U.S. Supports Privatization, other Reforms in Philippine Energy Sector

Transcript:Ambassador Francis Ricciardone
Interview with Business World Newspaper
Manila, December 5, 2002

Ambassador Ricciardone (AR): I am happy to be speaking to a reporter from BusinessWorld today. It is a chance to speak with you about your country’s energy sector issues. This is a big, big issue for us. Today is an important day, actually, on this subject because the United States has voted in favor of a $500 million dollar partial credit guarantee package. The PCG: Partial Credit Guarantee package at the ADB, the Asian Development Bank. The package is designed precisely to support the Philippines energy sector, that is, to support the privatization of the energy sector, which we think is absolutely pivotal to the future of this country. We voted for this, despite the fact that the Philippines had not met a key condition of the package that has been specified long ago, and that was to have gotten the Transco, the transmission company, privatized by now. As you probably know if you follow this issue closely, it was to have begun by last June. It should have been completed by now and it has not begun.

We worry about this a lot. Why? Because we’re concerned about the prosperity of the Philippines. If the Philippines is more prosperous --stronger, as your President says, ‘a strong republic’ -- if it’s stronger economically, it’s better for all of us. It’s better for the Philippines and it’s better for us. We’re important trading partners, we’re important investment partners, therefore we like our partners, our friends, our allies to be strong.

We see some strength in the national economy, and we are guardedly optimistic. But I use the word ‘guardedly’ advisedly. The optimism comes from the strength of this country: it’s the people, the resources. Some of the financial numbers are not bad. There is a lot of debt, but it’s long-term debt, for example. You’ve got a good export picture, for example. You’ve got some economic growth although it’s moderate. There are lots of reasons to be optimistic.

But the guarded part is because of some pivotal things that have got to get done before foreign investors will be reassured, or even Philippines investors will be re-assured, and before the country will really be strong as your President wants it to be. That means getting a grip on the larger state finances. To do that, you need to do some structural reforms. The most important one, and the one that most impressed foreign investors and foreign governments -- indeed, I would call it the signature economic reform of the Philippines for this congress and this administration -- was the Electric Power Industry Reform Act (EPIRA). That impressed the rest of the world. The Philippines was going to catch up and live up to its potential and open up. It really signaled that the Philippines was open for business.

That is why this ADB partial credit guarantee package was set up. We knew that the privatization process was going to cause some dislocation, some bumps, and the ADB wanted to provide a loan that would help the country get through those bumps. The United States, with its vote in the ADB, wanted to support that. We have been supporting the privatization process directly, bilaterally, through USAID. Now, our concern is, if the process of privatization does not go ahead, then the state is left saddled with a very expensive, losing set of assets. They will be less valuable, the longer they’re held. They will bring less income from a purchase or a franchise from the private investor, and they will keep your power costs in this country among the highest in Asia.

Our understanding is that there’s no political debate about this. Everybody in Congress and the administration agrees, did agree, back in the spring of 2001, that privatization is the only way forward to move these money-losing capital goods, these assets, to the private sector. The Philippines would have the one-time income, which would be useful. The country would have efficiencies then, market efficiencies would begin to work. And if you’re good, and lucky, prices would start to moderate by the pressure of market forces and most of all, you have a reliable, good supply of electricity, so that a few years from now, we don’t have blackouts again. So all of this is very important. If it doesn’t get done, it will shake, I think, international confidence in the Philippines.

BusinessWorld (BW): So when do you want this Transco privatization done?

AR: It’s not a question of when we want it done. It’s a question of when and whether the Philippines wants it done. You’ve put your finger on the question. That is what investors want to know: Does the Philippines really want to privatize the Transco? We believe the answer is “yes,” because we look at your legislation. But we understand that it’s been blocked now. It’s been held up in the Senate. The Administration and the Senate have been unable to come to terms on how to release the Transco for private bidding. This is something foreigners can’t decide for you. Every legislature has its various prerogatives and responsibilities for oversight. We have full faith that it is within the genius of the Filipino political system to come up with a solution that will reassure foreign investors, on the one hand, that when they make a deal with the government of the Philippines, it will stick. On the other hand, through your political process, the people need to be assured that there has been due oversight by the Senate, and that the deal was transparent, fair, and in the best interests of the Filipino people. Somehow, your political system has to accomplish that. We think it can, but it’s important that it accomplish it very soon.

BW: Well, like how soon?

AR: Like immediately, because the country is heading into a political year. We just voted for this $500 million dollar package even though the condition really wasn’t met. We don’t want to be facing a similar decision next month or two or three months down the road, and still have the Transco not privatized. This money is being provided to help the government to privatize. It is not meant for other purposes, such as balance of payment support, for example. So, it’s very, very important.

