Electricity is one of the most important facilitating modern activities and country’s development. Through time, the importance of electricity to people’s life has only increased.
On this ground, more efficient and reliable provision of electricity is desirable for the society.
This paper first examines past and present development of the electricity sector in four Southeast Asian countries–Thailand, Malaysia, Indonesia and the Philippines.
It then, discusses lessons learned from the past experiences and provides policy recommendations for the four countries.
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In developing countries, the surge of high demand for electricity began after the World War II. Electricity was one of the most crucial infrastructures facilitating modern development and industrialization. With advices and supports from the cold-war superpowers and multilateral development agencies, especially the World Bank, many developing countries adopted the state-led model and established their state-owned electricity enterprise (Williams and Ghanada, 2006). Thailand, Malaysia, Indonesia and the Philippines were among them. Prior to the late 1980’s, electricity production and transmission was owned by a state-own monopoly: EGAT in Thailand, National Electricity Board (NEB) in 11 peninsula states of Malaysia, Sabah Electricity Board (SEB) and Sawawak Electricity Supply (SESCO) in Borneo states of Malaysia, Perusahaan Umum Lishtrik Negara (PLN) in Indonesia and National Power Corporation (NAPOCOR) or (NPC) in the Philippines.
In these countries, development of electricity sector varied by speed and direction. The fact that Indonesia and the Philippines contain several small islands makes electricity distribution difficult. In 1990, electrification rate was 37.3 percent in Indonesia, 54.6 percent in the Philippines and 92.7 percent in Thailand (World Bank Publication, 1994). High electricity demand due to rapid economic growth in the cities also caused electricity blackouts during the peak hours (Sharma et al., 2004).
Facing financial constraint, the government of Indonesia and the Philippines had to legalize IPPs to produce additional electricity supply. In 1989, the Philippines was the first of the four countries to allow independent power producers (IPPs). By the end of 1993, more than 25 IPPs were producing electricity in the Philippines and the power shortage problem was resolved (Abrenica, 2004)
As in 2007, the electricity industry in Thailand, Malaysia, Indonesia and the Philippines is still highly vertically and horizontally integrated. The generation is still operated by either a state-owned monopoly (Thailand, Indonesia and the Philippines) or a corporation heavily controlled by the government (Malaysia). At the wholesale level, there is very little to no competition. Transmission is generally monopolized. Distribution is monopolized in Malaysia and locally monopolized in Thailand, Indonesia and the Philippines.
Next, we evaluate privatization and reform policies adopted by the four countries.
Philippines privatization and reform policies
When we abstract away from market imperfection–i.e. political influences and transaction costs–competitive conduct and higher efficiency could be achieved. To promote competition in the wholesale market, the government could privatize the state-owned enterprise, split it into smaller companies and let those companies compete in a competitive manner with all other IPPs. As for the retail market, the government could allow more companies to serve this function. Competition is believed to result in higher efficiency and lower price.
In reality, the electricity industry is very complex. First of all, the monopoly state-owned enterprise is subject to much control from the government. The rational behind many policies adopted in the past could be explained by pure politics. Second of all, electricity production requires high initial investment and takes a long time to break even. In developing countries, where the government still wants to attract private investors into the production field, rigorous competition could discourage them. Third of all, restructuring, unbundling and break-up of companies are often time irreversible. It takes time and has to be well-planned because unsuccessful outcome could result in great and unnecessary lost.
3.1 Privatization
In theory, privatization could lead to the following achievements: 1) private companies are subject to less counterproductive interference by the government, 2) if the government is financially constrained, privatization is a means to raise money and 3) foreign private investors could bring skills and technology to the country (Thomas, 2006). In practice, however, those achievements are not always realized. Factors such as politics and inefficient contracts can lead to anti-competitive and efficient conducts.
In Thailand, Malaysia, Indonesia and the Philippines, privatization took two forms. One is through allowing IPPs and another is through privatizing the state-owned enterprise. We next discuss each of these issues in detail.
3.1.1. IPPs
During the late 1980’s to early 1990’s, the government of Thailand, Malaysia, Indonesia and the Philippines legalized IPP to allow private participation in the electricity sector. The Philippines was the first among the four countries to allow IPPs. During the late 1980′s and early 1990′s, the country’s rapid economics growth led to high electricity demand. Blackouts of up to 10 hours were common and their economic cost was substantial (Sharma et. al., 2004). In 1989, the first IPP contract was signed. By the end of 1993, more than 25 IPPs were producing electricity in the Philippines and the power shortage problem was resolved (Abrenica, 2004). However, inequitable contracts and brought about large financial burden to the government (Abrenica, 2004). In 2001, about 41 percent of electricity is produced by IPPs and the rest by NAPOCOR (Woodhouse, 2005)
3.2. Wholesale Competition
The legalization of IPPs in Thailand, Indonesia, Malaysia and the Philippines provides a good foundation to promote competition in the wholesale market. Currently, however, IPPs directly supply to the national electricity authority under inflexible long-term bilateral contracts. There is very little to no wholesale competition in the wholesale market.
