Investors in the Philippines’ energy sector drove a 270% increase in committed investment in the first half of 2008, but are increasingly wary that the Philippines is backtracking on committed reforms.

Speaking before members of the American Chamber of Commerce recently, Philippines Department of Trade & Industry Undersecretary Elmer Hernandez said investment in the energy sector was primarily responsible for a 270% increase in committed foreign investment in the first six months of 2008 as efforts to privatize the sector accelerated. In recent months, however, investor sentiment has cooled.

Analysts and investors say one reason is that government is using its remaining generation assets to subsidize generation rates, making it impossible for them to compete profitably.

According to Global Source economists Romeo Bernardo and Marie-Christine Tang, the Energy Regulatory Commission — which regulates power rates — has mandated reduced generation rates for the state-owned National Power Corporation (NPC) that are P0.41 below cost. Ernie Pantangco, president of the Philippine Independent Power Producers Association which represents investors in the industry, said in a statement that government is effectively dictating unprofitable rates for investors who have purchased NPC assets or are planning to build new generating capacity.

The Philippines began privatizing electricity generation in 2001 with the passage of the Electric Power Industry Reform Act (EPIRA), whose ultimate objective was to lower the cost of power by fostering private-sector competition. Although EPIRA was widely praised at the time as a visionary reform effort that other countries should emulate, the Philippine government began selling generation assets in earnest only in 2007.

Once 70% of NPC assets and existing contracts with Independent Power Producers (IPP) have been privatized, industry and consumers will have the right to choose who they buy electricity from. Originally, the 70% threshold was expected to be met in 2004. Although delayed, the Philippines is finally close to meeting the assets threshold after selling close to $3 billion in NPC generating capacity, mostly in 2007 and the first three months of this year.

However, none of the NPC-IPP contracts have been sold. According to Pantangco, the government hasn’t decided how it should go about privatizing the contracts.

In the meantime, a consortium led by Suez Energy has delayed remitting a 40% down payment on its winning $787 million bid for the 600 MW Calaca coal-fired plant which was due August 4. The winning bid was announced in October 2007.

Pantangco said government has so far failed to fulfill the requirements for turnover of the plant. "On the other hand Suez and its creditors are also likely concerned that the investment won’t provide a return to investors if government continues to sell electricity below cost," he said.