VZCZCXRO5235
OO RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHML #3966/01 3530133
ZNR UUUUU ZZH
O 190133Z DEC 07
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9219
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHIN/AIT TAIPEI 1594
RUEHBJ/AMEMBASSY BEIJING 6278
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 9751
RUEHHK/AMCONSUL HONG KONG 4782
RUEHUL/AMEMBASSY SEOUL 2729
RUEHKO/AMEMBASSY TOKYO 3436
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