Action 2.2 Reduce transmission constraints in Luzon to enable network integration

15. 
    Policy guidelines from DOE need to empower ERC to issue a clear set of implementing rules and regulations consistent with development of a network that enables effective market competition, reliability for generators (including renewables), and cost-effectiveness for customers. The immediate priority needs to be on reducing transmission constraints in Luzon so that price differentials within WESM are reduced, and on fully integrating the Visayas with the Luzon system, enabling integration of the two power markets (which then sets the stage for the planned undersea cable linking Visayas and Mindanao).
    

16. 
    If Government financial liabilities can be managed successfully, while in parallel the service providers improve their operational and financial performance, the foundation will be there for attracting investment and ensuring the timely commissioning of new power generation capacity. However, developing an optimal mix of generation resources requires additional policy steps to implement the Renewable Energy Act 2008, and to develop a strategy to increase access to natural gas, so that the Philippines lessens its dependence on coal-fired generation to meet incremental demand. Such a strategy will require the Government to take a medium-term, strategic view of evolving global energy markets. Opportunities to build better linkages, whether for financing, technology, or fuel (especially natural gas), could help the Philippines achieve new levels of efficiency that could insulate consumers from big price hikes in the future.
    

The World BankAnnex – Power Sector Overview

Installed capacity	Installed capacity and gross power generation by fuel source (in percent)

The market in the Philippines comprises one national transmission company (now operated by a concessionaire, the National Grid Company of the Philippines, or NGPC); 20 urban utilities, mostly investor-owned utilities, but with a handful of municipally owned utilities as well; 119 rural electric cooperatives (ECs); and numerous publicly and privately owned generation companies. Prior to the 1990s, generation was dominated by the National Power Corporation (NPC, or Napocor), which was also the owner/operator of the transmission system. During the 1980s and 1990s, the Philippines experienced a succession of severe power crises, and there were three main policy responses. First, NPC turned to independent power producers (IPPs) for new capacity, with NPC serving in the role of bulk supplier to the country’s distribution companies. The country’s largest urban distributor, Meralco (serving Manila) also was a significant contractor of IPPs. Second, an impetus for reform of key government agencies steadily grew, with a focus on NPC and on the National Electrification Administration (NEA) and the electric coop sector. Third, there was consideration of broad-ranging market and regulatory reform.

1. 
   The Philippines Today: Progress and Challenges
   

1. 
   The lack of quality transport infrastructure and low level of service negatively affect the investment climate and economic growth in the Philippines. In Metro Manila, available transport capacity is unable to meet increasing demand and hampers the movement of people, goods and services. Some principal corridors already have high capacities but also exceedingly high traffic volumes. Different modes of public transport are characterized by low levels of service to commuters in terms of travel time, safety and convenience, and ease of transfers. The Light Rail Transport (LRT) network provides reliable mass transport service, but Mass Rail Transit (MRT) Line 3 and LRT Line 1 will need investments for the upkeep of rolling stock and additional capacity to match ridership. Airport and port-related passenger and cargo movements compete with typical urban traffic for limited road space. Restrictions on vehicle usage and trucks are in place, but their effectiveness will deteriorate as motorization rates continue to grow. Economic losses due to congestion in Metro Manila alone have been estimated to be around P100 billion a year in 1996 prices, or 4.6 percent of GDP. In other urban areas, congestion problems may be less severe compared to Metro Manila but rank among the most critical concerns of the residents. Population growth and motorization rates in these areas are now higher than in Metro Manila, and urban transport demand will continue to increase as the Philippines becomes one of the most urbanized countries in the region.
   

2. 
   The quality of the national road network managed by the Department of Public Works and Highways (DPWH) has not significantly improved. The percentage of roads in good or fair condition was 53 percent in 2007, even as the coverage of paved roads reached 72 percent. Based on current inventory, it is estimated that only 20 percent of local roads (64 percent of provincial and 53 percent of city roads) are in good or fair condition. The technical and financial capacity of Local Government Units (LGUs) to manage local roads is generally inadequate. As a result, conversion of local roads to national roads by legislation has been commonly pursued as a way of obtaining access to DPWH’s annual budget for maintenance. Without a stable classification of roads on the basis of their functional role in the network, there will be less predictability in the planning and budgeting process for national and local roads. Another area that deserves attention is transport safety.
   

3. 
   The development of nautical highways demonstrates the potential of intermodal integration to improve inter-island connectivity. Roll-on-roll-off (RORO)-enabled ports and new RORO ferry routes augmented the capacity of the existing port infrastructure to carry traffic, and were aimed at providing an alternative to longer-distance inter-island shipping. According to the Philippine Ports Authority (PPA), 65 out of more than 100 government ports can already accommodate RORO vessels; these are complemented by 24 private RORO-enabled ports.
   

4. 
   Total infrastructure investments declined in the Philippines between 1997 and 2006, following significant increases between 1985 and 1996. In real terms (2006 prices) the level of total public infrastructure expenditures rose from 59 billion pesos in 1985 to 363 billion pesos in 1998. In 2006, the level had fallen to approximately 186 billion pesos. Transportation infrastructure followed the general trend for infrastructure starting at 24.5 billion pesos in 1985 peaking at 97 Billion pesos in 1997 and falling to 66.4 billion pesos in 2006. (World Bank, Public Expenditure Review, 2009). Since 2007 the budgets for DPWH and the Department of Transport and Highways (DOTC) have increased remarkably. In 2010, DPWH and DOTC have a combined budget of P142 billion, which could have a significant impact if used effectively.
   