Encouraging competition in the wholesale market is risky when the market is not mature and there exist dominant sellers. Negotiation failure between sellers and buyers can lead to power shortage. Abuse of dominant power by big sellers can drive smaller firms out of the market. In the case of UK, Norway, Alberta and California, failure of market reform is resulted by “market power abuse of a few dominant sellers” (Woo et al., 2003). Thus, as long as the markets in Thailand, Malaysia, Indonesia and the Philippines are still dominated by a state-owned monopoly, competition in the wholesale market should not be enforced.
3.3. Retail Competition
Providing choices of retail services has not been taken seriously in Thailand, Malaysia, Indonesia and the Philippines. This is because the countries have been focusing on delivering electricity to rural communities and guaranteeing peak-load supply in the cities.
3.4. Unbundling
Unbundling of the four functions of the electricity sector–generation, transmission, distribution and retail–has been taken into consideration when countries make plans for privatization. In 2001, the Philippines government approved of a full privatization of the electricity sector through the Electricity Power Industry Reform Act (EPIRA) (Thomas, 2006). This includes unbundling generation, transmission, distribution, and retail services. As in 2007, the Philippines has already split the National Transmission Company (TRANSCO) from NAPOCOR. Both TRANSCO and NAPOCOR will be privatized, but the implementation has been delayed (Thomas, 2006).
3.5. Introduction of Independent Regulator
Since competition in the electricity sector is far from perfect, a regulatory body is needed to mimic competitive market conducts, promote efficiency and ensure fair practices. To achieve such outcomes, a regulatory body should be independent from political influences and understand complex conditions and problems of the electricity sector in each market. So far, none of the four countries has established a regulatory body to serve such functions.
On this ground, more efficient and reliable provision of electricity is desirable for the society.
This paper first examines past and present development of the electricity sector in four Southeast Asian countries–Thailand, Malaysia, Indonesia and the Philippines.
It then, discusses lessons learned from the past experiences and provides policy recommendations for the four countries.
****
In developing countries, the surge of high demand for electricity began after the World War II. Electricity was one of the most crucial infrastructures facilitating modern development and industrialization. With advices and supports from the cold-war superpowers and multilateral development agencies, especially the World Bank, many developing countries adopted the state-led model and established their state-owned electricity enterprise (Williams and Ghanada, 2006). Thailand, Malaysia, Indonesia and the Philippines were among them. Prior to the late 1980’s, electricity production and transmission was owned by a state-own monopoly: EGAT in Thailand, National Electricity Board (NEB) in 11 peninsula states of Malaysia, Sabah Electricity Board (SEB) and Sawawak Electricity Supply (SESCO) in Borneo states of Malaysia, Perusahaan Umum Lishtrik Negara (PLN) in Indonesia and National Power Corporation (NAPOCOR) or (NPC) in the Philippines.
In these countries, development of electricity sector varied by speed and direction. The fact that Indonesia and the Philippines contain several small islands makes electricity distribution difficult. In 1990, electrification rate was 37.3 percent in Indonesia, 54.6 percent in the Philippines and 92.7 percent in Thailand (World Bank Publication, 1994). High electricity demand due to rapid economic growth in the cities also caused electricity blackouts during the peak hours (Sharma et al., 2004).
Facing financial constraint, the government of Indonesia and the Philippines had to legalize IPPs to produce additional electricity supply. In 1989, the Philippines was the first of the four countries to allow independent power producers (IPPs). By the end of 1993, more than 25 IPPs were producing electricity in the Philippines and the power shortage problem was resolved (Abrenica, 2004)
As in 2007, the electricity industry in Thailand, Malaysia, Indonesia and the Philippines is still highly vertically and horizontally integrated. The generation is still operated by either a state-owned monopoly (Thailand, Indonesia and the Philippines) or a corporation heavily controlled by the government (Malaysia). At the wholesale level, there is very little to no competition. Transmission is generally monopolized. Distribution is monopolized in Malaysia and locally monopolized in Thailand, Indonesia and the Philippines.
Next, we evaluate privatization and reform policies adopted by the four countries.
Philippines privatization and reform policies
When we abstract away from market imperfection–i.e. political influences and transaction costs–competitive conduct and higher efficiency could be achieved. To promote competition in the wholesale market, the government could privatize the state-owned enterprise, split it into smaller companies and let those companies compete in a competitive manner with all other IPPs. As for the retail market, the government could allow more companies to serve this function. Competition is believed to result in higher efficiency and lower price.
