Global Insight Perspective
A group led by State Grid Corp. of China and involving domestic player Monte Oro Grid Resources has been awarded control of the Philippine electricity network, the National Transmission Corp. (or TransCo), winning the privatisation auction with a bid of US$3.95 billion.
Only two groups were involved in the final round of the sale, which has been in play since 2003. The consortium will manage TransCo's assets on a 25-year licence and will now have to invest heavily to address glaring infrastructural needs.
The sale will boost investor confidence in this troubled sector, with the ongoing privatisation of Philippine state electricity generator Napocor most likely to benefit.
For the almost five years that the Philippine government has attempted to divest the National Transmission Corp. (TransCo) (see "Related Articles"), it often looked as though this state asset would never be privatised. There have been problems on the administrative side, political shake-ups, concerns over possible returns on investment competitiveness of tariffs, and the waxing and waning of would-be operators of the 25-year licence on the table. In the time since 2003 when the government first launched its privatisation drive, the state of the power sector, and particularly rates of infrastructural investment, has suffered.
At last there is good news on this front. Reports from the Philippine capital, Manila, today indicate that a consortium involving foreign and domestic investors has been awarded the TransCo operating licence. A group led by China's electricity network giant, State Grid Corp., and Monte Oro Grid Resources Corp. of the Philippines won the tender with a US$3.95-billion bid. In the end, it would appear that the victory was rather narrow. A rival bid of US$3.905 billion was submitted by a consortium involving San Miguel Energy, a unit of Philippine food and drinks giant San Miguel Corp., Netherlands-based TPG Aurora BV, and Malaysian utility Tenaga Nasional Berhad (TNB). That consortium was the sole competitor that State Grid and Monte Oro faced at the final hurdle following the withdrawal of a third group, led by Philippine holding firm Metro Pacific Corp.
Here, there is clear evidence of the persistent investor concern over the commercial prospects represented in the contract. When it was first mooted, some 21 international and domestic bidders were queuing up for the chance to manage TransCo's network, which includes transmission and distribution assets alike, worth some US$3.3 billion on the basis of a 2006 valuation. Over time though, this list was gradually whittled down amid worries over the sort of return that could be expected from this investment. While state authorities did all they could to sweeten the deal, adjusting the tariff structure to improve the likely margins amongst other measures, the glaring investment needs that would greet the victor of the auction drove many away.
Outlook and Implications
It is to this spending that State Grid and Monte Oro must now turn. The Philippines' grid needs a reported US$850 million in funds over the next five years for upgrades and expansion. Given this need and the wider uncertainty about the profitability of the contract, it is difficult to be categorical about the merits of the investment. While the support of the Philippine government can be counted upon and the private investment arm of the World Bank has said it will throw up to US$250 million into the kitty for the winning bidder, in truth the way ahead does not look particularly lucrative. Nevertheless, the might of Chinese government-backed State Grid takes the sting out of such issues. The company has long been linked with TransCo and clearly holds the prospective upside of this contract at a different level to most. It will be interesting to watch subsequent moves by State Grid or other Chinese players in the Philippines' market over the years to come.
For the government, the victory today is clear. It has finally put an embarrassing story to bed in a notably successful fashion. Not only has the sale—which will incidentally be the largest privatisation in the country's history—raised it US$3.95 billion to be put against the losses that have been piling up as a result of state generator Napocor's poor performance, but it can also count on greater investor confidence in the Philippine electricity sector in general. That bodes well both for the further divestment of Napocor assets, and for the longer-term investment and operational health of the industry.
Philippines: 5 February 2007: Philippines: Back to the Drawing Board for TransCo Privatisation after Failed Auction in Philippines
Philippines: 8 July 2006: State Grid of China Leading Foreign Interest in TransCo
Philippines: 29 May 2006: Philippine Power Distributor TransCo's Assets Set for Auction
Asia Regional: 3 April 2006: Asian Power Sector Liberalisation to Heat Up; Will Investors Remain Cool?Philippines: 26 May 2003: TransCo to Auction Transmission Assets in June