Power industry, Privatization

The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

EPIRA was the result of intense pressure from NAPOCOR creditors led by the Asian Development Bank (Photo from finchannel.com)

Last June 8, the Electric Power Industry Reform Act (EPIRA) of 2001 or Republic Act (RA) 9136 marked its tenth year of implementation. A day before, utility giant Manila Electric Company (MERALCO) announced that it is again hiking its generation charge by 51 centavos per kilowatt-hour (kWh). The rate hike underscored how EPIRA has harmed consumers with exorbitant electricity rates, which have now become the highest in Asia. Indeed, EPIRA is considered one of the most notorious legacies of the despised Arroyo administration that was even accused of bribing Congress just to get EPIRA passed a decade ago.

But Mrs. Arroyo and her allies in the legislature are not solely to blame because EPIRA was not just a product of internal and independent policy making. Rather, it was the result of intense pressure from the creditors of the National Power Corporation (NAPOCOR) who were wary that the heavily indebted state firm will not be able to pay them back. NAPOCOR lenders, namely, the Asian Development Bank (ADB), World Bank, and the Japan Export-Import Bank (JEXIM) and Overseas Economic Cooperation Fund (OECF) withheld committed loans for NAPOCOR unless EPIRA was passed. At the same time, they promised additional lending for the privatization and deregulation of the power sector. (JEXIM and OECF merged in 1999 to form the Japan Bank for International Cooperation or JBIC.)

Credit rating agencies also put pressure on the bankrupt government to pass the EPIRA while investment banks acted as privatization consultants. These institutions represent foreign corporate interests who also pushed for the passage of EPIRA to widen their profit-making opportunities in the Philippines through the privatization and deregulation of the power industry. Therefore, these foreign banks and corporations are as accountable as the Philippine government for the mess created by EPIRA.

Pre-EPIRA intervention

In fact, the restructuring of the power industry and the role that these creditors played did not begin with Arroyo’s EPIRA in 2001. EPIRA was in reality the culmination of neoliberal power reforms long pushed by multilateral creditors. Initial efforts started in 1987 during the administration of the late President Cory Aquino with her Executive Order (EO) No. 215. This EO allowed private sector participation in the construction and operation of power plants in the country. In 1990, Congress passed RA 6957 or the BOT Law that authorized the financing, construction, operation, and maintenance of infrastructure projects by the private sector.

These policies formed part of neoliberal structural adjustment pushed by the IMF and World Bank starting in the 1980s in poor countries facing a debt crisis like the Philippines. Among the stated objectives of structural adjustment was to supposedly reduce government deficit and spending through, among others, the privatization of state assets and functions. The ADB had supported these privatization efforts in the early 1990s through loans and equity investment to independent power producers (IPPs) as well as guarantees for NAPOCOR bonds.

Compounding the fiscal woes of government was the deteriorating power situation in the early 1990s, which government responded to with more privatization. In 1993, former President Fidel Ramos was granted emergency powers to enter into negotiated contracts with IPPs for the construction of power plants through the Electric Power Crisis Act or RA 7648. Then in 1994, RA 7718 which amended RA 6957 was enacted to further promote the participation of the private sector in infrastructure development, including power generation.

However, the ADB in a 1994 study (as cited in Sharma et. al., “Electricity industry reform in the Philippines,” Energy Policy, 2004) noted that despite these efforts at privatization, the power crisis continued to worsen. It argued that there was a need for further privatization because NAPOCOR, despite ending its monopoly in generation, still retained its monopsony position. Furthermore, domestic capital was considered insufficient to meet the long-term capital requirements of the industry while legal restrictions on foreign ownership were hampering investment.

Power restructuring program

As early as 1994, the ADB, NAPOCOR, Department of Energy (DOE), and Department of Finance (DOF) had already initiated policy dialogue concerning NAPOCOR’s difficulty in funding necessary generation and transmission projects “and the need for a radical change.” By 1996, an Omnibus Power Industry Bill was filed at Congress to privatize NAPOCOR and restructure the industry. The bill did not gain ground but was later re-filed in 1998 as the ADB approved a $300-million loan to fund the Power Sector Restructuring Program (PSRP) that was co-financed by the JBIC with an additional $400 million. EPIRA was the direct product of this $700-million loan from the ADB and JBIC.

According to the ADB, the PSRP will create competitive electricity markets, restore NAPOCOR’s financial sustainability, and achieve operational improvements and increased efficiencies. The loan was meant to help finance the adjustment costs of privatization such as the take-or-pay contracts with the IPPs and excess debts upon NAPOCOR’s privatization – or what will be called as stranded debts and stranded contract costs under EPIRA. Aside from the loan, the PSRP was also accompanied by two technical assistance (TA) grants from the ADB worth $1.32 million for a study on electricity pricing and regulatory practice as well as a consumer impact assessment.

The PSRP was part of a standby arrangement in 1998 between the Philippines and ADB, World Bank, and IMF. The World Bank’s commitment to the standby arrangement was a fast disbursing loan package of $500 million while the IMF standby facility was worth $280 million. Under the standby arrangement, the Philippine government committed to implement among others further fiscal reforms, financial sector and structural reforms, and strengthening the corporate sector, which included as a critical component power sector restructuring.

Access to the PSRP was structured in a manner that ensured strict compliance to a total of 61 specific conditionalities identified by the ADB in the loan program. These conditionalities were jointly designed by the ADB, World Bank, and JBIC. The $300-million ADB loan was divided into three equal tranches with the first tranche released upon loan effectiveness and compliance to 13 conditionalities while the second tranche was targeted for release in 1999 upon compliance to an additional 8 conditionalities (including the approval of creditor banks of NAPOCOR’s restructuring and privatization plan and passage of EPIRA), while the third tranche was targeted for release in the second half of 2000 upon compliance to a further 7 conditionalities (including the promulgation of EPIRA’s implementing rules and regulations). The rest of the conditionalities were expected to be complied with during the implementation of the program.