5. 
   There is considerable potential for further improvements in the transport sector. The Philippines is ranked 94th out of 134 countries on overall quality of infrastructure surveyed in the Global Competitiveness Report 2008-09. The Philippines ranked 94h for roads, 85th for railroads, 100th for port infrastructure and 89th for airports. For all types of infrastructure, the Philippines consistently falls below the average score for all countries surveyed.
   

6. 
   With an archipelagic setting, an increasingly urban population, an unstable pattern of investment levels, and a weak governance and accountability framework, there are significant challenges for the transport sector. While the transport infrastructure has been developed and has been spread out across the country (more than 200,000 km of roads, 515 public and private ports , and 215 public and private airports), the level of service has not been good for lack of sustainable financing. With rapid urbanization (by 2030 77 percent of the population is expected to be living in urban areas), the urban transport infrastructure has been put under tremendous pressure and urban mobility has severely deteriorated.
   

7. 
   Governance in the transport sector has been a persistent issue. At the agency level, the high-risk areas are commonly known: procurement, financial management, and implementation of quality control. Lack of technical capacity in planning, intermodal integration, project appraisal, and monitoring are also weak points. The transport projects included in the national budget need to be validated in terms of their contribution to the country’s development strategy. Moreover, when the identification of these projects is done in a politicized, non-transparent manner, the integrity of the procurement, design, and implementation processes suffers.
   

8. 
   The role of the private sector in the competitive provision of transport services can be enhanced significantly. While the BOT (Build-Operate-Transfer) Law has been in place since 1990, only a handful of projects have been pursued under the open, competitive bidding process. The more common mode has been through unsolicited proposals or joint ventures by government corporations with mandates for infrastructure development. This has resulted largely from the failure to invest in adequate project preparation. This refers to the selection of priority projects, carrying out feasibility studies, and preparation of bidding documents as the key pre-requisites for an open, competitive bidding process.
   

9. 
   Institutional coordination in the sector is weak. The DPWH and DOTC are the principal agencies responsible for the delivery of infrastructure, but there are many other players involved in the sector such as the Philippine Ports Authority (PPA), Civil Aviation Authority of the Philippines (CAAP), Toll Regulatory Board (TRB), and Light Rail Transit Authority (LRTA). Coordination among transport agencies is lacking, and more so with economic sector agencies. The linkage of transport infrastructure at the planning level with potential growth sectors such as manufacturing, tourism, agriculture, etc. is not subjected to an active consultative process. The linkage between DPWH/DOTC agency plans and regional development plans is also generally weak. Proposed reforms involving institutional arrangements on separating regulatory powers and operations in the ports, airports, rail, and airports sub-sectors have not progressed despite being recommended in past medium-term plans.
   

2. 
   Where the Philippines Could Be: Policy Options/Strategic Priorities
   

10. 
    Transport sector policies need to focus on improving infrastructure quality and service delivery. While the quantity of transport infrastructure in the Philippines in network and facility density compares well with other countries in the region, the quality of service often does not. Improving and sustaining the quality of roads, airports, and ports, is most effectively achieved jointly as an intermodal network.
    

11. 
    As in most other countries, roads dominate all modes of transport in terms of shares in passenger and cargo traffic in the Philippines (Figure 1). For cargo traffic, water transport closely follows roads transport. Given that the road and water transport modes carry practically 100 percent of passengers and cargo, a focus on improving the quality and levels of these two transportation modes would have a very high impact. This is best done through an efficient modal and intermodal policy, planning and operations effort. For national roads, DPWH is the focal point in this effort. For local roads and urban transport, various institutions at the local (LGU) and national (DPWH/DOTC/DILG) levels are involved, so good coordination is important.
    

12. 
    The Draft National Transport Plan (DOTC-DPWH-NEDA-Ausaid-PEGR study) envisions a Strategic National Transport Network that supports major economic activities in the country. This Plan should serve to guide transport sector planning in an intermodal context. The main elements of the strategic network envisioned in this Plan are the following:
    

• 
  National Road Network - This network consists of the north-south road backbone, east-west laterals, and other roads of strategic national importance, which interlink regional and provincial capitals, growth centers, and defined principal ports and airports of the country.
  
• 
  National Port Network - This national port system comprises the base ports and terminal ports under the jurisdiction of PPA and CPA, and the ports directly managed by special economic zone authorities, notably Subic Port and the Mindanao International Container Port.
  
• 
  National Airport Network - The national airport system consist of the international airports under the special airport authorities (Manila, Mactan-Cebu, Subic and Clark) and the national airports in the current airport classification, except the 40 community airports.
  
• 
  National Railway Network - This railway links the existing operational and rehabilitated/improved lines using the Philippine National Railways right-of-way, including the Northrail system.
  
• 
  Road RORO Terminal System - This intermodal transport network includes the identified Western, Central and Eastern Nautical Highways.
  
• 
  Urban Transport Networks in Metropolitan Areas - These networks involve the road, mass transit systems and public transport terminals in Metro Manila, Metro Cebu and Metro Davao.
  

13. 
    The Joint Chambers of Commerce reported that in 2009, around 60 percent of the international shipment volume that entered the Philippines was handled in Manila (i.e., South Harbor and Manila International Container Terminal), while Batangas and Subic ports handled a small volume and were underutilized. Two factors that need to be reviewed are the existence of long-term concession contracts between private port operators and the Philippine Ports Authority (PPA), and the possible financial threat posed to PPA if traffic is diverted away from the Manila ports. (Subic port is not under PPA, but under the Subic Bay Metropolitan Authority, SBMA.) . This also highlights the need to designate a focal transport agency to coordinate inter-agency and inter-regional decisions that are important for overall transport sector development.