Business World
Introspective
The global outlook has become infinitely gloomier over the past couple of months, with the euro zone in a sovereign debt crisis and the US in what could be another recessionary environment. This puts a heavy cloud over the Philippine economy, whose fortunes are still in some ways tied to these countries, and opens up another period of uncertain growth.
In our central scenario, assuming global financial troubles can be contained, we bring down our growth forecasts from 4.8% to 4.3% in 2011 and from 5.5% to 4.8% in 2012. Activity would be mainly consumption-driven in our projections, with net exports likely to decline this year and not see a major resurgence the next. At the same time, government spending especially on infrastructure may remain weak, limiting the country's investment growth, though should eventually rebound.
In the worst case where European debt troubles coupled by US weakness lead to another global financial crisis of the same scale as 2008, the Philippines could remain as resilient to recession and financial volatility as it had been back then. This is in light of robust domestic demand, continued remittance and BPO inflows, historically high FX reserves, a generally healthy bank sector, and greater fiscal space this time to help counter a downturn in the real economy.
Reflective of the sound fundamentals of the country are the recent string of credit upgrades by international rating agencies and a jump in world competitiveness ranking (up by 10 slots in the World Economic Forum's latest Global Competitiveness report). These observers noted the country's strong macroeconomic management that has led to improvements in the country's debt situation, narrower interest rate spreads, and reined-in inflation.
In our best scenario, there could be a brightening in the outlook for the world economy if international efforts succeed at preventing a financial contagion coming from the euro zone and if effective measures to stimulate the US economy are put in place. Domestically, we could see a bump in economic activity if government actually succeeds in accelerating infrastructure spending as it hopes to, though the contribution of PPP to this will not likely be close to nil.
We had already cut our growth forecast for 2011 to 4.8% in our last quarterly report considering the threat posed at the time by surging global oil and food prices, weakened purchasing power of dollar remittances due to peso appreciation, and government's odd spending restraint. Supply-chain disruptions brought about by Japan's tsunami and nuclear crisis had also further weakened our outlook for exports, then expected to naturally decelerate from a recovery pace.
Based on first half performance (4.6% in 1Q2011, as revised, and 3.4% in 2Q2011), even this downscaled number has begun to look a bit optimistic, as it required the economy to grow upwards of 5.5% in the second half. The more likely figure, in our view, would be about 4.3% in 2011 (and around 4.8% in 2012) for a few important reasons.
First, while the government has vowed to redouble its spending and meet spending targets before the year ends, it may find it increasingly hard to do so. The big surprise during the second quarter had been the drop in public construction outlays, which fell by over 40%, a drastic reduction even coming from an election year. Fiscal accounts show that government (non-interest) spending during the first six months fell short of what was programmed by nearly P120 billion (about 17.5%) as wasteful projects were shelved and operating expenses cut. This presumably barred any front- loading to take place and make the most of the summer months as had been trumpeted by economic managers after early passage of the budget.
Second, in relation to this, we continue to see slow movement in the public-private partnership (PPP) program which should further stall the country's much-needed infrastructure boost. As we had discussed in earlier reports, delays traced to the lack of well-crafted feasibility studies; weak technical and institutional capacity; and overly tight scrutiny of unsolicited proposals, especially those put in the investment pipeline by the previous administration. With government's housecleaning efforts beginning to dilute investor interest rather than promote it, in the short run at least, we are doubtful PPP projects would be able to take off anytime soon.
Even the new scheme recently proposed for mass transport projects under the PPP may not yield the desired quick results. This approach, which hopes to tap cheap development loans to build the fixed component (e.g., tracks) while allowing private firms to bid for providing the rest of the system, including rolling stock and operations and maintenance, may be even harder and take longer to pull off as it introduces another layer of complexity in reconciling policies and procedural requirements of government, official funders, and private investors.
Third, the world economy has already entered what the IMF calls a dangerous new phase marked by weakened activity especially in advanced economies (the US and in Europe), falling confidence, and growing downside risks. This means another period of uncertain growth for the Philippines in view of the potential impact on exports and remittances.
On the upside, however, inflation risk has abated which helps support consumer demand and also lessens the unspoken bias for peso appreciation. Remittances while slower than expected continue to be resilient at 6.3% in the first semester. The government has vowed to make use of the extra fiscal space created and frontload spending on projects due for implementation next year.
Credit activity remains high on account of liquidity created by continued portfolio flows. Notwithstanding minimal holdings to the new troubled euro zone (only 1.4 % of total assets) and high concentration of assets in Philippine government paper and a handful of domestic conglomerates, banks are generally healthy. As in the last global financial crisis episode, we believe the Philippine economy will likely remain resilient compared to many of its neighbors in the region.
This article is an excerpt from an October 3 report written by Margarita Gonzales and this columnist for GlobalSouce, a New York based network of independent analysts. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Monday, October 31, 2011
Friday, September 9, 2011
De-monopolizing telecommunications
Business World
Introspective
Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government's development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country's competitiveness and development over the long run.
Let me start with a disclosure - I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the De-monopolization of Telecommunications, documents the political and regulatory fortitude needed to dislodge entrenched interests.
THEN
It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone. Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75% in the country's capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.
None of the telephone companies operating at the time were in a position to challenge PLDT's leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, spent heavily for the protection of its market share. For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. If he loses in this duel, the president's credibility as a strong leader will be severely dented, observed one report at the time.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.
As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country's teledensity had doubled and PLDT had already embarked on a zero backlog program.
Our 2008 paper continues: Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....
NOW
Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to reestablish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies - 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.
This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.
Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government to make sure no one of the private telcos gain even near monopoly powers. Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.
I am hopeful that the present regulators - and the national leadership - will be equal to the challenge of the times.
Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).
Introspective
Two key issues on telecommunications have lately hogged business headlines: a) the PLDT-Digitel Merger, and b) the proposed National Broadband project. Both these issues test the clarity of government's development vision and its commitment to sound regulation and competition policy. Its decisions will impact not only the efficiency of delivery of telephony and data services to both private users and government, but our country's competitiveness and development over the long run.
Let me start with a disclosure - I am a board director of Globe Telecom. In a previous life, though, for over two decades, I was a civil servant at the Department of Finance and in multilateral institutions. There, I had a good view of the politics of economic reform, especially as undersecretary under the reform-minded Aquino 1 and Ramos administrations. With this background, I was asked, together with my colleague Christine Tang, to do a case study on the subject by the World Bank Growth Commission. (The Political Economy of Reform during the Ramos Administration, link
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf). A key chapter, the De-monopolization of Telecommunications, documents the political and regulatory fortitude needed to dislodge entrenched interests.
THEN
It starts with a quote attributed to Singapore Senior Minister Lee Kuan Yew in 1992: The Philippines is a country where 98 percent of the residents are waiting for a telephone and the other 2 percent are waiting for a dial tone. Indeed it best describes the situation of the domestic telecommunications industry in 1992. An estimated 800,000 applicants, 75% in the country's capital, Metro Manila, were queuing for a telephone line. At the time, the Philippine Long Distance Telephone Company (PLDT), which owned the only nationwide transmission backbone, was a virtual monopoly, controlling over 90% of the country's telephone lines. Its controlling shareholder was politically well connected, its influence extending across the three branches of government as well as the media.
None of the telephone companies operating at the time were in a position to challenge PLDT's leadership. Following news accounts, PLDT, instead of expanding its network to meet service demand, spent heavily for the protection of its market share. For instance, when the previous government decided to open up the sector to competition, reports indicate that PLDT was able to secure as needed favorable legal rulings to block prospective entrants. It had apparently been a risky venture for the president to go after PLDT. If he loses in this duel, the president's credibility as a strong leader will be severely dented, observed one report at the time.
Nevertheless, the Ramos administration proceeded to pry the sector open with various tactics... from encouraging the formation of consumer groups that took to the streets and clamored for change, to boardroom battles. One case reportedly led to the resignation of a Supreme Court justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer.
As a result, the twin executive orders (EO) that the president issued in 1993 opened the floodgates to investments in the sector. By the time Congress passed legislation largely echoing provisions of the two executive orders, the country's teledensity had doubled and PLDT had already embarked on a zero backlog program.
Our 2008 paper continues: Fifteen years on, the benefits of the reform may be seen in (i) increased access to telecommunication services, with teledensity in the cellular mobile telephone service (CMTS) segment of the market reaching 50 per 100 population in 2007; (ii) increased market competition with the entry of more players representing domestic and foreign interests; (iii) the rise of new growth industries such as business process outsourcing; and (iv) a whole new range of business solutions using cellular mobile telephone technology that caters to the retail client, such as money transfers for overseas workers. An interesting, perhaps ironic turn of events is that PLDT, which had strongly resisted the reform, managed to shape up and emerged a big winner of the reform....
NOW
Fast forward to the present. PLDT, under new controlling ownership, proposes to acquire Sun-Digitel, threatening to reestablish a near monopoly situation. Together, the combined companies will control 73% of the market. Even more tellingly, the combined PLDT-Digitel will control three out of the four blocks of telephone frequencies - 75% of the highway for delivering the service. This level of control is against the spirit, if not a direct contravention of the Ramos era EO which sought to limit each telco to only one bloc.
This issue has been recently deliberated in the appropriate Senate committee whose findings we await, and is now under consideration by the NTC. What was made clear during the hearings is that nowhere in the world is such a degree of concentration allowed without putting effective limitations on the dominant provider. For example, in the US, the recent AT &T/T-Mobile merger triggered alarm bells in the US top anti-trust agency even though both carriers combined subscriber bases would amount to a little less than 44% of the total wireless market. Well established regulatory regimes everywhere else would have done the same.
Widely followed analyst Boo Chanco wrote in his latest column about the ill-advised revival of the National Broadband project. He provided yet another reason why we need to strengthen competition in the industry. To combat the fear of Secretary Montejo that our private telcos might overcharge government for telco services, he cited that two noted economists (Dr. Raul Fabella and Dr. Noel de Dios) at that meeting with the secretary urged government to make sure no one of the private telcos gain even near monopoly powers. Government must exercise its function and duty to regulate the telcos not just to get the prices they are seeking for government operations but for the sake of the consumers as well.
I am hopeful that the present regulators - and the national leadership - will be equal to the challenge of the times.
Mr. Romeo Bernardo is a Philippine GlobalSource Partners advisor, managing director of Lazaro Bernardo Tiu & Associates, Inc. and a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA).
Monday, August 1, 2011
The President's speech
Business World
Introspective
If the SONA had a theme, it would be to end what the President called the culture of entitlement in the country, as symbolized by the wang-wang (a word mentioned 11 times in the report) - notoriously used by government officials to bypass traffic - and to put in its place a new system of meritocracy.
Judged solely as a political document intended to inspire and inform his constituents about his accomplishments, the President's SONA must be counted a success. It was written in Pilipino, spoken with confidence, and mostly adhered to issues that resonate strongly with the broad public, such as corruption, poverty, security, and social services programs.
As a document that lays down clearly the economic, political, and legislative agenda of the current administration - as some hoped it would - it is notable for its many omissions. The President rather referred listeners to the proposed budget for next year, submitted the day after the SONA, for a more comprehensive plan for the coming year. [One could also refer to the Philippine Development Plan 2011-2016 (http://devplan.neda.gov.ph/http://devplan.neda.gov.ph/) originally made public in May.]