BW: So what really made you decide in favor of the loan when…

AR: When the conditions had not been met? I think because of the general support for, and confidence in, the Philippines. We believe this country can do it. We believe this government and this Congress, when they passed that legislation, were committed and that they remain committed to doing this for their country. So, I guess it is an act of faith more than anything else, but that act of faith, you know, is once. I do hope that the next time there is a credit package that comes forward to support privatization here that the privatization will be underway.

BW: After voting for the approval of that partial credit guarantee, are we expecting now the approval of the ADB board?

AR: The ADB board has voted in favor of it, I understand. It is a $500 million dollar package. There will be statement on this, released by ADB, this afternoon so you might check with them. They haven’t come out with it yet; while you were waiting, I spoke with the American representative of the ADB. He confirmed to me that they did take the vote today. The Board has approved it. So that’s good news. His understanding was that the President of the ADB was going to release a statement this afternoon.

BW: There have been significant developments in the way the Supreme Court ruled on the over-charging case of Meralco, and well, of course, the cancellation of PIATCO’s contracts to run the NAIA III terminal. How do these events affect the United States’ investment policies in the Philippines?

AR: I think you must be referring to American private investors in this case, right? Not the United States Government so much. Of course, we have no stake in PIATCO. As to Meralco, there are American private lenders involved. There is an expression that says, “Capital is a coward.” Meaning that investment only flows where it seems secure, where the risks are understood, clearly understood and quantified in some way. Not zero, but where you can put a good assessment on the risk and then you can factor that into your investment. When there are question marks -- when you can’t be sure how risky a proposition is -- capital stays away; investors stay away. When things like this come up, until the questions are resolved, it tends to keep capital away. For example, in the Supreme Court case, I think people are studying that very hard to find out precisely what it means. Investors certainly are, and we don’t know if it’s finished yet. We don’t know whether Meralco is going to appeal to the full Supreme Court. They have said they would. What this full Supreme Court says will be very important. Foreign investors want to understand precisely how Philippines law works with respect to such investments as public utilities. On that PIATCO issue, it is hard for me to say anything. I don’t understand it well enough.

BW: Anyway, sir, the partial credit guarantee was already granted and we’re expecting the yen-dominated ones to be issued before the year ends. For you, what do you think are the prospects for the bond float as well as the dollar-denominated bond float, which has been delayed for next year?

AR: The second part of… the $250 million?

BW: Yes, I think they increased the yen-denominated issues to $500 million dollars, and they deferred the $500…

AR: …. the $250 million? They deferred the $250 million?

BW: Yes, I think they have not finalized yet if they will make that dollar-denominated bond $250, but I think it’s still at $500, and they’re discussing that.

AR: Oh, okay. Well, you may know more than I do on it, and you should go by whatever the ADB says. My understanding, from a quick briefing just now, is that they just voted today on $500 million package. I guess it’s the yen-denominated one. The $250 will come up early next year. But the $250 is going to be subject to a second vote, I mean its own vote. And, it seems to me, clearly before they go ahead with that, they would want to see progress in privatization. So, I think it’s critical that this Transco go forward. Whatever the means is; no outsider can say how this ought to be resolved between the Senate and the Administration, but it needs to be resolved. The process needs to be, if it is at all possible, de-politicized, while ensuring due diligence and due oversight for the public good. I have faith that the Philippines’ Senate leaders, Congressional leaders and the Administration can find a way to do that.

BW: Have you already communicated this concern to the Philippine government?

AR: We have been involved as supportive friends, I would say, because we do have a vote in the ADB and we were concerned about this, and we wanted the Philippines’ government to know in advance before the vote what our concerns were. So yes, we communicated our concerns to the Philippines’ government about this.

BW: And how do you assess the government’s reaction?

AR: I think the government is fully committed to privatization of the Transco and the whole power sector, in accordance with the law, and I believe that the Congress is too, including the Senate. It’s a question of implementing that commitment of a year-and-a-half ago. We have to hope that that implementation will take place very, very soon.

BW: Aside from this concern on the Transco privatization, do you have any other concerns with regards to the restructuring of the power industry or with regards to the approval of this loan (inaudible)?

AR: Well, of course, it is a large, complex, and difficult proposition, but you’ve got a good road map in the law, and you have a lot of stakeholders who want the Philippines to succeed, starting with the Philippines public. Most importantly, the stakeholders are the Philippines’ people, government institutions, private companies, workers -- those are the main stakeholders -- but there are also foreign investors who want to see the Philippines’ economic growth take off. We want to see President Arroyo succeed in growing the country out of poverty, and that would be good for Filipino stakeholders and good for foreign stakeholders in the Philippines as well. That really cannot happen until the power sector is privatized.

BW: Worst case scenario: If the government fails to privatize Transco and they will be putting to vote the $250 million partial guarantee fee, would we be seeing its approval from the U.S., with regards to their vote on that decision?

AR: I don’t want to speculate on what we might do a month from now. I would rather just reserve comment on that if I could. Let’s see what happens down the line. I prefer to believe and to hope that the Congress and the Administration will conclude an agreement to let the investment go forward before that time.

