The patent mal-privatization of the transmission sector (Third of four parts)

By Ted Aldwin Ong


Privatization, instead of yielding maximum present value from privatization proceeds, resulted in gigantic losses to the National Government, in terms of Transco revenues and taxes.

In stark contrast, we are seeing the Concessionaire earning vulgar profits and declaring dividends, just 10 years into the Concession, of amounts way in excess of the 20-year concession fee. (By the way the concession fee is pegged at ₱42.50:$1.)

Onerous provisions abound in the concession contract

Refusal of NGCP to subject its operations to PHL government oversight. (Ironically, the Chinese government has FULL oversight.)

Broadband business a flagrant violation of concession agreement

The privatization of transmission through a Concession Agreement was intended to yield maximum revenue for the government. This is stated in Section 47(a) of the EPIRA, as well as in Rule 22 Section 11(a) of EPIRA implementing rules and regulations. To quote from the latter: “The [Transco privatization] award shall result in maximum present value of proceeds to the National Government.” (emphasis added)

In a submission to the Senate, TRANSCO compared the present value of its projected net income had it continued to operate transmission of the grid, with the present value of the concession fees from NGCP as per the privatization deal. What turns out is that TRANSCO’s net income for the 25 year period from 2009 to 2033, discounted at a rate of 9.3992 percent, would have yielded returns to the government of PhP341.4 billion. The concession fees paid by NGCP to the government for the 20-year period from 2009 to 2029, discounted at a similar rate of 9.3992 percent, yields a value of PhP168.9 billion—slightly less than half of the Transco projection.

Furthermore, because the franchise granted to NGCP reduced its tax liabilities, the losses in terms of government tax revenue are estimated (in present value terms) to run to billions of pesos. Unlike NGCP, Transco was required to pay a range of taxes—averaging nearly PhP10 billion a year prior to privatization. Had Transco continued to operate transmission, it would have contributed, in present value terms, a total of PhP108.8 billion in corporate income taxes to the Government Treasury. Compare this with the measly 3 percent franchise tax of NGCP. Over the same period, this would have resulted in a tax return at present value of only PhP16.3 billion. Transco would also have had to remit a final withholding tax of 20 percent on its interest income. NGCP has been exempted from doing so. The estimated total loss in government tax revenue, thanks to the generous tax provisions in the NGCP franchise, is PhP94.3 billion. These are losses on top of the previous estimate of lower returns from concession fee payments.

The numbers speak for themselves: the privatization of transmission did not yield a maximum present value of proceeds to the National Government. On this objective alone—set by the government that enacted EPIRA—the result is negative.

In stark contrast are the profit numbers of NGCP, leading to generous cash dividends amounting to over 90 percent of profits earned. According to the audited financial statements of the NGCP, from 2009 to 2018, the company netted a total of PhP205.9 billion from revenues of PhP446.5 billion—a profit rate of 46 percent! The net income in its first 10 years of operation already exceeded the total concession fees of PhP168.9 payable over 20 years.

From the net income generated, the company declared cash dividends for its stockholders amounting to PhP187.8 billion. This means that 91.2 percent of the profits earned went to the pockets of NGCP’s owners—including the Chinese government, in its first ten years of operation.

NGCP’s obscene profitability indicates that it is a business that has enjoyed zero risks, passing on unresolved cases (such as right of way) to the Transco.

The Concession Agreement has questionable provisions. For example, the annual concession fee, denominated in US dollars, is pegged at an exchange rate of PhP42.75:US$1. Now that the peso is falling to over PhP50 per dollar, this fixed rate peg spells more losses for the government—and more evidence of the failure to maximum present value of proceeds.

The Concession Agreement identifies NGCP as being responsible for the Transmission Development Plan. The company maintains it has exclusive rights over this planning function and has been excluding both the Transco and the Department of Energy from taking part in this. Nor has NGCP allowed the two agencies of government to review the Transmission Development Plan. (Again, take note: the Chinese government, through its parastatal, has access to this plan.)

Moreover, the NGCP’s non-compliance with the provision of the concession agreement and violations to the Anti-Dummy Law and the 1987 Constitution underscoring the prohibition for foreigners to have an active participation in the management, operations, administration or control of a corporation operating with a franchise. TRANSCO cited various NGCP memorandum and requests with the names of SGCC officials in the Board like Mr. Liu Zhaoquiang and also Mr. Liu Xinhua.

Various significant issues were also presented, such as the power to expropriate government property being exercised by NGCP, placing government property in the name of NGCP, the failure to ensure ancillary contracts for standby power in case of power deficiency, and its failure to comply with the Transmission Development Plan resulting to delays in the completion of transmission projects in the Visayas and Mindanao.

The government’s inability to enforce its power over a private concessionaire reveals the lopsided EPIRA in favor of private monopoly.  Among issues raise by TRANSCO were the following:

Concession agreement related issues which emanated from the commencement fee and prepayment of concession fee by NGCP to PSALM in 2013 amounting to Php57.88 billion yet with “excluded receivables” due to TRANSCO.

NGCP collection of non-current receivables, an amount supposedly due to TRANSCO yet collected by NGCP and not remitted to TRANSCO. Two cases were cited: 1.) The non-current receivables paid by Central Azucarera de Tarlac to NGCP between 2011 to 2013, and 2.) Capiz Electric Cooperative (CAPELCO) wherein NGCP collected an amount from the cooperative in November 2021 but remitted to TRANSCO months later.

Collected amount of NGCP related to Connection Charges/Residual Sub Transmission Charges (CC/RSTC) for year 2007, a subject of various ERC Orders in 2011 directing NGCP and TRANSCO to refund over-recoveries amounting to P339 million. The same issue ensued in the 2008 approval of CC/RSTC.

NGCP collections under the Third Regulatory Period (2011-2015) of WACC which integrated recovery of TRANSCO-incurred expenses for operating expenditures related to claims in the management of right-of-way.

Performance Incentive Scheme (PIS) approved by ERC for TRANSCO in 2008 amounting to PhP334.32 million but which was claimed by NGCP as an item under its account.

Force Majeure Event (FME), a pass through amount charged to customers during disasters caused by typhoon, flood, earthquake, sabotage, among others, which TRANSCO petitioned to ERC and approved by the Commission in 2008 in the amount of Php13.88 million but collected by NGCP and not remitted to TRANSCO asserting that it is not part of “excluded receivables” due to TRANSCO.