The SONA made no explicit mention of Public-Private Partnership (PPP) projects, after touting them as the lynchpin of the government's ambitious investment program in the first SONA. The nearest mention of the PPP was when the President talked about the need for all projects to have clear work programs and to undergo transparent bidding. This is perhaps understandable after the huge hype that followed PPP after the first SONA and the delays currently being faced by the scheme. The omission may be viewed as the administration's means of managing expectations. Finance Secretary Cesar Purisima has been quoted as saying that he expects the economy to follow a J-curve growth path, with growth first dipping as solid foundations are being laid, and then to pick up and be sustained afterward.
The SONA was also quiet about tax policy reforms and fiscal sustainability, apart from an admonition to the self-employed and professionals to pay the correct amount of taxes, and the vow to convict and jail tax evaders. The implicit assumption appears to be that improvements in collections, as a result of taxpayers toeing the line, a more streamlined system (e.g., better cross-checking of records within government), and better use of available funds (e.g., PAGCOR, Malampaya), will be sufficient to ensure fiscal sustainability without raising new taxes. This remains to be seen.
For the first four months of the year, tax revenue collections grew by 11% compared to last year. But given inflation and economic growth, this hardly made a dent on the tax effort ratio - estimated at less than 12% based on first quarter figures (and using the revised GDP numbers). Longer- term, once the government starts catching up to its spending program (currently slowed down by governance reforms), this may pose a problem and may affect public infrastructure investment and social spending, including plans for universal health care.
On the other hand, House of Representative Speaker Feliciano Belmonte has said, post-SONA, that the House Leadership will act with haste on fiscal measures aimed at shoring up government revenues, including the rationalization of fiscal incentives, review of VAT exemptions, and the restructuring of excise taxes on tobacco and alcohol. It may be that the administration's strategy is to push for tax measures behind the scenes and not to refer to them as new taxes. In the past, tax reforms were only achieved through strong sponsorship by the incumbent President (as was the case in the terms of President Ramos and President Arroyo). It will be interesting to see whether the current strategy, if it is indeed the strategy, will succeed, especially where the tax system has been characterized as a leaky pail that may need to be replaced, rather than simply plugged.
On agriculture, the President may be setting himself too lofty a goal by aiming for rice self-sufficiency within his term. Analysts have noted that the increase in rice production so far this year is mainly due to an increase in area planted and favorable weather conditions compared to last year. Given the fickleness of weather and the country's robust population growth, zero rice importation appears nearly unachievable in the near term. And even if achievable, rice self sufficiency may be expensive and sub- optimal from a budget point of view. The government's own Development Plan acknowledges that in terms of land productivity in rice, the country trails Vietnam, Indonesia, and Malaysia.
The saber-less rattling gesture directed at China is intriguing but may be potentially costly, depending on how China perceives it and reacts to it. Will China look at it as mere political posturing? Could it have an impact on tourism and investments from, and trade with China? The buildup in military hardware necessary to lend a sliver of credibility to the gesture could also be financially steep.
Underlying the two SONAs of President Aquino is a clear and simple framework. End the culture of entitlement and corruption and this will lead to better use of public funds and an increase in investor confidence. In turn, this will translate to the improvement of physical infrastructure that will enhance economic growth. Enhanced growth will create jobs and generate the revenues that will finance the social services to ensure no one is left behind.
One may argue, and many have, that this framework is overly simplistic, that far more than a strong anti-corruption thrust is needed to propel growth. One could also easily quibble about the achievements reported in the SONA. According to Social Weather Stations, from which the SONA figures on hunger incidence were obtained, self-reported poverty has been essentially flat and unemployment has been rapidly increasing instead of declining so far in President Aquino's term. Still, there is a general sense that the country is making significant strides, if in nothing else at least in the rebuilding of governance institutions. Whether and how long before this translates to growth, however, and whether the government can put in place the other necessary ingredients, remain important questions.
This article is based on a July 27 Global Source report written by the columnist and Jeff Ducanes. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Introspective
If the SONA had a theme, it would be to end what the President called the culture of entitlement in the country, as symbolized by the wang-wang (a word mentioned 11 times in the report) - notoriously used by government officials to bypass traffic - and to put in its place a new system of meritocracy.
Judged solely as a political document intended to inspire and inform his constituents about his accomplishments, the President's SONA must be counted a success. It was written in Pilipino, spoken with confidence, and mostly adhered to issues that resonate strongly with the broad public, such as corruption, poverty, security, and social services programs.
As a document that lays down clearly the economic, political, and legislative agenda of the current administration - as some hoped it would - it is notable for its many omissions. The President rather referred listeners to the proposed budget for next year, submitted the day after the SONA, for a more comprehensive plan for the coming year. [One could also refer to the Philippine Development Plan 2011-2016 (http://devplan.neda.gov.ph/http://devplan.neda.gov.ph/) originally made public in May.]
The SONA made no explicit mention of Public-Private Partnership (PPP) projects, after touting them as the lynchpin of the government's ambitious investment program in the first SONA. The nearest mention of the PPP was when the President talked about the need for all projects to have clear work programs and to undergo transparent bidding. This is perhaps understandable after the huge hype that followed PPP after the first SONA and the delays currently being faced by the scheme. The omission may be viewed as the administration's means of managing expectations. Finance Secretary Cesar Purisima has been quoted as saying that he expects the economy to follow a J-curve growth path, with growth first dipping as solid foundations are being laid, and then to pick up and be sustained afterward.
The SONA was also quiet about tax policy reforms and fiscal sustainability, apart from an admonition to the self-employed and professionals to pay the correct amount of taxes, and the vow to convict and jail tax evaders. The implicit assumption appears to be that improvements in collections, as a result of taxpayers toeing the line, a more streamlined system (e.g., better cross-checking of records within government), and better use of available funds (e.g., PAGCOR, Malampaya), will be sufficient to ensure fiscal sustainability without raising new taxes. This remains to be seen.
For the first four months of the year, tax revenue collections grew by 11% compared to last year. But given inflation and economic growth, this hardly made a dent on the tax effort ratio - estimated at less than 12% based on first quarter figures (and using the revised GDP numbers). Longer- term, once the government starts catching up to its spending program (currently slowed down by governance reforms), this may pose a problem and may affect public infrastructure investment and social spending, including plans for universal health care.
On the other hand, House of Representative Speaker Feliciano Belmonte has said, post-SONA, that the House Leadership will act with haste on fiscal measures aimed at shoring up government revenues, including the rationalization of fiscal incentives, review of VAT exemptions, and the restructuring of excise taxes on tobacco and alcohol. It may be that the administration's strategy is to push for tax measures behind the scenes and not to refer to them as new taxes. In the past, tax reforms were only achieved through strong sponsorship by the incumbent President (as was the case in the terms of President Ramos and President Arroyo). It will be interesting to see whether the current strategy, if it is indeed the strategy, will succeed, especially where the tax system has been characterized as a leaky pail that may need to be replaced, rather than simply plugged.
On agriculture, the President may be setting himself too lofty a goal by aiming for rice self-sufficiency within his term. Analysts have noted that the increase in rice production so far this year is mainly due to an increase in area planted and favorable weather conditions compared to last year. Given the fickleness of weather and the country's robust population growth, zero rice importation appears nearly unachievable in the near term. And even if achievable, rice self sufficiency may be expensive and sub- optimal from a budget point of view. The government's own Development Plan acknowledges that in terms of land productivity in rice, the country trails Vietnam, Indonesia, and Malaysia.
The saber-less rattling gesture directed at China is intriguing but may be potentially costly, depending on how China perceives it and reacts to it. Will China look at it as mere political posturing? Could it have an impact on tourism and investments from, and trade with China? The buildup in military hardware necessary to lend a sliver of credibility to the gesture could also be financially steep.
Underlying the two SONAs of President Aquino is a clear and simple framework. End the culture of entitlement and corruption and this will lead to better use of public funds and an increase in investor confidence. In turn, this will translate to the improvement of physical infrastructure that will enhance economic growth. Enhanced growth will create jobs and generate the revenues that will finance the social services to ensure no one is left behind.
One may argue, and many have, that this framework is overly simplistic, that far more than a strong anti-corruption thrust is needed to propel growth. One could also easily quibble about the achievements reported in the SONA. According to Social Weather Stations, from which the SONA figures on hunger incidence were obtained, self-reported poverty has been essentially flat and unemployment has been rapidly increasing instead of declining so far in President Aquino's term. Still, there is a general sense that the country is making significant strides, if in nothing else at least in the rebuilding of governance institutions. Whether and how long before this translates to growth, however, and whether the government can put in place the other necessary ingredients, remain important questions.
This article is based on a July 27 Global Source report written by the columnist and Jeff Ducanes. Mr. Bernardo is a board director of the Institute for Development and Econometric Analysis.
Monday, July 18, 2011
Old and new drivers of growth
Business World
Introspective
To achieve its fighting target of 7-8% growth per year under its term, the new administration is betting on a few key initiatives and the continued success of some traditional growth drivers. Chief among these are public-private partnership (PPP) schemes, improved governance, a vibrant tourism sector, an expanding business process outsourcing (BPO) industry, and robust overseas Filipino remittances.
Extending the betting metaphor, we may classify these prospective growth drivers, at least in the near term, into three groups: the sure thing; the long shot; and those that could go either way. We discuss each below.
BPO. The BPO sector is the sure thing. The sector is now second only to India's in size, and more recently exceeded India's in growth. Industry experts project its export revenues to reach US$25 billion by 2016 from $9 billion last year - a very attainable annual growth of 14.5% - on the assumption of a benign external environment and continuous supply of skilled labor. By 2016, the sector is expected to directly and indirectly employ 900 thousand workers, to indirectly create employment for 2 million others, to equal the contribution of remittances to GDP, and to have gradually shifted to non-voice and other higher-end services.
The feared shortage of qualified workers is not binding in the short term. More than a fifth of the country's 3 million unemployed are college graduates - and more graduates are expected to remain in the country given unfavorable foreign employment conditions. In addition, some colleges and universities now offer courses that are tailored to fit the needs of the BPO industry.
Tourism. The government is positioning tourism as a future major revenue source, targeting 3.7 million foreign tourists this year and 6.3 million by 2016. Some headway has been made, most notably the liberalized air policy in secondary airports and the increased number of budget airlines offering direct flights to the country. Longer-term are plans to build international airports via PPP projects in Albay, Bohol, Palawan, and Cagayan de Oro City.
Still, the foreign tourist arrival growth target is a long shot, as it has been flat at about 3 million in recent years. This year tourism was harmed by the isolated but much-publicized tragic death of tourists from Hong Kong in a botched hostage situation in Manila last year and recurrent travel warnings to the Philippines issued by the US. A recent World Bank report identified lack of accommodation, food culture, lack of a brand name, geographical isolation, poor business climate, and high energy costs as additional constraints to the sector.
Remittances. Remittances is a sure thing in one sense - its level will remain high. But it can be expected to grow at modest levels over the near term, given unfavorable conditions in major OFW destination areas, which will dampen earnings of existing OFWs and growth of potential remitters. The POEA projects deployment to decline by 5-6% this year. The purchasing power of remittances is also hampered by the strong peso. For the first four months of 2011, remittances in dollars rose 6%, but in peso-terms advanced only 1.3% - implying a decline in purchasing power.
