PSALM responds to the issues raised by Mr. Conrado R. Banal III of the Philippine Daily Inquirer in his column dated 23 September 2010

28 Sep 2010

The issues raised by Mr. Conrado R. Banal III in his Breaktime column titled "Sale with a kiss" contain inaccurate and misleading information.

On the alleged sale of "the transmission lines of Napocor"

The government, through the Power Sector Assets and Liabilities Management (PSALM) Corporation, never "sold the transmission lines of Napocor." Only the transmission business of the National Transmission Corporation (TransCo) was bid out through a concession agreement. The concession contract was awarded by PSALM to the National Grid Corporation of the Philippines, or NGCP, after conducting a transparent and competitive bidding. As far as we know, the consortium has not changed its name to "National Grid Philippines Corp., or NGPC," as Mr. Banal proffered.

Mr. Banal described the TransCo concession agreement as a "paiyakan" deal, alleging that the government did not get cash up front, with the payments being made in tranches. The truth is that prior to the turnover of the TransCo concession to the NGCP in January last year, PSALM received USD987.5 million as upfront payment of the concession fee in compliance with the provisions of the sale transaction. The amount is equivalent to 25% of the USD3.95-billion bid offer of the NGCP to acquire the 25-year concession contract. The balance of the concession fee will be paid to PSALM with interest in semi-annual installments for 20 years.

Through this payment structure, the government was able to maximize the proceeds from the concession agreement as per the provisions of the Electric Power Industry Reform Act.

On the alleged "utang muna" sale of a government power plant

The "horror story" that Mr. Banal is referring to may be his own column. PSALM never sold any power plant under the terms he described. Mr. Banal should get his facts straight and apologize to PSALM and its stakeholders for brandishing a lie under the guise of a business column.

On the alleged PhP100-million loss to Lehman Brothers

As it previously explained in a press statement, PSALM did not lose PhP100 million in its transaction with Lehman Brothers as claimed by Eastern Samar Representative Ben Evardone and echoed by Mr. Banal with nary a check of the information.

The deal PSALM entered into with Lehman Brothers Special Financing Inc. on 18 July 2007 was not an investment but a hedging transaction, specifically a Principal Only Swap (POS). Investment and hedging are two different transactions.

The POS is similar to an insurance purchase wherein PSALM pays an annual expense premium of 2.687% on the notional amount of USD100 million for 19 years. In exchange, PSALM or the government has the right to buy dollars at PhP44.788 in 2028 regardless of the foreign exchange rate at that time. Thus, the POS was used as an insurance against foreign exchange volatility.

Do note that the counterparties for the POS deal were selected based on a comprehensive selection process under the guidance of the Government Policy Procurement Board, the Department of Finance, and the Bureau of the Treasury.

When Lehman went bankrupt, PSALM invoked the International Swaps and Derivatives Association, Inc. (ISDA) agreement, terminated the transaction on 03 November 2008, and replaced it with a new POS with the same terms and conditions. The ISDA is a trade organization of participants in the market for over-the-counter derivatives. Based in New York, the ISDA has created a standardized contract (the ISDA Master Agreement) for derivatives transactions.

PSALM also filed for claims in a New York court for approximately USD3.4 million representing the cost of the replacement and other expenses (legal fees, damages, etc.) as may be allowed under the ISDA provisions, the authority for such and similar derivative transactions.

Finally, contrary to Rep. Evardone's allegation as reported by Mr. Banal, PSALM did not use the proceeds from the privatization of power assets in the deal as it was National Power that had paid the required premiums until May 2008.

In the spirit of fair play, we hope the Philippine Daily Inquirer will afford PSALM the opportunity and the space to make these clarifications. Additionally, unlike news reports that need to be released urgently, and thus may not allow any opportunity to validate facts, we hope that editorial columns will have the benefit of verification from the parties who are made the subject of such columns.

Corporate Communications Division
Tel. No. (632) 9029067