In reality, the electricity industry is very complex. First of all, the monopoly state-owned enterprise is subject to much control from the government. The rational behind many policies adopted in the past could be explained by pure politics. Second of all, electricity production requires high initial investment and takes a long time to break even. In developing countries, where the government still wants to attract private investors into the production field, rigorous competition could discourage them. Third of all, restructuring, unbundling and break-up of companies are often time irreversible. It takes time and has to be well-planned because unsuccessful outcome could result in great and unnecessary lost.
3.1 Privatization
In theory, privatization could lead to the following achievements: 1) private companies are subject to less counterproductive interference by the government, 2) if the government is financially constrained, privatization is a means to raise money and 3) foreign private investors could bring skills and technology to the country (Thomas, 2006). In practice, however, those achievements are not always realized. Factors such as politics and inefficient contracts can lead to anti-competitive and efficient conducts.
In Thailand, Malaysia, Indonesia and the Philippines, privatization took two forms. One is through allowing IPPs and another is through privatizing the state-owned enterprise. We next discuss each of these issues in detail.
3.1.1. IPPs
During the late 1980’s to early 1990’s, the government of Thailand, Malaysia, Indonesia and the Philippines legalized IPP to allow private participation in the electricity sector. The Philippines was the first among the four countries to allow IPPs. During the late 1980′s and early 1990′s, the country’s rapid economics growth led to high electricity demand. Blackouts of up to 10 hours were common and their economic cost was substantial (Sharma et. al., 2004). In 1989, the first IPP contract was signed. By the end of 1993, more than 25 IPPs were producing electricity in the Philippines and the power shortage problem was resolved (Abrenica, 2004). However, inequitable contracts and brought about large financial burden to the government (Abrenica, 2004). In 2001, about 41 percent of electricity is produced by IPPs and the rest by NAPOCOR (Woodhouse, 2005)
3.2. Wholesale Competition
The legalization of IPPs in Thailand, Indonesia, Malaysia and the Philippines provides a good foundation to promote competition in the wholesale market. Currently, however, IPPs directly supply to the national electricity authority under inflexible long-term bilateral contracts. There is very little to no wholesale competition in the wholesale market.
Encouraging competition in the wholesale market is risky when the market is not mature and there exist dominant sellers. Negotiation failure between sellers and buyers can lead to power shortage. Abuse of dominant power by big sellers can drive smaller firms out of the market. In the case of UK, Norway, Alberta and California, failure of market reform is resulted by “market power abuse of a few dominant sellers” (Woo et al., 2003). Thus, as long as the markets in Thailand, Malaysia, Indonesia and the Philippines are still dominated by a state-owned monopoly, competition in the wholesale market should not be enforced.
3.3. Retail Competition
Providing choices of retail services has not been taken seriously in Thailand, Malaysia, Indonesia and the Philippines. This is because the countries have been focusing on delivering electricity to rural communities and guaranteeing peak-load supply in the cities.
3.4. Unbundling
Unbundling of the four functions of the electricity sector–generation, transmission, distribution and retail–has been taken into consideration when countries make plans for privatization. In 2001, the Philippines government approved of a full privatization of the electricity sector through the Electricity Power Industry Reform Act (EPIRA) (Thomas, 2006). This includes unbundling generation, transmission, distribution, and retail services. As in 2007, the Philippines has already split the National Transmission Company (TRANSCO) from NAPOCOR. Both TRANSCO and NAPOCOR will be privatized, but the implementation has been delayed (Thomas, 2006).
3.5. Introduction of Independent Regulator
Since competition in the electricity sector is far from perfect, a regulatory body is needed to mimic competitive market conducts, promote efficiency and ensure fair practices. To achieve such outcomes, a regulatory body should be independent from political influences and understand complex conditions and problems of the electricity sector in each market. So far, none of the four countries has established a regulatory body to serve such functions.
4. Summary and Conclusion
During the late 1980’s to early 1990’s these four countries started to legalize IPPs to promote private participation in the electricity generation field. These IPPs alleviated the power shortage problem in Indonesia and the Philippines and served as an initial step towards market liberalization in all four countries. Since power plants are expensive, electricity demand is unpredictable and it could take a long time for the company to breakeven, the government had to provide them some insurance for healthy profit. This includes take-or-pay, dollar-pegged payment, and guaranteed rate of return clauses. Throughout the past decade, especially right after the Asian financial crisis in 1997, the governments have been struggling to meet these obligations.
It is, however, possible for the government to achieve more equitable contracts through renegotiation. Lessons learned from past experiences reveal that the take-or-pay and dollar-pegged clauses are very risky. When countries are hit by unforeseeable economic crisis and reduction in demand for electricity, the governments would have no choice but to pay for unutilized capacity. If the payment is in other currencies, currency devaluation would result in even greater loss. Here, contract renegotiation is a means to achieve equity. In the Philippines, the government renegotiated some of their IPP contracts and believed to have saved at least US$ 1 billion (Thomas, 2006).