The critical issue about remittances - almost $18 billion last year - is not growth but its use. In recent years, national savings have far outstripped domestic investments - meaning, the resources for investments are available, they are just inefficiently utilized. According to BSP, the country had a current account surplus, equivalent to 4.2% of GDP last year and has been running a surplus since 2003.
PPP. The PPP scheme is off to a rocky start, with most projects lined up facing delays. The previous administration failed to invest in building a project pipeline, and the mostly unsolicited projects now in the pipeline have been put under scrutiny by the current administration. This is exacerbated by lack of technical capacity in planning and implementing agencies, a problem the government hopes to address using grants totaling $27.5 million from donor agencies for such purpose.
The desire for quality at entry implies the program will move slowly in the beginning. On the bright side, if the government succeeds in institutionalizing watertight contracts, supposing it first solves capacity problems, the longer-run outlook for investments will be better. For this year, the PPP goals are unlikely to be met, but going forward, the PPP may still take off, depending on how quickly and well the administration beefs up its technical capacity, establishes proper regulatory and institutional framework, clarifies the rules of the game, and instills investor confidence.
Governance. The government record on governance and governance reform has been net positive, scoring points by exposing malfeasance in the previous administration, passing a law institutionalizing improved governance of GOCCs, and filing some high-profile tax evasion cases to improve tax compliance. On the negative side, the government has been seen as flip-flopping on some key issues (e.g., the NAIA-3 case), the Palace seen as occupied by squabbling factions, and the President criticized as unduly influenced by old friends and failing to provide clear directions. Some reform efforts have resulted not only in delays but at the added cost of shaking investor confidence in the government's commitment to honor contract obligations entered into by the last administration (e.g., RORO project with a French company and dredging project with a Belgian company).
Many governance challenges lie further ahead, and not just for the executive department. One such is the problematic ruling of the Supreme Court on the extent of foreign ownership in the case of PLDT. Another is the current bill in Congress seeking to create a water regulatory commission, which threatens the existing concession arrangement between the government and its concessionaires Manila Water Company and Maynilad Water Services, arguably the most successful PPP project in the country so far.
Although they hold potential, the designated new engines of growth are unlikely to pay off in the short term: the PPP has a slow start; tourism faces myriad challenges; and some governance reform initiatives have the unintended consequence of keeping investors wary. The Philippines still has to rely on its traditional growth drivers - the BPO sector and perhaps remittances if properly utilized - and will likely chug along at the 5-5.5% growth pace up to next year.
Note: This is a summary of the July 11 Global Source Monthly Report prepared by the author and Geoffrey Ducanes. Mr. Romeo Bernardo is GlobalSource Philippine advisor, managing director of Lazaro Bernardo Tiu & Associates, and board member of the Institute for Development and Econometric Analysis, Inc.
Introspective
To achieve its fighting target of 7-8% growth per year under its term, the new administration is betting on a few key initiatives and the continued success of some traditional growth drivers. Chief among these are public-private partnership (PPP) schemes, improved governance, a vibrant tourism sector, an expanding business process outsourcing (BPO) industry, and robust overseas Filipino remittances.
Extending the betting metaphor, we may classify these prospective growth drivers, at least in the near term, into three groups: the sure thing; the long shot; and those that could go either way. We discuss each below.
BPO. The BPO sector is the sure thing. The sector is now second only to India's in size, and more recently exceeded India's in growth. Industry experts project its export revenues to reach US$25 billion by 2016 from $9 billion last year - a very attainable annual growth of 14.5% - on the assumption of a benign external environment and continuous supply of skilled labor. By 2016, the sector is expected to directly and indirectly employ 900 thousand workers, to indirectly create employment for 2 million others, to equal the contribution of remittances to GDP, and to have gradually shifted to non-voice and other higher-end services.
The feared shortage of qualified workers is not binding in the short term. More than a fifth of the country's 3 million unemployed are college graduates - and more graduates are expected to remain in the country given unfavorable foreign employment conditions. In addition, some colleges and universities now offer courses that are tailored to fit the needs of the BPO industry.
Tourism. The government is positioning tourism as a future major revenue source, targeting 3.7 million foreign tourists this year and 6.3 million by 2016. Some headway has been made, most notably the liberalized air policy in secondary airports and the increased number of budget airlines offering direct flights to the country. Longer-term are plans to build international airports via PPP projects in Albay, Bohol, Palawan, and Cagayan de Oro City.
Still, the foreign tourist arrival growth target is a long shot, as it has been flat at about 3 million in recent years. This year tourism was harmed by the isolated but much-publicized tragic death of tourists from Hong Kong in a botched hostage situation in Manila last year and recurrent travel warnings to the Philippines issued by the US. A recent World Bank report identified lack of accommodation, food culture, lack of a brand name, geographical isolation, poor business climate, and high energy costs as additional constraints to the sector.
Remittances. Remittances is a sure thing in one sense - its level will remain high. But it can be expected to grow at modest levels over the near term, given unfavorable conditions in major OFW destination areas, which will dampen earnings of existing OFWs and growth of potential remitters. The POEA projects deployment to decline by 5-6% this year. The purchasing power of remittances is also hampered by the strong peso. For the first four months of 2011, remittances in dollars rose 6%, but in peso-terms advanced only 1.3% - implying a decline in purchasing power.
The critical issue about remittances - almost $18 billion last year - is not growth but its use. In recent years, national savings have far outstripped domestic investments - meaning, the resources for investments are available, they are just inefficiently utilized. According to BSP, the country had a current account surplus, equivalent to 4.2% of GDP last year and has been running a surplus since 2003.
PPP. The PPP scheme is off to a rocky start, with most projects lined up facing delays. The previous administration failed to invest in building a project pipeline, and the mostly unsolicited projects now in the pipeline have been put under scrutiny by the current administration. This is exacerbated by lack of technical capacity in planning and implementing agencies, a problem the government hopes to address using grants totaling $27.5 million from donor agencies for such purpose.
The desire for quality at entry implies the program will move slowly in the beginning. On the bright side, if the government succeeds in institutionalizing watertight contracts, supposing it first solves capacity problems, the longer-run outlook for investments will be better. For this year, the PPP goals are unlikely to be met, but going forward, the PPP may still take off, depending on how quickly and well the administration beefs up its technical capacity, establishes proper regulatory and institutional framework, clarifies the rules of the game, and instills investor confidence.
Governance. The government record on governance and governance reform has been net positive, scoring points by exposing malfeasance in the previous administration, passing a law institutionalizing improved governance of GOCCs, and filing some high-profile tax evasion cases to improve tax compliance. On the negative side, the government has been seen as flip-flopping on some key issues (e.g., the NAIA-3 case), the Palace seen as occupied by squabbling factions, and the President criticized as unduly influenced by old friends and failing to provide clear directions. Some reform efforts have resulted not only in delays but at the added cost of shaking investor confidence in the government's commitment to honor contract obligations entered into by the last administration (e.g., RORO project with a French company and dredging project with a Belgian company).
Many governance challenges lie further ahead, and not just for the executive department. One such is the problematic ruling of the Supreme Court on the extent of foreign ownership in the case of PLDT. Another is the current bill in Congress seeking to create a water regulatory commission, which threatens the existing concession arrangement between the government and its concessionaires Manila Water Company and Maynilad Water Services, arguably the most successful PPP project in the country so far.
Although they hold potential, the designated new engines of growth are unlikely to pay off in the short term: the PPP has a slow start; tourism faces myriad challenges; and some governance reform initiatives have the unintended consequence of keeping investors wary. The Philippines still has to rely on its traditional growth drivers - the BPO sector and perhaps remittances if properly utilized - and will likely chug along at the 5-5.5% growth pace up to next year.
Note: This is a summary of the July 11 Global Source Monthly Report prepared by the author and Geoffrey Ducanes. Mr. Romeo Bernardo is GlobalSource Philippine advisor, managing director of Lazaro Bernardo Tiu & Associates, and board member of the Institute for Development and Econometric Analysis, Inc.
Monday, June 6, 2011
Stirred, not shaken (Part 2)
Business World
Introspective
The Public Sector. Fiscal performance has been quite impressive from the point of view of financial markets with a lower-than-expected budget deficit for 2010 (P314.5 billion versus a P325-billion target) and 1Q2011 (P26.2 billion versus a P112-billion goal). Many are now anticipating a credit rating upgrade, particularly by Fitch Ratings which places Philippine sovereign debt at two notches below investment grade, renewing optimism in debt markets.
However, the good numbers to an extent came at the expense of a pullback in spending. In the first quarter, the national government's non- interest expenditures summed to only P258.6 billion or P71.5 billion lower than the programmed amount. The public works department, which is assigned a bulk of the funds, attributes this outcome to the need to suspend questionable projects as well as to the short pipeline for new state investments.
That said, there is now very little doubt about the ability of the new fiscal leadership to meet this year's deficit target, with the consensus forecast closely in line with the government's own goal (3.2% of GDP). Bolstering this belief as well is the expectation that the run-up in crude oil prices would lead to a VAT windfall.
Whether or not the government can meet its subsequent deficit targets is the bigger question (2% of GDP by 2013). The Aquino administration had previously vowed no new taxes for 18 months starting from when it took over in July last year, and winds may now be shifting according to senior fiscal officials we have talked to recently. A bill reforming sin tax measures with a yield of anywhere between P50 to P100 billion will reportedly be filed by January next year. In the meantime, rationalization of fiscal incentives will also be pushed by the current fiscal leadership. The proposed measures should help nudge up the country's tax effort ratio, which remains stuck below 13% as we had expected (12.8% in 2009 and 2010) with the application of several revenue-eroding laws.
EXTERNAL ACCOUNTS PRESSURES
Taking into account the impact of political turmoil in the MENA region and the Japan nuclear crisis brought on by the disastrous earthquake last March, central bank economists had cut their forecast for growth of remittances, which account for the bulk of the country's current account surplus, from 8% to 7% this year - the same as our own forecast - and to about 5% next year.
We maintain confidence in the resilience of remittances and also of services exports (specifically BPOs) in spite of external shocks given the structural factors that support it. This year, as in 2008 when crude prices shot up, the pressure will be on the goods trade balance as an anticipated reversal of the technology cycle exacerbated by the downturn in Japan occurs in tandem with a ballooning oil import bill, with Dubai fateh prices possibly averaging at about $110-$115 per barrel.
For this reason, we now expect a smaller current account surplus of around 3.3% of GDP this year from our previous forecast of 4%. If the uptrend in oil prices continues next year and dampens global outlook, it is unlikely the current account could improve by much and would probably still settle at below 4%.
POPULARITY DIPS
Net satisfaction ratings of the government under President Aquino dipped in the latest survey conducted by the Social Weather Stations, but were still pretty high by historical standards, only falling from very good to good. The state of the economy apparently still occupied people's minds, with the lowest scores again given in the area of ensuring no hunger and fighting inflation, for which the new administration had been given neutral marks.
President Aquino recently mentioned that he wants to appoint former senator Mar Roxas, his running-mate in last year's elections, to a Cabinet- rank position with a job that resembles that of a chief of staff. There are concerns that this would create frictions with the current executive secretary given the likely overlap of functions.