However, the passage of EPIRA was delayed and the ADB conditionalities were not met on time. Consequently, the second and third tranches of the PSRP were withheld by the ADB until the conditionalities were implemented by the Philippine government. The second tranche was released in December 2001 and the last tranche in November 2002.

In early 1999, NAPOCOR disclosed that its creditors had warned to cut-off new loans until the privatization of the state-owned power firm was implemented. The World Bank, for instance, indicated that it will no longer support NAPOCOR until the year 2000 while the OECF had advised that no NAPOCOR project will be included in its loan packages. The ADB, meanwhile, had imposed a “very strict” condition of 8% return on rate base (RORB) – a measure of profitability – for NAPOCOR to ensure access to loans. [“No new Napocor loans (Precarious condition worries foreign lenders),” BusinessWorld, March 26, 1999] It was estimated that over $1 billion in fresh foreign loans were riding on the passage of EPIRA. [“Int’l credit groups unsure about tack on Napocor loans,” BusinessWorld, April 13, 2000]

Pro-business lobby

Aside from the foreign creditors, other imperialist institutions had also added to the pressure to privatize NAPOCOR and in some cases even pushed for specific provisions that eventually became part of EPIRA. Credit-rating agencies like Moody’s Investor Service, Inc., for example, had made the privatization of NAPOCOR a pre-requisite for a credit rating upgrade for the Philippines. [“Napocor privatization needed for Moody’s credit rating upgrade,” BusinessWorld, December 13, 1999]

US-based investment banks Credit Suisse First Boston and Arthur Andersen, meanwhile, pushed for government to retain the debts of NAPOCOR instead of passing them to generating companies to make privatization more attractive. These same investment banks advised legislators not to abrogate the onerous purchased power adjustment (PPA) because it will “damage the country’s reputation in the international financial and political arenas.” [“Transparency necessary in Napocor privatization,” BusinessWorld, August 31, 2000]

Credit Suisse, which government tapped to develop a privatization plan for NAPOCOR, also pushed for cross-ownership in generation and distribution in contrast to the then power reform bill that banned all forms of cross-ownership. [“Legislator says Napocor sale consultant exceeded mandate,” BusinessWorld, August 18, 2000] The unbundling of rates supposedly for transparency as well as the dismantling of all forms of subsidy “as rapidly as possible” because “they send incorrect pricing signals in a free market and create economic inefficiencies” were also among the specific provisions in the EPIRA pushed by the Credit Suisse group.

Foreign investors had also publicly called on government to pass the EPIRA without delay. British power firms, for example, warned government that delays in the legislation of EPIRA were turning off investors. They also openly lobbied for cross-ownership, which was one of the debated issues then at Congress. These British firms were among the hundred or so foreign companies – mostly American and Japanese – that had expressed interest in the privatization of NAPOCOR. [“British investors ask gov’t to accelerate Napocor sale,” BusinessWorld, April 5, 1999]

Bankrolling EPIRA implementation

These creditors continue to fund the restructuring of the power sector even after the passage of EPIRA. The ADB, for instance, approved in December 2002 a partial credit guarantee (PCG) of up to $500 million equivalent in Japanese yen bonds to “help meet the cash flow requirements during the initial stage of privatization.” Specifically, the PCG was used to guarantee the bond issuance of the newly created Power Sector Assets and Liabilities Management Corporation (PSALM). EPIRA established the PSALM to oversee the privatization of NAPOCOR.

Also in December 2002, the ADB approved a $45-million loan for the establishment of the wholesale electricity spot market (WESM) and upgrading of critical transmission lines and substations, including a TA worth $0.8 million. JBIC co-financed the project with $45.5 million. It was followed by another TA from the ADB in 2004 worth more than $1 million to boost the confidence of private investors in the EPIRA by enhancing the efficiency of the Energy Regulatory Commission (ERC) and provide financial and technical advice to PSALM for privatization of the NAPOCOR.

So far, the largest power reform loan from the ADB after EPIRA’s enactment was the $450-million Power Sector Development Program (PSDP) approved in December 2006. In its August 2010 Completion Report, the multilateral agency said that the “ADB developed the PSDP to deal with the largest sources of the fiscal imbalance in the public sector caused by losses among the public power agencies. The PSDP was seen to reduce the losses at the (NAPOCOR) and make the (PSALM) more creditworthy, and to create the necessary conditions for the privatization of major power sector assets.”  In February 2007, JBIC provided co-financing for the PSDP worth $300 million bringing the total debt to $750 million.

PSDP’s specific objectives were (1) provide financial assistance to the government, through a program loan, to help meet part of the costs of power sector restructuring; (2) create the necessary conditions for substantial progress in privatization; (3) boost confidence in regulatory performance; and (4) smooth the transition to competitive markets. Part of the first objective is to help the national government finance the P200 billion in NAPOCOR debts that it absorbed under the EPIRA. In other words, government is servicing the debts of the state-owned corporation through additional debts.

Aside from bankrolling the implementation of EPIRA, the ADB also provided loans to private corporations involved in key privatization projects. In 2007, for example, it extended a $200-million loan to the Masinloc Power Partners Company Limited (MPPC), owned by the US-based AES Corporation, for the acquisition and rehabilitation of the Masinloc coal-fired thermal power plant. The 600-MW Masinloc plant was one of the largest privatized NAPOCOR-owned power plants. Incidentally, the ADB also provided $359 million in loans and Y12 billion in partial credit guarantee to NAPOCOR to build the Masinloc plant in the 1990s.

Meanwhile, Filipino taxpayers are not only burdened by the debts that bankrolled EPIRA. We are also oppressed by exorbitant power rates, energy insecurity, etc. that resulted from the neoliberal restructuring of the industry imposed on us by foreign institutions.

