Daily Archives: August 23, 2012

The REIT waits on

When will there be a Philippine REIT be available? Its anybody’s guess as it appears everybody is focused on the tax benefit than the whole benefit of the financial instrument for property development. Can someone just get started with doing it?

From Business Mirror

PSE fears longer wait for possible issuers of REIT

Sunday, 19 August 2012
Miguel R. Camus / Reporter

THE Philippine Stock Exchange (PSE) sees the current year as another lost cause for potential issuers of Real Estate Investment Trust  (REIT) and is more optimistic for 2013 as efforts to amend the REIT law gain steam, its top official said.

The PSE president, Hans Sicat, told reporters last week that an initiative to amend the law is being spearheaded by industry group Financial Executives of the Philippines but the effort is still far from a guaranteed success.

The law provides a framework for investors to buy shares in REIT firms, which will own assets, such as shopping centers, apartments and office buildings, and earn from dividend payments.

Sicat said the current strategy is to focus on the contentious public-ownership requirement, which starts at 40 percent but should be increased to 67 percent in three years, and the value-added tax (VAT) on one-time property transfers.

Based on the PSE proposal, taxes on the initial transfer of a property to a REIT should be based on “zonal valuation,” not market value, he added.

Philippine REITs will still come out less competitive versus other REIT frameworks abroad, Sicat said, as such property transfers are meant to be tax-free.

“On the other hand, maybe the trade-off is it’s better than having a product than no product at all,” the PSE president added. “Having something that approximates your ideal is better than zero.”

When asked whether the law can be amended in time for a REIT offer this year, Sicat said, “Given where we are, if it gets [amended], it’s a next-year product.”

The REIT Act was passed into law at the end of 2009 but its implementation has suffered several delays as the government worried that tax incentives would hurt revenue generation amid its swelling budget deficit.

The Department of Finance eventually came up with the tax implementation rules in mid-2011 but potential REIT issuers, already hesitant due to the steep public-float requirements, balked at the addition of VAT.

Since its implementation, there has not been a single REIT offer.

The PSE estimates that a viable REIT solution would generate at least $2.4 billion in fresh investments.

Sicat said the PSE is also focusing on the implementation of Exchange Traded Funds (EFT) as its draft guidelines were recently released by the Securities and Exchange Commission.

“EFTs continue to be the largest asset class and it still is growing asset class for all jurisdictions,” he said noting that the first ETFs could be operational within this year.

An ETF is similar to a mutual fund but also allows investors to diversify their portfolio by buying a single product that represents a wide range of securities tracking multiple assets such as stocks, commodities or bonds which can be traded like a stock

The PPP marches on

With 2 PPPs completed, expect more. Let’s just hope the pace would be faster as the current term of this administration is half way through and would need to do the most of the remaining time available.

PPP inches forward

Tuesday, 21 August 2012 19:58 The BusinessMirror Editorial
THERE’S no truth to the rumor that the Public-Private Partnership (PPP) Program of the Aquino administration is dead as a doornail.

The truth is that it is moving, although in an excruciatingly slow fashion.

Two years ago the fledgling Aquino administration trumpeted that it was going to launch the ambitious infrastructure program with more than 10 big-ticket projects costing hundreds of billions. Last we checked, however, only one project—the Nlex-Slex Connector Road—is up and running.

The good news is that at least two more projects have already gone past the drawing boards.

The Department of Education successfully bidded out work on the Public-Private Partnership for School Infrastructure Project (PSIP) with an approved budget of P16.4 billion in the Ilocos provinces, Central Luzon and Calabarzon. The PSIP is a build-lease-transfer contract for the design, construction and maintenance of 9,301 classrooms in the three regions for a period of 10 years. Education Secretary Bro. Armin A. Luistro believes that with this PPP project, easing the classroom shortage is finally within reach, with over 20 million young Filipinos to benefit from access to quality education.

At the same time, the P60-billion Light Rail Transit (LRT) Cavite Extension Project is inching closely toward reality with the recent decision of the Department of Transportation and Communications to extend up to next month the submission of prequalification documents by interested bidders.

The railway project will extend the existing 20.7-kilometer LRT Line 1 system, which runs from Roosevelt Avenue in Quezon City to Baclaran in Parañaque City, by an additional 11.7 kilometer southward to Bacoor, Cavite. Once completed, the new line is expected to increase ridership of LRT 1 from 500,000 to 700,000 passengers a day, thus providing faster and more convenient alternative to residents of Cavite, Las Piñas City and Parañaque City. The first half of the project is expected to be completed by late 2014 and the other half by late 2015. The project cost will be equally split between the private sector and the government.