We do think the idea of tapping a political heavyweight like Mr Roxas with high credibility in the business sector as a vocal ally would do the President some good, particularly in terms of firmly consolidating political hold to get much-needed economic legislation through. That means finding Mr Roxas a better job than chief of staff, a job that connotes routine work, and one instead that can project him as a modern problem solver with great executive skills.
FACING STRONGER HEAD WINDS
GDP grew by 4.9% in 1Q11, just barely hitting the tail end of the government's 4.8% to 5.8% forecast. This is the lowest GDP growth since 4Q09 and continues a trend of declining growth since 1Q10. As we predicted, a slowdown in government spending compared to the pre-national election quarter last year, as well as lackluster trade due to rising oil prices stemming from the political turmoil in MENA, were cited as the main culprits for the lower growth.
On the expenditure side, the economy was carried by a remarkable uptick in capital formation (37%) as well as a steady advance in personal consumption (4.9%). A plunge in government consumption by 17.2% and reversal of net exports into deficit from surplus dragged the economy down.
Though growth was respectable, it is far from impressive. The remarkable capital formation growth was in large part accounted for by change in stocks, a very volatile component of the income accounts, excluding which capital formation growth was a substantially lower though still decent 12% - durable equipment grew 16.7% and intellectual property rights 10%.
At this time, we are still sticking to our projection of 4.8% growth for the year, though it is obvious the economy now confronts stronger head winds. The woes in MENA combined with the continued sluggishness in Europe, point to remittances remaining relatively flat in the short term, indicating it may just be a matter of time before it starts dragging down personal consumption.
This is a summary of the May 12 Global Source Quarterly Report and a May 31 Market Brief written by Margarita Gonzales, Geoffrey Ducanes, and this columnist. Global Source is a New York-based network of independent analysts whose subscribers are mostly fund managers and banks.
Introspective
The Public Sector. Fiscal performance has been quite impressive from the point of view of financial markets with a lower-than-expected budget deficit for 2010 (P314.5 billion versus a P325-billion target) and 1Q2011 (P26.2 billion versus a P112-billion goal). Many are now anticipating a credit rating upgrade, particularly by Fitch Ratings which places Philippine sovereign debt at two notches below investment grade, renewing optimism in debt markets.
However, the good numbers to an extent came at the expense of a pullback in spending. In the first quarter, the national government's non- interest expenditures summed to only P258.6 billion or P71.5 billion lower than the programmed amount. The public works department, which is assigned a bulk of the funds, attributes this outcome to the need to suspend questionable projects as well as to the short pipeline for new state investments.
That said, there is now very little doubt about the ability of the new fiscal leadership to meet this year's deficit target, with the consensus forecast closely in line with the government's own goal (3.2% of GDP). Bolstering this belief as well is the expectation that the run-up in crude oil prices would lead to a VAT windfall.
Whether or not the government can meet its subsequent deficit targets is the bigger question (2% of GDP by 2013). The Aquino administration had previously vowed no new taxes for 18 months starting from when it took over in July last year, and winds may now be shifting according to senior fiscal officials we have talked to recently. A bill reforming sin tax measures with a yield of anywhere between P50 to P100 billion will reportedly be filed by January next year. In the meantime, rationalization of fiscal incentives will also be pushed by the current fiscal leadership. The proposed measures should help nudge up the country's tax effort ratio, which remains stuck below 13% as we had expected (12.8% in 2009 and 2010) with the application of several revenue-eroding laws.
EXTERNAL ACCOUNTS PRESSURES
Taking into account the impact of political turmoil in the MENA region and the Japan nuclear crisis brought on by the disastrous earthquake last March, central bank economists had cut their forecast for growth of remittances, which account for the bulk of the country's current account surplus, from 8% to 7% this year - the same as our own forecast - and to about 5% next year.
We maintain confidence in the resilience of remittances and also of services exports (specifically BPOs) in spite of external shocks given the structural factors that support it. This year, as in 2008 when crude prices shot up, the pressure will be on the goods trade balance as an anticipated reversal of the technology cycle exacerbated by the downturn in Japan occurs in tandem with a ballooning oil import bill, with Dubai fateh prices possibly averaging at about $110-$115 per barrel.
For this reason, we now expect a smaller current account surplus of around 3.3% of GDP this year from our previous forecast of 4%. If the uptrend in oil prices continues next year and dampens global outlook, it is unlikely the current account could improve by much and would probably still settle at below 4%.
POPULARITY DIPS
Net satisfaction ratings of the government under President Aquino dipped in the latest survey conducted by the Social Weather Stations, but were still pretty high by historical standards, only falling from very good to good. The state of the economy apparently still occupied people's minds, with the lowest scores again given in the area of ensuring no hunger and fighting inflation, for which the new administration had been given neutral marks.
President Aquino recently mentioned that he wants to appoint former senator Mar Roxas, his running-mate in last year's elections, to a Cabinet- rank position with a job that resembles that of a chief of staff. There are concerns that this would create frictions with the current executive secretary given the likely overlap of functions.
We do think the idea of tapping a political heavyweight like Mr Roxas with high credibility in the business sector as a vocal ally would do the President some good, particularly in terms of firmly consolidating political hold to get much-needed economic legislation through. That means finding Mr Roxas a better job than chief of staff, a job that connotes routine work, and one instead that can project him as a modern problem solver with great executive skills.
FACING STRONGER HEAD WINDS
GDP grew by 4.9% in 1Q11, just barely hitting the tail end of the government's 4.8% to 5.8% forecast. This is the lowest GDP growth since 4Q09 and continues a trend of declining growth since 1Q10. As we predicted, a slowdown in government spending compared to the pre-national election quarter last year, as well as lackluster trade due to rising oil prices stemming from the political turmoil in MENA, were cited as the main culprits for the lower growth.
On the expenditure side, the economy was carried by a remarkable uptick in capital formation (37%) as well as a steady advance in personal consumption (4.9%). A plunge in government consumption by 17.2% and reversal of net exports into deficit from surplus dragged the economy down.
Though growth was respectable, it is far from impressive. The remarkable capital formation growth was in large part accounted for by change in stocks, a very volatile component of the income accounts, excluding which capital formation growth was a substantially lower though still decent 12% - durable equipment grew 16.7% and intellectual property rights 10%.
At this time, we are still sticking to our projection of 4.8% growth for the year, though it is obvious the economy now confronts stronger head winds. The woes in MENA combined with the continued sluggishness in Europe, point to remittances remaining relatively flat in the short term, indicating it may just be a matter of time before it starts dragging down personal consumption.
This is a summary of the May 12 Global Source Quarterly Report and a May 31 Market Brief written by Margarita Gonzales, Geoffrey Ducanes, and this columnist. Global Source is a New York-based network of independent analysts whose subscribers are mostly fund managers and banks.
Stirred, not shaken (Part 1)
Business World
Introspective
Unwanted shocks have hit the Philippine economy since the start of the year, starting with political turmoil in the Middle East and North African (MENA) region that has disturbed world oil markets followed by a destructive earthquake in Japan resulting in a nuclear crisis, the after effects of which continue to pose a risk to the rest of Asia. Upon closer inspection, the impact of these events coupled with domestic inertia leads us to lower our growth forecast for the country from 5.3% to 4.8% this year.
While we have brought down our growth expectations, the central scenario for the economy would remain manageable in our view. We are still expecting oil prices to stabilize by 2012. Thus far, double-digit inflation seems unlikely to set in especially with good harvests helping to keep food inflation down. We also believe that spillovers to domestic economic activity due to disruptions in Japan's production as well as curtailment of Japanese demand will not last for very long especially with a massive reconstruction effort underway.
OPTIMISM DECLINES
The country's national income accounts are set to be released end of the month (May 30) and while growth is widely expected to weaken this year, analysts believe some momentum from last year would still be felt in first- quarter growth numbers. Top indicators from the leading economic indicators index released by the National Statistical Coordination Board suggesting a slowing economy moving forward were the terms-of-trade index, which had a negative relationship with GDP, and the number of new businesses created.
We are similarly starting to get more worried about the threat posed by rising commodities costs, especially of oil, given the impact on net exports, which already showed signs of a slowdown as the electronics business cycle reversed course and will likely to be further weighed down by the Japan nuclear crisis, as well as the relatively high pass-through to domestic prices because of the absence of subsidies. While we find double- digit inflation highly unlikely, the uptick in the CPI would surely be a dampener to consumer and business confidence.
Already, a survey conducted by the Bangko Sentral showed a sharp decline in consumer expectations during the period on account of sustained increases in petroleum prices, more expensive goods and services, and a general increase in household expenses. Growth of remittances in peso terms, meanwhile, continued to be dragged down by the domestic currency appreciation trend, taking further steam out of private consumption which comprises the bulk of GDP (about 80%).
With the national government still exhibiting unusual spending restraint, conspicuously failing to front-load infrastructure spending during the first quarter despite early passage of the budget, and public- private partnerships not expected to make a strong impact for the year at least, we are becoming less and less optimistic that growth of above 5% can be achieved this year. We are thus bringing down our growth forecast for 2011 from 5.3% to 4.8%, though tentatively maintaining projections for 2012 at 5.5%.
FIGHTING INFLATION
After appearing to stabilize in March, inflation re-accelerated to 4.5% in April. Core inflation, which excludes the impact of volatile food and energy items (e.g., rice, gasoline and other fuels), also quickened from 3.5% in March to 3.8% in April. With inflation likely to peak around the fourth quarter, we continue to expect further monetary adjustments before the year ends, via policy rate increases or tweaking the reserve requirements.
Inflation jitters have seemingly subsided in financial markets, with peso bond yields, in particular, seen sliding since March. The benchmark 91-day T-bill dropped to a historical low of 0.57% in the last auction (May 2). Albeit with still greater preference for shorter tenors, bonds have generally rallied owing to the perceived good fiscal picture under the new administration, robust foreign inflows due to interest differentials and consequently high market liquidity. Yields may remain low especially with the rising expectation that the budget deficit will be contained and with only moderate monetary tightening, though inflation could still be a latent risk.
We now see the peso-dollar rate ending year at around P42/$ with support provided by a still positive current account balance, a higher interest differential, and possible appreciation bias by monetary authorities to counter the effect of an escalation in commodities prices.
(To be continued)
This is a summary of the May 12 Global Source Quarterly Report written by Margarita Gonzales, and this columnist. Global Source is a New York-based network of independent analysts whose subscriber base are mostly fund managers and research units of banks.
Introspective
Unwanted shocks have hit the Philippine economy since the start of the year, starting with political turmoil in the Middle East and North African (MENA) region that has disturbed world oil markets followed by a destructive earthquake in Japan resulting in a nuclear crisis, the after effects of which continue to pose a risk to the rest of Asia. Upon closer inspection, the impact of these events coupled with domestic inertia leads us to lower our growth forecast for the country from 5.3% to 4.8% this year.
While we have brought down our growth expectations, the central scenario for the economy would remain manageable in our view. We are still expecting oil prices to stabilize by 2012. Thus far, double-digit inflation seems unlikely to set in especially with good harvests helping to keep food inflation down. We also believe that spillovers to domestic economic activity due to disruptions in Japan's production as well as curtailment of Japanese demand will not last for very long especially with a massive reconstruction effort underway.
