Sunday December 06, 2015 

Reduce regulatory burden!

Posted on December 06, 2015 08:50:00 PM

Foreign direct investments (FDI) into the Philippines were once again the lowest among the ASEAN-6 (Association of Southeast Asian Nations) in 2014, at 5% of total Asean-6 FDI flows, only half of the proportionate share of the Philippines to the entire ASEAN-6 economy. Our investments to gross domestic product ratio at 20% is also well below the 25%-35% range in the other ASEAN-6.

 This unhappy state of affairs of underinvestment by both domestic and foreign players persists despite unprecedented low international and domestic interest rates arising from high global liquidity and excess domestic savings from remittances and business process outsourcing. The investment response to surplus funds and improved credit rating has been relatively weak. What gives?

Analyst studies and global competitiveness surveys have pointed to three factors to explain this: (a) poor infrastructure, (b) unfriendly investment environment -- restrictions on foreign investments in the Constitution and certain laws and government policies, such as failed agrarian reform and rice policy, and (c) regulatory uncertainty and red tape. The first two have been well covered in earlier columns of my Introspective fellow columnists, Chikiamco, de Dios, and Fabella, and me. Allow me now to focus on the third. (See graphs)

Let me first cite some examples.

The 2016 Ease of Doing Business of the World Bank ranked us 103rd out of 189 countries; we are the second to the lowest among the ASEAN-6. To open a business, it takes 16 steps and 29 days. Best performing Singapore and Malaysia take 2.5 and 4 days, respectively. Even Vietnam, until recently a centrally-planned economy, is better at 20 days.

These surveys are based on what it takes to establish a small or medium enterprise. I don’t know whether we should take comfort that big companies suffer as long. I have seen a chart prepared by a major power industry player on the number of signatures it takes to get a power plant started, around 200. No wonder it takes twice as long to build a power plant here vs. elsewhere -- contributing to thin reserves and high cost power.

In the latest World Economic Forum Global Competitiveness report, 2015-2016, “inefficient government bureaucracy” climbed to the top spot as the most problematic factor for doing business in the country, from last year’s fourth place. Moreover, “complexity of tax regulations” ranked fourth, whereas elsewhere in the ASEAN it is not in the top 5 concerns.

I’m told that under Revenue Memorandum Circular 7-2014, tricycle operators, farmers, fishermen and sari-sari store owners are now required to issue Bureau of Internal Revenue-registered receipts and sales invoices without any “de minimis threshold.” The World Bank has earlier warned that “Certain tax policy regimes are both inefficient and detrimental to job creation. Enforcing the current weak tax design may yield more revenues but will have adverse impacts on jobs” (World Bank, “Philippine Economic Update,” 2014).

Then there are the big disputes arising from sudden idiosyncratic reinterpretation by regulatory bodies of contracts after more than a decade of being implemented and celebrated as successful examples of public-private partnerships. I refer to the two water concessions of the Metropolitan Waterworks and Sewerage System, the Shell-Oxy Malampaya project, and the Manila North Tollways Corp.; all are now or about to enter international arbitration initiated by the private parties against government for non-implementation of contracts in amounting to several tens of billions of pesos.

I cannot recall there being so many concurrent international arbitrations at one time.

How can Public-Private Partnership (PPP) projects for infrastructure, in the platforms of all of the Presidentiables, take off unless government can provide greater regulatory clarity and stability?

Recognizing the importance of effective and sound regulations, other countries have pursued government-wide action in improving regulatory quality. Countries belonging to the Organisation for Economic Co-operation and Development (OECD) have adopted an explicit “whole-of-government” approach to regulatory reform, which requires stakeholder engagement in extensively reviewing regulations, use of regulatory impact assessment (RIA) by oversight bodies for an evidence-based policy-making, and conduct of effective ex-post evaluation of policies.

In our region, Vietnam has made great strides in overhauling its administrative procedures. They call this reform process “regulatory guillotine.” Vietnam, in 2007, established a “Project 30” unit in their government, with the goal of simplifying administrative procedures and reducing administrative costs by at least 30%. It is no surprise then that Vietnam has continued to be ahead of us in the Ease of Doing Business rankings and has received 50% more FDIs than us.

