The Privatization of Essential The Privatization of Essential Services in AsiaServices in Asia

and the experience of Power and the experience of Power Privatization in the Privatization in the

Philippines Philippines

Privatization of Essential Services in Privatization of Essential Services in the Asia Regionthe Asia Region

Privatization of essential services -- sweeping the region (and globally) for the last one and a half decades.

Major emphasis has been on the privatization of water and power services.

Almost all countries in the region - India, Pakistan, Bangladesh, Srilanka, Nepal, Indonesia, Philippines, Thailand, Malaysia, Korea, China, Vietnam

Conditions that have been used to justify privatization --

• Government budget constraints & fiscal problems which have led to decreasing government spending on basic services, including investments in public utilities. For many countries -- the problem of servicing huge debts is a major cause of fiscal problems.

• Problems in the public management of utilities - deficits and losses, corruption, poor quality of service

Myths justifying privatization --

• The private sector has the capital to finance public utilities (in truth - many of them borrow capital to invest, and require government guarantees)

• The private sector is always more efficient (no empirical evidence to back this up)

• The government must concetrate on its "core" functions and leave these industries to the private sector

The real reasons behind privatization --

• Liberalization and privatization of services is taking place because of the need for new investment areas

to realize profits;

power and water is big business...

• Government prioritizes paying public debts, spending on military and security, and providing public guarantees for private profits

IMPACTS of PRIVATIZATION of ESSENTIAL SERVICES

Undermining of basic rights

Reduced access to services especially for the poor and marginalized because of increasing rates, reduction in service delivery to areas considered non-profitable - leading to poorer health, illness, loss of livelihoods

IMPACTS of PRIVATIZATION of ESSENTIAL SERVICES

Reduced access to natural resources

Poorer quality of service, quality of water

Greater burden on women

Wastage of resources due to inefficiencies

Environmental destruction, pollution

IMPACTS of PRIVATIZATION of ESSENTIAL SERVICES

Loss of jobs, loss of incomes

Violation of right to determine policies and path to development; Meddling and intervention by International financial institutions, global corporations, consulting firms, foreign governments

IMPACTS of PRIVATIZATION of ESSENTIAL SERVICES

Displacement of communities and indigenous peoples

Public resources used to guarantee private profits, bail out companies etc

NATIONAL GOVERNMENTS and State/Local

Governments

International Financial

Institutions IMF, World Bank, ADB Export Credit Agencies

Northern Governments (governments of

countries of the global corporations)

Global Corporations and Consulting Firms(Water and Power)

Commercial Banks & Financial Markets

WTO-GATS & FTAs -EPAs

The experience of Power The experience of Power Privatization in the PhilippinesPrivatization in the Philippines

The 1980’s The 1980’s

• Debt Crisis – huge foreign debt was a Debt Crisis – huge foreign debt was a major drain in the resources of the major drain in the resources of the government; debt payments more than government; debt payments more than 50% of the government budget50% of the government budget

• prioritization of debt payments led to prioritization of debt payments led to inability to maintain, repair and expand inability to maintain, repair and expand power supplypower supply

The experience of Power Privatization in The experience of Power Privatization in the Philippines, p2the Philippines, p2

Early 1990’sEarly 1990’s

• Power Crisis – Supply was unable to Power Crisis – Supply was unable to meet demand with many power meet demand with many power generation plants performing way under generation plants performing way under original capacityoriginal capacity

• 10 to 12 hour brown outs 1990-1999110 to 12 hour brown outs 1990-19991

The experience of Power Privatization in The experience of Power Privatization in the Philippines, p3the Philippines, p3

1992 – 19981992 – 1998• Early phase of privatization with the Early phase of privatization with the

entry of Independent Power Producers entry of Independent Power Producers (IPP) – private companies(IPP) – private companies

• Government entered into more than 40 Government entered into more than 40 BTO, BOT, BOO contracts with IPPs that BTO, BOT, BOO contracts with IPPs that involved “take or pay” agreements and involved “take or pay” agreements and other risk guaranteesother risk guarantees

