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Printed Matter3rd Class Mail- Post paid at San Juan CPO-OM-04-16 NCR.Valid Date:31 December 2007

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Jobs, Save Jobs....Save our Economy. Stop Smuggling! Save Jobs, Save Jobs....Save our Economy.

FPI RETURN ADDRESS: Suite 701 Atlanta Center, Annapolis St. Greenhills, City San Juan, Philippines.

he Bureau of Customs (BOC) Commissioner Napoleon Morales’ announcement that

the operations of the Entry Encoding Centers (EEC) managed and operated by the Philippine Chamber of Commerce and Industry (PCCI) will stop operating by November 05 is already a long-delayed action. This will not in anyway obliterate the infraction of law committed by the parties.

The FPI President believes that the EEC which operations was awarded by BOC to PCCI since 1994 is a government function and therefore should not have been given to a private organization whose membership includes importers and traders for reason of conflict of interest.

As a matter of fact, the contract is so disadvantageous to the government. The contract expired last February 2001 but was allowed by BOC to continue for almost 7 years to date without any public bidding held, a clear violation of law.

This is very similar to the case of Mayor Pewee Trinidad of Pasay City where he allowed the garbage collection to continue despite the lapse of the contract which caused his ouster as ruled by the Ombudsman. In the case of the EEC contract, any alleged noble intentions cannot

CLOSING DOWN OF PCCI-BOC ENCODING CENTERS WILL NOT EXTINGUISH CULPABILITY

substitute to the strict requirement of law, Arranza added.

PCCI currently is collecting P40.00 per entry. The EEC processed an average of 800,000 entries per year which means that about P32 million per year is collected by PCCI. Sen. Juan Ponce Enrile in the recent budget hearing admonished Morales that only Congress can impose levy on anybody and that Congress has not delegated such power to the BOC but it allowed the PCCI to collect fees from importers. Enrile believes that this is a case of plunder as he warned Morales.

Ponente: Associate Justice ANTONIO EDUARDO B. NACHURA

Facts:

Petitioners impugned the constitutionality of Section 34 of Republic Act (RA) 9136, otherwise known as the “Electric Power Industry Reform Act of 2001” (EPIRA), imposing the Universal Charge, and its Implementing Rules and Regulations (IRR), which seeks to implement its imposition. The particular provision of law subject matter of the petition reads:

SECTION 34. Universal Charge. — Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the following purposes:

(a) Payment for the stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry;

(b) Missionary electrification;

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-vis imported energy fuels;

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.

The universal charge shall be a non-bypassable charge which shall be passed on and collected from all end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO. The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only for the purposes specified herein in an open and transparent manner. All amount collected for the universal charge shall be distributed to the respective beneficiaries within a reasonable period to be provided by the ERC.

The petitioners alleged that the Universal Charge is a tax and the power to tax is strictly a legislative function. Hence, they contended that its

Jesus L. Ar ranza

S u p r e m e C o u r t D e c i s i o n D i g e s t :by: Atty. Rufino M. Margate Jr.

delegation to ERC is unconstitutional.

Issues:1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and

2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC.

Ruling:

1. The Universal Charge imposed under Sec. 34 of the EPIRA is not a tax.

In resolving this first issue, the Supreme Court initially distinguished the State’s power of taxation from the police power, as follows:

The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency that is to pay it. It is based on the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. Thus, the theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property. It is the most pervasive, the least limitable, and the most demanding of the three fundamental powers of the State. The justification is found in the Latin maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty which virtually extends to all public needs, police power grants a wide panoply of instruments through which the State, as parens patriae, gives effect to a host of its regulatory powers. We have held that the power to “regulate” means the power to protect, foster, promote, preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility and of its patrons.

The Supreme Court stated that the conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made, that is: if generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.

In the present case, the regulatory dimension that can be deduced from Sec.

