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Since the fall of President Marcos in 1986, privatisation of state assets has promised to relieve the Philippine state of massive stranded assets, boost flagging revenues, and stoke much-needed foreign investment inflows into the country. In 2003-2004, the Philippine state plans to privatise some or all of the National Power Corporation (Napocor), the largest state firm with debts over 350 billion pesos. In the last five years alone, Napocor has lost 73 billion pesos. Yet, the budget gap between projected revenues from privatisation and actual revenues is usually the largest of all revenue gaps, with underperformance often over 80 per cent. So far, foreign interest in assets up for privatisation has been minimal, with most assets either failing to be sold or being bought by large local corporations for significantly less than the indicative price.
In the last year, privatisation in the Philippines has witnessed a major reversal and the possibility of two more large privatised firms being re-nationalized. In 1995, the Philippine state privatised Metro Manila’s water utility, franchising part of the water system to the powerful Ayala conglomerate and part to the equally powerful Lopez group of companies. The Philippine state claimed this sale was the largest of its kind in the world. On 9 December 2002, due to rising costs, losses and debts, the Lopez franchise terminated its contract and returned its share of the water utility back to the state. Just prior to the Lopez group’s announcement, water authorities had rejected the firm’s request for an immediate fee increase of over 60 per cent to boost its revenues. On the other hand, the Ayala franchise has been in the black since 2000, despite charging less than half the fee of the Lopez franchise.
Re-nationalizations of failed asset sales may not be a one-off exception caused by bad management, as the Philippine state has announced plans to potentially re-nationalize Philippine Airlines and the Philippine National Bank, both controlled by Lucio Tan and in financial distress. While the plan to re-nationalize Philippine Airlines in an effort to boost flight arrivals into the tourist-starved Philippines is now on the back burner, Philippine National Bank – the seventh largest bank in the Philippines – may return to the state fold. Hammered by heavy foreign exchange exposure during the Asian Financial Crisis and a politically-compromised loan portfolio, the bank suffers from the highest non-performing loan ratio conservatively estimated to be above 50 per cent. To save its 15 per cent stake in the suffering bank, the Philippine state is proposing to convert its emergency liquidity loans to the bank into equity to regain managerial control of the bank. Once control is regained, the state has promised to fully re-privatise the bank, if any willing and able buyers can be found.
Recent privatisation pitfalls have added to the state’s privatisation difficulties, while the return of the Lopez water franchise has burdened the state with lower revenues and more expenditure demands. Re-nationalizing either Philippine Airlines or the Philippine National Bank would add to these fiscal worries and cast more doubt on the Philippines’ already battered investment climate. These problems will aggravate the difficulties of privatising Napocor, the largest state firm with the heaviest fiscal burden.
WATCHPOINT: If the Philippine National Bank is re-nationalized, the Philippine state’s already tense relations with the World Bank may worsen.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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