The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, one of the first laws signed by President Gloria Arroyo in 2001.

IBON Features– Amid the flurry of accusations between private distributor Manila Electric Company (Meralco) and state-run National Power Corporation (Napocor) over unjust charges, one fact remains clear: privatization and deregulation of the power industry– distribution, transmission and generation– is at the heart of high electricity bills.

For example, consider the multitude of unjust ‘pass-on’ charges levied by Meralco on its customers. These include system losses, in which power lost through pilferage and technical problems are passed on to consumers and P500-million a year of Meralco’s own power consumption which is similarly reflected in electric bills. There is also a reported plan to pass bad debts incurred by the power distributor on to consumers.

These charges have been approved by the government Energy Regulatory Commission (ERC), which is tasked to regulate the rates of electricity distributors. Although blame has been placed on the ERC’s lax regulation for such excessive ‘pass-on’ rates, in truth the regulatory environment has become lenient because of deregulation of the power sector and while moving towards full privatization.

It should also be noted that although Meralco is a public utility with a congressional franchise, its essential nature is a private, profit-oriented corporation listed in the Philippine Stock Exchange. Thus, it should not be surprising that the company exploits legal loopholes to levy such unwarranted charges in order to fatten its bottom line and make its stockholders and owners happy.

The privatization of the power sector created profit opportunities for private-sector independent power producers (IPPs). In order to quickly attract investors to the sector, government had to ensure the power producers’ profitability. Thus, onerous provisions such as ‘take or pay’ (which required Napocor to buy 70% to 100% of power producers’ output) and ‘fuel cost guarantee’ (which obligated Napocor to source and pay for fuel used by IPPs) were tacked onto IPP contracts. These provisions bloated consumers’ power bills through charges such as the infamous Purchased Power Adjustment (PPA). They also contributed to Napocor’s skyrocketing debt burden.

It will be remembered that a government-mandated review of 35 IPP contracts during the Arroyo administration found that only six were “clean” or without financial or legal issues. Five were found to contain “onerous” terms that were “grossly disadvantageous to government”. However none of these contracts were cancelled, and were instead “renegotiated”.

High transmission charges have also been blamed as a factor in high power rates. But the National Transmission Corporation (Transco) is also set for privatization, and thus, needs to charge high rates in order to attract potential investors. It should also be noted that transmission charges are regulated by the ERC as well.

Open Access

The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, which was one of the first laws signed by President Gloria Arroyo in 2001.

Before EPIRA the sector was composed of generation, transmission and distribution sectors. Napocor generated electricity on its own and bought electricity from IPPs, and transmitted this to distributors and large industrial customers through high-voltage wires. Distribution of electricity to end-consumers was done by privately-owned electric utilities, a few government-owned utilities and electric cooperatives.

Under EPIRA, the various components of the power sector are separated into generation, transmission, distribution and supply. Generation and transmission assets of Napocor would be privatized while distribution would continue to be handled by the private sector. The end goal of the sale of Napocor’s generation assets is “open access” which is government’s supposed answer to high electricity prices. “Open access” ostensibly aims to introduce competition into the industry by allowing consumers to select their supplier.

EPIRA advocates claim that competition would lower rates, particularly with a provision which states that no power generator should control more than 30% of supply in a given grid and ostensibly prevents monopolies. But the experience of the deregulation of the downstream oil industry demonstrates that such “competition” does not bring down prices. Deregulation has resulted in new players taking 12% of the market while the big three oil firms (Petron, Shell and Chevron) share the remaining 88% or an average of 29% per firm. This has not stemmed cartel-like behavior with oil industry players raising pump prices nearly simultaneously. It has also not resulted in lower prices, as pump prices of all petroleum products have raised an average of almost 580% since deregulation of the industry was implemented in 1996.

EPIRA also notably allows cross-ownership between distributors and generators. This has allowed the Lopez family to own a controlling share in Meralco while also owning IPPs. This situation has led to questions of conflicts of interest as Meralco would naturally be more inclined to buy power from its sister firms regardless of whether it is cheaper than electricity sourced from Napocor IPPs.

Reversing Privatization

In the light of high costs in power rates, the reversal of privatization of the entire power sector becomes an increasingly viable answer. This entails the repeal of EPIRA law, reversal of the privatization of Napocor’s generation assets, and government control over the entire power sector – distribution, generation, transmission and supply.

Of course many would question the return of state control over the industry, particularly in light of corruption allegations against Napocor such as its alleged overbilling of customers by some P10 billion and its purchase of overpriced coal for its power plants.