Malaysia, in 2013, launched the National Policy for the Development and Implementation of Regulations, and has started implementing reforms in regulatory practice, such as requiring RIA for all new regulations.

Also South Korea, which was able to review over 11,000 regulations, in the process eliminating almost 50% of them, all within the span of 11 months. Over 1 million new jobs and $36 billion in FDIs were projected to be the economic gains of such regulatory cleanup.

To keep in step with our neighbors, a comprehensive regulatory package must be part of next administration’s reform pillars.

In a recent Philippine Institute for Development Studies seminar (for more information, visit http://goo.gl/l2hvCj), NEDA Deputy Director General and University of the Philippines Professor Emmanuel F. Esguerra identified elements from OECD and ASEAN for best practices for good regulation. These are: internationally recognized processes, systems, tools and methods for improving quality of regulation, a system for implementing public consultation and stakeholder engagement and impact analysis of regulations to achieve desired policy objectives.

Beneath technocratic language is the political reality of bureaucratic inertia and entrenched interests in the status quo labyrinth that must be overcome.

Hopefully, our next leader will have the vision and political will and skill to take on this difficult but necessary task for the Philippines to truly travel the “tuwid na daan” to inclusive investment-led growth.

Romeo Bernardo is a Trustee of Institute for Development and Econometric Analyis and of the Philippine Institute for Development Studies.

http://www.bworldonline.com/content.php?section=Opinion&title=reduce-regulatory-burden&id=119736

The Way Forward: The Path to Inclusive Growth

Opinion

Posted on November 08, 2015 10:36:00 PM

The launching of Foundation for Economic Freedom (FEF) President Calixto “Toti” V. Chikiamco’s book, The Way Forward: The Path to Inclusive Growth, in National Book Store, Glorietta, Makati City on Aug. 26 with Senator Juan Edgardo “Sonny” M. Angara, Socioeconomic Planning Secretary Arsenio M. Balisacan, FEF Senior Advisers former Prime Minister Cesar A. Virata and Dr. Gerardo P. Sicat, and Fellows of the FEF.

This latest book of my fellow Introspective columnist, Foundation for Economic Freedom (FEF) President Calixto “Toti” V. Chikiamco is making the rounds of government and policy circles. I learned Speaker Feliciano R. Belmonte Jr. ordered 300 copies to give to congressmen. The candidates to high office in 2016 would do well to read his thematic compilation of his best columns in BusinessWorld.
 

Allow me to share my remarks on the occasion of its launch, and talk about as well of the Foundation for Economic Freedom (FEF).

Thank you, Toti, on behalf of our Chairman Roberto “Bobby” F. de Ocampo, and all the other Fellows for your kind dedication of this volume to us. And your resolute dedication to FEF as its President and chief executive officer since 2011.

The genesis of FEF goes back to early ’90s, when our Chairman, Sir Bobby de Ocampo, was Finance Secretary. FEF’s philosophy was shaped by the circumstances and govt thinking of that time -- the unleashing of private sector energies through market friendly reforms and good governance. Indeed this is thinking that traces back to reforms from an earlier period was pushed by former Prime Minister Cesar Virata and former Socioeconomic Planning Secretary Dr. Gerardo “Gerry” P. Sicat.

FEF started as an impromptu dinner club of like-minded people who came from different careers, but found themselves united by common cause on orphaned issues of the day. I recall the catalyst was the P1-per-liter Leung Levy in early ’90s which was opposed by everyone -- communists, rightist putschists, some business groups like the Federation of Philippine Industries, Catholic Bishops Conference of the Philippines, you name it.

All except for guys who in their individual capacities were writing, talking, pushing for this necessary measure to stabilize the country’s fiscal situation and nurture development. These guys who then decided to meet every now and then for dinners, KKB or with a rotating host, to see how they might be listened to more, how to educate the public, especially legislators and policy makers, and how they might help reformers inside government who badly need support and encouragement.