R O M E O P. G E R O C H I , e t . a l . v s . D E P A R T M E N T O F E N E R G Y ( D O E ) , e t . a l . ,G . R . N o . 1 5 9 7 9 6 , ( E N B A N C ) , J u l y 1 7 , 2 0 0 7

U N I V E R S A L C H A R G E I M P O S E D U N D E R T H E E P I R A I S N O T A T A X

Continued on page 7

The Federation of Philippine Industries enthusiastically welcomes the UNITED COCONUT ASSOCIATIONS OF THE PHILIPPINES (UCAP) and FIBER TELECOMMUNICATION, INC. , as the most recent members of the Federation.

Aforementioned new partners are represented by their corporate heads, namely - Chairman of the Board Mr. Danilo M. Coronacion for UNITED COCONUT ASSOCIATIONS OF THE PHILIPPINES and President & CEO Ms. Dorothy Tañedo Jao for FIBER TELECOMMUNICATION, INC. . The foregoing business establishments respectively occupy the following business addresses at 2nd Flr. PCRDF BIdg., Pearl Drive cor Lourdes St., Pasig City and Unit 3903 Discovery Center, 25 ADB Ave., Ortigas Center, Pasig City.

FPI WELCOMES ITS 2 NEW MEMBERS!

It can be recalled that as early as 2006 budget hearing, Sen. Enrile had asked Morales to discontinue allowing PCCI to manage the EEC but despite the letter sent by Morales to PCCI directing them to stop and that BOC will take over, such letter and order was flagrantly ignored and no pressure came from Morales.

Arranza said that some violations by EEC staff have been discovered ranging from allowing non-BOC accredited importers to pass EEC to the use of the TIN of legitimate importers. It is also done to avail of the super green lane which does not require inspections.

It has been reported that Batas party list has brought this matter to the Ombudsman months ago and there has been no action up to this date. Arranza is appealing to the Ombudsman to act on it with dispatch similar to how they acted in the Pewee Trinidad case.

Arranza is confident that the Ombudsman will apply the law without fear or favor and that any amount illegally collected should be returned.

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EXECUTIVE EDITORS:

Jesus L. Arranza;

Henry A. Tañedo;

George S. Chua;

Renato R. Ermita.

Conributors:

A. Articles-Jesus L. Arranza

FPI President & Chairman of Anti-Smuggling Committee

Commodore George S. ChuaFPI Director & Chairman of Management Committee

Atty. Rufino M. Margate Jr. Secretary General

Stevenson C. TaveraTechnical Staff

B. Technical Inputs-bernard m. feliciano

Technical Staff-Media Affairs

C. General Services-Ellen R. Cusilit

Communications and Follow-up Calls

Judanito F. Yap & Allan A. Salvador P.O. Box Relocation and

Materials Distribution

Jocelyn C.Delos Santos; Accounting Functions

The TAMBULI Magazine, entered as a third-class mail matter at the Makati Central Post Office and published once a month, is the official publication of the Federation of Philippine Industries, Inc., with editorial office located at Suite 701 Atlanta Center, Annapolis St. Greenhills, City San Juan, Philippines. Tel. Nos. 722-3409; 721-9642; 727-4359; Fax: 722-9737 ; E-mail: fpi@fpi.ph or fpi@philonline.com; Website: http://www.fpi.ph

The views expressed in any articles or items appearing in the magazine, are those of the authors and do not necessarily reflect those of the FPI Management.

To contribute any articles, whether in the form of an industry situation analysis, position papers, or feature articles touching on issues related to industry/trade, banking and finance, environment, labor, energy and so forth, please contact the FPI Secretariat in the same address given above.

T a m b u l i

E d i t o r i a l B o a r d

For queries on subscription and/or to advertise, please contact the FPI Secretariat in the same address / contact numbers given above.

Dindo C. MerceneConcept and Layout-Design

Cover & PagesPrinters

THE PHILIPPINE NATURAL GAS- An Indigenous Clean Fuel Resource

It is estimated that the total deposit of natural gas in the Philippines is around 25.7-39.5 trillion cubic feet (Tf3), and about 13.5% or 3.4-5.4 Tf3 are extractable reserves.

Natural gas is a form of fossil fuel, like crude oil and coal, found in the depths of the earth and sea/ocean. Natural gas has neither color nor odor. The aforementioned Philippine deposit is prominently found in Malampaya, Palawan.

