december 2008
About the Author
Julie M. Bayking
Investment Officer, Infrastructure Advisory, East Asia
Pacific, IFC Philippines. Area of
Expertise: Power/rural power
(Structuring, Business
Development, Client
Relationship). Julie started
with IFC as a Short Term
Consultant in 2004, when the
Small Power Utility Group
(SPUG) mandate was signed.
She was part of IFC’s core
team in the structuring of the
pilot SPUG transaction and
then became the Team Leader
of the subsequent
Transactions.
Securing Private Sector Participation in OffGrid Areas - The Greatest Reward of All
The off-grid areas in the Philippines have been bastions of high cost
and inefficiency and indeed virgin territories for rationalized
government policy. The success of this project demonstrates, however,
that chronic challenges in the power sector can be overcome by
investing in strong marketing and education efforts, creating a new
niche market for local investors in the sector, and staying one step
ahead of spoilers using vigilant and creative project management.
side by poor reliability
and high costs that
cannot be covered
through tariffs (the
average
per-capita
income in these areas is
only about $2 a day),
and on the distribution
side, less than efficient
rural
electric
cooperatives.
SPUG
loses P6 billion a year,
only P2 billion of which
can be covered by
missionary
subsidies
that are collected from
the universal levy. The
average loss of P6.50
for every kilowatt-hour
it
produces
Groundbreaking in Tablas Island, one of the pilot SPUG areas attended by the
consequently has been
officials of the Philippine Energy, 3i Powergen (new power provider), Tablas
a big disincentive to
Electric Cooperative, local public and IFC Team with Director Bernie Sheahan.
generate and to fully
serve the islands’ power
Providing power to remote islands in the
supply requirements.
Philippines represents a challenge. Consider
Government subsidies have been insufficient
this: the country’s population of over 85
to cover capital costs and new investments
million is spread over 7,100 islands, many of
to provide quality services and meet future
them so remote that even medium-size
demand needs. Without reliable power,
islands cannot be easily connected to the
economic development in these areas is
three major power grids that supply most of
thwarted and so are the prospects for its
the population with reliable power. The
inhabitants to improve their lives.
current alternative is the National Power
Corporation’s Small Power Utility Group
To address the challenge of providing
(SPUG) the monopoly of power supply in the
sufficient power to meet current and
islands and off-grid areas. These services
suppressed demand in an efficient and
have been characterized on the generation
sustainable manner, the Government of the
IFC SmartLessons — december 2008
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Philippines introduced a private sector participation scheme
for power generation. The government appointed IFC’s
Infrastructure Advisory department as Transaction Advisor
to support and advise on:
• The preparation of a regulatory framework for private
sector participation in SPUG areas;
• The drafting of model contractual documents such as
the Power Supply Agreement and Subsidy Agreement;
and
• The design, management, and implementation of a
competitive and transparent process to select new
private power providers.
As a start, in 2004 the government identified 14 possible
areas (the “First Wave”) based on their high level of
contribution to subsidy requirements: approximately 80
percent. This is where I got involved with this highly
challenging and compelling program! The first pilot SPUG
transaction, completed in 2005, covered the areas of
Marinduque, Tablas, and Romblon. It was followed by SPUG
II in 2006/07 in the fourth poorest province of Masbate, and
most recently in 2007/08 in Basilan Island, an area of conflict
south of Mindanao. In the process I have learned a number
of useful lessons, which I summarize below:
Lessons Learned
1) Keep in mind who is the boss… and it is not IFC!
Key to our success has been the ability to create a transaction
structure that served consumers and balanced the interests
of the off-taker (the electric cooperative) and the private
provider on a sustainable basis (i.e., affordable rates, secure
subsidy levels, and investment returns), crafted under rules
that are responsive to the needs of both parties, and
provided with balanced, fair mechanisms to address future
eventualities and differences in opinion. To get there, IFC
developed a Power Supply Agreement and new contractual
documents that addressed the concerns of off-takers and
new power providers, and blended international and local
good practices.