Read the “Ten years of EPIRA: What went wrong?” series

Part 1 – on electricity rates

Part 2 – on NAPOCOR debts

Part 3 – on monopolies and energy security

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Privatization

MRT commuters face 222 percent increase in debt servicing thru fare hike

The long and short of the MRT/LRT fare hike is that Noynoy wants the commuters to directly shoulder an even larger portion of the debt burden

In the past two weeks, I have talked to some officials of the Department of Transportation and Communications (DOTC) on the issue of the impending fare hike in the LRT and MRT. I have also asked for documents including the rail study that the department conducted which was used as the basis for the fare hike. They have yet to provide the documents although they have repeatedly assured me they will do so soon in the spirit of transparency.

(Download Bagong Alyansang Makabayan’s “Five reasons why we oppose the LRT/MRT fare hike” here and discussion guide here.)

But while I have not yet seen the documents explaining the details behind the fare hike, I have confirmed at least one important fact thru my conversations with the DOTC officials. This is the issue of debt, which I argued in a previous post is the biggest reason behind the so-called losses of government in the MRT operation. The long and short of the fare hike is that the Aquino administration wants the 1.2 million daily commuters of the MRT and LRT, of whom  7 out of 10 earn less than P10,000 a month said one study, to directly shoulder an even larger portion of the said infrastructures’ debt burden.

The rule of thumb for large infrastructure projects like the LRT/MRT is that 85 percent of the total cost represents debt, said one DOTC official. This means that 85 percent of what government claims is the actual cost of an MRT ride, which is about P60, accounts for the debts incurred by the private consortium that built the infrastructure.  Without the debt, the cost of a train ride in MRT will turn out to be just P9, even higher than its current minimum fare of P10.

In other words, the present revenues of the MRT as well as of the LRT 1 and 2 could not only easily cover their operation and maintenance costs but even pay for an already significant portion of the debts. If the provisionally approved new rates will be implemented, commuters will be shouldering a higher portion of the MRT/LRT debt servicing. At present, each commuter already shells out an average of P3.30 to as much as P8.83 per train ride for debt payments. With the fare hike, the average amounts will grow by 54 percent (in LRT 1) to a staggering 222 percent (in MRT)! (See Table below)

But why is the issue of debt important? Isn’t it reasonable for the commuters to shoulder the cost of building the infrastructure which was funded by foreign debt?

In the case of the MRT, the original proponents were private corporations that formed a consortium – the Metro Rail Transit Corp. (MRTC). I have already pointed out how these investors made a killing on the MRT due to their interlocking interests with the foreign and local banks that financed the project. They also borrowed in near commercial rates, which a DOTC official I spoke to said could have been avoided if the government was the proponent since it can avail of soft loans. Payments for these onerous debts are being shouldered by the commuters and taxpayers.

The issue of debt also disproves the claim of the Aquino administration that there is a need for a fare hike because government is losing money. Such claim misleads the people into believing that MRT/LRT commuters pay below the actual cost of operating and maintaining the rail systems. As I showed earlier, they are paying even more than the cost of operation and maintenance. Government is losing money due to onerous contractual and debt obligations.

Furthermore, it is not unusual for state agencies managing public infrastructure like the Light Rail Transit Authority (LRTA), which operates LRT 1 and 2, to be in the red because their performance is measured not in narrow financial terms but through the net social and economic benefits they bring. The new capability that results from public infrastructure such as improved mobility of the economy’s workforce, for instance, far outweighs what government deems as its “losses”. These losses are actually not losses in the business sense but public investment that go into achieving economic efficiency and improving the overall living condition of the people.

By placing additional burden on commuters to settle the debts of the MRT/LRT, government is abandoning its obligation to provide the infrastructure needs of the people and the economy. The Aquino administration tries to conceal this dereliction of duty by peddling the twisted logic that it is unfair for Mindanao taxpayers to subsidize the MRT/LRT users in Metro Manila.

The Filipino people are paying for the debts of the MRT/LRT in the same way that we are paying for the debts incurred to build infrastructure in Mindanao and elsewhere in the country. If Aquino is sensitive to the needs and interests of the people, he should be lessening, not intensifying, this burden. One way is to renegotiate with creditors – an option that even some technical people in the DOTC recognize as legitimate, particularly in the case of MRT – to reduce the impact on government’s scant resources. The country has so many odious debts dating back from the Marcos dictatorship up to the Arroyo government (for instance, read here) that a leader with strong political will and genuine concern for the people would work hard to abrogate.

There is neither need nor urgency to increase the fares in MRT/LRT. If Aquino’s economic managers will insist that there is because of the precarious fiscal situation, then instead of unjustly burdening the people, they should advise the President to stop bailing out transnational corporations (TNCs) like what he did in the case of the Pagbilao coal-fired power plant which saved Japanese giants Tokyo Electric Power Co. and Marubeni Corp. from paying P6 billion in taxes.  Or they can tell the Chief Executive to stop giving investors more state guarantees, which will be taken from the people’s money, such as the regulatory risk insurance Aquino promised to prospective participants in his public-private partnership (PPP) scheme.

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Power industry, Privatization

P932-billion power debt: the cost of privatization

Energy Sec. Rene Almendras said that consumers should pay part of the enormous P932.21 billion in debts incurred by the energy sector. The rest will be shouldered by government, said Almendras, because they are not allowed to recover the entire P932.21 billion through the universal charge. Government, of course, will use taxpayers’ money and taxpayers are also the consumers of electricity.

