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Country Strategy and Program Update 2002: Philippines

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II. New Support for the Power Sector

ADB has had long involvement in supporting investment, policy development, and institution building for the Philippines power sector, having provided 25 loans for a total of $2.2 billion and 22 TA grants for $8.4 million. Our priority now, in close collaboration with the Government and other development partners, is to provide well focused support for comprehensive restructuring of the power industry, including unbundling functional activities, privatization, and introducing competitive markets. The Government’s request for support for the two new activities is both a concrete expression of its strengthened commitment in these important areas, as well as with the long-term strategic objectives we have previously articulated.

A. Electricity Market and Transmission Development Project

The project is being prepared on the basis of preparatory work of the earlier proposed Transmission Interconnection and Reinforcement Project (TIRP). TIRP was included in ADB’s earlier lending pipelines, but processing was suspended due to the Government’s decision to implement the major submarine transmission component with private sector financing. The new project comprises three other components of TIRP: (i) establishing an wholesale electricity spot market, (ii) Luzon transmission upgrading, and (iii) Mindanao substation expansion. The components are prerequisite for maintaining the momentum of the reform agenda for restructuring and privatizing the power industry.

The proposed financing plan is for an ADB loan of $40 million (40% of total project cost), cofinancing of $40 million from Japan Bank for International Cooperation, and $20 million from the Government. The concept paper for the project is attached.

B. Partial Credit Guarantee

ADB has been requested by the Government to provide a partial credit guarantee (PCG) to assist it to mobilize resources to meet the adjustment costs for the ongoing comprehensive restructuring of the power sector. The Electric Power Industry Reform Act (EPIRA), effective since June 2001, provides the legal framework for the restructuring, including privatization of National Power Corporation (NPC). The EPIRA creates two new agencies: Power Sector Assets and Liabilities Management Corporation (PSALM) and National Transmission Corporation (TRANSCO). PSALM, with the principal role of liquidator, will take possession of NPC’s assets and liabilities. PSALM will arrange for the sale of the generation assets. NPC’s transmission assets will be transferred to TRANSCO (wholly owned by PSALM), whose operation will be bid out to a private concessionaire. Operating revenues, privatization proceeds, and debt assumption by the Government will be adequate over time to cover the public sector restructuring costs. However, the cash flow deficit in the initial years, especially in 2002, is greater than earlier envisioned. Half of the $1.5 billion financing gap projected for 2002 has been funded through an international sovereign bond issue. As the privatization plan is implemented, commencing with asset sales in 2003, the annual cash deficits are expected to decline significantly, and to disappear after 2005.

The PCG will support issuance of new debt either by the Government or one of the power sector agencies. In the latter case, the Government will provide ADB with a counter guarantee. The PCG will be anchored in ADB’s PSRP loan.² Reforms supported by the PSRP are proceeding well, and the third (final) tranche is expected to be released during 2002. Finalization of the PCG proposal for Board consideration will depend on satisfactory compliance with the third tranche conditions for the PSRP.

Based on initial market soundings by the Government and ADB, there is strong interest from financial firms to participate in the transaction, including with PSALM as the possible borrower. The PCG will reduce the costs to the Government of meeting incremental restructuring costs of up to $750 million, and will be structured to minimize ADB’s exposure. Based on the net present value (NPV) of the portion of the debt to be guaranteed, this could be up to about $400 million.

To date ADB has provided 11 PCGs, including one for the Philippines in 1995 for $21 million (in NPV terms), supporting a $142 million bond issue in the power sector. The largest PCG has been for $620 million (in NPV terms) in 1998 for a $1 billion syndicated loan for an export financing facility to support Thailand’s re-entry to international capital markets after the East Asian financial crisis.³

The PCG will have high development impact in a key infrastructure sector in terms of maintaining reform momentum, profiling a new power sector agency in the international capital market, and crowding in private sector financing and investment.

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