Another ambitious development program is the Clark Special Economic Zone. While not listed under the PPP Program, the project is being pushed by the Bases Conversion and Development Authority. The agency has already commissioned the drafting of a master plan covering the development of the remaining 36,000 hectares of untapped land in Pampanga.

The new master plan for the Clark Ecozone is expected to set the pace of socioeconomic development in Central Luzon by transforming the area into a highly integrated, high-tech, green community—sort of Bonifacio Global City meets Silicon Valley amid lush greenery—and position Clark as the investment destination in Southeast Asia.  The new city that will be built is seen to boost the national economy by attracting more investments and generating thousands of jobs for Filipinos. But one big question is how the planners will go around the geographic hurdle, since the Pampanga plains is highly vulnerable to flooding. Buildings on stilts and elevated roadways, perhaps?

In any event, the Aquino administration should now fast-track the implementation of various infrastructure development programs even as it pursues a vigorous campaign against corruption. The money saved from the grubby hands of the corrupt should be channeled to more projects that will benefit the economy and raise the people’s quality of life in the long run.

Meralco to venture into wind energy

Wow. At last a large Philippine power utility expanding to generate wind energy. I hope more will follow to help the country lead in the region in renewable energy.

Meralco eyes Ilocos wind farm

Part of expansion into renewable energy


Wednesday, August 22nd, 2012

Leading power distributor Manila Electric Co. plans to venture into the renewable energy-generation businessbeginning with an investment in a potential 300-megawatt wind farm in Laoag, Ilocos Norte, the company’s chief executive said.


The entry into the renewable energy sector is part of Meralco’s plan to install 2,500 MW in new generation capacity between now and 2020, using part of the leeway allowed by the energy deregulation law for it to generate relative to its distribution volume, Meralco president Oscar Reyes told the Inquirer.


Reyes said Meralco was also looking at liquefied natural gas-fired plants for diversification purposes.


He added that Meralco was addressing the issues delaying the 600-MW coal-fired power plant project in Subic Bay freeport, which is being undertaken by subsidiary Meralco PowerGen Corp. through a joint-venture (Redondo Peninsula Energy) with the Aboitiz group.


“We’re also in discussions for a potential renewable facility in Laoag,” Reyes said, pointing out that more than 300 MW in capacity was being considered for the facility in Ilocos Norte.


Asked whether Meralco was happy with the recently approved feed-in-tariffs (FIT) for renewable energy, Reyes said the important thing would be to locate the renewable energy facility in an area considered robust in terms of efficiency and load factor so that it would be possible to make good returns even under competitive tariff rates.


“We would rather rely on an efficient plant for a return rather than (on) high feed-in tariff that involves some form of support from consumer,” Reyes said.


The Energy Regulatory Commission recently approved the much-awaited FIT rates for four renewable energy resources, which represents the subsidy consumers will bear to give incentives to the industry: P9.68 a kilowatt-hour for solar; P8.53/kWh for wind; P6.63/kWh for biomass; and P5.90/kWh for hydropower projects. The ERC deferred fixing the FIT rates for ocean thermal energy conversion resource for further study and data gathering.


“The more you get grid-competitive rate, the better it is for the consumer,” Reyes said.

The Threat of Solar Power

This article discusses the impact of solar power on the Australian energy market and its threat to power utilities. For some reason I suspect the fear of Australian utilities may be also the same in the Philippines. But unlike Australia, we have yet to see the common use of solar power to help consumers in their power needs. While there is a renewable energy law which grants incentives and feed-in-tariffs for solar energy generation, it remains to be seen whether local utilities will allow excess power generated to flow to the grid.

From Leading Company

Who’s afraid of solar PV?

23 August 2012 Mike Sandiford

The recent take-up of domestic solar photo-voltaic (PV) panels in Australia has been quite phenomenal. Across 2010 and 2011, the installed capacity increased seven fold to about 1.4 gigawatts, doubling every 9 months.

By the end of this year we will probably have in excess of 2 gigawatts of solar PV capacity installed. All fired up at the same time it is enough to produce about 8% of the average daytime electricity demand.