In other words, we will absorb the full impact of the huge liabilities of the National Power Corp. (NAPOCOR), Power Sector Assets and Liabilities Management Corp. (PSALM), and the National Transmission Corp. (TRANSCO). PSALM accounts for 84.2 percent of the P932.21-billion debt. But note that PSALM just absorbed the debts of NAPOCOR as prescribed by the Electric Power Industry Reform Act of 2001 (EPIRA) or Republic Act (RA) 9136. TRANSCO is also a spinoff of NAPOCOR’s privatization under EPIRA. (See Chart)

More financial woes

Before EPIRA was passed in 2001, the debt of NAPOCOR was pegged at $16.5 billion or about P729.14 billion (based on an exchange rate of P44.19 per US dollar, the 2000 average according to central bank data). Proponents of power privatization made the public believe that such heavy debt burden can be reduced by EPIRA. Economic managers of the Arroyo administration, for instance, claimed that the privatization of NAPOCOR will yield a surplus of some P22.29 billion in consolidated public sector deficit (CPSD) by 2009. CPSD includes the budget deficit of the national government and its monitored government-owned and –controlled corporations (GOCCs) and reflects the public sector’s financial position.

But instead of a reduced debt, Filipino taxpayers and consumers are now confronted with a power debt that is more than P203 billion larger than before state-owned power plants and transmission assets were sold to the biggest local compradors and foreign companies. The CPSD for 2010, meanwhile, is expected to hit P281.3 billion. Government ended up more indebted and bankrupt, while the people oppressed thrice over – by servicing the debt through taxes, by enduring lack of social services as funds are siphoned off by debt servicing, and by paying exorbitant monthly electricity bills to cover among others payment for NAPOCOR debts.

This is the cost of the privatization of state assets that we have been paying for in the name of so-called fiscal consolidation, which by the way is the favorite buzzword today of the International Monetary Fund (IMF) and the World Bank, and unsurprisingly being echoed by Aquino’s finance officials. President Noynoy Aquino also made it clear that privatization, including through public-private partnership (PPP), will be among the main pillars of his medium-term economic program.  

Stranded costs

As mentioned, bulk of the power sector’s debt, P785.09 billion, represents PSALM obligations, which it absorbed from NAPOCOR under EPIRA. Specifically, these are called stranded debts and stranded contract costs. Stranded debts refer to any unpaid financial obligations of NAPOCOR which have not been liquidated by the proceeds from the sale and privatization of its assets. Stranded contract costs refer to the excess of the contracted cost of electricity under contracts entered into by NAPOCOR with independent power producers (IPPs) as of Dec. 31, 2000 over the actual selling price of the contracted energy output of such contracts in the market. As mandated by EPIRA, these costs shall be passed on to hapless consumers through the universal charge.

Of the P785.09 billion debt of PSALM, stranded debts account for about P525.76 billion. PSALM has already filed two separate petitions in 2009 and this year before the Energy Regulatory Commission (ERC) to recover the amount through a total rate hike of P1.17 per kilowatt-hour (kWh). Meanwhile, PSALM’s stranded contract costs recovery, if approved by the ERC, will result in a rate hike of 69.03 centavos per kWh. Total rate hike due to stranded costs recovery thus could reach P1.86 per kWh that shall be reflected in the universal charge.

Privatization proceeds

But how and why did the debts of NAPOCOR/PSALM increase? Ideally, the debt of NAPOCOR should have been settled by the proceeds from the privatization of its power generation plants and other assets. This, however, did not happen as the sale of power plants has been greatly delayed and investor appetite hampered by among others lack of guaranteed markets through supply contracts and irregularities in the bidding process. Consequently, government has been forced to continue maintaining the unsold power plants and in the process incurred more debts.

EPIRA has only surpassed the 70-percent mark in privatized assets and contracted capacities early this year, and even this is still unofficial since the accomplishment counts Angat dam that is currently under question before the Supreme Court (SC). So far, PSALM has clinched privatization deals worth a total of $6.7 billion ($3.47 billion for power plants and $3.23 billion for contracted capacities) while the privatization of TRANSCO yielded $3.9 billion. But the privatization revenues as well as income from remaining power plants are not enough to cover the financial obligations of PSALM to creditors as well as to NAPOCOR’s old IPP contracts. In 2009, for instance, debt service maturities and obligations to IPPs reached $2.45 billion (about P116.72 billion, based on the 2009 average exchange rate), dwarfing the P10-billion income PSALM generated from the still unprivatized power plants during the same period.

Furthermore, we have also learned recently that PSALM has incurred “privatization-related expenses” that it integrated in its calculation of recoverable stranded costs. These include a privatization bonus for PSALM officials and employees amounting to P80.9 million as well as privatization consultancy fees worth P118 million.  

Sweetheart deals

And how and why did NAPOCOR incur such huge debts prior to EPIRA? Since the time of the Cory Aquino administration, government has been entering into various PPP deals with private corporations to build power plants under the Build-Operate-Transfer (BOT) Law or RA 7718. To entice investors, government forged “sweetheart deals” with them. Government agreed to shoulder all the risks associated with market demand, fuel cost and foreign exchange fluctuation. The “take or pay” clause in these onerous contracts required NAPOCOR to pay 70 percent to 100 percent of the capacity of an IPP (capacity fee), whether electricity is actually delivered and used or not. (Read a 2004 article I wrote about these sweetheart deals here.)

In a 2002 review IPP contracts, an interagency committee found out that at least 26 contracts are fraught with financial issues, meaning they contain provisions (take or pay, fuel cost guarantee, etc) that are financially disadvantageous and burdensome for government. The then Arroyo administration set up the IPP review body amid strong public protest against exorbitant electricity rates. The table below lists these financially onerous IPP contracts. Unfortunately, government did not rescind these contracts after warnings from the foreign creditors and power firms that doing so would undermine investor confidence in the country.

Today, these debts are approaching the P1-trillion mark and the Aquino administration wants us – as consumers and taxpayers – to shoulder the burden. We should not honor these illegitimate debts. We should not allow PSALM to further hike power rates in order to recover NAPOCOR’s stranded costs through the universal charge. NAPOCOR’s debts should at least be renegotiated with creditors and the 2002 review of IPP contracts must be revisited in order to find ways to substantially reduce the debt burden. EPIRA must be finally repealed to stop the power sector’s financial bleeding.

The vicious cycle of privatization, debt, and exorbitant electricity rates must be stopped from further oppressing the people, especially the poor. Unfortunately, the policy direction of President Aquino points to more privatization, more debt, and more exorbitant electricity rates.

