The Need to Challenge the Private Sector Fundamentalism of the IFIs in Power Sector Program

In the 1990's,fundamental power sector restructuring swept developing
countries around the world. At each step the heavy hand of the World
Bank and the Asian Development Bank guided the governments. This paper
points to the growing evidence that the ADB and the World Bank power
restructuring operations is resulting in higher electricity prices for
consumers, greater probability of private market power in the sector,
less environmental protection, less consumer protection, and
legitimating of wrong policies and corruption.

Short presentation at the Privatization of Infrastructure Seminar
held 5-6 January 2003 in Hyderabad, India as part of the Asian Social
Forum. For a more in-depth treatment of Philippine power sector
restructuring, see the author's paper titled "The Philippine Electric
Power Industry Reform: A Tragedy of ADB and World Bank Private Sector
Fundamentalism and Unaccountable Government.

In the 1990's,fundamental power sector restructuring swept developing
countries around the world. In a workshop held in Bangkok in October
2002, activists from South, Southeast, and East Asia shared their
country experiences in power reforms. And as we heard yesterday, and as
we will hear resoundingly as our resistance intensifies this year, the
stories ring and will continue to ring familiar.

These are stories with the same plots and progression. They are about
increasing the role and power of foreign corporate interest in the
provision of a very critical public utility. They start with the
introduction of various schemes for private sector participation in the
early 1990s, such as service contracts, management contracts,
concessions, and build-operate-transfer contracts and its numerous
variants. (Incidentally, an IPP executive calls this period "The Gold
Rush".) Towards the end of the 1990s and continuing at present, the
reforms have progressed towards fuller privatization and deregulation
of the sector following the World Bank and Asian Development Bank
models of unbundling.

The stories share the same principal actors. On one side of the policy
change is the influential ADB and World Bank with their sector studies
and sector loans backed-up by their jet-setting consultants (at times
industry players themselves) and local allies in the academe. On the
other side are often unaccountable governments. The members of the
corporate sector, vested interests all, follow closely behind.

Lastly, there is ever-growing evidence that these stories will share
the same conclusions: the reform process is resulting in higher
electricity prices for consumers, greater probability of private market
power in the sector, less environmental protection, less consumer
protection, and legitimating of wrong policies and corruption.

The experience in Philippine power sector restructuring adheres
faithfully to such storyline. The state-owned National Power
Corporation (NPC), which built dominance in the power generation and
distribution starting from its creation in 1936, started a process of
reversal beginning in the 1990s. In generation, the NPC entered into
supply contracts through BOT and its variants with private power
producers in quick succession. Between 1993 and 1994, 27 NPC contracts
with IPPs were put in operation delivering new capacity of 2,859MW.
This trend continued over the rest of the 1990s. At present there are
more than 40 IPP contracts in power generation.

The privatization process reached new heights when President Gloria
Macapagal-Arroyo signed into law on 8 June 2001 Republic Act 9136, or
the "Electric Power Industry Reform Act (EPIRA) of 2001". It is a
comprehensive legislation mandating the deregulation and full
privatization of the electric power industry in the Philippines. This
law provides for the vertical unbundling of the electric power industry
into four subsectors: generation, transmission, distribution, and
supply. Deregulation takes place with the law expressly declaring that
generation is not a public utility operation, and providing that the
sector is competitive and open. This has the effect of overhauling the
present set-up where the government owns/controls the construction of
generation facilities throughout the country. Also, not anymore being a
public utility operation, generation was carved out from the
constitutional requirements of franchise and nationality limitations on
ownership. Privatization takes place with the law mandating the sale of
NPC's generation assets and contracts with independent power producers,
along with real estate and other disposable assets. The transmission
sector, while remaining classified as a common carrier subject to
regulation, will also be
privatized either through an outright sale or a concession contract.

The privatization of the Philippine power sector was not an autonomous
act of government. At each step the heavy hand of the World Bank and
the Asian Development Bank guided the government. The World Bank
started the process by highlighting the financial problems of the
National Power Corporation (NPC) in its 1988 Philippine Energy Sector
Study, and made a pitch for BOTs. The World Bank then saw the severe
brownouts in early 1990s as an opportunity to push BOTs further, and to
propose the unbundling of the system in a new sector study in 1994. In
1998, the ADB intensified the pressure by extending a US$300 M loan for
the power sector restructuring program that culminated in the passing
of the EPIRA.

The World Bank and the ADB used a "carrot and stick" lending structure
to the hilt. The lending for institutional reforms was bundled with
loans intended for NPC's investments in the expansion of transmission
networks. The 1998 ADB loan was also provided in the context of a joint
standby assistance program with the International Monetary Fund and the
World Bank.
{mospagebreak}
So far, the results of restructuring can only be characterized as a disaster from the perspective of public interest.

First, Filipinos now face higher prices of electricity as a direct
result of the IPP "gold rush". The generating capacity provided by the
private sector did not come cheap. The World Bank itself noted in 1994
that the average price of some 13 IPP projects it analyzed was 6.52 US
cents/kWh, "quite high" compared to the 6.37 US cents/kWh bulk energy
tariff of the NPC at that time. But bigger costs were to be borne by the
government and the consumers in the longer run. The consumers were
subjected to high fuel price risks in imported petroleum that consumers
assumed through fuel adjustment clauses for tariffs in the IPP
contracts. There is likewise an exchange risk in pegging the wholesale
tariff to the dollar. The government, and ultimately, the consumers,
also assumed the market risk through generous take-or-pay guarantees.
In the end the longer-term costs caught up with the initial euphoria
over the IPP episode, leaving taxpayers and consumers holding the bag.
In addition to the initial high cost of the IPPs, the Asian crisis also
dramatically upset all the economic growth and foreign exchange
assumptions of the IPPs. This meant much higher fuel costs and
oversupply of electricity capacity. But the investors are fully covered
by the fuel cost adjustment mechanism and take-or-pay guarantees for
which consumers are now paying a heavy price.

