On credit ratings upgrade and power shortage risk

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Romeo L. Bernardo

Introspective

The Foundation for Economic Freedom just released a statement on the recent credit upgrade, congratulating President Duterte and his Economic Team on a job well done.

“We, the Foundation for Economic Freedom, congratulate President Rodrigo Roa Duterte and his economic team for enabling the Philippines to get a ratings upgrade from Standard and Poor’s Global Ratings to BBB+ from BBB.

The ratings upgrade is attributable to the administration’s economic reforms, sound fiscal policies, and prudence in external debt management. Credit must be given to President Duterte and his economic team led by Finance Secretary Carlos Dominguez III.

The ratings upgrade will result in increased investor confidence in the economy, lower borrowing costs for the government and the private sector, and more investment inflows.

In light of lower borrowing costs to government and the private sector, the government may wish to consider shifting away from projects funded by Official Development Assistance (ODA) and its tied procurement, to ones funded via Public-Private Partnership (PPP). Overall, PPP Projects will turn out to be cheaper than ODA projects because of the incentive of the private proponent to finish the projects on budget and on time, especially with the lower borrowing costs enabled by the higher S&P ratings.

The administration should also sustain the ratings upgrade by acting quickly to solve the water shortage,power shortfalls,and infrastructure bottlenecks.




Moreover, we would like the Duterte administration to take the ratings upgrade as a challenge to push for more reforms that will drastically reduce poverty and strengthen the economy’s structural foundations. In particular, the administration should focus on agricultural growth, which had been lagging behind population growth. Its weak performance had been acting as a drag to manufacturing and the other sectors of the economy, making the country vulnerable to food price shocks.

The administration should also shore up the country’s weak export performance in order to contain the ballooning trade and current account deficits. The country cannot continue to rely on OFW remittances to finance its negative external trade position. In the meantime, the administration should also promote tourism and a stable mining policy regime in order to generate more dollars to finance the growing capital import requirements of its bold infrastructure program.”

The FEF Board equivocated a bit on issuing this statement. Because of the numerous recommendations on how we can do better, the statement may be misread as a “backhanded compliment,” a remark that “seems to be compliment[ary], but can also be understood as an insult.” It is not that,but a commendation meant in all sincerity. Our abiding desire is the success of this administration, which is also the success of our country and the economy.

Allow me to also focus on one risk factor to such success that the FEF became acutely aware of after listening to a recent dinner speaker, Energy Regulatory Commission Chair Agnes Devanadera. Fellow FEF Fellow Boo Chanco lucidly summarized her “good and brave” remarks on the power situation in his column: “Numbers behind the power crisis,” Philippine Star, May 3. I would disagree with Boo only in his characterization of the situation as a “crisis”. Though it can certainly turn into one unless the various government agencies act resolutely and coherently.

Chair Devanadera’s chart, “On PSA Evaluation”, particularly grabbed my attention. It goes a long way in explaining why we have been having red and yellow alerts lately, beyond the more immediate cause of a “perfect storm”, the occurrence of forced outages of several plants during the peak hours of the high demand summer months. Or as a power sector colleague well explains it — “shit happens” .

Chair Devanadera’s chart shows that there are 454 Power Supply Agreements Requiring Further Action, involving 150 power plants. How long does an evaluation take and how many technical people has the Energy Regulatory Commission assigned to evaluate? Answer : 90-180 days; 14 technical personnel. Clearly, we will be in trouble if Energy Regulatory Commission stays on a business as usual course.

WESM

Thankfully, Chair Devanadera is not a business as usual person. FEF Pres. Toti Chikiamco described her as being “very open minded and approachable and with a good grasp of the issues”. Below are some proposals learned from colleagues in the power industry, including FEF Fellow and former Energy Secretary Raphael “Popo” Lotilla, and co-members in the MAP Energy Committee. ( Disclosure: I serve as an Independent Board Director in Aboitiz Power Corporation. )

1) The Energy Regulatory Commission can be more faithful to market based competition principles under the Electric Power Industry Reform Act by moving away from detailed cost based review of every PSA, an impossible task given the backlog and available technical staff. Instead of, or in addition to “the principle of full recovery of prudent and reasonable costs incurred”, it should adopt “such other principle that will promote efficiency as may be determined by the ERC” ( Section 25 of Electric Power Industry Reform Act) . For example, a simple validation of adherence to Competitive Selection Process rules to ensure arms length competitive contracting would be a fairly quick and straightforward alternative approach.

2) The Philippine Electricity Market Corporation ( PEMC) should fast-track the creation of the Power Reserve Market. This will encourage the development of standby power plants. Moreover, together with the ERC, PEMC needs to review the secondary price cap in the spot market as it distorts the true cost of electricity and discourages investment in peaking facilities.

3) The National Grid Corporation should review the required level of reserves, particularly regulating reserves considering the amount of variable renewable energy that is now connected to the grid. It also needs to contract for new capacity for ancillary reserves similar to what is being done by the distribution utilities. Right now, they are “free riding” on existing capacity via set asides without compensation under the Grid Code.

EPIRA is working — additional capacity have been and are being built, and electricity prices have been dropping. Government agencies and private players need to perform their respective roles.

 

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom. He was Finance Undersecretary during the administrations of Corazon C. Aquino and Fidel V. Ramos.

romeo.lopez.bernardo@gmail.com