Natural gas is burned as fuel for the following utilization: power generation plants for industrial and commercial use e.g. climate control either for heating (boilers, ovens) or cooling (aircon, chiller) equipment in manufacturing plants and commercial buildings, as well as for cooking and vehicle fuel. It is regarded as the clean fuel for the future or green fuel because it has no lead content and its combustion does not produce air pollutants. It is economical because it is relatively cheaper than diesel or gasoline fuels. Its use in transport vehicles is widespread in countries like U.S, Argentina, India, Korea, Malaysia and others.

I. Classification

Natural gas are classified into four types, namely: Oil Gas, Coal Gas, Water-Associated Gas (includes marsh gas)-from vegetable matter that had decayed in bogs and swamps at early stage of petrification, and Inorganic Gas- formed through inorganic processes such as hydrothermal processes,

contact metamorphism and serpentinization.

II. Natural Gas Deposits

The major deposits in the Philippine area are the oil-gas types found at the following sites of Camago-Malampaya (NW Palawan Offshore), San Antonio (Cagayan Valley), and Libertad (Cebu).

The current Philippine gas industry development initiative is anchored on the Camago-Malampaya deposit which is estimated to support the operation of 3,000 MW gas-fired power plants for over 20 years with its 2.5-3.2 Tf3 maximum recoverable reserves.

In 1994, the government-owned Philippine National Oil Company established the first gas-fired power plant, of a 3 MW capacity, utilizing small gas deposit discovered in late 1950’s onshore San Antonio, Cagayan Valley, Northern Luzon.

However, gas-fired power plants programmed beyond 2002 require additional gas discoveries or the importation of LNG. Other options are: the conversion of the Bataan Nuclear Power Plant into a 1,500 MW gas-fired plant and the ASEAN Gas Pipeline Project.

III. Historical Brief Of The Malampaya Gasfield

In October 1989, Occidental Philippines, Inc. (Oxy) discovered natural gas in a deep-water well (the

Camago well) located within a 350,000 hectare area 75 km. northwest offshore Palawan province and 500 km. south-SW of Luzon.

After a year, Oxy’s exploration contract was converted into a service contract (SC38) with Shell Philippines Exploration B.V. (SPEX) which took over operation of the field and drilled three more wells. The second of which resulted in the discovery of the Malampaya gasfield in 1992, which is connected to the Camago structure.

Continuing the drilling program, SPEX was able to ascertain recoverable reserves of about 2.5 trillion cubic feet (TCF) of gas and some 85 million barrels (MMB) of condensate.

The Malampaya gasfield (with a potential capacity to produce up to 4.3 TCF of gas) was declared commercially viable in May 1998 and SPEX in September of that year acquired full ownership in SC38 and then formed a consortium with Texaco Philippines, Inc. (now ChevronTexaco) and PNOC-EC. This SC 38 consortium is the largest single foreign investment in the country’s history - developing the Malampaya gasfield, laying 504 km. of pipeline through some of the world’s best undersea vistas and building an on-shore gas facility in Tabangao, Batangas Province that now processes the natural gas (from said gasfield).

In October 16, 2001, Pres. Gloria Macapagal-Arroyo inaugurated the Malampaya Deep Water Gas-to-Power Project which supplies gas to three power plants that are all located within

34, which enumerates the purposes for which the Universal Charge is imposed, show that the Universal Charge is not a tax, but an exaction in the exercise of the State’s police power.

The Court added that it is a well-established doctrine that the taxing power may be used as an implement of police power” and cited its landmark Decisions in Valmonte v. Energy Regulatory Board, et al., G.R. Nos. L-79601-03, June 23, 1988, 162 SCRA 521 and in Gaston v. Republic Planters Bank, G.R. No. L-77194, March 15, 1988, 158 SCRA 626, where it held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the police power.

2. There is valid delegation because the regulation is germane to the objects and purposes of the law (completeness test) and it is not in contradiction to, but in conformity with, the standards prescribed by the law (sufficient standard test).