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Fiscal issues

2011 national budget: reducing the debt burden

A COA report released in 2008 noted a number of serious issues in bridge projects funded by foreign debt (Photo from http://www.pia.gov.ph)

The House of Representatives today (September 1) started its review of the P1.645-trillion national budget submitted by Malacañang.  Rep. Emilio Abaya of Cavite, chair of the committee on appropriations, has earlier promised a thorough deliberation of the Aquino administration’s proposed budget.

Sec. Butch Abad of the Department of Budget and Management (DBM) called the proposed 2011 budget a “reform budget”. The first budget of the new government is supposedly anchored on the basic governance principles of, among others, fiscal responsibility to reduce debt and bias in allocating resources for the poor.

Increased debt burden

But the spending plan submitted by Pres. Noynoy Aquino to Congress even increased the debt burden and like his predecessors, effectively marginalized resources for the poor. In fact, almost 77.5 percent of the P104.4-billion increase in the 2011 budget came from the huge P80.88-billion rise in interest payments for government’s debt. While personal services grew by P47.24 billion, maintenance and other operating expenses (MOOE) fell by P10.92 billion and capital outlays and net lending, by P12.8 billion. The said declines reflect the avowed policy of the Aquino administration of turning over to the private sector vital functions of government, including the provision of services and undertaking infrastructure development. Public infrastructure, for instance, fell by P21.13 billion in the 2011 budget. This policy will ultimately take its toll on the poor and marginalized in the form of, among others, exorbitant user fees. (See Table)

The Aquino administration is proposing interest payments of P357.09 billion in the 2011 budget, or 21.7 percent of its planned spending program. But the total debt burden for 2011 could actually reach P823.27 billion if the principal amortization of P466.18 billion is added to interest payments. Thus, debt burden (interest payments plus principal amortization) represents 38.9 percent of what the Aquino administration is willing to spend in its 2011 budget. (See Table)

Such a heavy debt burden means that fewer resources are available to spend for social and economic services badly needed by the people. What makes it doubly unjust is that many of the projects and programs funded by these debts did not benefit the people, or worse, even made life more difficult for them while private contractors, corrupt government officials, and the creditors rake in billions of pesos in taxpayers’ money.

Anomalous projects

Many of these anomalous and questionable loans can be easily identified. Take the case of the notorious bridge projects undertaken by the previous administration. In June 2008, the Commission on Audit (COA) released its findings on selected bridge projects undertaken by the Arroyo administration from 2002 to 2006, which were funded by various loan agreements with foreign creditors.

The COA noted a number of “lapses in the process of implementation” of these bridge projects such as uninstalled and unaccounted construction materials, use of expensive materials despite the availability of a cheap alternative, project delays that resulted in commitment penalties, construction of bridges in inappropriate places, overlapping of bridge projects, poor quality of constructed bridges, projects overshooting the approved budget, etc.

Based on the COA findings, I tabulated below some of these foreign debt-funded bridge projects to give an idea how much in taxpayers’ money are being wasted on debt servicing. Five questionable projects alone already cost $62.93 million in principal amortization and interest payments for 2011. That’s around P2.83 billion (at an exchange rate of P45 per US dollar) in funds that could be used for more meaningful and beneficial purposes. If the policy of automatic appropriation for debt servicing is not repealed soon, these onerous and questionable loans will continue to drain our budget and resources for many more years to come. (See Table, click to enlarge)

To be sure, these foreign debt-funded bridge projects exposed by the COA are just a small sample of the many anomalous loans incurred by government and unjustly being passed on the people. Not included in the table above, for instance, is the First National Roads Improvement Project (NRIP) in which the Philippines borrowed $150 million from the World Bank. The loan closed in March 2007 and we have already been servicing our debt to the World Bank when the country learned that five Filipino and Chinese contractors that participated in the project were involved in bid-rigging. For 2011, we will pay the World Bank $14.74 million (about P663 million) in principal amortization and interest payments for the anomaly-ridden NRIP and the country will continue to service the loan until 2020.

Debt for neoliberal reforms

Aside from infrastructure projects, there are also programs bankrolled by foreign debt that introduced neoliberal structural reforms in the Philippines. One example is the ongoing power sector restructuring program that will supposedly address high electricity cost and power supply insecurity through privatization and deregulation. But after many years of restructuring, what we have are frequent brownouts and monthly increases in our electricity bills while the auction of state-owned power assets has been repeatedly marred by irregularities (the latest case is Angat Dam privatization) and industry participants again and again manipulate electricity rates. Worse, taxpayers have been paying for the debts used to implement these anti-people power reforms.

The power sector restructuring program, which included the bribery-ridden railroading of the Electric Power Industry Reform Act (EPIRA) in 2001, has been mainly funded by the Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC). For 2011, the Aquino administration wants us to shell out $121.34 million to service the principal amortization and interest payments of four loan accounts with the ADB and JBIC for the implementation of power sector reforms. (See Table) The amount is on top of the debt servicing, worth $151.07 million in 2011, for the loans incurred by the National Power Corporation (NAPOCOR).

A more meticulous review of Philippine debts will certainly yield more anomalous transactions ranging from loans associated with the privatization of water utilities, loans for the mandatory importation of agricultural goods including rice from the US, loans used in infrastructure projects fraught with corruption, etc.

Challenge Congress, Noynoy

Our resources are indeed limited, constantly undermined by a fundamentally weak and backward economy and systemic corruption. Thus, lawmakers, as they review the 2011 budget proposal of the Aquino administration, must be pressured to take a serious look into these questionable and anomalous debts. We must compel them to at least suspend payments for these debts (and later work towards their complete repudiation). Congress can pass a 2011 budget stipulating that certain debts must not be serviced due to unresolved issues of corruption, program failure, etc. This move will also challenge President Aquino – will he veto such a budget and choose to honor his predecessors’, including Gloria Arroyo’s, illegitimate debts?