OPTIMISM DECLINES
The country's national income accounts are set to be released end of the month (May 30) and while growth is widely expected to weaken this year, analysts believe some momentum from last year would still be felt in first- quarter growth numbers. Top indicators from the leading economic indicators index released by the National Statistical Coordination Board suggesting a slowing economy moving forward were the terms-of-trade index, which had a negative relationship with GDP, and the number of new businesses created.
We are similarly starting to get more worried about the threat posed by rising commodities costs, especially of oil, given the impact on net exports, which already showed signs of a slowdown as the electronics business cycle reversed course and will likely to be further weighed down by the Japan nuclear crisis, as well as the relatively high pass-through to domestic prices because of the absence of subsidies. While we find double- digit inflation highly unlikely, the uptick in the CPI would surely be a dampener to consumer and business confidence.
Already, a survey conducted by the Bangko Sentral showed a sharp decline in consumer expectations during the period on account of sustained increases in petroleum prices, more expensive goods and services, and a general increase in household expenses. Growth of remittances in peso terms, meanwhile, continued to be dragged down by the domestic currency appreciation trend, taking further steam out of private consumption which comprises the bulk of GDP (about 80%).
With the national government still exhibiting unusual spending restraint, conspicuously failing to front-load infrastructure spending during the first quarter despite early passage of the budget, and public- private partnerships not expected to make a strong impact for the year at least, we are becoming less and less optimistic that growth of above 5% can be achieved this year. We are thus bringing down our growth forecast for 2011 from 5.3% to 4.8%, though tentatively maintaining projections for 2012 at 5.5%.
FIGHTING INFLATION
After appearing to stabilize in March, inflation re-accelerated to 4.5% in April. Core inflation, which excludes the impact of volatile food and energy items (e.g., rice, gasoline and other fuels), also quickened from 3.5% in March to 3.8% in April. With inflation likely to peak around the fourth quarter, we continue to expect further monetary adjustments before the year ends, via policy rate increases or tweaking the reserve requirements.
Inflation jitters have seemingly subsided in financial markets, with peso bond yields, in particular, seen sliding since March. The benchmark 91-day T-bill dropped to a historical low of 0.57% in the last auction (May 2). Albeit with still greater preference for shorter tenors, bonds have generally rallied owing to the perceived good fiscal picture under the new administration, robust foreign inflows due to interest differentials and consequently high market liquidity. Yields may remain low especially with the rising expectation that the budget deficit will be contained and with only moderate monetary tightening, though inflation could still be a latent risk.
We now see the peso-dollar rate ending year at around P42/$ with support provided by a still positive current account balance, a higher interest differential, and possible appreciation bias by monetary authorities to counter the effect of an escalation in commodities prices.
(To be continued)
This is a summary of the May 12 Global Source Quarterly Report written by Margarita Gonzales, and this columnist. Global Source is a New York-based network of independent analysts whose subscriber base are mostly fund managers and research units of banks.
Monday, May 9, 2011
A bad FIT
Business World
Introspective
There have been numerous publicity releases from advocates and developers of renewable energy projects in connection with the forthcoming release of the Feed-in-Tariff (FIT) recommendations by the National Renewable Energy Board (NREB). From here, it will be subject to public hearings by the Energy Regulatory Commission.
Allow me to share a statement, below, of the Foundation for Economic Freedom on this issue: Make Renewable Energy subsidies transparent, limited and technology neutral. The FEF is a public advocacy group espousing market-oriented reform for good governance and consumer access.
It counts among its fellows, eminent economists and former senior government officials such as PM Cesar Virata, Felipe Medalla, Bobby de Ocampo, Mahar Mangahas, Gerry Sicat, Anton Periquet, Peter Wallace, Simon Paterno, Arsenio Balisacan, Ernest Leung, Gary Teves, and my three fellow columnists under this Introspective column banner - Cayetano Paderanga (on leave), Raul Fabella, and Calixto Chikiamco.
Quote.
In the matter of implementing the Renewable Energy Act of 2008 (R.A. 9513), the Foundation for Economic Freedom (FEF) believes the Feed-in- Tariffs to be issued by the Energy Regulatory Commission must provide for an absolute peso cap on the total amount of subsidies that the public will be made to bear. These subsidies must be capped both on an annual basis and for the life of the project.
The amount of public subsidy for Renewable Energy (RE) projects, which could run to several tens of billions of pesos per discussions at the National Renewable Energy Board, should be explicitly disclosed and shown to be commensurate to the social benefit that the public is expected to derive from this program. As is done for all public expenditures, the outlay should be transparently evaluated based on value for money to the public. It should likewise consider the ability of the public to shoulder additional levies on a per kWh cost of power. The Philippines already suffers from one of the highest power rates in the world. We should not unnecessarily add to the already heavy burdens of our electricity consumers and businesses.
Moreover, the FEF believes that the selection of projects that have recourse to such subsidies should be based on lowest cost Renewable Energy projects first, regardless of technology. We believe this is the best use of resources for the country as it will require the least amount of subsidies per kilowatt-hour generated, which in turn can support higher installation targets and greater quantities of environment-friendly energy for a given cost to the consumer.
We estimate the subsidies required for the two most expensive RE technologies, Solar and Wind, could otherwise pay for 5 times as much energy from the next cheaper source, which is Biomass, or 8 times as much energy from the cheapest, which is Run-of-River hydro, of the RE technologies eligible for the Feed-In Tariffs. When you add the cost of additional reserves and transmission facilities needed to support these RE projects, the case for judicious allocation of the FIT subsidies becomes even more compelling.
While this approach may initially discourage diversity of RE sources, the potential to produce more Renewable Energy at affordable costs should be the overriding policy direction. In any case, the projected energy from these more expensive technologies is not of a magnitude that would impact the energy mix, just the energy cost. Postponing some of the more expensive technologies, instead of locking in the high costs now for 20 years, will allow the Filipino people to benefit from the expected improvements in both the efficiency and costs of these technologies. The Philippines already has renewable energy generation capacity equivalent to almost 34% of its total installed capacity, well ahead of most other countries in the world. We can move further ahead by focusing our limited resources on the more affordable renewable energy projects at this time.
This is not to say that technologies such as Solar PV have no place in our energy mix at this time. They may be the best, or only, substitute, in some areas, for expensive diesel-fired plants serving off-grid customers. When they are used to augment off-grid diesel installations, the avoided costs (and emissions) are higher, so the required incremental subsidy is less. And no additional reserves or transmission facilities are needed. In fact, solar technology is already used in a significant number of rural electrification projects all over the country.
We support the Renewable Energy Act of 2008 and believe our future hinges on the sustainable use of resources. But when the public has to bear the costs, let us ensure the resources are used judiciously. End.
Postscript. The recommended FIT program will likely add 13 centavos per kWh to everyone's bill, amounting to P 9 billion annually, or P 180 billion for the twenty year proposed contract period. That could buy an awful lot of school buildings, highways, houses for the homeless, etc., all of which provide very clear benefits to the public.
On the other hand, what is it exactly that the envisioned FIT program is supposed to buy us? It is unclear. Is it to lower our carbon emissions in order to help arrest global warming? Our carbon footprint is a rounding error vs. the large and more industrialized countries, and our RE component, at 30 to 40 pc of installed capacity, is already five times the global average.
If despite these, we want to do more carbon emission reduction, why choose such an inefficient RE technology like solar for on-grid whose subsidy cost for carbon reduction is six times bio-mass, and eleven times hydro?
Instead of adopting the NREB recommendations, the ERC can rule that just like any government procurement, RE projects should be selected using an auction process, thus minimizing costs and/or maximizing benefits. Or ERC can set a universal FIT level only fractionally higher than current cost of power-say no more than 30 pc higher (vs. in excess of 300 pc premium for solar) and approving all projects meeting that hurdle, irrespective of technology. Our ERC will save our people tens of billions of pesos of needless higher electricity expense over the next 20 years. By doing this, it can also relieve pressure on electricity rates so that universal charges under the EPIRA can be promptly implemented, and thus provide our national treasury funding for needed social and infra spending - instead of giving these money away to foreign suppliers of immature and inefficient technologies.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA). He was Finance undersecretary during the Aquino and Ramos administrations.
For comments and inquiries, please email us at idea.introspective@gmail.com.
Introspective
There have been numerous publicity releases from advocates and developers of renewable energy projects in connection with the forthcoming release of the Feed-in-Tariff (FIT) recommendations by the National Renewable Energy Board (NREB). From here, it will be subject to public hearings by the Energy Regulatory Commission.
Allow me to share a statement, below, of the Foundation for Economic Freedom on this issue: Make Renewable Energy subsidies transparent, limited and technology neutral. The FEF is a public advocacy group espousing market-oriented reform for good governance and consumer access.
It counts among its fellows, eminent economists and former senior government officials such as PM Cesar Virata, Felipe Medalla, Bobby de Ocampo, Mahar Mangahas, Gerry Sicat, Anton Periquet, Peter Wallace, Simon Paterno, Arsenio Balisacan, Ernest Leung, Gary Teves, and my three fellow columnists under this Introspective column banner - Cayetano Paderanga (on leave), Raul Fabella, and Calixto Chikiamco.
Quote.
In the matter of implementing the Renewable Energy Act of 2008 (R.A. 9513), the Foundation for Economic Freedom (FEF) believes the Feed-in- Tariffs to be issued by the Energy Regulatory Commission must provide for an absolute peso cap on the total amount of subsidies that the public will be made to bear. These subsidies must be capped both on an annual basis and for the life of the project.
The amount of public subsidy for Renewable Energy (RE) projects, which could run to several tens of billions of pesos per discussions at the National Renewable Energy Board, should be explicitly disclosed and shown to be commensurate to the social benefit that the public is expected to derive from this program. As is done for all public expenditures, the outlay should be transparently evaluated based on value for money to the public. It should likewise consider the ability of the public to shoulder additional levies on a per kWh cost of power. The Philippines already suffers from one of the highest power rates in the world. We should not unnecessarily add to the already heavy burdens of our electricity consumers and businesses.
Moreover, the FEF believes that the selection of projects that have recourse to such subsidies should be based on lowest cost Renewable Energy projects first, regardless of technology. We believe this is the best use of resources for the country as it will require the least amount of subsidies per kilowatt-hour generated, which in turn can support higher installation targets and greater quantities of environment-friendly energy for a given cost to the consumer.
We estimate the subsidies required for the two most expensive RE technologies, Solar and Wind, could otherwise pay for 5 times as much energy from the next cheaper source, which is Biomass, or 8 times as much energy from the cheapest, which is Run-of-River hydro, of the RE technologies eligible for the Feed-In Tariffs. When you add the cost of additional reserves and transmission facilities needed to support these RE projects, the case for judicious allocation of the FIT subsidies becomes even more compelling.
While this approach may initially discourage diversity of RE sources, the potential to produce more Renewable Energy at affordable costs should be the overriding policy direction. In any case, the projected energy from these more expensive technologies is not of a magnitude that would impact the energy mix, just the energy cost. Postponing some of the more expensive technologies, instead of locking in the high costs now for 20 years, will allow the Filipino people to benefit from the expected improvements in both the efficiency and costs of these technologies. The Philippines already has renewable energy generation capacity equivalent to almost 34% of its total installed capacity, well ahead of most other countries in the world. We can move further ahead by focusing our limited resources on the more affordable renewable energy projects at this time.