The Supreme Court explained that in completeness test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it. While the sufficient test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate’s authority and prevent the delegation from running riot.

The law passes the Completeness test since the Universal Charge to be determined, fixed and approved by the ERC is subject to the legislative parameters provided in Sec. 43(b)(ii) of the EPIRA. Additionally, the ERC does not enjoy a wide latitude of discretion in the determination of the Universal Charge in view of Sec. 51(d) and (e) of the EPIRA, where it mandates PSALM Corp. to calculate the amount of the stranded debts and stranded contract costs of NPC which shall form the basis for ERC in the determination of the universal charge.

EPIRA likewise passes the Sufficient test for the reason that its provisions “to ensure the total electrification of the country and the quality, reliability, security and affordability of the supply of electric power” and “watershed rehabilitation and management” are sufficient standards that meet the requirements for valid delegation, as they provide the limitations on the ERC’s power to formulate the IRR.

Thus, the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its essential terms and conditions, and that it contains sufficient standards.

In deciding the case at bar, the Honorable Supreme Court likewise cited its earlier ruling in Freedom from Debt Coalition v. Energy Regulatory Commission, G.R. No. 161113, June 15, 2004, 432 SCRA 157.

Supreme Court Decision Digest.... continued from page 8

Stevenson C. Tavera

FPI hits smuggling of textiles, used clothes

A PRESIDENTIAL adviser and industry leader asked the trade department on Tuesday to act on reports on the alleged smuggling activities of a textile trading company.

In a letter to Trade Secretary Peter Favila, Senior Presidential Anti-smuggling Group adviser and Federation of Philippine Industries Inc. (FPI) president Jesus Arranza said: “This is the same disturbing case which I mentioned to you during the FPI general assembly which you requested to formally reduce in writing,” Arranza said.

Arranza said the FPI brought to Favila the case involving Interlink Recyders Philippines Inc. of 8325 Argonaut Hi-way, Boton area, Subic Bay Freeport Zone.Interlink, which is engaged in the importation of textile waste and cotton fabrics, has a warehouse in barangay Putatan, Muntinlupa City.

Records reveal that it is owned by certain Manuel Bergado of Ayala Alabang Village, Muntinlupa City.

On April 11, 2006, Interlink was caught bringing out one truckload of used clothing from the Subic Free port, a violation of the Tariff and Customs Code.

In his letter, Arranza said: “In view of this apprehension, the Bureau of Customs and the SBMA [Subic Bay Metropolitan Authority] subsequently conducted a joint audit on lnterlink’s warehouse in Subic Freeport.

“The findings later showed that there was a big discrepancy between the declared quantity or weight as against the actual imports, which exceeded 425,366 kilograms.

“Thus, on April 20, 2006, the SBMA board issued a decision, signed by its chairman, Feliciano Salonga, imposing an indefinite suspension on Intelink.

“In a separate incident, two container vans containing used clothing consigned to Kintetsu World Express Philippines Inc. arrived in Subic on April 23, 2006.

Arranza said FPI warned the SBMA, inks urgent letter dated August 25, 2006, informing the latter that based on reports reaching the federation, used clothing stored in the warehouse of Interlink will be brought out surreptitiously.

“Sadly, despite our warnings, on February 17, 2007, a closed van with license plate number TKN-499 loaded with bales of used clothing illegally withdrawn from Interlink was intercepted when it was abo u t to exit Kalaklan Gate. Worse, the closed aluminum van was secured with an SBMA metal seal,” Arranza said.

Hence, Arranza said thai, “we were literally shocked when the SBMA board reissued on March 26,2007, the corresponding certificate of registration and tax exemption to Interlink which entitled the latter to continue its operations.”

“When FPI formally inquired from the SBMA board why they issued the certificate of registration and tax ex¬emption to Interlink, they conveniently claimed that the criminal and customs cases have allegedly been dropped.”

