Currently under construction in the Philippines, the San Roque multi-purpose scheme has been described as a government flagship project. Analysing the financial arrangements that have allowed construction to get underway, Suzanne Moxon explains why so much is riding on this project

Increasing energy demands in the Philippines have prompted sweeping changes across the country’s power industry. Hydro power, one of the country’s major energy resources, has been recognised by the government as being one of the key options in fulfilling its increasing requirements. Hydro will have an important role to play in reshaping the Philippine power sector, preparing it for the 21st century.

Historically, this country’s power industry has perhaps been rather more famous for its failures than its accomplishments. In 1992 and 1993 power shortages were a daily occurrence, resulting in scheduled and unscheduled power cuts. The crisis, caused equally by the breakdown of old plants and by increased energy demands prompted by economic growth, affected the Philippine economy badly. Not surprisingly, any problem that hurts a country’s economy, takes precedence in the government’s plans. President Fidel Ramos soon decided to shake up the electricity sector and increase the pace of the country’s power development programme.

Shake up

With much haste, the Philippines has since set to work on an extensive power plant construction programme. It has also become a major advocate of build-operate-transfer (BOT) schemes, believing that they are a route to develop more power facilities at greater speed. Private sector participation is actively encouraged and estimates suggest that between 1993-99 an extra 6000MW of electricity will have been generated by BOT schemes in the country. In the process, US$17M of private investment has been fed into the power industry.

The World Bank has been quick to congratulate the Philippines on its accomplishment. It has described the country’s power plans as one of the most successful programmes in the developing world in recent years, and has since regarded the Philippine programme as a model for other developing nations.

Power demand is still increasing, and to prepare to meet the need the government has decided to restructure the industry over an eight-year period (1996-2003). Among its aims are restructuring and privatisation of the National Power Corporation (NPC); supporting private sector generation; and creating a competitive market place.

Having done its power calculations, the Philippine government also unveiled a 37-year power plan. Called the 1998-2035 Philippine Energy Plan, the document aims to provide resources to meet peak energy demands. These are expected to increase from 7420MW in 1998 to over 114,000MW by 2035. In the plan, hydro power’s contribution will total 11,607MW. And in the far future NPC sees vast potential in hydro. In over 245 different sites across the country, 12,308MW of hydro potential exists.

San Roque

Sixty percent of this potential is located in Luzon. One BOT hydro scheme currently under development in northern Luzon is the San Roque project, a multi-purpose scheme which will utilise the water of the Agno river. Comprising an earth and rockfill dam 1097m long and 198m high, the project will boast the twelfth highest embankment dam in the world. When complete, San Roque will generate 345MW of additional peaking power for the Luzon grid and irrigate 87,000ha of land, enabling farmers to plant more than one crop a year. Flood control will also be an objective of the project — the Lower Agno river annually overflows its banks and inundates municipalities downstream. Water quality improvements will also be covered by the scheme.

As PL Lopez, project director for BOT hydro projects at NPC explained, implementation of the project is being undertaken by NPC for the government of the Philippines. After the submission of international tender bids, the BOT scheme was awarded to a consortium of:

•Sithe Holdings Philippines, an affiliate of US power producer Sithe Energies.

•Marubeni Corporation, one of Japan’s largest trading firms.

•Kansai Electric Company, one of Japan’s largest utilities.

In order to work in the Philippines the consortium formed the San Roque Power Corporation (SRPC) for the sole purpose of implementing and operating the project. SRPC is majority owned and controlled by Sithe Holdings Philippines, which has a 50.05% share. Marubeni Corporation has a 42.45% share and Kansai Electric holds the remaining 7.5%.