The regulatory framework was a “first” in these frontier
areas and had never been tested before. IFC was successful
in having the Regulatory Guidelines, based largely on an
output-based subsidy scheme, approved by the regulator in
an unprecedented timetable. This became possible because
at inception we had invested in a major effort in information,
communication, and education programs for national and
local stakeholders, and had gotten the buy-in of the
regulator. Early regulatory approval of these guidelines was
essential to the “success” of the private sector participation
program; it provided clear procedures for subsidies to flow
to the new private providers as competitively determined
through the tender process.
As Transaction Advisor we could be driving the bus, but let
us not forget who we are driving for…. It is the
stakeholders.
2) With targeted marketing, a new set of players in the
private power industry can come from local investors.
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IFC SmartLessons — december 2008
At the time the project was launched, IFC understood that
most of the players in the private generation industry were
foreign companies looking for scale and high growth upside
in projects. By those criteria, the off-grid areas are not
attractive enough, and these current investor groups would
have been a hard sell. The IFC local team, however, felt that
developing the off-grid islands as a niche market in the
Philippine power sector and offering local investors the
right incentives to invest could lead to the creation of an
emerging investor market. IFC undertook a painstaking
project marketing effort targeted toward this new group
of investors. Countless one-on-one sessions were patiently
held. IFC’s comprehensive information memorandum
provided them with sufficient data and project structure
that answered many of their concerns and made them
comfortable enough with the risks to bid. In the pilot areas,
the winner was a local diversified group whose main
investments are in bus transportation and tourist hotels. In
the second project, in Masbate, the winner was a local
construction, fuel, and water company that has just moved
into private power generation.
It is expected that the success of the initial projects will
attract even more local players and provide a continued
supply of private power partners for the country’s 60-plus
more isolated islands that need power supply
improvements.
3) Don’t cross the line between facilitating a solution
and imposing a solution.
One of the critical strategic decisions made by the IFC
project team that helped insure the attraction of private
sector players was to stay technology and energy resource
neutral, thus allowing the private sector to propose its own
solutions. IFC did not impose a solution itself. It did not
choose the energy that will be harnessed on each island. It
did not define the technology that will be used. It facilitated
the solutions by defining only the performance requirements
and environmental standards, the resource validation
criteria to avoid speculative tenders, and the flexible pricing
mechanism so that bids of different technologies can be
compared on common benchmarks. IFC insured that the
range of technologies and energy solutions are provided
for in the tender documents.
4) Love and commitment for a project objective are
contagious, and they have to start within the hearts of
the IFC project team.
Getting local power officials and business leaders of the
poorest provinces (who have doubts about the attractiveness
of their island for private sector power investors) to believe
in their own ability to achieve the project goals was an
important part of the team’s work. It required equal doses
of: commitment and resolve to overcome obstacles; and
patience to deal with issues and concerns and to put up
with unexpected delays.
The second SPUG transaction in Masbate Island province the fourth poorest province in the Philippines and a
typhoon-prone area  is a good example of how this works
in practice. The off-taker’s management and Board and the
government were initially skeptical because of low private
advice was to tender Basilan and Sulu islands separately,
sector interest. Coupled with the low credit rating given by
because the differences in off-taker creditworthiness and
the Philippine electrification agency to the off-taker, this
readiness outweighed common factors and economy-ofposed a serious challenge for our team. But as the common
scale considerations.
cliché goes, “Love begins at home.” The team’s initial work
was focused on the off-taker and its preparedness
and willingness to believe in its strengths, but also on
the need for change. This preparation entailed
bimonthly on-site visits, even on weekends and
during typhoon season. And it paid off, as we
managed to build confidence in the transaction.
Regarding the private sector players, we convinced
them that the project could be bankable and
attractive when we presented practical and
achievable solutions to improve the off-taker’s
performance and the growth prospects, once power
infrastructure constraints were addressed. The
ultimate proof of our success was that we were able
to solicit three qualified bids from local and
international companies. This tender was the most
competitive tender process I have experienced since
we started with the pilot areas in 2005. The result of
the first two lowest bids was a difference of P0.08
cents (equivalent to two-tenths of one US cent The control room of a power plant in Masbate, the 2nd island of the SPUG
$ 0.002).
transaction.
5) Execute with integrity and consistency.
7) Watch out… Not everyone wants it!
Tenders for projects in the Philippines tend to be flexible in
their implementation. People are used to the tugging and
pulling of the rules before and after the tender as bidders
and their sponsors try to gain advantage. In fact in many of
these islands, private power projects initiatives have failed
because of local politics.