This is not to say that technologies such as Solar PV have no place in our energy mix at this time. They may be the best, or only, substitute, in some areas, for expensive diesel-fired plants serving off-grid customers. When they are used to augment off-grid diesel installations, the avoided costs (and emissions) are higher, so the required incremental subsidy is less. And no additional reserves or transmission facilities are needed. In fact, solar technology is already used in a significant number of rural electrification projects all over the country.
We support the Renewable Energy Act of 2008 and believe our future hinges on the sustainable use of resources. But when the public has to bear the costs, let us ensure the resources are used judiciously. End.
Postscript. The recommended FIT program will likely add 13 centavos per kWh to everyone's bill, amounting to P 9 billion annually, or P 180 billion for the twenty year proposed contract period. That could buy an awful lot of school buildings, highways, houses for the homeless, etc., all of which provide very clear benefits to the public.
On the other hand, what is it exactly that the envisioned FIT program is supposed to buy us? It is unclear. Is it to lower our carbon emissions in order to help arrest global warming? Our carbon footprint is a rounding error vs. the large and more industrialized countries, and our RE component, at 30 to 40 pc of installed capacity, is already five times the global average.
If despite these, we want to do more carbon emission reduction, why choose such an inefficient RE technology like solar for on-grid whose subsidy cost for carbon reduction is six times bio-mass, and eleven times hydro?
Instead of adopting the NREB recommendations, the ERC can rule that just like any government procurement, RE projects should be selected using an auction process, thus minimizing costs and/or maximizing benefits. Or ERC can set a universal FIT level only fractionally higher than current cost of power-say no more than 30 pc higher (vs. in excess of 300 pc premium for solar) and approving all projects meeting that hurdle, irrespective of technology. Our ERC will save our people tens of billions of pesos of needless higher electricity expense over the next 20 years. By doing this, it can also relieve pressure on electricity rates so that universal charges under the EPIRA can be promptly implemented, and thus provide our national treasury funding for needed social and infra spending - instead of giving these money away to foreign suppliers of immature and inefficient technologies.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA). He was Finance undersecretary during the Aquino and Ramos administrations.
For comments and inquiries, please email us at idea.introspective@gmail.com.
Monday, April 18, 2011
Gap between knowledge and power
Business World
Introspective
Think tanks seek to bridge the gap between knowledge and power. The role of think tanks is to link the two roles, that of policy maker and academic, by conducting in-depth analysis of certain issues and presenting this research in easy-to-read, condensed form for policy makers to absorb. - James G. McGann, Comparative Think Tanks, Politics and Public Policy.
This quote so very well describes what the Philippine Institute for Development Studies (PIDS), a government think tank, has been doing well over the 34 years since its inception by then Planning Secretary, economics guru, Dr. Gerry Sicat. I am privileged to serve as trustee in its board, since 2006, with such distinguished thinkers as Dr. Cayetano Paderanga, its chairman, Dr. Josef Yap its president, UP sociology professor Dr. Cynthia Banzon- Bautista, and former Science and Technology Secretary Dr. William Padolina. While it is a government institution, its fathers imbued it with some independence by giving it a corporate identity and some measure of fiscal autonomy. Additionally, its trustees are not appointed by the President, but are self-electing with staggered terms, following strict qualification and nomination guidelines defined in the charter.
PIDS research is envisioned to help government planners and policy makers in the executive and legislative branches of government. It's fellows are known experts in their areas, and over the years included not just economists of different areas of specialization, but also sociologists, public health specialists, public administration experts, demographers, statisticians, etc, who individually and collectively contribute to the body of research materials and studies required for the formulation of national development plans and policies. (You can find more about PIDS and its rich resources in www.pids.gov.ph.)
I was prompted to write about PIDS after reading its latest research publication - 2010 Economic Policy Monitor on the theme of Fiscal Space, Investment, and Poverty Alleviation, which I found particularly informative, thoughtful, and with compellingly argued recommendations. You can view the user friendly 141-page report with a four page Executive Summary in http://www2.pids.gov.ph/seminars/wp- content/uploads/2011/03/PIDS-2010-Economic-Policy-Monitor.pdf.
With the limited space, allow me to focus on a critical section of the report, Financing the Millennium Development Goal and inclusive growth in the time of fiscal consolidation, authored by Dr Rosario Manasan. The literary reference in the chapter title is appropriate, as indeed, the achievement of the MDGs and inclusive growth under the current fiscal situation can be as elusive as love in the time of cholera. That is, unless government acts swiftly and with resolve, including through legislation of new tax measures.
She introduces the dilemma of government, thusly:
1. The national government's gains in fiscal consolidation between 2002 and 2006 started to unravel in 2009 as government pursued a more expansionary expenditure policy, even as overall revenue effort contracted. There is need for fiscal consolidation now, even as it does not have the pathway to improved fiscal health since it has been underspending markedly on basic social services and infrastructure.
2. Low levels of government spending on basic education and health services have put at risk the country's attainment of the Millennium Development Goals (MDGs). This needs to be addressed as such government spending is directly linked to poverty reduction as well as economic growth.
3. Lack and poor quality of infrastructure, particularly in the roads/transport and power sectors, hold back economic growth by raising the cost of doing business, thereby inhibiting domestic and foreign private sector investment. Low growth in turn has contributed to poverty, even as lack of infra has led to inequitable access of the poor to education, health services and economic opportunities.
4. The greatest challenge in the fiscal arena today is to reduce the fiscal deficit while providing adequate budgetary support for the much- needed basic social services and infrastructure that are critical for economic growth and poverty reduction. This means that the challenge to increase revenues is doubly daunting. There is an urgent need to increase government revenues in order to achieve fiscal consolidation in the medium term; otherwise public debt levels and debt service will rise again and a vicious cycle of high fiscal deficits and expanding debt levels will be set in motion. At the same time, there is need to further increase government's revenue effort in order to sustain, if not increase, spending in MDG related interventions and infrastructure.
I will leave you to go to the full report for the detailed analysis of the current situation, alternative solutions and recommendations.
After Dr. Manasan presented her paper to the PIDS board, PIDS President Josef Yap (also a co-author of the EPM) and she were encouraged to disseminate vigorously the ideas in the paper as a way to start the process of getting decision makers in both the executive and the legislative branches to focus on the need for urgent and resolute action in the fiscal front. I suggested that they should immediately present to the Cabinet Cluster on Economic Affairs for starters. Perhaps later on to legislators and their staffs, or even to the President.
I do believe that this is the one area where PIDS needs to earnestly play its proper role in bridging the gap between knowledge and power, where there may indeed be a wide chasm.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino 1 and Ramos administrations. He sits as director in a number of publicly listed companies and one government think tank.
Introspective
Think tanks seek to bridge the gap between knowledge and power. The role of think tanks is to link the two roles, that of policy maker and academic, by conducting in-depth analysis of certain issues and presenting this research in easy-to-read, condensed form for policy makers to absorb. - James G. McGann, Comparative Think Tanks, Politics and Public Policy.
This quote so very well describes what the Philippine Institute for Development Studies (PIDS), a government think tank, has been doing well over the 34 years since its inception by then Planning Secretary, economics guru, Dr. Gerry Sicat. I am privileged to serve as trustee in its board, since 2006, with such distinguished thinkers as Dr. Cayetano Paderanga, its chairman, Dr. Josef Yap its president, UP sociology professor Dr. Cynthia Banzon- Bautista, and former Science and Technology Secretary Dr. William Padolina. While it is a government institution, its fathers imbued it with some independence by giving it a corporate identity and some measure of fiscal autonomy. Additionally, its trustees are not appointed by the President, but are self-electing with staggered terms, following strict qualification and nomination guidelines defined in the charter.
PIDS research is envisioned to help government planners and policy makers in the executive and legislative branches of government. It's fellows are known experts in their areas, and over the years included not just economists of different areas of specialization, but also sociologists, public health specialists, public administration experts, demographers, statisticians, etc, who individually and collectively contribute to the body of research materials and studies required for the formulation of national development plans and policies. (You can find more about PIDS and its rich resources in www.pids.gov.ph.)
I was prompted to write about PIDS after reading its latest research publication - 2010 Economic Policy Monitor on the theme of Fiscal Space, Investment, and Poverty Alleviation, which I found particularly informative, thoughtful, and with compellingly argued recommendations. You can view the user friendly 141-page report with a four page Executive Summary in http://www2.pids.gov.ph/seminars/wp- content/uploads/2011/03/PIDS-2010-Economic-Policy-Monitor.pdf.
With the limited space, allow me to focus on a critical section of the report, Financing the Millennium Development Goal and inclusive growth in the time of fiscal consolidation, authored by Dr Rosario Manasan. The literary reference in the chapter title is appropriate, as indeed, the achievement of the MDGs and inclusive growth under the current fiscal situation can be as elusive as love in the time of cholera. That is, unless government acts swiftly and with resolve, including through legislation of new tax measures.
She introduces the dilemma of government, thusly:
1. The national government's gains in fiscal consolidation between 2002 and 2006 started to unravel in 2009 as government pursued a more expansionary expenditure policy, even as overall revenue effort contracted. There is need for fiscal consolidation now, even as it does not have the pathway to improved fiscal health since it has been underspending markedly on basic social services and infrastructure.
2. Low levels of government spending on basic education and health services have put at risk the country's attainment of the Millennium Development Goals (MDGs). This needs to be addressed as such government spending is directly linked to poverty reduction as well as economic growth.
3. Lack and poor quality of infrastructure, particularly in the roads/transport and power sectors, hold back economic growth by raising the cost of doing business, thereby inhibiting domestic and foreign private sector investment. Low growth in turn has contributed to poverty, even as lack of infra has led to inequitable access of the poor to education, health services and economic opportunities.
4. The greatest challenge in the fiscal arena today is to reduce the fiscal deficit while providing adequate budgetary support for the much- needed basic social services and infrastructure that are critical for economic growth and poverty reduction. This means that the challenge to increase revenues is doubly daunting. There is an urgent need to increase government revenues in order to achieve fiscal consolidation in the medium term; otherwise public debt levels and debt service will rise again and a vicious cycle of high fiscal deficits and expanding debt levels will be set in motion. At the same time, there is need to further increase government's revenue effort in order to sustain, if not increase, spending in MDG related interventions and infrastructure.
I will leave you to go to the full report for the detailed analysis of the current situation, alternative solutions and recommendations.
After Dr. Manasan presented her paper to the PIDS board, PIDS President Josef Yap (also a co-author of the EPM) and she were encouraged to disseminate vigorously the ideas in the paper as a way to start the process of getting decision makers in both the executive and the legislative branches to focus on the need for urgent and resolute action in the fiscal front. I suggested that they should immediately present to the Cabinet Cluster on Economic Affairs for starters. Perhaps later on to legislators and their staffs, or even to the President.
I do believe that this is the one area where PIDS needs to earnestly play its proper role in bridging the gap between knowledge and power, where there may indeed be a wide chasm.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino 1 and Ramos administrations. He sits as director in a number of publicly listed companies and one government think tank.
Monday, February 28, 2011
Down the rabbit hole
Business World
Introspective
The Philippines witnessed surprisingly roaring growth in 2010 befitting a tiger year, but may see a tamer economy this year, now supposedly belonging to the rabbit. That is what believers in Chinese astrology would probably say about 2011. But from our point of view, entering the New Year may also be like going down the rabbit hole, not entirely sure if one would run into a lot of good surprises or be hit by more of the very bad ones.