A manager for SRPC gave a little more background to the major players in the project. ‘Sithe and Marubeni developed the project jointly and reached financial closure in 1998,’ he explained. ‘Both entities contributed substantial development and financing capabilities to the project. Kansai then joined the ownership after financial closing.’ SRPC selected subsidiary companies of US design and construction firm Raytheon Engineers & Contractors as the chosen EPC contractor. United Engineers International is responsible for the engineering, design and procurement of all imported equipment and materials, including construction equipment. The second company, Raytheon Ebasco Overseas, is responsible for procurement of local materials, construction and commissioning. The Sithe affiliate is responsible for construction, operation and maintenance management, while Kansai will also participate in certain parts of construction management. ‘All three owners of SRPC will contribute substantial capital and management oversight to the continued success of the project,’ SRPC says. Harza Engineering of the US will also assist with the design review and on-site quality assurance.

Commenting on the BOT scheme, SRPC praised NPC’s track record with similar projects. ‘We understand that the BOT scheme was chosen by NPC and the Philippine government on the basis of the remarkable success NPC has experienced with other BOTs. Recognition was also given to the fact that the private sector was likely to hold the best formula for the successful implementation of the project.’ Lopez from NPC said: ‘Strictly speaking, the implementation of the project is not a sole BOT arrangement, it will also be partly build-transfer-operate (BTO). This is because the non-power components (irrigation, flood control and water quality improvement) which are non-revenue generating endeavours, will be funded directly by the government through NPC. US$400M will be disbursed to the San Roque Power Corporation to fund these. In turn,’ he added, ‘there will be an early transfer of ownership of the dam facility.’

Powerful agreements

A 25-year power purchase agreement (PPA) has been signed by NPC with the Consortium. ‘Upon completion,’ SRPC explains, ‘SRPC is obligated to deliver capacity and energy in accordance with certain performance requirements. NPC will purchase such delivered capacity and energy at rates stipulated in the PPA.’ These rates are denominated in dollars, yen and peso and are applied according to complex formulae. When SRPC bid for the project NPC performed a bid evaluation using its own set of assumptions and methodologies. ‘These took into account payment of capital recovery, energy and operation and maintenance fees,’ Lopez said. ‘This resulted in a price of Philippine peso2.98/kWh beginning in 2004 for a period of 25 years.’ (1 peso = 2.4 US cents.) NPC’s other obligations under the PPA also include disbursement of US$400M for the cost of non-power components over the first three years of construction (1998-2000); social acceptance, water rights, watershed management and permit assistance. Associated transmission lines and access roads to the project site and the resettlement area for project-affected people are also NPC’s responsibility.

Talk about money

The overall cost of the San Roque project (after finance) amounts to US$1191.2M. As Lopez explains, this includes interest during construction, commitment charges and development costs, as well as the cost of irrigation facilities.

NPC and the government took the decision to separate the non-power and power components of the project when considering financing.

‘NPC decided to contribute US$400M directly in recognition of the multiple benefits and beneficiaries of the dam,’ says SRPC. The non-power funding will be secured by NPC on behalf of the three agencies involved in these components of the project. The National Irrigation Administration represents the irrigation component of the scheme, the Department of Public Works and Housing represents flood control, and the Department of Natural Resources represents the water quality interests of the San Roque project.

The US$400M non-power funding will be used mainly for dam construction and appurtenant structures. This is being arranged as an untied loan facility with the Japanese Export-Import Bank (JEXIM) and is understood to be on attractive terms. The loan is currently in its final stage of approval with JEXIM. A memorandum of understanding has been signed by NPC; the Department of Finance; Department of Budget and Management; and the Department of Agriculture. This has established the mechanism by which the debt service for the JEXIM untied loan will be reimbursed to NPC by the respective agencies, Lopez explained.

Funding for the power portion of the San Roque project has, again, been secured through JEXIM. The US$402M project loan is yen-denominated and will run for 15 years (five years for construction and ten years for repayment). JEXIM is providing US$302M of the funds, and a consortium of commercial banks arranged by the Bank of Tokyo Mitsubishi, Fuji Bank and Sumitomo Bank, are providing the remaining US$100M.

