Was Tiwi-Makban a steal?

If champagne bottles were not popping, there must have been an air of jubilation or a round of backslapping and self congratulations at Power Sector Assets and Liabilities Management Corp. (PSALM) 's office when it was able to sell Tiwi-Makban complex, the first of geothermal assets to be sold. At the very least, there must have been sighs of relief as the asset has been put on the auction block since 2005.

As this is the first sale of a geothermal asset, necessarily, it has become a benchmark both in pricing and methodology for subsequent geothermal assets disposal. On the queue are the Palinpinon complex, Tongonan I and Bacman which are all slated for bidding in the coming months.

Interestingly, PSALM has not given indications whether the sale proceeds were beyond its expectations as there was no indicative base price given even after the auction.

Was the price reasonable?

One should assume that the bidders have done their homework to arrive at their respective bid price. PSALM would have done likewise.

Below is a tabulation of the results of the privatization efforts of PSALM (prices in million U.S. dollars, $ M):


For comparison, consider the price per MW paid for the coal and big hydro plants. The prices range from $1.15 M for Pantabangan-Masiway to $1.86 M for Ambuklao-Binga. But surprise, for Tiwi-Makban the price is ridiculously low at $ 0.60 M. For comparison, a rule of thumb says that to put up a new geothermal plant that size, the total cost would amount to something like $ 2.5 to $ 3 M per MW.

So, Aboitiz snagged the geothermal complex for a song with nary a whimper from PSALM, and not a finger or eyebrow raised from the usual rambunctious politicians who see dirt at any government auction?

Not necessarily.

The price quoted already inputted the multifarious problems facing the complex-- and there are many.

One, the hardware has been there starting 1979, and considering Napocor has been in a tight financial squeeze for as long as one can remember, one cannot expect that the plants are in good running conditions. In fact, two of the units were supposed to have been rehabilitated prior to the bidding are still sitting idly, from what I gather. Many of the cooling towers, hot well pumps, turbines, and the control room--big components of the plants--are a little more than derelicts of a bygone industrial era.

Two, there is still the nagging issue of the geothermal resources sales contract (GRSC) which is foisted upon the winning investor, which is, based upon the pronouncements of the interested investors prior to the bidding, not exactly a money machine, to put it mildly. So much so that Luis Miguel Aboitiz, vice-president of his family's power unit, insisted immediately after the winning bidder is announced, that the contract has to be negotiated.

Three, while a power sales contract of more than 400 MW has been attached to the sale, the rest of the power generated will have to be dispatched through the wholesale electricity spot market (WESM) at competitive prices. Geothermal electricity from Tiwi-Makban will have to compete with hydro, natural gas and coal for base load requirements. Worse, the steam price is tied to coal prices as stipulated in the GRSC, so geothermal electricity from Tiwi-Makban would have difficulty competing even with coal plants.

And four, while Aboitiz gets to make use of power from Makban field which is one of the most productive fields in terms of power density, Tiwi is another story. There, Aboitiz may be hard-pressed to expand the capacity owing to technical limitations of the field. Its technical staff would soon learn problems associated with mineral deposition, declining pressures, cold water inflow that has ravaged about half of the original field, and acidic fluids, to name a few.

There are more. The Aboitiz group, hard-nosed savvy investor, must have inputted all these risks during its due diligence and came to the conclusion that the assets cannot be at par with the other power plants--coal or hydro-- sold by the government. Hence the seemingly low price.

So, the price must be justified, and PSALM bosses could at last report to their superiors at the Department of Finance that at least they have gotten some amount from a problematic asset to help plug the government's chronic deficit after several tries. For all we know, PSALM may have a secret base price and the winning bid tops it.

So everybody seems happy. End of the story.

But there is a worrisome item that bothers me since. I need to let it off my chest.

If anyone who has the best position to value the assets, it must be Energy Development Corporation (EDC), the losing bidder. It has vast experience in managing geothermal fields, so it knows the ins and outs of the costs involved in operation. It has acquired power plants, so it has a pretty good idea how to run these profitably.

The whiz kids at its finance department must have cranked out all sorts of economic and discounted cash flow models to arrive at the conclusion that it must be pretty good--for itself. For how could you explain the assiduous defense of the contract by the EDC president?

EDC did not come to the bidding table only to lose. So it has come up with a number which to itself must represent a fair market value for the assets: all for $ 368.44 M. That would amount to $ 0.49 M per MW--less than half the price of coal or hydro plants.

It looks like the Abotiz group would have its hands full in the coming months to justify its bid.