The best state of course would be if the global economy beats expectations yet still runs at a pace that doesn't put too much pressure on commodities prices and if the current political uprising in Egypt (which has now spread elsewhere in the region), which could be the much-feared black swan event, would find swift resolution and thus prevent further volatility in the world oil markets. This way, with macroeconomic conditions remaining benign, remittances from overseas workers and hence consumption would still find room to grow while exports and private investment could continue to expand.
The worst state would be the opposite - that is, the remote case of global growth especially in advanced economies again slumping even as financial and political turmoil erupts in the Middle East because of contagion and leads to a rocketing of oil prices, raising costs, and impeding growth elsewhere in the world. With this backdrop, the strategy of holding back on spending to reduce the national deficit would seem like an inadequate approach while a strong effort for fiscal reform would be that much harder to launch. Such a scenario would also mean a hard fight against inflation and a deterioration of financial conditions.
Forecast Summary
Global Source
2011 2012
GDP annual change % 5.3 5.5
CPI inflation % 4.3 4.2
Benchmark interest rate % 4.8 4.8
Exchange rate PHP/USD 43.0 42.2
Fiscal balance/GDP Unit -3.3 -3.0
Current account/GDP Unit 4.0 4.4
International reserves USD bn 64.0 68.0
External debt/GDP % 30.0 27.5
Fortunately, the base case, while holding some uncertainty, would be a bit easier to face. As discussed in sections below, we see the economy growing at a softer yet still quite robust pace with price risks likely to be contained.
A SOFT YEAR AHEAD?
We had already adjusted our projections for 2011 upward to 5%-5.5% in a previous report in light of then quite high business confidence, robust remittances, strong corporate earnings, and quite benign macro environment. While the economy roared in 2010, growing by 7.3%, and there may still be some momentum left from last quarter's 3% quarter-on-quarter growth, there does not seem to be strong drivers in the horizon. Thus, our forecast range should hold for the meantime.
INFLATION FEARS
Factoring in the latest developments in global commodity markets, our own simulations place average inflation at about 4.3% this year and 4.2% the next, though with substantial upside risk. While oil markets have suffered some volatility and food price indexes have surged, the world price of rice, the more important food commodity in the Philippines (with 9.4% weight in the CPI) and thus closely watched because of its capacity to unhinge inflation expectations, seems fairly stable for now at half of peak levels scaled in 2008. With the US Fed on hold, we continue to look for policy rate hikes around the second half of 2011, the earliest being June when headline inflation starts to climb to the upper edge of the targeted range with a possible breach around the fourth quarter before falling back into the band. Tightening will likely be in the order of 75 to 100 bps (in 25 to 50 bps increments) for the year.
THE PUBLIC SECTOR
The government is hoping to cut the deficit to 3.2% this year (to about P290 billion) and further down to 2% by 2013. But because of the effect of several revenue-eroding laws. the likelihood remains that targets will again be met by expenditure compression despite some bright spots on the privatization front, meaning increasingly less funds for needed social services and infrastructure going forward. Looking ahead, we expect fairly good results for the country's debt ratio, which should remain on a downward trajectory over the next couple of years despite possibly higher domestic interest rates and low primary surplus owing to continued growth and peso appreciation.
NO REPEAT OF BOP HIGH
We are less sure that the substantial external surplus in 2010 can be repeated this year. Remittance growth, while remaining robust, will likely edge a bit lower this year owing to lower deployment of overseas workers over the past year. The export recovery may have already lost steam, with electronics exports, which account for about two-thirds of the total, rising by just 8% annually in November after growing at high double-digit pace since December 2009. Also, while the emerging market story may still be a convincing one for global investors given still comparatively high prospects for growth, tremors in the world commodities markets, particularly oil, may increase risk aversion and weaken or even reverse positive sentiment with many developing economies highly sensitive to changes in food and fuel prices.
POLITICS: STILL ON HONEYMOON
Judging from what the pundits have been saying, one would think the political honeymoon for Benigno Noynoy Aquino six months into the presidency is nearing its end. Not so if one bases conclusions on the recently released survey of the Social Weather Stations, a non-profit social research organization, which still saw the fairly new administration receiving historically high (very good) net satisfaction ratings. Mr Aquino will eventually be forced to take a more active approach to governing as every honeymoon has its expiration date. On economic affairs, an issue he would need to handle would relate to growing concerns over food and fuel inflation, an area where he got a neutral score - already his lowest - in the recently released net satisfaction survey.
This is a summary of the Feb. 8 Global Source Quarterly Report written by Margarita Gonzales, and this columnist. Global Source is a New York- based network of independent analysts whose subscriber base are mostly fund managers and research units of banks.
Introspective
The Philippines witnessed surprisingly roaring growth in 2010 befitting a tiger year, but may see a tamer economy this year, now supposedly belonging to the rabbit. That is what believers in Chinese astrology would probably say about 2011. But from our point of view, entering the New Year may also be like going down the rabbit hole, not entirely sure if one would run into a lot of good surprises or be hit by more of the very bad ones.
The best state of course would be if the global economy beats expectations yet still runs at a pace that doesn't put too much pressure on commodities prices and if the current political uprising in Egypt (which has now spread elsewhere in the region), which could be the much-feared black swan event, would find swift resolution and thus prevent further volatility in the world oil markets. This way, with macroeconomic conditions remaining benign, remittances from overseas workers and hence consumption would still find room to grow while exports and private investment could continue to expand.
The worst state would be the opposite - that is, the remote case of global growth especially in advanced economies again slumping even as financial and political turmoil erupts in the Middle East because of contagion and leads to a rocketing of oil prices, raising costs, and impeding growth elsewhere in the world. With this backdrop, the strategy of holding back on spending to reduce the national deficit would seem like an inadequate approach while a strong effort for fiscal reform would be that much harder to launch. Such a scenario would also mean a hard fight against inflation and a deterioration of financial conditions.
Forecast Summary
Global Source
2011 2012
GDP annual change % 5.3 5.5
CPI inflation % 4.3 4.2
Benchmark interest rate % 4.8 4.8
Exchange rate PHP/USD 43.0 42.2
Fiscal balance/GDP Unit -3.3 -3.0
Current account/GDP Unit 4.0 4.4
International reserves USD bn 64.0 68.0
External debt/GDP % 30.0 27.5
Fortunately, the base case, while holding some uncertainty, would be a bit easier to face. As discussed in sections below, we see the economy growing at a softer yet still quite robust pace with price risks likely to be contained.
A SOFT YEAR AHEAD?
We had already adjusted our projections for 2011 upward to 5%-5.5% in a previous report in light of then quite high business confidence, robust remittances, strong corporate earnings, and quite benign macro environment. While the economy roared in 2010, growing by 7.3%, and there may still be some momentum left from last quarter's 3% quarter-on-quarter growth, there does not seem to be strong drivers in the horizon. Thus, our forecast range should hold for the meantime.
INFLATION FEARS
Factoring in the latest developments in global commodity markets, our own simulations place average inflation at about 4.3% this year and 4.2% the next, though with substantial upside risk. While oil markets have suffered some volatility and food price indexes have surged, the world price of rice, the more important food commodity in the Philippines (with 9.4% weight in the CPI) and thus closely watched because of its capacity to unhinge inflation expectations, seems fairly stable for now at half of peak levels scaled in 2008. With the US Fed on hold, we continue to look for policy rate hikes around the second half of 2011, the earliest being June when headline inflation starts to climb to the upper edge of the targeted range with a possible breach around the fourth quarter before falling back into the band. Tightening will likely be in the order of 75 to 100 bps (in 25 to 50 bps increments) for the year.
THE PUBLIC SECTOR
The government is hoping to cut the deficit to 3.2% this year (to about P290 billion) and further down to 2% by 2013. But because of the effect of several revenue-eroding laws. the likelihood remains that targets will again be met by expenditure compression despite some bright spots on the privatization front, meaning increasingly less funds for needed social services and infrastructure going forward. Looking ahead, we expect fairly good results for the country's debt ratio, which should remain on a downward trajectory over the next couple of years despite possibly higher domestic interest rates and low primary surplus owing to continued growth and peso appreciation.
NO REPEAT OF BOP HIGH
We are less sure that the substantial external surplus in 2010 can be repeated this year. Remittance growth, while remaining robust, will likely edge a bit lower this year owing to lower deployment of overseas workers over the past year. The export recovery may have already lost steam, with electronics exports, which account for about two-thirds of the total, rising by just 8% annually in November after growing at high double-digit pace since December 2009. Also, while the emerging market story may still be a convincing one for global investors given still comparatively high prospects for growth, tremors in the world commodities markets, particularly oil, may increase risk aversion and weaken or even reverse positive sentiment with many developing economies highly sensitive to changes in food and fuel prices.
POLITICS: STILL ON HONEYMOON
Judging from what the pundits have been saying, one would think the political honeymoon for Benigno Noynoy Aquino six months into the presidency is nearing its end. Not so if one bases conclusions on the recently released survey of the Social Weather Stations, a non-profit social research organization, which still saw the fairly new administration receiving historically high (very good) net satisfaction ratings. Mr Aquino will eventually be forced to take a more active approach to governing as every honeymoon has its expiration date. On economic affairs, an issue he would need to handle would relate to growing concerns over food and fuel inflation, an area where he got a neutral score - already his lowest - in the recently released net satisfaction survey.
This is a summary of the Feb. 8 Global Source Quarterly Report written by Margarita Gonzales, and this columnist. Global Source is a New York- based network of independent analysts whose subscriber base are mostly fund managers and research units of banks.
Monday, January 31, 2011
Renewable energy - reality check
Business World
Introspective
The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.
My attention was caught by a news article reporting a billion-dollar renewable energy (RE) loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that most of the $1-billion loan will be focused on supporting solar, wind and biomass power projects. I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.
The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kilowatt-hour (kWh), biomass and wind around P10. This compares very poorly with the current grid rate of P4.50 per kWh - anywhere from two to five times true cost now.
So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty- free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.
The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public's power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kWh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.
Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB- supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P5,000/month contract for a dozen years.)
The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won't be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge - so no advantage in rushing.
These solar and wind technologies are already being subsidized by those who can afford them - taxpayers and consumers in developed countries helping their firms in these emergent technologies - in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers. Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs - in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)
If we don't support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity - and calling for caution in embracing these fashionable, but for now, costly, distractions.
Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is a board director of the Institute for Development and Econometric Analysis.
Introspective
The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.
My attention was caught by a news article reporting a billion-dollar renewable energy (RE) loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that most of the $1-billion loan will be focused on supporting solar, wind and biomass power projects. I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.
The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kilowatt-hour (kWh), biomass and wind around P10. This compares very poorly with the current grid rate of P4.50 per kWh - anywhere from two to five times true cost now.
So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty- free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.
The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public's power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kWh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.
Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB- supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P5,000/month contract for a dozen years.)
The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won't be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge - so no advantage in rushing.
These solar and wind technologies are already being subsidized by those who can afford them - taxpayers and consumers in developed countries helping their firms in these emergent technologies - in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers. Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs - in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)
If we don't support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity - and calling for caution in embracing these fashionable, but for now, costly, distractions.
Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is a board director of the Institute for Development and Econometric Analysis.
Monday, January 10, 2011
A PPP success story
Business World
Introspective
Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.
Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.
During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.
As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.
What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.
Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.
This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.
Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.
What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.
All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.
Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.
Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.
This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.
Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.
The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.
Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.
There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.For comments and inquiries, please e-mail us at idea.introspective@gmail.com.
Introspective
Public Private Partnership (PPP) has been launched recently as a key ingredient in the administration's program to address infrastructure needs, raise investment levels, and build a broader base for sustainable growth, while attending to the country's fiscal constraints.
Earlier called BOT (and its variants), PPP was used effectively by President Ramos and his team to address in record time the power and water crises in the 1990s, demonstrating political will and effective management. As a Finance undersecretary at the time, I was privileged to have worked with Energy Secretary Del Lazaro, drafted from a distinguished career in the private sector to put the lights back on, as well as with MWSS Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally Del's brother, to bring water to the people.
During the succeeding two administrations, interest in PPP waned markedly. The decline in the number of PPP projects, as well as the amounts invested in them, mirrored the decline in the investment to GDP ratio - from an average of 25% during the Ramos administration to only 15% during Arroyo's. The 1997 Asian financial crisis and controversies that hounded a few high profile projects (e.g., PIATCO) contributed to this steep drop, but I think the real binding constraint has been the well- documented deterioration in indicators of governance and regulatory environment over the past decade. Hopes are therefore high that the P-Noy administration, having been elected on a good governance platform, enjoying an unprecedented trust rating, and possessing a strong economic team, can relieve this constraint, and reinvigorate investor interest in PPP.
As encouragement for the way forward, let me share the success story of the MWSS PPP. This is a story I am familiar with as I was Finance Secretary de Ocampo's representative in the MWSS board to track the privatization. I also wrote a paper on it for the World Bank, and later on, was an occasional adviser to one of the concessionaires.
What prompted the MWSS privatization in the mid 1990s? Very poor service delivery seen as a water crisis. Only two thirds of Metro Manila were connected to MWSS water pipes. Most customers were subject to water rationing with less than 3 out of 10 having 24-hour supply, and worse, occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS had become a major fiscal burden with debt in excess of a billion dollars. It found itself in a Catch-22: no resources to expand the system and improve its very poor service delivery, but unable to politically justify raising water rates needed to raise resources. Moreover, it was encumbered by government bureaucratic inertia, processes, and vested interests, both within and without. Privatization, which had worked well elsewhere, was seen as a logical way out.
Through the exercise of political will and judicious haste, the complex preparatory technical, economic, legal, and political management process from conception to final award of the largest privatization anywhere was completed in less than two years. It was done in a most transparent competitive bidding process overseen by the World Bank/IFC and participated in by four established Philippine conglomerates in joint venture with international utilities firms.
This process and the long story up to the present is told in a paper on the Political Economy of Reform During the Ramos Administration
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which Christine Tang and I wrote for the World Bank's Growth Commission. This story is punctuated by the financial failure of the Maynilad west zone concession after the Asian financial crisis, and transfer of the Maynilad concession to the Metro Pacific group in 2007 following a competitive bidding process. This was an event which analysts saw as proof of the robustness of the privatization design and the political will of the government to persevere with the PPP path.
Notwithstanding the hiccups and the regulatory learning along the way, and based primarily on the record of Manila Water, this PPP story can be judged an outstanding success. The success of Manila Water, moreover, provides an easy road map for the new Maynilad to replicate for the west zone in good time.
What is the success record of Manila Water? The numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5% at present. As a result, without taxpayer money being spent for new water sources, the amount of delivered water to customers grew threefold from 440 million liters per day to 1,140 million. From serving only 3 million customers, it now serves 6 million, practically all of whom get 24-hour service, from just 30% before privatization. Most notably, through an innovative community service scheme, it now provides continuous piped water to 1.7 million people in marginalized communities at a cost of less than P75 per month, when in the past they would have had to buy vended water at P 150- 200 per cubic meter.
All this was achieved by the investment of over a billion dollars in the system, sourced not from the public purse as would have been the case pre-privatization, but from investors, commercial lenders and official development loan providers who believed in the company. Manila Water, a profitable listed company with 45% of its shares in public hands, has received numerous global awards for operating efficiently and bringing water to the urban poor.
Manila Water's ability to improve and expand service, and access funding efficiently without any government guarantees is likewise testament to a functioning regulation by contract framework.
Save for a few months in 2009, when the contractually agreed upon automatic adjustment in tariffs was suspended for what seemed like political reasons, regulation by contract has worked rather well.
This framework includes a regular rate rebasing exercise once every five years, subject to wide and intense public scrutiny and hearings. During an early rebasing, key performance indicators and business efficiency measures were introduced to mimic a competitive market.
Credit for effective regulation is owed to an independent Regulatory Office of MWSS and the technical assistance it has been able to access, notably from UP professors led by Dr. Philip Medalla.
The oversight agencies, the Department of Finance and NEDA, have likewise played important roles in maintaining the integrity of the concession agreement.
Finally, it has helped that there was never any interference from politicians in the rate setting, and that there is a dispute settlement process incorporated in the concession agreement involving international arbitration, a safeguard that has been tested successfully twice.
There are key lessons from this PPP success story: the importance of political will and judicious haste, the value of competitive award processes and good use of expert technical assistance, the need to uphold the integrity of concession contracts, ensure their proper implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a course for its PPP program should help it deliver on its promise to bring our country to a higher growth path and improve peoples' lives.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.For comments and inquiries, please e-mail us at idea.introspective@gmail.com.
Sunday, January 9, 2011
"A PPP success story"
Business World, Introspective
Public Private Partnership (PPP) has been
launched recently as a key ingredient in the administration's program to
address infrastructure needs, raise investment levels, and build a broader base
for sustainable growth, while attending to the country's fiscal constraints.
Earlier called BOT (and its variants), PPP was
used effectively by President Ramos and his team to address in record time the
power and water crises in the 1990s, demonstrating political will and effective
management. As a Finance undersecretary at the time, I was privileged to have
worked with Energy Secretary Del Lazaro, drafted from a distinguished career in
the private sector to put the lights back on, as well as with MWSS
Administrator Lito Lazaro, a Princeton PhD civil engineer and coincidentally
Del's brother, to bring water to the people.
During the succeeding two administrations,
interest in PPP waned markedly. The decline in the number of PPP projects, as
well as the amounts invested in them, mirrored the decline in the investment to
GDP ratio - from an average of 25% during the Ramos administration to only 15%
during Arroyo's. The 1997 Asian financial crisis and controversies that hounded
a few high profile projects (e.g., PIATCO) contributed to this steep drop, but
I think the real binding constraint has been the well- documented deterioration
in indicators of governance and regulatory environment over the past decade.
Hopes are therefore high that the P-Noy administration, having been elected on
a good governance platform, enjoying an unprecedented trust rating, and
possessing a strong economic team, can relieve this constraint, and
reinvigorate investor interest in PPP.
As encouragement for the way forward, let me
share the success story of the MWSS PPP. This is a story I am familiar with as
I was Finance Secretary de Ocampo's representative in the MWSS board to track
the privatization. I also wrote a paper on it for the World Bank, and later on,
was an occasional adviser to one of the concessionaires.
What prompted the MWSS privatization in the mid
1990s? Very poor service delivery seen as a water crisis. Only two thirds of
Metro Manila were connected to MWSS water pipes. Most customers were subject to
water rationing with less than 3 out of 10 having 24-hour supply, and worse,
occasional outbreaks of cholera cases were a growing concern. Moreover, MWSS
had become a major fiscal burden with debt in excess of a billion dollars. It
found itself in a Catch-22: no resources to expand the system and improve its
very poor service delivery, but unable to politically justify raising water
rates needed to raise resources. Moreover, it was encumbered by government
bureaucratic inertia, processes, and vested interests, both within and without.
Privatization, which had worked well elsewhere, was seen as a logical way out.
Through the exercise of political will and
judicious haste, the complex preparatory technical, economic, legal, and
political management process from conception to final award of the largest
privatization anywhere was completed in less than two years. It was done in a
most transparent competitive bidding process overseen by the World Bank/IFC and
participated in by four established Philippine conglomerates in joint venture
with international utilities firms.
This process and the long story up to the
present is told in a paper on the Political Economy of Reform During the Ramos
Administration
(http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf ) which
Christine Tang and I wrote for the World Bank's Growth Commission. This story
is punctuated by the financial failure of the Maynilad west zone concession
after the Asian financial crisis, and transfer of the Maynilad concession to
the Metro Pacific group in 2007 following a competitive bidding process. This
was an event which analysts saw as proof of the robustness of the privatization
design and the political will of the government to persevere with the PPP path.
Notwithstanding the hiccups and the regulatory
learning along the way, and based primarily on the record of Manila Water, this
PPP story can be judged an outstanding success. The success of Manila Water,
moreover, provides an easy road map for the new Maynilad to replicate for the
west zone in good time.
What is the success record of Manila Water? The
numbers tell all. Non- revenue water was reduced from 63% in 1997 to just 12.5%
at present. As a result, without taxpayer money being spent for new water
sources, the amount of delivered water to customers grew threefold from 440
million liters per day to 1,140 million. From serving only 3 million customers,
it now serves 6 million, practically all of whom get 24-hour service, from just
30% before privatization. Most notably, through an innovative community service
scheme, it now provides continuous piped water to 1.7 million people in
marginalized communities at a cost of less than P75 per month, when in the past
they would have had to buy vended water at P 150- 200 per cubic meter.
All this was achieved by the investment of over
a billion dollars in the system, sourced not from the public purse as would
have been the case pre-privatization, but from investors, commercial lenders
and official development loan providers who believed in the company. Manila
Water, a profitable listed company with 45% of its shares in public hands, has
received numerous global awards for operating efficiently and bringing water to
the urban poor.
Manila Water's ability to improve and expand
service, and access funding efficiently without any government guarantees is
likewise testament to a functioning regulation by contract framework.
Save for a few months in 2009, when the
contractually agreed upon automatic adjustment in tariffs was suspended for
what seemed like political reasons, regulation by contract has worked rather
well.
This framework includes a regular rate rebasing
exercise once every five years, subject to wide and intense public scrutiny and
hearings. During an early rebasing, key performance indicators and business
efficiency measures were introduced to mimic a competitive market.
Credit for effective regulation is owed to an
independent Regulatory Office of MWSS and the technical assistance it has been
able to access, notably from UP professors led by Dr. Philip Medalla.
The oversight agencies, the Department of
Finance and NEDA, have likewise played important roles in maintaining the
integrity of the concession agreement.
Finally, it has helped that there was never any
interference from politicians in the rate setting, and that there is a dispute
settlement process incorporated in the concession agreement involving
international arbitration, a safeguard that has been tested successfully twice.
There are key lessons from this PPP success
story: the importance of political will and judicious haste, the value of
competitive award processes and good use of expert technical assistance, the
need to uphold the integrity of concession contracts, ensure their proper
implementation and insulate PPPs from toxic politics.
For the P-Noy administration, keeping to such a
course for its PPP program should help it deliver on its promise to bring our
country to a higher growth path and improve peoples' lives.
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