Of course, a characteristic of solar PV is that it doesn’t fire up for much of the time at all. With a capacity factor of about 18%, 2 gigawatts capacity would be expected to output an average of no more than 360 megawatts or about 1.5% of our average demand. At those levels you might ask if solar PV is having any impact on our demand for mains electricity.

Judging by the numbers, the answer is a definitive “yes”. In fact, so much so that it wouldn’t surprise if it is beginning to worry some utility managers.

Since solar PV production rises and falls in a characteristic pattern through the daylight hours, any substantive impact should be evident in a distinct reduction in demand for mains electricity in the middle of the day. With PV penetration having risen so dramatically since 2009, that pattern should be apparent in comparisons of demand over the last 12 months with equivalent periods prior to 2009.

In fact when we do this, the PV signature is blindingly obvious, especially in the states of South Australia and Queensland where PV penetration is highest. It is also showing itself in the revenues generated by electricity sold on the wholesale market.

In South Australia, midday to early afternoon demand was down over the financial year 2011-12 by about 8% on the average for the period spanning mid- 2007 through mid-2009. That contrasted with a negligible change in demand outside daylight hours.

In Queensland the story is very similar, although the proportional impact is lower with midday 2011-12 demand down only about 4% on 2007-09 levels.

Given the extent to which PV has been rolled out in the last few years, the characteristic signature of demand reduction in the middle of the day is not particularly surprising. What is more interesting is the signature of PV penetration in the wholesale electricity market.

As pointed out in this column a few weeks back, demand reduction is creating oversupply in the wholesale electricity market and causing prices to collapse.

And it is the afternoon and early evening when the wholesale market makes its money, because that is when demand is highest. So any decline in demand in the afternoon will take much of the cream out of the market.

In the period prior to significant PV penetration, hourly revenues on the South Australian wholesale market typically peaked at 3-4 pm in the afternoon at 5 times above base revenues. By 2011-12 those peaks were gone. Even though PV generation is tailing off significantly by 4 pm, the demand reduction was still enough to reduce peak hourly revenues by almost 90% between 2007-09 and 2011-12, contributing to a 30% decline in the annual wholesale revenue.

In Queensland, 2011-12 midday revenues were down 50% on 2007-09 averages, contributing to an annual revenue fall of about 18%.

Across the National Electricity Market, 2011-12 revenues were down 35%, or some $3.3 billion, on the annual $9.6 billion for the two years prior to mid-2009.

These represent massive impacts on the business of electricity. With PV being a major causal factor, things are are only likely to get worse if solar PV deployment continues at the recent frenetic pace.

It will only take several more doublings in capacity, or about 18 months if recent history is any guide, to reduce midday demand to current midnight levels. That would render the midday to early afternoon period akin to the current overnight ‘off-peak’. In such a scenario, the window of opportunity for healthy margin on mains electricity supply will shrink to just a few hours during the evening peak. With that need best supplied by gas “peakers” such a scenario must be making for some anxiety amongst the managers of our base-load coal generation fleet.

In such a scenario, the cost of delivering mains power will have to rise. That is because while the distribution network needs to be scaled to the size of peak demand, it recoups investment over the total amount of electricity supplied through day and night. With solar PV biting into the daytime demand but barely shaving peak demand, the unit cost of distribution will inevitably rise. Distribution is already the major factor in retail electricity prices.

The problematic feedback is evident. Rising retail prices will further incentivise take up of domestic PV, which in turn drives retail prices even higher. Meanwhile, further deployment of PV helps reduce its costs making it even more attractive, and so on ad infinitum, at least until most household roofs are covered.

A potential nightmare facing the mains electricity industry has recently been acknowledged by the AGL economists Paul Simshauser and Tim Nelson in their paper “The Energy Market Death Spiral – Rethinking Customer Hardship”. In that paper the “death spiral” scenario for the Australian power industry is framed by a quote from a US study by Craig Severance.

The unspoken fear of all utility managers is the “Death Spiral Scenario”. In this nightmare, a utility commits to build new equipment. However, when electric rates are raised to pay for the new plant, the rate shock moves customers to cut their kWh use. The utility then raises its rates even higher – causing a further spiral as customers cut their use even more… In the final stages of that death spiral, the more affluent customers drastically cut purchases by implementing efficiency and on-site power, but the poorest customers have been unable to finance such measures…

It is not hard to imagine how utility managers here in Australia are worrying about just how PV is going to impact their business.

This article first appeared on The Conversation.

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