“In sum, the SBMA board, by these lame and self-serving justifications, had practically closed its eyes on the various offenses of Interlink of the SBMA rules,” Arranza said.

as reprinted from the BusinessMirrorNovember 21, 2007 issue

Paul Atienza / Correspondent

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THE PHILIPPINE NATURAL GAS.... continued from page 3

a 12 km. radius from the Batangas onshore gas plant. The combined cycle gas turbine (CCGT) power plants with a pooled capacity of 2,760 MW, comprises about 19 percent of the country’s total installed capacity in 2002. The project was completed in January 2002 landing gas for power plant commissioning and commercial operations.

IV. Gas Industry Development Plan

A. Camago-Malampaya Gas Development

The development of the Camago-Malampaya gas field resulted to drastic changes in fuel mix in ensuring the attainment of energy self sufficiency of 40% under the Philippine Energy Plan 1996-2025 (PEP 1996).

The natural gas produced is allocated for about 3,000 MW installed capacity as of 2002. To further expand its capacity, the development program includes: (a) drilling of production wells, (b) setting up production platform, and (c) construction of the 500-kilometer undersea pipeline.

The production will yield about 400 to 500 MMSCFG per day, plus substantial quantities of oil and condensate. The production system include facility to separate the oil, the condensate and production water from the gas. After which, the dry gas will be piped all the way to users. The current plan calls for a 24” undersea pipeline all the way to Luzon.

B. Development of Gas-fired Power Plant

To develop the natural gas market, government prioritized the 3,000 MW as allocated for gas-fired power capacity development beginning 2001.

The National Power Corporation (NPC) and the MERALCO group of Companies will each have 1,500 MW.

NPC recently awarded, through bidding, to Korea Electric Power Corporation (KEPCO)

a BOT contract for the construction of the gas-fired power plants with total capacity of 1,200 MW at Ilijan, Batangas.

Meralco has assigned First Gas Holdings Corporation, a joint venture company between First Gas Holdings (MERALCO Group Member) and British Gas Corporation, to put up gas-fired power plants, initially with a 990 MW greenfield plant at Sta. Rita, Batangas which will be followed by a 510 MW plant in the CALABARZON area.

In addition, the 620-MW Bataan Nuclear Power Plant has also been programmed by government for conversion into a 1,500 MW gas-fired power plant, where Pilipinas Shell-Occidental Petroleum (Shell-Oxy) joint venture offered to implement the conversion using the Malampaya-Camago deposit and other deposits as well.

Beyond 2015, a 2,000 MW gas-fired power generating capacity expansion is programmed for Mindanao, possibly in Zamboanga (PEP, 1996) and possible gas discoveries in Sulu Sea are being eyed for this expansion.

C. LNG Option

Realizing the limitations of discovered natural gas resources in the country and the time it would take for the development of these resources, government encourages the importation of LNG.

To complement indigenous gas supply, the Department of Energy (DOE) encourages the use of imported LNG which may be competitive in combine cycle gas turbines and if ever with Camago-Malampaya gas.

D. Other Gas Market Users (Industry, Household and Transport Sector)

The Philippine government encourages the development of other natural gas use. Thus, the Philippine Energy Plan projects’ substantial gas markets for industries are the cement, food,

and steel particularly in the Luzon industrial centers (CALABARZON) and Mindanao (Iligan-Cagayan de Oro).

Natural gas can also be used as feedstock for chemical industries. Development of the gas market for these industries will be contingent on discovery of gas with suitable gas composition such as higher ethane and heavier hydrocarbon contents.

Between 2010 and 2020, the plan projects the household sector as a major gas market. Approximately 400,000 commercial and residential customers are expected to come from Metro Manila, Batangas and Cavite in Luzon; and Cagayan de Oro areas in Mindanao.

Use of compressed natural gas (CNG) for the transport sector is therefore projected to be made available in Luzon by 2010.

E. Trans-Asean Gas Pipeline The Trans-ASEAN gas pipeline plan is viewed by the Philippine government as an assurance that the gas infrastructure being planned will not run short of natural gas supply over the long-term.

The scheduled phasing of the Trans-ASEAN pipeline development is in consonance with the Philippine gas industry development plan with reference to the concluded feasibility study by the ASEAN Energy Management and Training Center (AEEMTRC) and the European Union.

