POSTSCRIPT / February 11, 2007 / Sunday

By FEDERICO D. PASCUAL JR.

Philippine STAR Columnist

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With 3rd Transco failed bid, why not negotiate?

ITALIANS FUMING: The TERNA Group, the top Italian and the No. 2 European electricity transmission grid operator, must be irritated with the conduct of the third public bidding for the $3-billion National Transmission Corp. (Transco) privatization held Feb. 5.

Its Filipino partner, Citadel Holdings Inc., was itself shaken that the third bidding in six years was declared a failure by the Power Sector Assets and Liability Management Corp. (Psalm) because only one party (Citadel/TERNA) submitted a bid.

Since this is the third failed attempt to sell Transco, the bidding committee could have just announced that since there was only one formal bidder out of the three interested parties, the government is now ready to negotiate with the lone bidder left.

Such a move is allowed under the law, which provides that after a second failed bidding the government may negotiate with the remaining lone bidder. The privatization of Transco has dragged on too long.

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$3-B TEMPTATION: The slow pacing of the administration in closing giant deals that need quick decisive moves has turned off a number of foreign investors to whom time is gold.

To complicate matters, sometimes such delays spawn illicit maneuvering such as the rewriting of the bidding terms to favor players who have found the right connect to the powers that be. A $3-billion deal is too tempting to let pass.

After six years, it will not be surprising if the inconclusive attempts to bid out Transco – among other deals gone sour — may have damaged the investment environment in the country in the eyes of Europeans.

In the Transco case, I heard that the Italians are not ready to just flush down the drain the considerable amount of time, money and energy they have spent in preparing for the bidding.

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ADJUSTMENTS EYED?: What were the reasons behind the withdrawal of the other two interested parties? In contrast, why did the Citadel/TERNA Group go on and submit a bid?

Business buzz has it that the two other parties that did not submit their bids were waiting for adjustments in the bidding rules to make them more liberal. Such a stance is understandable in this country where it is easy to change the rules in mid-game. But…

On the other hand, the Citadel/TERNA partnership went ahead and submitted bids for both the technical and financial aspects of the privatization despite its not having any big and influential backer. Why?

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THORNY ISSUES: Industry sources said that there were three serious issues complicating the Transco bidding, which may explain why two parties backed out:

1. The reported P15-billion Transco outstanding liabilities and obligations. Who will pay for them?

2. The still unresolved congressional franchise of Transco. After topping the bid, will the winner still spend a fortune lobbying for a franchise from Congress?

3. The solitary liability clause, which requires that each of the parties in the winning bid could be held liable for any damages incurred from the transaction.

These three issues were also cited by other parties that did not participate in the bidding.

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NEGOTIATED SALE: The big difference among the three bidders was that Citadel/TERNA considered all the three issues and took the risk. It assured Psalm that it will take the responsibility and shoulder the cost of solving the three problems.

With this assurance, power sector players I have talked with said the time was right for a negotiated sale with the Citadel/TERNA consortium — now that it has shown willingness and readiness to assume all attendant risks.

This will not only show and prove to foreign investors that the Philippines means business, but will also disprove talk that the administration is favoring one or two groups over the last remaining committed bidder.

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BLOODY PROCESS: After six years, Transco and whoever takes over it will have to buckle down to work, especially on maintenance and the major upgrading of the national electrical transmission network estimated to entail $850 million.

The Citadel/TERNA group has said it was ready to shoulder this massive undertaking.

Consortium representative Rogelio Singson (former president of Bases Conversion Development Authority) said that their initial thought was to walk out after the third failed bidding. But he added that they were still hoping the government will see through the tedious and expensive process.

In a press conference last week, Singson said that the consortium has spent millions of dollars just for the bid preparation. He added that the group might not want to go through that again.

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WALK AWAY?: Italian Ambassador Rubens Fedele told the press: “I am sad what happened creates doubts in investors. It will be very hard to invite other Italian investors to the Philippines. Please note that investments almost disappeared after 1997 with only one major Italian investment remaining.”

He added: “We might walk away, but if given a chance, I will talk to the President. Although I am most willing to discuss the matter with the concerned ministers of the government and tell them what our concerns are and that we are very hopeful.”

Upon Psalm’s announcement of failure of bidding, Fabio Todeschini, chief financial officer of the consortium, said: “Our first impression is for us to walk away. It is really disgusting and disappointing.”

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PCCI SUPPORTIVE: At the Philippine Chamber of Commerce and Industry, chairman Donald G. Dee expressed support for Malacanang’s possibly opting, through Psalm, to negotiate the purchase of Transco with the qualified entity that submitted the lone bid.

The former ambassador said: “This is the fourth time that a similar international bidding was held and it is about time that the national government showed its determined will and formal decision to finally proceed with the initial privatization of Transco under its own terms and conditions as defined in the latest bidding.

“In formal business sense and practice, this is and would be totally acceptable and respectable nationally and internationally.

“Further adjustments and negotiated terms with bidders who failed and abstained in bidding would not only cause more delay but also manifest continuing weakness and even credibility in national government decision-making and transparency in its processes.”

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RATE REVIEW: Dee proposed, however, the inclusion in the negotiation with the lone bidder “the very important element of not only rate making but more of forward rate planning and indications or, where possible, rate commitment be included as a major item in the agreement.”

Dee said that this would align Transco’s privatization with the objectives of the Electric Power Industry Reform Act of 2001 (EPIRA), which is to bring power rates to competitive level within some predictable period of time.

Business has brought up with government the concern, he said, that “the Transco rate is observed to be highest in the region and that the unusually high return on investment of Transco, as an intrinsic monopoly, would need some review.”

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(First published in the Philippine STAR of February 11, 2007)

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