14 years of oil deregulation is enough! (Part 1)

Because oil is a very socially sensitive commodity, the Oil Deregulation Law has become one of the country's most contentious laws (Photo by Nino Jesus Orbeta)

On February 10 (Friday), Republic Act (RA) 8479, or more notoriously known as the Oil Deregulation Law, will mark its 14th year of implementation. The law, which was aggressively pushed by the International Monetary Fund (IMF), was enacted on Feb. 10, 1998 by the 10th Congress. Because oil is a very socially sensitive commodity, the ODL has become one of the most contentious laws in the country. Its constitutionality had been the subject of several petitions at the Supreme Court (SC). In the past five Congresses, many legislators have filed bills amending or repealing the ODL. The Executive has convened, since 2005, three “independent” panels to review the law, including one recently set up by the Aquino administration.

From RA 8180 to RA 8479

In fact, RA 8479 was not the original deregulation law. The original, RA 8180, was enacted on Mar. 28, 1996. But massive people’s protests greeted the passage of RA 8180. Organizations under the Bagong Alyansang Makabayan (Bayan) launched two people’s strikes against oil price increases. The Asian financial crunch in 1997 further inflamed the unrest. Following a massive strike in October 1997, the Supreme Court (SC) was forced to issue a temporary restraining order (TRO) against the deregulation law. RA 8180 was finally declared as unconstitutional by the SC in a Nov. 5, 1997 decision.

According to the SC, the said law breached constitutional provisions outlined in Article XII Section 19. This provision states that “The State shall regulate or prohibit monopolies when public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.” In its decision, the SC recognized that the Philippine oil industry conceded that “operated and controlled by an oligopoly, a foreign oligopoly at that.”

The High Court further pointed out that “The much ballyhooed coming in of new players in the oil industry is quite remote considering that these prospective investors cannot fight the existing and well-established oil companies in the country today, namely Caltex, Shell, and Petron. Even if these new players will come in, they will still have no chance to compete with the said three (3) existing big oil companies considering that there is an imposition of oil tariff differential of 4% between importation of crude oil of the said oil refineries paying only 3% tariff rate for the said importation and 7% tariff rate to be paid by businessmen who have no oil refineries in the Philippines but will import finished petroleum/oil products which is (sic) being taxed with 7% tariff rates.”

However, then President Fidel V. Ramos marshaled his allies in Congress to immediately pass a replacement, correcting the unconstitutional provisions cited by the SC. The minimum inventory requirement was deleted while the import tariff rate was pegged at 3% for both crude oil and refined petroleum products. In two months since the SC junked RA 8180, Congress enacted RA 8479, which continues to be effective until today. Another petition was filed against RA 8479 arguing that price control should not be lifted because it contradicts the anti-monopoly provision of the Constitution. But in a Dec. 17, 1999 decision, the SC denied the said petition.

Role of the IMF

The passage of RA 8180 (and its replacement RA 8479) was tied to a loan of almost $1.04 billion that the Philippines contracted with the International Monetary Fund (IMF) in 1995 under the multilateral institution’s Extended Fund Facility (EFF). The deal with the IMF actually involved six major areas covering 43 specific measures. Aside from the deregulation of the oil industry, other conditionalities included tax reform, import liberalization, financial sector reform, foreign investment liberalization, and privatization. According to Bangko Sentral ng Pilipinas (BSP) Governor Gabriel Singson, the IMF wanted these provisions in the Oil Deregulation Law in order for the country to exit from the IMF “on a secure footing.”

Not only did the IMF push for the passage of an oil deregulation law, it also actively influenced the actual provisions that such legislation will contain. In fact, to access some $300 million in the first tranche of the EFF, as well as another $300 million in loans from the Japan Export Import Bank (JEXIM), the IMF had first to approve the then newly enacted RA 8180. (See BusinessWorld, “New oil deregulation law gets nod,” February 20, 1998) The IMF had also pushed for automatic price adjustment and elimination of any form of subsidy as among the main provisions that an oil deregulation law must contain.

The timing of full deregulation also became a contentious issue during the deliberations in Congress. The Senate and the House of Representatives were then pushing for a transition period before full deregulation takes place but the Executive was rejecting the proposal because the IMF requirement was immediate liberalization of the oil industry. To accommodate the IMF conditionality, the Ramos administration lobbied for an acceleration clause. Congress, in the end, passed RA 8479 with such clause, stated in Chapter VI Section 19, which authorizes the President to accelerate the start of full deregulation (which the law states shall start five months following the effectivity of RA 8479) except for socially-sensitive oil products (i.e. LPG, regular gasoline, and kerosene). As expected, Ramos exercised this prerogative and accelerated the implementation of full deregulation (earlier by four months) to hasten the approval of fresh loans worth $1.6 billion under the IMF’s standby credit facility. (See BusinessWorld, “Oil deregulation rushed for ‘IMF credit,’” March 16, 1998)

Continue reading here 

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

Notes on the text tax

no to text tax (TXTpower.org)also published in Bulatlat.com

As expected, the revived proposal to impose a tax on text messaging is again controversial and widely opposed. What surprised some people perhaps are the strong statements from telecommunication companies (telcos). They called the plan “anti-poor”, “oppressive” and “one of the worst anti-consumer legislations ever made”.

Telcos, of course, are still reeling from the public relations beating they had from questionable charges, missing load and other abuses recently probed by the Senate. Thus some may think that telcos just hope to recover some publicity points by taking on an issue their customers strongly oppose. But Globe Telecom and Smart Communications are actually defending their business interests threatened by the proposal, which include their promotional bucket-priced short message service (SMS) plans that allow them to protect their market share and earn billions of pesos in profits.