V. Role of Private Sector

The Philippine commitment towards full development of globally competitive market economy requires a private-sector generated development of the natural gas industry.

This policy is explicitly embodied in EO 215 in 1987 which provided rules for private sector participation in the power generation. The law

was later amended to expand the accreditation of all IPP’s in special economic zone and non-utilities that generate their power for own use. DOE issued guidelines which allowed customers of 2 MW and above to directly contract with any IPP.

The Department of Energy (DOE) favors open access to the offshore pipeline from the Camago-Malampaya as long as access is acquired on commercial terms. This would permit other gasfield operators to gain access/tap into the pipeline for gas transport with corresponding tariff or charge. Open access is also encouraged onshore pipelines to promote diversification in the growth of the natural gas industry.

The Omnibus Power Restructuring Bill being deliberated in Congress provides the milestones for the eventual privatization of the power industry xxx.

VI. Investment Opportunities

Opportunities for investment are wide open under strong government commitment for a private-sector led natural gas industry development from upstream to downstream.

Establishment of a nationwide gas infrastructure is expected to maximize gas potentials through extensive exploration, coupled with development of natural gas markets.

A. Indigenous oil and gas explorations

Potential hydrocarbon areas in the Philippines assessed to be “gas-prone” have now become highly prospective due to government’s assured development of the domestic natural gas industry.

The Central Luzon Basin gas potential was recently enhanced with the result of the Manila Bay well drilling in 1995, which prompted local exploration companies to acquire new contract

areas or expand holdings in the Central Luzon Basin.

In the Cagayan Basin in northern Luzon in addition to San Antonio gasfield, PNOC and a local company contract areas for more gas discoveries.

In Cotabato Basin and Agusan-Davao Basin in Mindanao, extensive geophysical exploration activities are being done by two consortia to identify drillable targets particularly natural gas.

Rooms for foreign investment in natural gas exploration is wide open through participation of service contractors in the activities where foreign equity may be 100% for any of the service contract modes.

B. Gas Infrastructure

Government is actively promoting setting up of gas distribution networks in Luzon to provide vital link between natural gas sellers and market.

Shell and Occidental Petroleum, for the 500-kilometer pipeline from northwest Palawan to Luzon, have committed to build and operate the pipeline themselves, but have not closed doors for new partners.

Luzon network will primarily depend on the pipeline connecting Camago-Malampaya field to power plants in Batangas and Cavite. This pipeline system will be expanded to Metro Manila, Bataan and later to Central and Southern Luzon.

The onshore pipeline (at the end of the 500-kilometer offshore pipeline from Camago-Malampaya) from the beach at Batangas to Manila is about 110 km. And additional 250 km pipelines are needed to continue to Bataan via Bulacan and Pampanga provinces. In addition, an LNG receiving facility will be built in Bataan or in Batangas.

Power plants will most likely build themselves

the onshore pipelines to their plants. Probably, they may seek partners for the pipeline construction. Example of this is the First Gas Holdings (FGH) which awarded construction of a 990 MW gas-fired power plant on turn-key basis to Siemens of Germany.

On long term, the expansion of the Philippine gas industry into the rest of Luzon and Mindanao will entail extension of transmission pipelines and construction of distribution pipelines. These constitute big opportunities for companies to do business in the pipeline construction and operation.

C. Independent power production and power transmission

Again, the most attractive and immediate opportunity for investment is the construction and operation of power plants using the Camago-Malampaya gas. The next important opportunity is the conversion of the Bataan nuclear plant into a 1500 MW gas-fired combined cycle plant.

D. Other gas markets

One immediate potential opportunity for foreign private companies is the state-owned Manila Gas. This company has existing old gas distribution network in Manila, currently being privatized, which can be rehabilitated and expanded.

Major industrial and commercial gas users, particularly industrial zones in Luzon and northern Mindanao, will surely switch to gas as the price becomes competitive and as the country’s emission standards get even more stringent. They will need partners who have expertise in gas conversion and utilization.

Finally, another potential huge market is the transport sector. A major shift to gas in this sector would substantially reduce the heavy pollution in Metro Manila. DOE is conducting studies towards formulating a policy on utilization of natural gas in this sector.