You might think that everyone should love the program
but, surprisingly, not everyone does. There are those whose
agenda and interests are not served by the program, and
they will try to slow you down and trip you up.
IFC consistently kept politics out of the picture and sent a
clear signal that the competitive selection process would be
protected. IFC’s involvement in the whole process mitigated
the risk of political interference because it was conducted
on the basis of clear and objective criteria, full transparency,
and IFC’s consistent objectivity and integrity.
The buy-in of the key stakeholders varies in every island.
Generally, the government and the local distribution utilities
share the same objective of delivering reliable and efficient
power supply to the local communities. But in some cases,
this objective is not matched by their actions. Inexplicable
delays in approvals either at the national and subnational
level were encountered during the implementation and
post-implementation of the transactions.
6) In projects of this kind, maximize the common elements but leave room for each island to generate its own
template for success.
While we at IFC take pride in creating “templates” for
“replication” to scale up our successes, we need to also be
on the look-out for unique considerations in each island
that can affect design and implementation. Achieving the
correct balance between what is unique to each transaction
and situation, and maximizing the common elements to
achieve a fair degree of replication and economies of scale,
are essential in the context of smaller transactions that we
could otherwise not do on a stand-alone basis.
In our case the pilot transaction was a package of three
islands that were close geographically and had similar credit
ratings and off-takers, though they differed in size. Part of
the rationale for grouping was to attain economies of scale
and attractiveness to bidders that one of the smaller islands
might not achieve on its own. This rationale may not be
applicable to other areas, such as Mindanao. There, our
The team has had to be firm, control the timetable, and
closely monitor the progress of documents from table to
table if needed. It is not enough to have good intentions
and a good project that will benefit everyone. We need
vigilant project management because of those who would
try to derail the project for their own reasons or vested
interests. So watch what they do and not just what they
say.
8) Going the extra mile for the clients.
The original terms of reference envisioned that after the
open tender, when the award and the Power Supply
Agreement were signed, IFC’s job would be done. Not so.
In the first IFC-managed SPUG tender for the pilot areas, no
sooner was the ink was dry on the Power Supply Agreement,
than it became apparent that the new power provider and
the off-taker electric cooperatives would have a continuing
need for IFC’s hand-holding to interact with each other,
IFC SmartLessons — december 2008
3
undertake joint efforts for permitting, and
resolve project post-implementation issues.
IFC has to go the extra mile if we are to remain
true to our mandate and commitment to the
stakeholders, including our government client.
IFC stepped up to the challenge and elected to
provide post-implementation services. This
improved the understanding and coordination
between the contracting parties, facilitated
rational solutions for problem areas, and
consequently moved the project forward
despite the challenges.
Final Word - The greatest reward of ALL
To borrow a MasterCard slogan: Being involved
in this program, one finds the travel and
sights…. enjoyable. The hours… sufferable.
The IFC salary… tolerable. But the improvement
in the lives of the people in the remote islands,
and the future that we are able to open for
them. PRICELESS!
That is the greatest reward of all.
Post-implementation services will now be an
integral part of our transaction advisory
services.
IFC would like to recognize the following for their support for this project:
• 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 supported IFC’s advisory work on this project with
US$538,000 for, in particular, the technical and legal aspects.
• The Global Partnership on Output-Based Aid (GPOBA), a multi-donor program
administered by the World Bank and supported by the UK’s Department for International
Development, the Dutch Ministry of Foreign Affairs, the IFC, the Swedish International
Development Agency, and the Australian Agency for International Development, provided
US$350,000 in technical assistance for project design and development.
Disclaimer
IFC SmartLessons is an awards
program to share lessons learned
in development-oriented advisory
services and investment
operations. The findings,
interpretations, and conclusions
expressed in this paper are those
of the author(s) and do not
necessarily reflect the views of IFC
or its partner organizations, the
Executive Directors of The World
Bank or the governments they
represent. IFC does not assume
any responsibility for the
completeness or accuracy of the
information contained in this
document. Please see the terms
and conditions at www.ifc.org/
smartlessons or contact the
program at [email protected].
IFC SmartLessons — december 2008
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