The Government of Philippines is seeking private sector participation to help provide power generation to rural non-grid areas (e.g. remote islands) without connection to the existing transmission network. These remote rural areas have traditionally been served by Small Power Utilities Group (SPUG), a state-owned company with inefficiently high costs and unreliable supply. SPUG needs approximately $81 million in subsidy per year to continue operations and an additional US$ 18 million to serve new remote areas. To reduce the financial burden, the Government is taking steps to involve private sector participation and reform SPUG to reduce overall subsidies through a competitive bidding process. The Government has introduced a new output based aid (OBA) scheme whereby subsidies will be paid to these private generators on the basis of energy supplied.

TA Complete.

Philippines Case Study

The tender for the first three pilot islands - Marinduque, Tablas and Romblon – serving a total of 60,000 households was concluded in September 2005. This tender resulted in much lower costs of generation - leading to over 70% subsidy savings (US$ 7 million) in the first year alone. Furthermore, the private provider is contractually obliged to provide a more reliable supply while complying with environmental laws and regulations. As of August 2007, construction is currently underway in two of the pilots.

The Government of the Philippines is pleased with these results and is currently expanding the OBA framework to three additional areas. The tender for the fourth pilot in Masbate island was concluded in 2006 with similar savings.

GPOBA TA funding was used to prepare the model contract documents (Power Supply Agreement or PSA). The PSAs are critical to private sector participation as they define the rights and obligations of power suppliers. GPOBA funds were also used to design the OBA subsidy framework, including regulatory aspects, subsidy disbursement procedures, and integration of the OBA scheme with PSAs.

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