Continued on page 6

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Business Optionsby George S. Chua

40to

W

1

Business Options Business Options Business Options Business Options Business Options Business Options Business Options Business Options Business Options

40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to 1 40 to

ith our peso making daily advances against the once mighty US dollar, we may hit the 40 to 1 level

sooner than we think. The big question in everyone’s mind is how is this going to affect us? Obviously, to those that are primarily earning in US dollars this is certainly bad news, very bad news indeed. The simplest way to think about it is an expatriate professional working in the Philippines getting his salary in US dollars, but because he is living here, he spends in pesos for the salaries of the driver and maids, household expenses, recreation and so on.

If our expatriate friend came here a few years ago when the exchange rate was Php56 to US$1 and his salary was US$10,000 a month, he would have had the equivalent of Php560,000. However, with the appreciation of the pesos to about 42.50 now, he would only have the equivalent of Php 425,000 a month, in effect his salary had shrunk by 135,000 a month!

Closer to the heart of the matter, we currently have about 11 million Overseas Filipino Workers (OFW) which sent back to their families about US$12.8 billion in 2006. Undoubtedly, our OFWs have been instrumental in keeping our economy going particularly in the consumer goods and the low and medium housing industry. However, with the appreciation of the peso reaching 30% in the last couple of years, this is tantamount to a reduction in the earnings of our OFWs. The obvious effect is of course a cut back in the domestic spending of the families of these OFWs as well as a decline in

the demand for residential properties and in more than a few cases, defaulting on their amortization payments.

Having hobbled the purchasing power of the OFW families, another large segment of the domestic economy has been adversely affected. Exporters are now feeling the impact of a 30% reduction in their revenues without the corresponding reduction in their cost. I do recall that the labor groups were clamoring for an increase in wages because the peso was depreciating. Now that the reverse is happening, no one is pushing for a return to a lower wage rate, on the contrary, the constant pressure for a wage increase has not abated. It is precisely because of this one way movement of the cost of labor that has led

to an upward spiral in costs and if this keeps up, more export companies will be forced to scale down their operations and may even close down.

Call Centers which has been a high growth sector, providing one of the highest if not the highest pay for entry level positions is also feeling the pinch. Since the revenues of BPOs are in US dollars and they pay their agents in pesos, their profits are now being squeezed. Unable to adjust their single biggest cost, which is salaries and wages, to reflect the appreciation of the peso, they are stuck with finding ways to squeeze out their profits elsewhere. As to how successful they will be remains to be seen. Nevertheless, there could be a serious shakedown in this industry

as the peso continues to appreciate.

If the BPO industry were to suffer a major decline, industries thriving on call center agents will also be severely affected. These would include 24 hour convenience stores, coffee shops, high rise condominiums selling affordable studio type units and a whole slew of other businesses that rely heavily on the significant disposable income of these young people.

So far there seems to be a lot of negative effects brought about by a very strong peso. Are there any real beneficiaries to a strong peso? Well of course! Such

as those people who earn primarily in pesos and those that have borrowed heavily in other currencies particularly the US dollar.

Most employees should benefit from a strong peso, provided of course their company stays in business. The funny thing with the appreciation of the peso is that it is still quite hard to feel the direct benefit to the consumer. Prices of basic commodities, including gasoline, have not gone down. However, I did notice that the cheap Chinese merchandise being sold in down town, seem to have actually gotten cheaper! For those that enjoy traveling, you will notice that you do get more foreign exchange for your pesos, certainly a good thing.

The government being the largest borrower in foreign currency is also the biggest beneficiary of the strong peso. With government external debt at about US$27.5 billion, each peso appreciation means a savings of Php27.5 billion since the debt has been reduced by this amount. Coming from Php56 down to Php43 already means a Php357.5 billion windfall for the government. No wonder the government does not seem particularly concerned about the appreciation of the peso. As for the rest of us, it is just like riding the roller coaster, we can only scream with each sudden move up, down and the occasional loop and hope we survive the ride.

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