nor negotiate sales. The actual disposition of assets falls to the APT, but decisions on price, buyer, and terms of sale are subject to the Committee’s approval. While this arrangement ensures supervision, the Committee’s power to overrule the APT despite the latter’s superior familiarity with the details, is a constant threat to sound decision-making in privatization."

Even with the shift to the Privatization Management Office (PMO), the same problem exists, according to PMO sources themselves. Venus Cajucom, a member of the privatization council that formulates policies for the finance department on disposal of state assets, says the government is still studying whether to have the PMO sell together with the government financial institutions holding shares in PNCC or sell separately.

In the PNCC case, it is ironic that the state, which has previously shown a penchant to foreclose mortgages as an intermediary step to the privatization process, could find its way blocked in a similar manner. The Supreme Court’s temporary restraining order (TRO) issued on a petition by the government preserves the status quo until it reaches a decision in favor of the debt-strapped firm or sends the case back to the Court of Appeals for a full hearing of its merit.

Valuation controversy

Privatization efforts are always hounded by valuation disputes. The Philippine government faces a dilemma common to "privatizers" or privatization hunters around the world: Firms offered at high prices – such as the transfer price – are completely uninteresting to prospective buyers. This has been shown in the past failure of the PNCC and FTI auctions.

However, low prices that accurately reflect the financial straits and low level of investment in GOCCs invite criticism and have led to congressional inquiries on alleged fire sales of assets.

That remains the chief problem of the PMO, Cajucom acknowledges. Any effort to hide encumbrances and other problems would still be unearthed during due diligence studies by investors.

And, according to Finance Undersecretary Eric Recto, the recent experience of the Lopez-led Maynilad Water Services Inc. (Maynilad) could prompt more intense studies by investors who would not want to find themselves trapped in conditions that negate sustainable operations of the new venture.

With a big number of assets still up for sale, the government cannot afford to see another slow slide of privatized utilities into bankruptcy.

In the case of Maynilad, its inability to manage its finances was seriously hampered by the alleged failure of government to provide the promised additional sources of water, which kept operational costs high.

The Philippines privatized its water utility sector in 1997, the world’s largest of its kind, involving service to 11 million residents of Metro Manila. The awards went to Maynilad for the west sector and the Manila Water Corp. of the Ayala group for the east sector.

It was also a happy arrangement for the Metropolitan Waterworks and Sewerage System (MWSS) whose debts with the World Bank, Asian Development Bank and other lending institutions were passed on to the new concessionaires – 90 percent to Maynilad and 10 percent to Manila Water.

Five years later, the Lopezes are throwing in the towel, while the Ayalas say they’ve made money – P553 million in 2002.

Aside from El Nińo and the Asian currency crisis that has hit other concerns of the Lopez group, Maynilad Water also blames MWSS for "breaches of its obligation under the concession agreement," including failure to complete vital concession projects involving the daily supply of millions of liters of water. The issue is now under arbitration.

What devastated Maynilad, however, was its absorption of 90 percent of MWSS debts that were denominated in US dollars. These loans were obtained at a time when the foreign exchange was P26 to a dollar. After the Asian crisis, the peso slipped to P40 versus the dollar, and eventually to over P50. This resulted in the rise of its debts, said to reach $800 million.

Social entanglements

In the cases of utilities, the government has to weigh its needs for funds with the public’s clamor for affordable services.

In the sale of properties, the government also has to deal with people – squatters long ensconced on government lands and the relocation of institutions occupying the land.

Nevertheless, the National Government still intends to conduct "the country’s biggest property deal in history" through the privatization of the 550-hectare New Bilibid Prisons reservation in Muntinlupa City.

Preliminary estimates show that the developed property can fetch as much as P110 billion, dwarfing the P34 billion paid for the 160-hectare Fort Bonifacio property just as the 1997 East Asian financial crisis broke out.

Recto says President Arroyo made the privatization of the New Bilibid Prisons a top priority and the justice department is expected to present its plans for the prison reservation.

"The President has made it known that this shouldn’t take too much time," Recto says. "There is a written directive for us to do it."

However, the government property also houses, aside from inmates and staff of the prison, a squatter community with a conservative estimate of 50,000 people. How it will negotiate their relocation with a winning bidder remains to be seen.

Recto says the government will sell the property outright and is not open to joint venture development agreements, explaining that the government should not be in the business of developing.

"Partnerships generally take a long time to put together and the bottom line is we have taken so much time," he notes.

The prison facility shares a wall with the posh Ayala Alabang Village where property prices currently stand at P17,000 to P20,000 per meter. Thus, the New Bilibid Prisons Reservation will likely fetch a high of P93.5 billion to P110 billion.

Conservative estimates place potential proceeds from the entire privatization exercise at P22 billion. Finance officials though expect something midway.

Since it started the privatization program under the administration of former President Corazon C. Aquino, the government has always set ambitious goals. But the failure of some privatized industries, the continuing controversies over other contracts like that of PIATCO, social issues, and global economic woes has drastically trimmed proceeds from the program.

With legal suits pending and hostile legislators waiting to pounce on any missteps, the President may just end her term still in dire need of deficit funds, or start a new term with the same uncompleted privatization program? Or will the National Government ever learn the rudiments of privatizing bad assets?

Reported by: Sol Jose Vanzi

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