‘We consider loans to be confidential,’ SRPC remarked when asked about the terms in more detail, ‘but the JEXIM margin is low relative to “market” bank margins,’ it explained. ‘The yen base rates are also low and such a financing scheme helped SRPC and NPC to achieve the lowest possible power tariff for the project.’ In addition there is also a US$43.5M ‘standby’ loan which is dollar-denominated and runs for ten years (five years for construction and five for repayment). The same commercial bank syndicate is providing this facility. Again, SRPC described rates and margins as ‘relative to the market’.

At the time when the financial arrangements for the project were being discussed the Asian Pacific financial crisis reared its ugly head. Did this have an adverse effect on how things progressed? ‘There should be no further impact now,’ SRPC says, ‘but it did have a tremendous impact on the financing process and the final financing package.’ However, the spokesman added that it had no, and will not have any, impact on the price of power purchased by NPC. The San Roque Power Corporation absorbed all the cost and other impacts.

Other potential impacts on the project, especially during the financing stage, could have been the imminent privatisation of the Philippine power sector. SRPC remarked that the Corporation does not know the Philippine government’s plans for privatisation but that the government has provided a performance undertaking (PU), guaranteeing the performance of NPC under the PPA. ‘The PPA and this undertaking survive privatisation under any and every scenario,’ SRPC added.

Lopez from NPC explained that the planned privatisation of the country’s power industry will require the passage of the Omnibus Energy Law by the Philippine Congress, which is expected to be approved sometime this year. ‘The PU means that the financial obligation of NPC under the Corporation’s contract is guaranteed by the government,’ Lopez said. ‘In the event of privatisation of NPC its obligations under the San Roque PPA shall be satisfactorily and fully complied with because of the PU.

‘In addition, the privatisation provision in the PPA indicates that SRPC’s economic position will be restored if it is adversely affected by privatisation.’ Commenting on the prospect of privatisation, SRPC says: ‘Under the PPA the National Power Corporation is obligated to ensure any possible successor is at least as credit-worthy as NPC was before privatisation. In the event of dispute, the NPC and the government would be obligated to buy the San Roque Power Corporation out of the PPA.’ However, given the multi-purpose nature of the facility, SRPC believes that NPC is most likely ‘always to be a government-owned entity’.

‘The prospect of privatisation,’ the spokesman went on to say, ‘has very little effect on SRPC. Therefore, while it raised questions, it was never an issue for financing.’


At present the San Roque project is in the initial construction phase. In March 1998 NPC disbursed its first installment of US$90M to SRPC, who in turn released the money to Raytheon to start work on the project. ‘The sponsors had by that time also contributed a substantial amount of capital to SRPC for a variety of development, permitting, geo-technical and preliminary engineering and environmental work,’ SRPC added.

Construction work had to start at the beginning of last year, partly so it began before the onset of the rainy season, and partly to ensure that the project adhered to the overall construction schedule. However, as NPC had not closed its US$400M untied loan with JEXIM, NPC had to enter into a one-year loan with Citibank to bridge its financing requirement until the JEXIM loan is closed. Once this happens, Lopez said, the proceeds of the loan will be utilised to repay Citibank and the balance of NPC’s obligations under the PPA.

Latest reports from the construction site state that the major access roads and most of the site infrastructure have been completed. Construction is proceeding on the diversion tunnels, cofferdam foundation preparation, dam abutment excavations, conveyor systems and the material processing plant.

The contract for the supply of turbines for the 3x115MW units, as well as related controls, has been awarded to Toshiba International Corporation. Bids have been received or are pending for the main transformers and penstock lining, and within the next few months tenders will also be requested for major gates and cranes. Things look good for power plant operation to begin in 2003.

A flagship project

The San Roque multi-purpose project has been described as a flagship project of the government in northern Luzon.

Reflecting on his company’s involvement in this project, Shay Assad, chairman of Raytheon Engineers & Constructors said: ‘This is an important project for the Philippines. It will benefit the residents of San Roque and the surrounding communities in several ways. We are grateful to the San Roque Power Corporation for allowing us to be an integral part of such an important project.’