Infrastructure Advisory The PPP series provides an overview of successful public- private partnerships in various infrastructure sectors, where IFC was the lead advisor. Infrastructure Advisory Services 2121 Pennsylvania Avenue NW Washington DC 20433, USA T. +1 202 458 5326/7 ifc.org 53264 Power Sector Philippines: Small Power Utilities Group, Basilan IFC is helping to introduce private sector efficiency in power generation in off-grid areas covered by the Small Power Utilities Group, 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. DevCo, a multi-donor program affiliated with the Private Infrastructure Development Group and supported by the UK's Department for International Development, the Dutch Ministry of Foreign Affairs, the Swedish International Development Agency and the Austrian Development Agency also supported the advisory work, in particular the technical and legal aspects. Background provide guaranteed capacity to the Basilan Electric Cooperative, The Philippines has a population of 85 million spread across the local distribution utility. 7,100 islands. In remote and island regions such as Mindanao, Recognizing that consumers in these off-grid areas cannot connection to the main power grid is often unviable because of afford payments that reflect the true cost of generation, the the high generation costs and the low incomes of the end users: new regulatory framework provides for regulated generation per capita incomes in the region average less than PHP 100 a day. rates based on affordability. The new power provider is selected In addition, high cost structures and poor reliability in off-grid through a competitive selection process and the one offering the areas, resulting in frequent power outages, characterize the state- lowest generation rate is awarded the contract. This rate will be owned power suppliers (the cost of generation in off-grid areas adjusted over time to reflect changes in fixed and variable costs of of Basilan is PHP 11 per kilowatt-hour, compared with PHP generation. 5.12 for regulated generation --regulated rates are established by the Energy Regulatory Commission, based on affordability). Based on the general framework, the electric cooperatives are The government has to partially subsidize the resulting revenue allowed to charge the above agreed rate for the generation deficit. Investments required to provide quality service and meet component of the consumer's electricity charges. However, if the future capacity needs have been inadequate because of budget true cost of generation rate were higher, the new power provider constraints. will be reimbursed for the difference, on the basis of kilowatt- hours supplied, from a subsidy fund. IFc's role The Government decided to introduce private sector participation BIddIng in power generation to: In accordance with national legislation, the Bids and Awards Committee initiated negotiations with the sole bidder after single · lower generation costs, bids had been received for each of two previous tenders. After a · reduce its subsidy burden, series of discussions, approved by the board of directors of the Basilan Electric Cooperative, the Coastal Power Development · improve reliability, and Corporation tendered its winning proposal to the Committee. · meet projected demand in off-grid areas. Under the terms of the agreement, beginning in 2010 the corporation will supply 11.8 megawatts to the Basilan Electric In 2004, IFC signed a comprehensive mandate with the Cooperative at a cost of PHP 11 per kilowatt-hour. Philippine's Department of Energy; the National Power Corporation, which runs the Small Power Utilities Group's private sector participation program; and the Power Sector Assets and expecTed posT-Tender resulTs Liabilities Management Corporation. The target of the mandate · The reliability and quality of supply will improve for is to open 14 areas covered by the Small Power Utilities Group 145,000 people with existing service almost immedi- to private sector participation (Basilan is one of them). These ately after the start of commercial operations. areas were selected based on their high subsidy requirements (approximately 80%). · Some 185,000 people currently without access to electricity will gradually gain access to service for As part of its comprehensive mandate, IFC advised the the first time. Government on: · The Government will save more than PHP 50 million · preparing a regulatory framework for private sector participa- per year (deficit reduction and impact on national tion in Small Power Utilities Group areas; budget). · drafting model contractual documents, such as the power sup- · The reduction in subsidies in this area will allow ply agreement and the subsidy agreement; redeployment of funds to other · designing, managing, and implementing a fair and transparent areas currently without services. competitive selection process; and · selecting new power providers. TransacTIon sTrucTure For all 14 areas, IFC structured a concession whereby the 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 power supply agreement whereby the supplier would 12/2008