BW: In that month’s time, what do we want to see? Do we just want to see the passage of the franchise bill and what specific things do we want to have started already?

AR: I think we’d like to see the privatization get off square one. We’d like to see it move ahead. What that process might look like? It could be the passage of the bill, it could be… it is hard for me to believe that the investment, that the bidding could have started without that but, maybe, a bidding process begun for the Transco and/or passage of the bill. Those would be the things that could show that it is moving.

BW: I guess you will be very closely monitoring developments in these following days?

AR: Yes, we certainly will, and supporting them. We believe this can succeed, will succeed, must succeed, and through our votes in the ADB, and through our direct bilateral support, we will be ready to stand by our Philippines’ partners and allies in dealing with a tough transition from a losing public sector electrical system to a private power system that lowers rates to the consumers here.

BW: In relation to that, what are your thoughts on -- there were earlier talks on a government takeover of Meralco, and there have been also reports that the government is intending to run the NAIA 3, instead of letting PIATCO run it. What do you think of increasing government control over utilities?

AR: Well, there is the question of oversight versus control. Most governments, including my own government, exert some degree of influence, control, monitoring to protect the public interests. That’s fair and that’s normal. That needs to be done in a transparent way. One of the big successes, and one of the things that makes me optimistic with respect to the power sector here is the successful transformation from the old ERB to the new ERC. It seems to be doing its job in a diligent way; although I gather it is short a member and people are waiting for it to make decisions. But everyone I spoke with in the industry and outside believes these are people with integrity that are working hard, and when they announce decisions they will be good, objective, independent decisions. So, having a de-politicized, public oversight body established is a major accomplishment. So, it’s a good thing. We think you can do it.

BW: Can I ask you a few more questions about some other issues?

AR: Sure.

BW: Because we’re doing a special report on security in the Philippines, and regarding the travel advisories you’ve been issuing, where do the information, which you are using to determine whether some places in the Philippines are safe or unsafe, where do these come from?

AR: Pretty much from the media. The travel advisories are intended to give Americans a timely and accurate information base on which they can make their decisions. Too often, Americans will take away from the media a much more negative impression than we think is warranted. So, people will read something on the Internet or see CNN. They will see protests or they’ll see news of a killing or something. That doesn’t give a whole picture. So our advisory is not meant to frighten Americans away. On the contrary, if you read it, it’s not a warning saying, “Stay away.” The advisory is for Americans to use caution, to be careful and think before they go to a given place within the Philippines. You should probably use the same caution when you visit my country. You know, find out places where there’s crime and you should not go at night and so forth. So, that’s what the advisories are for. It’s a due diligence sort of thing. As I say, most of the information comes from the media. I won’t say exclusively; to the extent we can, we check the media facts.

BW: But what are your others sources of information for these advisories?

AR: Host government authorities. We will ask them about things; if there is a reported kidnapping or, you know, a violent crime of some sort against an American. We will check with local authorities about that.

BW: How do you disseminate this information and how often do you update your advisories?

AR: It’s on our website and it’s updated on an ‘as needed’ basis, if the situation changes substantially from better to worse, or worse-to-better, or if a new event occurs. Certainly, not less than once a year or several times a year. In the case of the Philippines, it’s a little more dynamic. I think we’ve updated it once or twice in the past few months.

BW: What further steps do you think should be taken by the Philippine government with regards to increasing safety in the Philippines, particularly against terrorist attacks?

AR: Well, it’s not for me to recommend any further steps. On the contrary, we’re delighted here at the U.S. Embassy with the level of protection afforded both for the Philippines’ public and to us as guests within the Philippines’ public. We feel well protected, not only with the visible measures you see, but in the exchange of information we have on potential threats. So, we’re basically grateful to the government of the Philippines for its staunch support at every level. In fact, let’s see if the police boat is out there today. Some days they put a police boat out there in the back and they’re usually there without our even asking. Maybe they’ve got some news of a new threat. So, we’re really quite happy. I think Filipinos should be proud, too. The government is working very hard to protect the Philippines’ public and foreign visitors and residents, and by and large, they’ve had some successes. But crime is what it is. Terrorism is what it is. Terrorists have struck my country as well as yours. We’re in this together.

BW: Any final points on your statement on the Transco privatization and the U.S. approval of the partial credit guarantee?

AR: Well, again, the United States is guardedly optimistic. We’re optimistic that this country has taken a major decision and has made a commitment to privatize the power sector. We think that’s key to resolving some of the macro-economic imbalances and problems in this country. We’re confident you can do it and you mean to do it. The reason we’re guarded in the optimism is because you hadn’t done it yet. There are official American funds involved in supporting you as well as private investors who want to become involved and are involved in various elements of the power sector. So, we’re in your corner. We believe you can get this done. Now, we want to see it get done.

BW: Thank you very much for your time, sir.

AR: Thank you.

###