These impromptu dinners, included from government -- we in the Department of Finance (DoF) -- Ernest Leung, later Bobby De Ocampo, and at National Economic and Development Authority -- Cayetano “Dondon” W. Paderanga, Jr. The academe/University of the Philippines School of Economics then dean Felipe M. Medalla, Raul V. Fabella, Ruping Alonzo, Dante B. Canlas. From the private sector, civil society -- former Prime Minister Cesar A. Virata, Mahar K. Mangahas, Ramon R. del Rosario, Jr., the late Francisco Varela, Alexander R. Magno, Bong Montes, Simon Paterno, Tony Abad, Alan Ortiz, and Toti Chikiamco.

Although it was Mahar Mangahas -- a University of Chicago alumnus at heart -- who gave FEF its name and ex-DoF guys who made funding from bilateral grants happen, it was Toti who was the most consistent, persistent, and coherent as a public intellectual. His weekly columns which had a strong following among “shakers and movers” as one official termed it, contributed much to shed light, provide broader perspective on the issues of the day. He likewise lent his pen to the various advocacies of the FEF.

These FEF advocacies have met with various degrees of success over the years. With its fellows “raging incrementalists” at heart, FEF took such setbacks under Philippine political conditions as a part of the game.

Such efforts and FEF batting scores/contribution in the reform efforts included pushing “good to haves” like adjustments in excise taxes on tobacco, alcohol (check), reform of the value-added tax (check), liberalization of retail trade (question mark), privatization/public-private partnership, notably the Metropolitan Waterworks and Sewerage System (check), opening up the economy to foreign investments (question mark), property rights (check with success in land patent distribution), peace and development in Muslim Mindanao (question mark).

And trying to put a stop or expose such flawed policies/programs like wasteful subsidies for National Power Corp. (check), National Food Authority (cross), extension of a failed Comprehensive Agrarian Reform Program (check), central oil procurement by government (check), an overly generous feed-in tariffs for renewable energy (partly check).

More recently, President Toti brought the FEF from advocacy to hard core development work in the area of property rights.

Thanks to him and FEF’s land rights team, the number of free patents awarded to beneficiaries leaped from just only 3000 to 60,000 titles annually by working with the Department of Natural Resources and Local Government Unit partners.

On Toti’s book, The Way Forward: The Path to Inclusive Growth, FEF’s Chairman, former Finance Secretary, Bobby de Ocampo, has this to say: “There are some who may think of economists as theoretical and obscure. Others may view them as simultaneously argumentative and detached. Not so economist Calixto “Toti” Chikiamco. Anyone who reads his book compiling his numerous articles and opinion pieces will probably think instead of adjectives like engaging, committed, courageous, and patriotic yet also global.

“Often one can feel his frustration at the country’s seeming inability to rise above mediocrity brought in no small way by political leadership that is self-serving, myopic, small minded and hypocritical, not to mention of course corrupt and bereft of vision. But still, one can equally sense his undying hope that a better day will inevitably come.”

Our Senior Adviser, Dr. Gerry Sicat, captured in a thoughtful testimonial in the book the essence of why Toti refers to himself as a political economist in the tradition of Smith and Ricardo: “[Thus] economic problems involve the political process in order to correct them. This is one reason some of the essays carry on a political side. Solutions require convincing government and the men who compose and make decisions. The topics range from politics and economics in the large, to development issues in the small -- constitutional change, entrepreneurship, national security, wages, income and social inequity, poverty, land rights, property rights.”

For those who only know Toti from his column, you should be aware that Toti has a day job as an Internet entrepreneur. This has enriched his writings even more -- perhaps just as hardships and ordeals contribute to the shaping of an artist?

This synergy between public intellectual and grounded entrepreneur is summed up well by former Chairman of SGV group, also a Fellow and Trustee of FEF -- Glo Tan Climaco: “Toti is an economist who passionately loves his country. He is also a businessman who competes and has to survive in the real world. This rare combination makes his essays very compelling reading for me. I find his observations and suggestions realistic and practical. Many times I learn new ideas. This book has gems of wisdom.”

Toti Chikiamco’s book, The Way Forward: The Path to Inclusive Growth, is available in branches of National Book Store.