However there remains no substitute for responsible state control in an industry such as the power sector whose natural monopolies will inevitably be exploited by private interests for maximum profit even at the expense of the public. And as a state-run industry, the people must have the right to subject the power sector to scrutiny and demand transparency in its operations. Effective state control remains the best solution to address high power rates– even as it is acknowledged that leaving the power industry to an administration known for allegations of corruption, unaccountability, and subservience to elite interests compromises achieving a pro-people power sector.



By imposing tariff cut recently, the cash-strapped Arroyo government has not only failed to address high pump prices but defaulted on its responsibility to collect revenues, all in favor of the oil companies.

Government had already imposed tariff reductions in the wake of high prices through Executive Order (EO) 527. The automatic tariff mechanism imposed under the EO may be viewed as a compromise after government removed VAT exemptions on petroleum products. The VAT on petroleum products has since become one of the largest sources of revenue for the cash-strapped Arroyo government.

Under EO 527, the current oil tariff scheme of 3% would be lowered to 2% up to 0% based on certain triggers indexed to oil prices in the world market. The expectation was that the tariff cut would soften the impact of global oil prices on the economy. Under the EO, government had reduced the tariff on oil products at least twice, but the move has not had the desired effect. Instead of addressing high oil prices, it only delayed price hikes on diesel by several days while easing the tax burdens of the oil companies.

“By choosing to remove tariffs on oil imports as a solution to high oil prices, government is protecting the interests of the oil firms at the expense of potential revenues that should be used to fund vital social services such as health and education,” said IBON executive editor Rosario Bella Guzman.

A more effective solution to the problem of high oil prices would be the lifting of VAT on oil products, she said. But the only permanent solution to high oil prices is nationalization of the local oil industry, starting with the repeal of the oil deregulation law. “The oil industry is vital to the country’s economic development, and as such should be regulated by government,” said Guzman.


In the face of its glaring failures, the Arroyo government continues to pursue the very same bankrupt economic policies that caused these in the first place

By Sonny Africa

IBON Features– Undoubtedly, President Gloria Macapagal-Arroyo will use her State of the Nation Address (SONA) to hype her achievements. Arroyo would likely claim that her greatest achievement and her legacy is to set the Philippines well along the road to progress and prosperity. To buttress her claims she will certainly roll out the familiar rosy economic indicators that she has consistently used to try and silence her critics: the fastest quarterly growth rate in nearly two decades, stock market indices soaring to all time highs, record international reserves, the “strengthening” of the peso and steady increases in foreign investment.

However, these claims would not hold up to even the most cursory scrutiny. The scores of homeless people living on the streets and sidewalks of Manila testify to widespread poverty and joblessness despite Malacañang’s claims that poverty has decreased. The more than 3,000 Filipinos who leave the country every day to seek work abroad belie the government’s claim that it has generated more than 800,000 jobs a year since it came into office in 2001.

Yet, even in the face of its glaring failures, the Arroyo government continues to pursue the very same bankrupt economic policies that caused these in the first place. In fact, it promises to pursue these policies even more aggressively and apply them to more areas of the economy.

Behind ‘Economic Growth’

One of the key economic indicators that the Arroyo government undoubtedly will be hyping is the continuous economic growth it has experienced. According to Palace Secretary Ricardo Saludo, the country has enjoyed twenty-five consecutive quarters of Gross Domestic Product (GDP) growth, with GDP hitting 6.9% in the first quarter of 2007, supposedly the highest in seventeen years.

But the GDP merely tracks the continued erosion of the country’s productive sectors. The share of the manufacturing sector has been steadily falling, from 25.7% of total domestic output in 1980 to 23% last year. Over the same period, agriculture fell from 25% of GDP to 14 percent.

Even if the economic growth could be taken at face value, it remains meaningless to the millions of poor Filipinos for whom its benefits have not “trickled down”. IBON estimates that some 65 million Filipinos or around 80% of the total population struggle to survive on the equivalent of P96 or less per day. This is substantially larger than the Arroyo government’s official poverty incidence figure of 24 million Filipinos.

Increased growth has also not reduced the gross income inequalities that continue to haunt the country. In 2000, the poorest 30% of families (some 3.8 million) accounted for almost 8% of total family income, while the richest 10% (1.3 million families) accounted for 38.4 percent. By 2003, inequality had barely softened, with the poorest 30% (now nearly five million families) accounting for 8.5% while the richest 10% (1.6 million families) accounted for 36.3 percent.

Meanwhile, the richest Filipinos continued to get richer. The wealth of the country’s three richest individuals/families (Henry Sy, Lucio Tan and Jaime Zobel de Ayala and family) grew in real terms from P177.4 billion in 2001 to P261.5 billion last year.


The Arroyo government also continues to hype the peso’s all time highs and the booming stock market. But when looked at in an overall regional context, the seven-year high of the peso and the all-time high of the stock exchange are not even particularly impressive. They merely reflect an overall trend of appreciating currencies and exuberant stock markets.