Servicing debts that did not benefit the people and the country amid chronic poverty and hunger and severe lack of social services is not only immoral and unjust. It is also inconsistent with genuine and sustainable development since it deprives government the capacity and the resources to invest in its people and spur the economy.

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2010 elections, Fiscal issues

Debt and deficit as election issue

The state of public coffers as an electoral agenda in the coming May polls is not getting the national attention it rightfully deserves. Except for a recent statement by Liberal Party standard bearer Noynoy Aquino that he will not impose new taxes and raise existing ones if elected, presidentiables have not touched the crucial issues of the burgeoning budget deficit and mounting debt that government faces. Vows to curb graft and corruption, meanwhile, are statements too general to pass as a concrete platform in terms of protecting and raising public revenues.

But the reality is that whoever becomes the next President will have to run a government that is almost P5 trillion deep in debt and with a budget deficit of P300 billion or more. Thus, whatever promises about providing for the basic needs of the people especially the poor are empty rhetoric unless candidates disclose how they intend to address the worsening fiscal situation.

Debt accumulation

Every second, the country’s debt is growing by P8,394.54. That’s the average pace in the last nine years and it is still accelerating. Last year, it was expanding by P8,462.36 per second. The rate at which the debt stock is accumulating is indeed alarmingly high.

As of October last year, the total debt of the national government including its outstanding and contingent liabilities was about P4.99 trillion. Outstanding debt refers to unpaid obligations while contingent debt includes government guarantees to state-owned corporations and financial institutions.

At the end of 2000 before the current Arroyo administration took over, the total debt was P2.65 trillion. It means that under the incumbent regime, government’s debt increased by P2.34 trillion. Such huge amount of accumulated debt makes President Gloria Macapagal-Arroyo the heaviest borrower among all post-EDSA presidents.

In addition, the domestic economy despite the aggressive hype about its growth by the Arroyo administration is not coping with the rapid accumulation of government debt. From 2001 to 2008, government’s annual outstanding debt as a portion of the yearly gross domestic product (GDP) was pegged at 67.8 percent. Comparing it with its immediate predecessor, the Estrada administration (1998 – 2000), the debt-to-GDP ratio was at 60.1 percent. Note that the GDP under Arroyo supposedly expanded by 4.8 percent per year and only 3.5 percent per year under deposed President Joseph Estrada.

For creditors, the higher the debt-to-GDP ratio, the higher the risk of default or inability to make future payments. But for the great majority of the people, it means that the economy, already hampered by structural issues of highly skewed distribution of wealth, would be further unable to provide opportunities for decent living.

Impact on the people

Current debt levels mean that each of the 92.23 million Filipinos is now practically in debt by around P54,093.46 to government’s creditors. And at the rate that government debt is growing since 2001, each Filipino would have a debt of about P56,965.97 by the end of 2010.

But the direct impact on the people of this huge debt can be measured by how much pressure it puts on public resources. The Arroyo administration has shelled out more than twice the amount it borrowed from creditors. From 2001 to 2009 (until November only), government has so far paid its creditors a total of P5.06 trillion for interest and principal payments.

It means that every second, the country is giving out P17,970.90 to pay for government debts. It also means that each Filipino has practically shelled out P54,832.39 to pay for such debts and yet still owes government’s creditors almost the same amount.

Every year since 2001, the amount of debt servicing has been equivalent to 42.7 percent of annual government expenditures and 67.4 percent of annual revenues. Stated more simply, it means that for every P10 that government spends more than P4 go to its creditors while out of every P10 it collects from the people’s taxes and other revenue measures, almost P7 are used to pay for its debt.

More money that go to debt servicing means less money that go to the people for social services. To compare, in 2008 (latest available data), debt servicing for interest and principal payments comprised 47.6 percent of total public expenditures. Education, culture, and manpower development accounted for only 14.5 percent; social security, welfare and employment, 5.5 percent; health, 1.2 percent; land distribution, 0.3 percent; housing and community development, 0.02 percent; and other social services, 0.1 percent. Even if we add the share of these social services together, they will still not comprise even half of public expenditures that went to debt servicing.

Note that the public expenditures for health, education, and housing cited above include spending for police and military schools, hospitals, and housing programs. Thus, actual spending that directly benefited the civilian poor are much smaller. Unfortunately, such data for the said period are not available.

Budget gap and debt trap

Government justifies its heavy borrowing by pointing to the budget deficit, or the gap between its revenues and expenditures. To bridge this gap, government is forced to borrow. And just how big is this gap? As of November 2009, the budget deficit is pegged at P272.52 billion – already an all-time high in absolute terms (and the December figures have not yet been accounted for). It is also P22.52 billion higher than what government anticipated for the whole 2009.

From January to November last year, total revenues was at P1.02 trillion but total expenditures was bigger at P1.29 trillion. To finance the deficit, government raised P541.02 billion through borrowing during the period, mostly through the foreign and domestic bond markets. But if government’s deficit is only P272.52 billion, why did it borrow almost twice the amount? Because portion of the borrowings will cover not only interest payments (which is 20.1 percent of the reported expenditures) but also for principal amortization, which reached P332.91 billion during the 11-month period. In other words, government borrows not only to bridge the deficit gap but to settle as well its old and existing debts.

This cycle goes on and on, worsening in every turn.

What must be done?

One way is to raise revenues. But it does not necessarily mean new (such as the text tax) and higher taxes as the Arroyo administration repeatedly claims. There are numerous ways to raise public resources without subjecting the people to additional burden – curb corruption and bureaucratic wastage, reverse trade and investment liberalization, improve tax collection efficiency, collect proper taxes from the biggest foreign and local corporations instead of giving over generous fiscal incentives, to name a few.