Broad opposition

Nonetheless, the firm position of Globe and Smart against the text tax is a welcome development. They reinforced the broad opposition versus an onerous tax proposal repeatedly raised by Congress as well as Malacañang the last 7 or 8 years. Members of the Senate, led by self-styled consumer advocate Senate president Juan Ponce Enrile, have also spoken strongly against the text tax. Add the 2010 elections to the equation, some say, then it is almost certain that this plan will not materialize any time soon.

But proponents of the measure are adamant. The House ways and means committee led by Quezon Rep. Danilo Suarez and Ilocos Sur Rep. Eric Singson has promised to pass a law imposing a 5-centavo tax on SMS within the year. Some sort of an alternative bill is also being pushed by Sen. Richard Gordon reportedly supported by the DOF and NEDA. In Gordon’s version, the text tax is in the form of a 5-year levy on telcos’ profits on SMS. Malacañang has not asked its allies to drop the text tax though it set conditions for its support, namely no pass-on to users; telcos must pay; and revenues for education, health or computerization.

IMF pressure

The latest incarnation of the text tax (a consolidated version of Singson’s House Bill 6625 and Suarez’s House Resolution 282) comes in the context of an administration under pressure from the International Monetary Fund (IMF) to widen its revenue base. In its latest consultation with Philippine officials concluded last January 2009, the IMF Executive Board “suggested” that government raise tax collection effort, broaden revenue base and rationalize fiscal incentives. The IMF noted the still high level of public debt amid continuing need for a measured fiscal stimulus, and thus raised said proposals to provide government “more scope for fiscal easing and well-targeted pro-poor cash transfers”.

While no longer in debt with the IMF, the Philippines remains hostaged to it because its assessment of a country’s fiscal situation is used as a signal by foreign creditors and investors. A favorable review by the IMF means high “creditworthiness” for the debt-dependent economy. The IMF has exercised control over the country’s fiscal policies through regular consultations between its Executive Board and Filipino officials such as the one they concluded in January.

Incidentally, it was the IMF that first openly pushed the text tax idea in 2002 to address government’s burgeoning budget deficit. But it was hugely unpopular and promptly rebuffed by some lawmakers. Even so, various text tax and related bills have been filed in Congress since then. Finance and Trade officials have also raised the proposal at various times and circumstances – at one point to pressure the bicameral committee to fast track the also infamous Reformed Value-Added Tax (RVAT) law in 2005 and in some instances as trial balloon on public opinion. The National Tax Research Center (NTRC) has conducted a study as well on the text tax in 2007 to weigh potential revenues and impact on consumers.

Lobby vs. sin taxes

Due to its unpopularity, the text tax could not be found in official policy pronouncements of Mrs. Arroyo. In her July State of the Nation Address (SONA), for instance, Mrs. Arroyo has categorically asked Congress, to further restructure so-called “sin taxes”, which unlike the text tax does not invite loud public outcry. During its January consultation with IMF officials, Arroyo officials promised to pass a law imposing separate uniform tax rates for alcoholic drinks and cigarette products.

But apparently, Malacañang and Congress have given in to the strong lobby of local manufacturers of sin products, who reportedly sought a meeting with Mrs. Arroyo in her Forbes Park (Makati) home to lobby against the proposal. The coming 2010 elections could have also played a role – with known huge election campaign contributors Lucio Tan (who owns Asia Brewery Inc and Fortune Tobacco) and Danding Cojuangco (who own San Miguel Corp) as among the stakeholders to be affected by sin taxes reform. There is also strong opposition from the so-called Northern Luzon bloc, or congressmen from the country’s tobacco-producing region.

While openly asking for sin taxes reform, Mrs. Arroyo has also been discreetly pushing for a text tax law, which in March she described as having a rate of between “5 to 10 centavos” and with collections earmarked for “education”. Note that these are the same salient provisions of current House proposal for a text tax. After Mrs. Arroyo’s SONA, sin taxes are no longer in the agenda of the Malacañang-controlled House ways and means committee. Its chairman Antique Rep. Exequiel Javier has already declared that the text tax is more doable than the sin taxes reform.

Do we need new taxes?

For the IMF, what is important is that government be able to widen its revenue base and manage the national budget deficit, which is expected to balloon to ₱250 billion this year. The IMF and government hope to reduce this to ₱233.4 billion in 2010 through new taxes. Whether the new taxes will come from our cellphones or our beer, the intention is to assure creditors that the Philippine government, which presently has a debt of ₱4.23 trillion, will continue to be a viable borrower.

But do we really need new taxes when government losses from anomalous contracts in infrastructure projects alone such as the botched NBN-ZTE broadband project reach at least ₱30 billion a year and nearly approximate the projected ₱36 billion in potential annual revenues from the text tax?

Consider also that 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 ₱117 million in potential revenues per month due to lower duties.

Government claims that revenues from the text tax will be used for education. In a policy regime of automatic debt servicing, this is lip service, to say the least. In the proposed 2010 national budget, for instance, the Arroyo administration is allocating a per capita education budget of ₱2,502, while each Filipino will have a debt servicing burden of ₱7,944. For health, Malacañang is allocating ₱402 for 2010 and ₱58 for housing. Thus, this administration which always uses social services to defend its oppressive taxes is allocating a combined budget for education, health and housing with an amount that is merely 37% of what it intends to pay its creditors.

And finally, how can a regime whose highest officials dined for $35,000 (ostensibly using taxpayers’ money) in two nights during a US junket justify another onerous tax on a people already battered by high prices, low wages and job scarcity?

By the way, text tax proponent Suarez claimed to have paid for one of those dinners.