Second, the law implementing the World Bank and ADB unbundling model,
or the EPIRA, is seriously flawed in its competition and regulatory
policy. Because the law allows cross-ownership by related interests in
the distribution and generation sub-sectors, Filipinos face a very
clear prospect of market dominance by a few industry players. The
assumption that restructuring will result in electricity price equating
with long-run marginal cost is deceitful, if not naïve. In regulatory
policy, the EPIRA means less environment and consumer protection. The
power of the Department of Energy (DOE) over planning the mix of energy
sources has been severely watered down. In the past when the NPC was an
attached agency, the DOE had the capacity to implement its energy mix
program. Under the present law, DOE's power has been limited to merely
"encouraging" the private sector to invest in the development of
indigenous and renewable energy sources. There is no consumer
representation in the ERC. This is consistent with the World Bank and
ADB idea of an "independent" regulatory agency that is insulated from
influence of government, electricity suppliers, or consumers. There is
a need to make an exception for consumers. The returns to an individual
consumer from participating in regulatory processes (such as hearings)
are very small compared to the returns to electricity suppliers and
other industry players. Especially in countries where there are no
strong consumer groups, consumers are at a big disadvantage. One way to
offset this problem is to have consumer representation in the
regulatory body.

Third, the reform process has undermined people's participation in
policymaking. In its case-by-case technique to privatization, the World
Bank identifies the following steps in pushing privatization: (1)
Identification of privatization candidates; (2) Feasibility study; (3)
Privatization plan; (4) Legislation or executive order; and (5) Sale.
This technique is designed to be unaccountable. It places particular
importance
to autonomy in institutional design. Autonomy is the extent to which
"an institution is insulated from outside interference, and thus from
the veto power held by politicians or social groups." It locates the
privatization program at the most powerful center of government to be
able to overcome opposition and manage political issues effectively. A
related implication is that the process is designed to be
non-transparent. Thus, the public only figures in step three after the
policy issues have been resolved and the legislation or executive order
has been prepared. And the public does not come in from a consultative
frame, but as part of a "communication plan" to build public support.
The public will only have a chance to participate when the policy
involves legislation that requires public hearing.

Fourth, the reform process has meshed very well with corruption. In the
IPP episode, the recent report by the Philippine Center for
Investigative Journalism points out that then President Fidel Ramos
"personally pushed for the speedy approval of some of the most
expensive power deals". Further, "individuals linked to Ramos lobbied
for the approval of some IPP contracts, which came with numerous other
deals, including lucrative legal, technical and financial
consultancies." Strong business lobby groups also figured in the
passage of EPIRA. At one point, two members of Congress admitted that
they were given money from an unknown source to push the passage of the
Power Bill. The House did not investigate the exposé.
{mospagebreak}
In the face of the growing evidence of failure, we can expect
resistance to intensify. In the Philippines, we have several groups
with independent initiatives to challenge the process and put forward
alternatives. While there may be differences in alternatives, there is
clearly a wide space for uniting on what is wrong with the present
set-up, and we look forward to seeing the building of that united front
this year.

Regionally, there is definitely a big space for acting together as
well. The IFI's, particularly the ADB and the World Bank, are our
common enemies in power sector reform. Let us unite to further expose
the hypocrisy of these institutions. Behind their rhetoric of
transparency and good governance is a nontransparent and unaccountable
process. Behind the IFI's academic façade of the efficiency of free
markets is
what I call private sector fundamentalism. It is driven by the global
business interest in opening up developing countries to foreign
investments (and trade), regardless of efficiency, equity, and
sovereignty issues as well as the potential for effective activist
governments. On any given day, the private sector fundamentalist will
insist on privatization and deregulation even in the face of market
failure, imperfect
markets, intensifying inequities, and further marginalizing of peoples.

The global corporate interest in the privatization of the electricity
sector, along with other areas of infrastructure, in developing
countries is sizeable. The World Bank has developed the Private
Participation in Infrastructure (PPI) Database to track private
infrastructure projects, specifically in energy, telecommunications,
transport and water. The PPI Database reports that more than 121
developing countries
introduced private participation in at least one infrastructure sector
between 1990 and 1999. These developing countries approved over 1,900
projects involving aggregate investment commitments of US$580 billion.
The electricity industry accounted for a big share in such
participation. From 1990 to 1999, there were 649 electricity projects
with private participation that reached financial closure in developing
countries. These electricity projects involved US$155 billion in
investments.

To be sure, when one looks hard at industry problems, a reform agenda
cannot avoid considering the potential of market instruments in
fostering better sector performance. But this should not distract
public interest advocates from appreciating the growing evidence of
failure of IFI-sponsored restructuring of the electricity industry, and
taking action.

The political power of unaccountable governments is enormous. The
machinery of the International Finance Institutions is formidable. Let
us deepen our research, exchange information, listen to our public, and
act together. Let us make the possibility of another world a reality.

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