As pointed out in a previous article: “even without modifying our existing commitments with the World Trade Organization (WTO) and other free trade deals, the Philippines can hike tariffs across the board and raise billions of pesos in revenues. Note that due to continuing trade liberalization, total collections from tariffs on imported goods and services under Arroyo now only account for 2.8% of total revenues and gross domestic product (GDP), compared to around 4.5% for most of the 1990s. In the first half of 2009 alone, we are giving up almost P117 million in potential revenues per month due to lower duties.”

In fact, even onerous taxes such as the 12 percent value added tax (VAT) especially on oil, power, and other essential goods and services can be scrapped and still government can raise needed revenues.

But raising revenues in a pro-people way is just one aspect of the urgent fiscal reforms that we need today. Unless we plug the largest fiscal hole that is debt servicing, our resources will continue to be drained. Thus, all presidentiables must also outline how they intend to address the country’s debt crisis that has been raging on for almost three decades now.

More concretely, what do candidates intend to do with Executive Order (EO) 292 or the Administrative Code of 1987 that provides for automatic debt servicing at the expense of social services? What do they intend to do with odious debts or those debts incurred by past and present administrations that were tainted with corruption and anomalies ala-NBN-ZTE? Or those that only caused death and destruction of livelihood for marginalized communities such as the San Roque Dam?

These are some of the most pressing questions that those who want to steer government in the next six years (if Arroyo’s Charter change scheme will not push through) will have to answer now. ###

Tables

NG debt (in P billion)
Indicator 2000 2008 2009*
Outstanding 2,134.12 4,220.90 4,424.08
Contingent 514.69 545.58 564.96
Total 2,648.81 4,766.48 4,989.04
*As of October
Source: Bureau of the Treasury
NG debt servicing for interest & principal (in P million)
Year Total Interest Principal
2001 274,439 174,834 99,605
2002 357,959 185,861 172,098
2003 469,990 226,408 243,582
2004 601,672 260,901 340,771
2005 678,951 299,807 379,144
2006 854,374 310,108 544,266
2007 614,069 267,800 346,269
2008 612,682 272,218 340,464
2009* 593,055 260,147 332,908
Total 5,057,191 2,258,084 2,799,107
*Jan to Nov
Source: Bureau of the Treasury
Debt servicing vs social services expenditures (in P million), 2008
Indicator Amount % of total (w/ principal payments)
Total expenditure (social services + others) 1,015,597.59
Total expenditure with principal repayments 1,287,815.59 100%
Debt servicing (interest & principal) 612,682 47.6%
Education, culture, & manpower development 186,619.70 14.5%
Health 15,729.22 1.2%
Social security, welfare, & employment 70,307.56 5.5%
Housing & community development 274.42 0.02%
Land distribution 4,166.94 0.3%
Other social services 1,266.45 0.1%
Source: Bureau of the Treasury, BESF 2010
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Climate change, Economy, Poverty

Notes on the economic and social impact of Ondoy and Pepeng

Ondoy victims in Pila, Laguna receive relief goods from volunteers of the Bayan's Bayanihan Alay sa Sambayanan (BALSA)

Ondoy victims in Pila, Laguna receive relief goods from volunteers of Bayan's Bayanihan Alay sa Sambayanan or BALSA (photo from Bulatlat.com)

The twin devastation brought by typhoons Ondoy and Pepeng hit the Philippines at a time when the country is still reeling from the impact of the global financial and economic crisis. According to the latest (as of Oct 16) consolidated report of the National Disaster Coordinating Council (NDCC), the total cost of damage from the two typhoons reached P21.29 billion. The cost of damage to agriculture accounted for 64.8% of the total, and infrastructure, 35.1%. About 7.43 million were affected in the country’s 12 regions, including Metro Manila. (See Table 1)

Initial estimates from the National Economic Development Authority (NEDA), meanwhile, claimed that the macroeconomic impact of the two typhoons is about 0.2% of the gross domestic product (GDP). This could be mitigated, according to NEDA, by remittances from overseas Filipino workers (OFWs) who would tend to send home more money because of emergencies and “will make up for the billions lost in devastating floods”.

Table 1. Estimated extent of impact of Ondoy and Pepeng, data cited as of Oct 16, 2009
Indicators Ondoy Pepeng Total
Affected no. of people (in million) 4.32 3.11 7.43
Total no. of casualties, of which: 781 654 1,435
   No. of dead 354 419 773
   No. of injured 390 184 574
   No. of missing 37 51 88
Cost of damage (in P billion), of which: 10.85 10.44 21.29
   Infrastructure 4.08 3.40 7.48
   Agriculture 6.77 7.03 13.8
   Private property n.d.c. 0.003 0.003
Total no. houses damaged, of which: 101,278 33,883 135,161
   Totally 25,259 4,040 29,299
   Partially 76,019 34,843 110,862
Regions affected, of which: III, IV-A, IV-B, V, VI, IX, X, ARMM, CAR, NCR I, II, III, IV-A, V, VI, CAR, NCR n.a.
   No. of barangays 1,902 4,585 n.a.
   No. of municipalities 155 361 n.a.
   No. of cities 30 35 n.a.
   No. of provinces 25 27 n.a.
Notes: n.d.c. – no data cited; n.a. – not applicable
Compiled using data from the NDCC Situation Report No. 31 dated Oct 16, 2009

Because of the need for additional spending for post-Ondoy and Pepeng rehabilitation and reconstruction, on top of the need to pump-prime the economy amid the global financial and economic crisis, the 2009 budget deficit could reach as much as P307.9 billion, according to the Department of Finance (DOF). There is no official figure yet on the actual amount needed for rehabilitation and reconstruction but Congress has already approved a P12-billion supplemental budget for the immediate needs of the typhoon victims.

In addition, a total of P32 billion spread over 10 years is needed to relocate more than half a million illegal settlers, including those occupying waterways in Metro Manila. Mrs. Arroyo has ordered the immediate relocation of families near waterways following the massive flooding caused by Ondoy.

