The Department of Energy of the Republic of the Philippines yesterday put out public notices inviting interested parties to apply to bid for Transco, the transmission assets of the National Power Corporation. The notices formally put in motion a process that has been awaited since the ratification of the Electric Power Reform Act (Epira) in June 2001. CSFB is advising the government on the sale, a mandate it has held since August 2001.
Between then and now, the process has had to cross some interminable legal and regulatory hurdles, including the passage of the Implementing Rules and Regulations, the Privatization Plan and a soon to be ratified Franchise Deal.
Despite this wrangling, there seems to be a clear desire on the part of the government to finally get the deal done. The transaction will be structured as the sale of a concession agreement with some operational parts of Transco remaining with the company. The revenues that can be made from this concession agreement will be laid out in a new regulatory regime, which the power regulator - the ERC - will publish by the end of next month. It is thought that key to this new regime will be a pass through mechanism whereby certain operational costs will be allowed to be passed onto the consumer.
The deal is also likely to be structured so that a large amount of the consideration paid by the winning bidder can be deferred. This earn out structure will ensure that the operational risks will be mitigated by aligning the financial interests of the buying and selling parties.
The public notice makes it clear that only parties with the technical experience of running a transmission grid of a similar size to that of the Philippines are allowed to apply. There are thought to be 15-20 such companies in the world. However, there are no Philippine companies that meet these requirements.
Moreover, according to the Philippine constitution, no foreign party can fully own Philippine power assets. Instead they must form a local-foreign consortium 60%/40% in favour of the Philippine side. This means that any eventual winner of the deal will have to be a consortium between foreign and local parties.
One possible source of interest will come from the private equity players who are looking for regulated assets and returns in this time of global market misery. Indeed CVC recently bought a large transmission company in Spain, while KKR did a similar deal in the US, both attracted by regulated returns in the area of 12% a year.
However, the Philippines is a different kettle of fish from the US and the EU. There are huge regulatory and legal risks inherent in this deal. And most bidders will be looking for some kind of government guarantee over Transco's revenue streams. Given that one of the main reasons the government is doing the deal in the first place is to reduce its ballooning budget deficit, such a guarantee will not be too attractive to them. However, as the public notice makes perfectly clear, if the potential bidders and putative structures of the deal do not make sense to the Republic, then it reserves the right not to do the deal. Initial expressions of interest should be submitted to the government by February 21.