Thursday, November 15, 2007

Should we privatize PNOC-EDC?

SO, the government is thinking of selling 60 percent of the Philippine National Oil Co.-Energy Development Corp., or PNOC-EDC. For what? Because the government has failed to meet its tax-collection targets and, therefore, would sell some prized assets to compensate for its incompetence?

We had better be clear about our objectives because we might be losing track of our long-term interests in favor of some short-term gains. We should go easy on the privatization trigger on this one. Or, as Senate President Manny Villar Jr. counseled at Wednesday’s Quijano de Manila Symposium, the key word to privatization is “judiciousness.” In this case, you have to weigh both the financials and the energy-strategy considerations.

This is precisely the message of Sens. Joker Arroyo and Mar Roxas who are pushing Resolution 203 urging the government to “hold in abeyance” the bidding of the PNOC-EDC shares worth P35 billion. Indeed, why sell a prime state asset when it’s earning money for its own business and some for the government? If we lose control of the EDC, are we not abandoning our policy objective of developing indigenous sources of energy with the sale? Maybe, maybe not—but we first have to answer these questions before we can even think of selling those assets. And we do need lots of technical inputs in making that decision. A November 21 auction date, therefore, makes it impossible for the government and its experts—if it’s even tapping any—to find out whether or not we’d need to keep holding on to a strategic 60-percent stake in such a strategic company.

Privatization has its merits. If the company doesn’t have much money, the entry of private investments could translate to more cash for energy exploration and development. Yet, in truth, the company has been doing financially well and is projected to earn a net profit of more than P7 billion this year.

Supposedly, private companies, especially if they are those huge international oil companies (IOCs) like Royal Dutch Shell, possess new technologies and management expertise necessary to recover hard-to-reach and hard-to-find oil or gas, something that could rub off on our local oil and gas professionals, thus improving our own capabilities. The Norwegians privatized Statoil, their national oil company (NOC), and that policy decision seems to be working just fine for them.

But then again, privatizing NOCs has not always been the trend globally. It’s because NOCs perform certain social functions that are quite different from the IOCs’. While IOCs are driven purely by the profit motive, NOCs worldwide were often envisioned to ensure energy security and sustain local economies. In other words, NOCs, like our very own PNOC-EDC, are there to perform certain long-term strategic national objectives.

This role has even become more important during this “age of energy-supply anxiety” characterized by the rapid rise of energy demand from the Asia-Pacific region (especially China); the continuing political uncertainties brought about by terrorist threats to energy infrastructure; production disruption in oil-producing areas like Iraq; and declining access by IOCs to proven reserves controlled by states in the Middle East, Russia and Latin America.

There is, in fact, a paradigm shift in the way NOCs are behaving in response to this anxiety, said geologist Pete Stark, vice president for Denver-based IHS Inc., an energy and engineering think tank. It used to be that NOC businesses were simply all about managing the state’s energy resources for the country’s long-term benefit. Now, NOCs—according to Stark—are becoming international exploration companies, competing with IOCs in the home as well as global marketplace. The extreme manifestation of this paradigm shift is “energy nationalism” where countries like Libya, Russia, Venezuela and Angola moved to consolidate state control away from IOCs.

What’s the Philippines’ game plan, given these new global realities? How would the selling of the country’s crown jewels affect our chances of improving our indigenous energy sources? Will privatization work for us during this time of energy nationalism? It seems that the government is not looking at these issues quite well, as its mind is largely focused on getting the fresh billions that the sale would generate. Yet, meeting short-term fiscal balance this year will never be worth the potential loss of a long-term strategic resource.

We are concerned with the moral hazard that goes with this sale. Privatization per se, granting that it’s done properly and with great transparency, is a very good policy. This is clear enough with water privatization where, despite the problems with Maynilad, access to potable water has ceased to become a political issue in Metro Manila. But privatization could be a questionable policy decision when the primary purpose is to collect the cash to compensate for government failures elsewhere, and improving the economic-policy environment becomes secondary. The sale of PNOC-EDC seems to have these characteristics.

What’s to prevent the government from conducting a fire sale of an available public asset every time the Bureaus of Internal Revenue and Customs fail to collect the desired amount of taxes? Indeed, if revenue bureaucrats could sell anything every time they fail to do their mandate, there would no longer be any incentive for policy reforms. And when we run out of assets to sell, what happens?

1 comment:

Anonymous said...

And here we are at the tail end of 2009, two years after you wrote this article, and the question remains: what happens when we run out of assets to sell? The government not only plans now to sell PNOC-EDC, bu thas increased the stake it plans to sell, from 40 to 60 percent.