In this paper, we first examine development towards liberalization and privatization of the electricity sector in four Southeast Asian countries-Thailand, Malaysia, Indonesia and the Philippines. During the late 1980’s to early 1990’s these four countries started to legalize IPPs to promote private participation in the electricity generation field. These IPPs alleviated the power shortage problem in Indonesia and the Philippines and served as an initial step towards market liberalization in all four countries. Since power plants are expensive, electricity demand is unpredictable and it could take a long time for the company to breakeven, the government had to provide them some insurance for healthy profit. This includes take-or-pay, dollar-pegged payment, and guaranteed rate of return clauses. Throughout the past decade, especially right after the Asian financial crisis in 1997, the governments have been struggling to meet these obligations.
It is, however, possible for the government to achieve more equitable contracts through renegotiation. Lessons learned from past experiences reveal that the take-or-pay and dollar-pegged clauses are very risky. When countries are hit by unforeseeable economic crisis and reduction in demand for electricity, the governments would have no choice but to pay for unutilized capacity. If the payment is in other currencies, currency devaluation would result in even greater loss. Here, contract renegotiation is a means to achieve equity. In the Philippines, the government renegotiated some of their IPP contracts and believed to have saved at least US$ 1 billion (Thomas, 2006).
In many cases, however, equity may not have been the objective in the first place. IPP permits in Malaysia and the Philippines are mostly granted through nontransparent processes to investors with connections and cronies (Smith, 2003) (Seymour and Sari, 2002). The permit winners usually received contract terms that greatly favor them. Here, although it is possible for the government to cut their loss through renegotiation, they may not choose to. Apart from the complexity of the electricity sector itself, politics is also an important cause of inefficiency.
Other than the legalization of IPPs, market liberalization through other means in the four countries has been limited. We analyzed the electricity sector liberalization in five aspects–privatization, wholesale competition, retail competition, unbundling and introduction of independent regulation. The idea to progress towards each of these aspects has long been discussed in all the countries. However, the implementation has been very slow. In Thailand, privatization of the state-owned enterprise has been strongly opposed by the EGAT’s employees union. They claimed that it could lead to higher electricity price, nontransparent allocation of shares and takeover by foreigners. In Malaysia, the government corporatized 30 percent of Tegana. The company is still mostly controlled by the government and the corporatized shares were allocated people with connections and cronies. In Indonesia and the Philippines, privatization of PNL and NAPOCOR has been planned, but not yet executed.
Privatization would be useless if it does not bring about any competition and efficiency gain. In Malaysia, liberalization of Tenaga did not increase competition in the wholesale market and did not necessarily promote efficiency. It seems that the only obvious result was wealth transfer from the public to shareholders. In the case of Thailand, Thaksin’s privatization without liberalization of EGAT is likely to yield a similar result. If competition and efficiency are not achieved, any form of privatization would be meaningless.
Wholesale and retail competitions are still not yet developed in the four countries. This might be because the current market structure does not facilitate wholesale competition. As long as the state-owned monopoly has not been privatized and divested into smaller companies, the monopoly will tend to abuse its dominant power (Woo et al., 2003). As for the retail market, competition and more choices could help increase consumer’s surplus. However, as long as privatization and wholesale competition has not been implemented, retail competition is unlikely to result in much gain. As for unbundling, without competition in the wholesale and retail markets, the process would not be meaningful.
An independent regulator is what all the countries need. However, the process of establishing one is not easy. First of all, the government of Thailand, Malaysia, Indonesia and the Philippines need to let the regulator be independent of all the political influences. In these countries where politics plays a very important role in the electricity sector, the process of establishing an independent regulator could be difficult if not impossible. Second of all, an effective regulator must have a comprehensive understanding of the electricity sector (both in general and in its specific country). It takes a long time for the regulator to learn and acquire expertise to become effective (Thomas, 2006).
From the past experiences, we learned from Thailand, Malaysia, Indonesia and the Philippines that electricity reform is a very delicate issue. For most countries in the world, privatization and market liberalization are adopted as means to achieve the sole objective of reform–highest achievable efficiency. For the four countries discussed in this paper, efficiency was usually overlooked or used as an excuse to fulfill many political objectives. In Thailand, for example, the Thaksin administration almost privatized EGAT without liberalizing it (i.e. without splitting up the company). As discussed earlier, it is unlikely that this process would result in higher efficiency. Here, an independent regulatory body could help emphasizing the real objective of reform. Although the process of establishing one could be long and difficult, the gain from well-planned policies and higher efficiency is worth it.