A look at the trend from 2001 shows that Asian currencies, in general, have been appreciating against the US dollar especially since the middle of 2006. The US economy is heavily weighed down by its historic budget and trade deficits as well as by the wars it is unable to win in Afghanistan and Iraq . It is also widely expected to experience an economic slowdown this year.

Asia has also been receiving markedly higher inflows of speculative investment, many of which are going to the region’s stock markets, with the trend again being especially marked since the middle of last year. During the first quarter of the year, some US$2.8 billion or 78% of gross foreign portfolio inflows into the country went to the Philippine Stock Exchange. These inflows were equivalent to nearly half of gross inflows in the whole of 2006 and two-thirds of gross inflows in 2005.

The Philippines is also one of Southeast Asia ’s laggards in terms of economi c p erformance. Philippine economic growth of 5.3% last year was the third worst in Southeast Asia and even less than the ASEAN average of 5.8 percent. The country has the worst unemployment and is the fifth poorest country in terms of GDP per capita and national poverty rates. Although comparisons of this sort are problematic because of differing methodologies and measures, it should at least serve as a wake-up call for the administration.

Fiscal Hype

Another achievement that would surely be hyped in the SONA is how Arroyo succeeded in arresting the country’s fiscal crisis through “reforms” such as the implementation of the reformed value-added tax (RVAT). But the country remains vulnerable to another financial crisis, which could explode at any time.

The budget deficit has indeed gone down from the historic high it reached it 2002 when it peaked at 5.4% of GDP. Last year it was at 1.1% of GDP. But the deficit was addressed not through improved revenues or dealing with runaway debt service payments; instead, government cut spending on vital social services such as education, heath, and housing, whose combined share in the national budget fell to 15.6% in 2007 to 19.7% in 2001.

Meanwhile, the Arroyo administration is making the most debt payments of any administration in the country’s history. Foreign and domestic debt ate up a historic 87.3% of revenues and 14% of GDP in 2006. Total debt service last year on foreign and domestic debt was a colossal P854.4 billion in 2006. And public debt continues to increase, hitting P3.9 trillion as of March 2007. National government debt was 65% of GDP in 2006.

Although the RVAT netted P76.9 billion in 2006 and P18.7 billion in the first quarter of 2007, it was not enough to make up for revenue losses from trade liberalization, corporate tax evasion and corruption. The government’s tariff reduction program has resulted in import duties as a share of total revenues falling to 19% in 2006 from 36% in 1993.

Meanwhile, corporate tax evasion may cost the government some P54 billion in lost revenues annually (according to a 1998-2002 survey by the National Tax Research Center ) and some P146 billion may have been lost to corruption in the 2007 national budget (based on the 13% estimate of the 2001 budget by the United Nations). This means that as much as P200 billion may be lost this year due to corruption and tax evasion.

In fact, government recently reported that its half-year deficit had already reached P41 billion or 65% of the year-end target of P63 billion.  Its only hope now of achieving its deficit target is the privatization of some of its remaining assets, such as its stakes in San Miguel Corp. and the Manila Electric Co. (Meralco), which could fetch as much as P105 billion. But this represents a one-time boost in revenues. Thus, higher taxes on the scale of the RVAT are likely inevitable despite government denials.

Unsound fundamentals

The Philippines ’ weak productive sectors are ultimately what underpin its financial vulnerability. Its declining agriculture and manufacturing sectors result in chronic trade deficits because the country is dependent on imported inputs and finished products, while having a limited capacity to export genuinely Philippine-made goods. This in turn increases the dependence on foreign sources of financing and capital. The local economy thus becomes unduly sensitive to the fluctuations of global markets.

The country’s problems are essentially due to liberalization policies enacted under an economic globalization framework. These policies have eroded incomes and destroyed livelihoods, undermined domestic productive sectors and created the conditions for financial crisis. Trade liberalization destroys local agriculture and manufacturing while reducing tariff revenues. Liberal investment regimes have given generous incentives to foreign corporations while reducing the benefits to the domestic economy to nothing.

Pres. Arroyo, a staunch believer in so-called free market economics and was instrumental in the country’s membership to the World Trade Organization, will likely continue her adherence to neoliberal policies, which will reinforce the country’s structural inequities and weaknesses.

For example, she will undoubtedly continue to pursue liberalization through the various WTO agreements and free-trade agreements such as the Japan-Philippine Economic Partnership Agreement (JPEPA) and liberalization of the mining sector and privatization of the power generation and transmission sector in order to further encourage foreign investment.  And then there is the removal of economic sovereignty provisions in the Constitution through Charter change.

With these policies, it is clear that Arroyo’s legacy will not be that of a prosperous Philippines but rather an economy that is ripe for another bout of financial and fiscal crisis.