Cablegate: Philippines Finally Sells Transco for $3.95 Billion

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O 190133Z DEC 07
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9219
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
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RUEHIN/AIT TAIPEI 1594
RUEHBJ/AMEMBASSY BEIJING 6278
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
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RUEHHK/AMCONSUL HONG KONG 4782
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RUEHWL/AMEMBASSY WELLINGTON 3438
RHHMUNA/USCINCPAC HONOLULU HI//FPA//

UNCLAS SECTION 01 OF 02 MANILA 003966

SIPDIS

STATE FOR EEB/IFD/OIA, EB/ESC AND EAP/PMBS
DOE FOR TOM CUTLER
STATE PASS EXIM, OPIC, AND USTR
STATE PASS USAID FOR AA/ANE AND AA/G
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ECON ENRG EINV RP
SUBJECT: Philippines Finally Sells TransCo for $3.95 Billion

REF: a) MANILA 170 b) 06 Manila 1411

1. (SBU) Summary: With a bid of $3.95 billion a Philippine/Chinese
consortium won the fifth (and hopefully final) round of bidding for
the 25 year concession to operate the Philippine National
Transmission Company, TransCo, which operates the electric grid of
the Philippines. The consortium must now obtain a franchise from
the Philippine Congress in order to take over operations.
Accusations of improprieties in the bidding process may complicate,
but are ultimately unlikely to deter, congressional approval. This
is a significant step in the important process of privatization and
liberalization of the electric sector in the Philippines. End
summary.

2. Only two bidders ultimately participated in the fifth round of
bidding for TransCo. The Monte Oro Group/State Grid of China
consortium won the round with a bid of $3.95 billion. The other
bidder, a Philippine/U.S./Malaysian consortium, bid $3.905 billion,
also beating the reported reserve price of $3.8 billion.

Accusations of Corruption
-------------------------

3. As is usual in the Philippines, speculation about possible
corruption or conflict of interest in the bidding process is
widespread. Some accusations focus on the participation in the
Monte Oro Group of Ricky Razon, the owner of port operator
International Container Terminal Services and a strong supporter of
President Arroyo, and Diosdado "Buboy" Macapagal, Jr., President
Arroyo's brother. Muckrakers highlight the long-term business
relationship between Razon and Jose Ibazeta, the official
responsible for the privatization process. Other conspiracy
theorists suggest that the bids are "too close to each other and to
the reserve price, for comfort" and that they may have been
negotiated among the bidders. (One participant told us that his
company was offered such a deal during the fourth round.) One
prospective bidder, disqualified for insufficient financial
resources, has already filed a case against the government alleging
bias in the process.

4. (SBU) Embassy has been in close contact with Texas Pacific Group
which (via Newbridge Asia LLP) held a 35% share in the losing
bidder. This consortium also participated in the fourth round, but
ultimately did not bid in that round as bidding documents did not
meet international standards and were not bankable. On December 4,
Ambassador met with Ernie Bower, representative of Texas Pacific
Group. Bower said the bidding document issues had all been
resolved. On December 14, Bower told EconOff that the bidding
process seemed to have been fair and open.

What Comes Next
---------------

5. (U) The government now has 30 days to review the winning
bidder's documents to verify that the submission meets all technical
requirements. The winner will then have to seek a franchise from
Congress. Our contacts believe that Congress will grant the
concession, but that numerous bribes will have to be paid in the
process.

6. (U) If all goes well, the TransCo concession could be in private
hands sometime in 2008. Much of the sales price will be used to
retire TransCo debt, which stood at $2.9 billion in September, 2007,
though there will be a significant infusion of cash into the
government's budget from the sale.

Background
----------

6. (U) Four prior bidding rounds, including one in February 2007,
failed to attract more than one bidder. The government brought in
Jose Ibazeta from the private sector to head-up the power
privatization process after the failure of the fourth round. His

MANILA 00003966 002 OF 002

effort to bring bidding documents up to international standards and
his road show in June 2007 netted interest by 19 potential bidders
and the final sale.

7. (U) Five consortiums submitted bidding documents. One was
disqualified due to lack of financial strength. A second
consortium, accused of not meeting the 60% Philippine-ownership
requirement saw its foreign partner, Terna S.p.A. of Italy, back out
at the final hour. The third consortium cited discomfort with the
auction conditions.

8. (SBU) Comment: Corruption allegations are to be expected in any
major privatization in the Philippines. It is unlikely that we will
ever know whether collusion took place in this bidding, or whether
there were other irregularities. There is a consensus among
Filipinos that Congress will get its share when the franchise comes
before it. In any case, privatization of TransCo is yet another
victory for free enterprise and sensible economic policy in the
Philippines. Together with an increased pace in the privatization
of generation assets, the sale of the grid brings more market power
to bear in the electric sector. In the long run, this should lead
to lower electric prices and more certainty of supply.

KENNEY

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