BOT – Build, Operate, Transfer orBOT – Build, Operate, Transfer or

BTO – Build, Transfer and Operate:BTO – Build, Transfer and Operate:

• Private companies would build power plants Private companies would build power plants using private capital part of which was using private capital part of which was borrowed from private banks with borrowed from private banks with counterpart government guaranteescounterpart government guarantees

• They would operate the plants and at the They would operate the plants and at the end of the contract period, transfer the end of the contract period, transfer the ownership to the government; or transfer ownership to the government; or transfer ownership to govt but operate it for 20 to ownership to govt but operate it for 20 to 25 years to recover their investments and 25 years to recover their investments and generate profitgenerate profit

““Take or Pay” provisions in power Take or Pay” provisions in power purchase agreementspurchase agreements

• Contracts would involve a guarantee that Contracts would involve a guarantee that the government would purchase at least the government would purchase at least 80% of installed capacity of the power 80% of installed capacity of the power plants regardless of whether the electricity plants regardless of whether the electricity was used or notwas used or not

• With the building of many independently With the building of many independently privately owned plants with these privately owned plants with these agreements, with total capacity surpassing agreements, with total capacity surpassing demand --- this led to the second highest demand --- this led to the second highest electricity rates in Asia next only to Japanelectricity rates in Asia next only to Japan

Other kinds of GuaranteesOther kinds of Guarantees

• Foreign Exchange Cover – Govt (NPC) Foreign Exchange Cover – Govt (NPC) guaranteed a rate of foreign exchange – guaranteed a rate of foreign exchange – when the Peso depreciated vs the US$ - when the Peso depreciated vs the US$ - the Govt paid the differencethe Govt paid the difference

• Cost of Fuel Guarantee – Govt guaranteed Cost of Fuel Guarantee – Govt guaranteed the cost of Oil – and when Oil prices went the cost of Oil – and when Oil prices went up, govt paid for the differenceup, govt paid for the difference

““Take or Pay” provisions and Risk GuaranteesTake or Pay” provisions and Risk Guarantees

• Consumers absorbed a big part of the cost Consumers absorbed a big part of the cost of unused electricity – 30 to 40 % of the bill of unused electricity – 30 to 40 % of the bill

• National Power Companies began to National Power Companies began to experience big increase its liabilities and experience big increase its liabilities and cost of operations, and led to bigger debts cost of operations, and led to bigger debts of the NPCof the NPC

• Big debts and liabilities of the NPC used as Big debts and liabilities of the NPC used as justification for its comprehensive justification for its comprehensive privatizationprivatization

• Consumers and public funds paid for Consumers and public funds paid for guarantees for private profitguarantees for private profit

OMNIBUS POWER PRIVATIZATION LAWOMNIBUS POWER PRIVATIZATION LAW

• Introduced in 1997 as a bill but took 5 years Introduced in 1997 as a bill but took 5 years to pass because of strong campaign against to pass because of strong campaign against the bill – passed in 2002the bill – passed in 2002

• All sectors of the industry to be fully All sectors of the industry to be fully privatized – generation, transmission and privatized – generation, transmission and distributiondistribution

• Consumers and Govt to absorb the NPC Consumers and Govt to absorb the NPC debts so the assets can be sold debt-freedebts so the assets can be sold debt-free

• Allowed for “cross ownership” – Allowed for “cross ownership” – generation and distributiongeneration and distribution

OMNIBUS POWER PRIVATIZATION LAWOMNIBUS POWER PRIVATIZATION LAW

• Passage of bill is part of ADB conditionalities Passage of bill is part of ADB conditionalities to power sector loans; ADB has been to power sector loans; ADB has been pushing for privatizationpushing for privatization

• Electricity rates last month increased by Electricity rates last month increased by 50% - generation, transmission, distribution50% - generation, transmission, distribution

• Will again increase once govt starts Will again increase once govt starts charging the stranded contract costs of IPP charging the stranded contract costs of IPP contractscontracts

• Strong clamour to review and reverse Strong clamour to review and reverse privatization of power industryprivatization of power industry