Public-Private Partnership Stories Philippines: Rural Electrification Small Power Utilities Group: Basilan Photo © Julinette Bayking/IFC IFC is helping to introduce private sector efficiency in power generation in off-grid areas covered by the Small Power Utilities Group (SPUG), which is already yielding significant social, economic, and environmental benefits. IFC’s third transaction in rural power in the Philippines is located at Basilan Island. Under a new power supply agreement with the Coastal Power Development Corpora- tion, 185,000 people currently without electricity in the Mindanao region will gain access to electricity for the first time. The Coastal Power Development Corporation will supply 11.8 MW at a cost of PHP 11 per kilowatt-hour. The agreement was signed in August 2008. This series provides an overview of public-private partnership stories in various infrastructure sectors, The project was implemented with the financial support of DevCo, a multi-donor facility affiliated with the where IFC was the lead advisor. Private Infrastructure Development Group. DevCo provides critical financial support for important infra- IFC Advisory Services in structure transactions in the poorest countries, helping boost economic growth and combat poverty. DevCo Public-Private Partnerships is funded by the UK’s Department for International Development (DFID), the Austrian Development 2121 Pennsylvania Ave. NW Agency, the Dutch Ministry of Foreign Affairs, the Swedish International Development Agency, and IFC. Washington D.C. 20433 ifc.org/ppp BACKGROUND Recognizing that consumers in these off-grid areas cannot The Philippines has a population of 85 million spread across afford payments that reflect the true cost of generation, the new 7,100 islands. In remote and island regions such as Mindanao, regulatory framework provides for regulated generation rates connection to the main power grid is often unviable because of based on affordability. The new power provider is selected through the high generation costs and the low incomes of the end users: a competitive selection process and the one offering the lowest per capita incomes in the region average less than PHP 100 a day. generation rate is awarded the contract. This rate will be adjusted In addition, high cost structures and poor reliability in off-grid over time to reflect changes in fixed and variable costs areas, resulting in frequent power outages, characterize the state- of generation. owned power suppliers (the cost of generation in off-grid areas Based on the general framework, the electric cooperatives are of Basilan is PHP 11 per kilowatt-hour, compared with PHP allowed to charge the above agreed rate for the generation 5.12 for regulated generation—regulated rates are established component of the consumer’s electricity charges. However, if the by the Energy Regulatory Commission, based on affordability). true cost of generation rate were higher, the new power provider The government has to partially subsidize the resulting revenue will be reimbursed for the difference, on the basis of kilowatt- deficit. Investments required to provide quality service and meet hours supplied, from a subsidy fund. future capacity needs have been inadequate because of budget constraints. BIDDING In accordance with national legislation, the Bids and Awards IFC’S ROLE Committee initiated negotiations with the sole bidder after single The government decided to introduce private sector participation bids had been received for each of two previous tenders. After a in power generation to: series of discussions, approved by the board of directors of the • Lower generation costs. Basilan Electric Cooperative, the Coastal Power Development • Reduce its subsidy burden. Corporation tendered its winning proposal to the Committee. • Iimprove reliability. Under the terms of the agreement, beginning in 2010 the • Meet projected demand in off-grid areas. corporation will supply 11.8 megawatts to the Basilan Electric Cooperative at a cost of PHP 11 per kilowatt-hour. In 2004, IFC signed a comprehensive mandate with the Philippine’s Department of Energy; the National Power Corporation, which runs the SPUG’s private-sector participation EXPECTED POST-TENDER RESULTS program; and the Power Sector Assets and Liabilities Management • The reliability and quality of supply will improve Corporation. The target of the mandate is to open 14 areas for 145,000 people with existing service almost covered by SPUG to private-sector participation (Basilan is one immediately after the start of commercial of them). These areas were selected based on their high subsidy requirements (approximately 80%). operations. As part of its comprehensive mandate, IFC advised the • Some 185,000 people currently without access government on: to electricity will gradually gain access to service for the first time. Preparing a regulatory framework for private sector • participation in SPUG areas. • The government will save more than PHP 50 Drafting model contractual documents, such as the • million per year (deficit reduction and impact power supply agreement and the subsidy agreement. on national budget). Designing, managing, and implementing a fair and • transparent competitive selection process. • The reduction in subsidies in this area will allow redeployment of funds to other areas currently Selecting new power providers. • without services. TRANSACTION STRUCTURE For all 14 areas, IFC structured a concession whereby the 12/2008 new power provider would operate and maintain the existing power station or build a new one. In the case of Basilan, IFC also brokered a 15-year power supply agreement whereby the supplier would provide guaranteed capacity to the Basilan Electric Cooperative, the local distribution utility.