Meanwhile, the Arroyo administration has also successfully raised $1 billion from the global bonds market which it said would be used for its reconstruction efforts in regions affected by Ondoy and Pepeng.

While government tends to downplay the effects of the recent typhoons on the economy, with NEDA pointing out that reconstruction will spur domestic growth, the costs are actually much higher considering the still unquantified short- and medium-term effects of losses in jobs and livelihood due to Ondoy and Pepeng, although independent think tank IBON Foundation, in an estimate, said that Ondoy alone would push at least 276,000 families in NCR, Calabarzon, and Central Luzon into “long-term poverty”.

Note also that official unemployment before the storms ravaged the country was pegged at 7.6% nationwide (National Statistics Office’s July 2009 Labor Force Survey), with the top three highest regional unemployment posted by the NCR (12.1%); Calabarzon (11.1%); and Central Luzon (9.9%) – the regions most affected by the typhoons. These regions account for 79.9% of the total number of permanently displaced workers due to economic reasons from Jan 2008 to Jun 2009 as well as 69.3% of the total number of families affected by Ondoy and Pepeng. (See Table 2

Table 2. Unemployment rate, no. of permanently displaced workers due to economic reasons, and population affected by Ondoy and Pepeng by region
Region Unemployment rate (in %, Jul 2009) No. of permanently displaced workers due to economic reasons (full-year 2008 & 1st half 2009) No. of affected families by Ondoy & Pepeng (as of Oct 16, 2009)
NCR 12.1 40,427 176,776
IV- A – Calabarzon 11.1 22,241 509,221
III – Central Luzon 9.9 9,902 382,788
I – Ilocos Region 6.7 328 234,479
Cordillera Administrative Region 4.6 1,182 54,507
VI – Western Visayas 7.4 1,360 316
X – Northern Mindanao 5.7 982 0
V – Bicol Region 5.4 347 70,389
XII – Socksargen 5.1 226 603
IV-B – Mimaropa 4.3 635 7,296
IX – Zamboanga Peninsula 4.1 295 191
ARMM 3.4   350
II – Cagayan Valley 2.8 308 105,529
National total (including other regions not affected by Ondoy & Pepeng) 7.6 90,788 1,542,445
Compiled using data from the NSO on unemployment, BLES on displaced workers, and NDCC on affected families by Ondoy & Pepeng
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Fiscal issues

Drowned by Ondoy, drowned by debt

A community in Pasig City remains flooded days after tropical storm Ondoy hit Metro Manila and nearby provinces (photo from Bayan - NCR)

A community in Pasig City remains flooded days after tropical storm Ondoy hit Metro Manila and nearby provinces (photo from Bayan - NCR)

Malacañang admitted Thursday (Oct 1) that government’s calamity fund of P1 billion is in danger of being depleted. Thus, members of the Senate and the House of Representatives held an emergency meeting with some Cabinet officials and agreed to pass a P10-billion supplemental budget in the wake of Ondoy’s onslaught in Metro Manila and adjacent provinces last weekend (Sep 26-27).

The problem is where to source the money. Not surprisingly, Department of Finance (DOF) Secretary Margarito Teves announced that they will tap the global bond market again in order to raise funds for relief and rehabilitation of “Ondoy” victims. This would be the third round of global bond issuance for the Philippine government this year, after the $1.5-billion bond sale in January and the $750-million sold in July, and would come ahead of the scheduled Samurai bond issuance later in the year.

But instead of borrowing more which will only aggravate the country’s debt problems, the more sensible step would be for government to cancel debt payments to free up billions of pesos in public funds that can be used for disaster relief and rehabilitation in the immediate, and provide much needed social services in the medium and long-term.

Debt servicing, since the time of the dictator Ferdinand Marcos, has been siphoning valuable public resources from the country, with the current Arroyo administration paying out the biggest amount of public funds for debt servicing. Debt servicing (interest payments and principal amortization) under Mrs. Arroyo has been, on the average, more than 10% of the country’s gross domestic product (GDP) – higher than Aquino’s 8.1%, Ramos’s 6.8% and Estrada’s 6.6 percent.

Under its proposed national budget for 2010, the Arroyo administration will shell out a huge P746.18 billion for debt servicing covering interest payments and principal amortization. In 2009 and 2008, government spent P702.6 billion and P612.68 billion for debt servicing, respectively. These are huge amounts of money, with interest payments in 2010, for instance, eating up 22.1% of the national budget compared with housing’s 0.4%, health’s 2.5%, and education’s 15.3% – all of which will surely require more funds now because of Ondoy and other stronger typhoons expected to hit the country.

Is debt cancellation possible? Ecuador just did it earlier this year, with its President calling the country’s foreign debt “immoral”.

Considering the still unfolding humanitarian crisis that Ondoy has caused and threats of more super typhoons, the

Youth groups under the Serve the People Brigade join relief efforts for Ondoy victims in Laguna (photo from Kabataan party-list - Southern Tagalog)

Youth groups under the Serve the People Brigade join relief efforts for Ondoy victims in Laguna (photo from Kabataan party-list - Southern Tagalog)

Philippines can justify its move to cancel debt servicing and attend to the more immediate needs of its people. On top of this is the long-standing issue that many of the country’s debts are considered odious and thus the people should not be burdened to pay for them.

Current debt-funded projects such as the multi-million dollar road projects being bankrolled by Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC), $100-million text book project of the World Bank, China’s $885.4-million South Luzon railways project, ADB’s $750-million power sector reform programs and projects, among others are tainted with irregularities and corruption and should be considered for debt cancellation.

While emergency grant assistance for disaster relief from foreign donors are welcome, debt cancellation should be a top option for the Philippines in terms of raising sufficient resources in a sustainable manner to deal with disasters and other immediate and basic needs of its people.

As an initial move, Congress must repeal the Marcosian automatic debt servicing rule as provided under the revised Administrative Code of 1987 and rechannel funds allocated to debt servicing in the 2010 national budget to social services and disaster relief and rehabilitation.

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