The Philippines Re-energizes: Privatization of the National Power Corporation and the Red Flag of Political Risk

After over a decade of timorous steps in reforming its power industry, the Philippine Government ("Government") approved bold legislation that overall augurs well for both the public and private sectors. The new law-the Electric Power Industry Reform Act of 2001 ("EPIRA")--calls for the restructuring of the power industry, including the total privatization of power generation and transmission, which previously had been the exclusive domain of the state-owned Philippine National Power Corporation ("NPC," also referred to as "Napocor"). The term "privatization" can have different meanings, and implicate the use of different techniques. Privatization, in a narrow sense, can mean the permanent transfer of control of a public enterprise to the private sector.' In a broader sense, privatization can mean varying degrees of private sector participation, or "any measure that results in temporary transfer to the private sector of activities exercised ... by apublic agency."' The level of privatization, then, can range from build-own-and-transfer ("BOT") arrangements, representing temporary privatization, to complete divestiture? The objectives of privatization make eminent sense, and include: promotion of competition, especially by abolishing monopolies; promotion of domestic and foreign investment; introduction of new technologies and the promotion of innovation; upgrading of plants and equipment; introduction of new management methods and teams; maximization of net privatization receipts to fund government expenditures, trim the public sector deficit, or pay off public debt; reduction of the financial drain of state-owned enterprises on the state; and reduction of the opportunities for corruption and misuse of public property by government officials and managers. To be sure, the foregoing objectives are relevant to the privatization efforts now underway in the Philippine power industry; and especially relevant if the country is to measure up to the economies of its APEC5 and ASEAN6 partners. Part II of this paper provides a brief country overview of the Philippines, while Part III provides an essential historical perspective of the Philippine power industry. Part IV discusses and comments on the general restructuring and privatization plan envisaged by the EPIRA, with particular emphasis in the generation and transmission sectors. For completeness, Part IV also discusses the distribution and supply sectors, as well as "open access." Aside from the soundness of the privatization law itself, the question of "political risk" will also be an important consideration for investors in the power industry. Accordingly, Part V discusses political risk in the context of (1) the Government-mandated review of independent power producer ("IPP") contracts, and (2) the legislative imbroglio regarding the National Transmission Corporation ("Transco") franchise. Part V argues that these two factors work at painful cross-purposes with the Government's goal of attracting private capital to the power industry and, unwittingly, raise the red flag of political risk.