The Privatization of Essential Services in Asia and

The Privatization of Essential Services in Asia and the experience of Power Privatization in the Philippines

Privatization of Essential Services in the Asia Region n 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

n 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

n 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

n 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 n n 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 n n n 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 n n 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 n n Displacement of communities and indigenous peoples Public resources used to guarantee private profits, bail out companies etc

International Financial Institutions IMF, World Bank, ADB Export Credit Agencies Commercial Banks & Financial Markets Global Corporations and Consulting Firms (Water and Power) Northern Governments (governments of countries of the global corporations) WTO-GATS & FTAs -EPAs NATIONAL GOVERNMENTS and State/Local Governments

The experience of Power Privatization in the Philippines n The 1980’s • Debt Crisis – huge foreign debt was a major drain in the resources of the government; debt payments more than 50% of the government budget • prioritization of debt payments led to inability to maintain, repair and expand power supply

The experience of Power Privatization in the Philippines, p 2 n Early 1990’s • Power Crisis – Supply was unable to meet demand with many power generation plants performing way under original capacity • 10 to 12 hour brown outs 1990 -19991

The experience of Power Privatization in the Philippines, p 3 n 1992 – 1998 • Early phase of privatization with the entry of Independent Power Producers (IPP) – private companies • Government entered into more than 40 BTO, BOT, BOO contracts with IPPs that involved “take or pay” agreements and other risk guarantees

n BOT – Build, Operate, Transfer or BTO – Build, Transfer and Operate: • Private companies would build power plants using private capital part of which was borrowed from private banks with counterpart government guarantees • They would operate the plants and at the end of the contract period, transfer the ownership to the government; or transfer ownership to govt but operate it for 20 to 25 years to recover their investments and generate profit

n “Take or Pay” provisions in power purchase agreements • Contracts would involve a guarantee that the government would purchase at least 80% of installed capacity of the power plants regardless of whether the electricity was used or not • With the building of many independently privately owned plants with these agreements, with total capacity surpassing demand --- this led to the second highest electricity rates in Asia next only to Japan

n Other kinds of Guarantees • Foreign Exchange Cover – Govt (NPC) guaranteed a rate of foreign exchange – when the Peso depreciated vs the US$ the Govt paid the difference • Cost of Fuel Guarantee – Govt guaranteed the cost of Oil – and when Oil prices went up, govt paid for the difference

n “Take or Pay” provisions and Risk Guarantees • Consumers absorbed a big part of the cost of unused electricity – 30 to 40 % of the bill • National Power Companies began to experience big increase its liabilities and cost of operations, and led to bigger debts of the NPC • Big debts and liabilities of the NPC used as justification for its comprehensive privatization • Consumers and public funds paid for guarantees for private profit

n OMNIBUS POWER PRIVATIZATION LAW • Introduced in 1997 as a bill but took 5 years to pass because of strong campaign against the bill – passed in 2002 • All sectors of the industry to be fully privatized – generation, transmission and distribution • Consumers and Govt to absorb the NPC debts so the assets can be sold debt-free • Allowed for “cross ownership” – generation and distribution

n OMNIBUS POWER PRIVATIZATION LAW • Passage of bill is part of ADB conditionalities to power sector loans; ADB has been pushing for privatization • Electricity rates last month increased by 50% - generation, transmission, distribution • Will again increase once govt starts charging the stranded contract costs of IPP contracts • Strong clamour to review and reverse privatization of power industry