Romeo Bernardo is Philippine advisor of GlobalSource Partners and is a Board Director of the Institute for Development and Econometric Analysis.

romeo.lopez.bernardo@gmail.com

Board Independence: Reality or Myth?

Board Independence: Reality or Myth?

GGAPP Forum for Independent Directors

October 19, 2015

I congratulate Dr. Francis Estrada on his most comprehensive and educational lecture on global corporate governance practice. If  I were in the U.S. or any other OECD country, I would say "amen" and my remarks  end here.

However, we are in the Phl.  Here the  challenge is keeping  in step with these global practices, but making very sure that we "Inculturate"  to Philippine  and ASEAN situation. It is a most apt term I first heard from CJ Panganiban.

We need to sweat some of the emerging details that are now before us, for instance in the draft corporate governance blueprint making the rounds.  Let me attempt to do that now --

The theme of this symposium is a provocative one. Board Independence, Reality or Myth.  In the course of addressing the question, I beg your pardon in advance. I will try my best to be provocative.

What does the symposium title mean? When we say independent, independent from whom? And independent to do what?

The Corporation Code and the SEC Corporate Governance Memorandum, 2002   provide the answer:

"It is the Board's responsibility to foster the long-term success of the corporation and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it should exercise in the best interest of the corporation and its shareholders ".

I would myself interpret independence to mean, free to perform such a responsibility unhampered by forces, be it management,  the majority shareholder, or  for that matter-- any other interests--- pushing interests that  are not aligned with the corporation and its shareholders in achieving its long-term success. 

The particular subset of "independent director" is  defined in the SEC Memo to be one who is without a relationship with the corporation,   is expected to exercise a higher level of diligence in ensuring actions are in the interest of all shareholders.

The need for such independent directors especially arose from cases of misgovernance  in the west -- of the "principal agent problem" type. In many companies with defused ownership and with no controlling shareholder it has happened that  management became unaccountable to anyone, and becomes its own principal.  Addressing this incentive misalignment has been the driving force behind initiatives in OECD countries to increase the number of ID's, in fact to a minimum of majority. And to ensure that that the Chair is an ID, and other such limitations.  This is wholly appropriate in that context.

However, the situation in the Phl and the rest of Asia is quite different.

Here there are really almost no such thing as companies with defused ownership.  Here,  the principal value creators  are anchor investors, typically a family that has nurtured and grown the corporation and continues to nimbly navigate it in fast globally  changing environment.  In fact many passive  investors, not just local but global strategic investors,  put money in these companies on the premise of continuity of that anchor investor family  being in control.

In short under this model, the interests of all shareholders are generally aligned with the controlling shareholder. Think of the continuity across generations being provided by the Ayalas, Sys, Aboitiz, Gokungweis, et al.   The  advantages of this model has been well described in special section  in The Economist a few months ago. It contrasted it with the short termism observed in many firms in the west.

This difference in situations give rise to question of  appropriateness of the OECD model to Asia, where “family anchor investors” are  the value creators.  Take for example the rule that majority of the Board should be independent or that ID's should be especially empowered.  In Asia, It is not clear how requiring majority independents enhance long term shareholder value.   Especially when coupled with the preference that terms of independent directors should be short.

As well described by Chief Justice Panganiban,  the role of ID's in the Phl and similar Asian context, is an oversight role,  to make sure Board actions are for the benefit all shareholders, that  related party transactions are at arms length and disclosed, and that there is full compliance with laws of the country, especially ones on corporate behavior  and governance. That majority of the board should be independent  is not needed for this,  as rightly not provided under our laws now. And it should stay that way.

Let me now turn to the question of what will assure independence,  and effectiveness.    The draft CG blueprint as well as past SEC issuances contain measures which I think miss  the point.

The most ones most discussed pertain to term limits and number of seats.

A.  Term limits.

1. No evidence that longevity compromises independence nor  on the advantages of term limits.

2. Longer serving directors are more effective. And companies with longer serving directors perform better.

(See for example,  "the Non-Correlation Between Board Independence and Long Term Firm Performance" by Sanjai Bhagat and Bernard Black, professor of Finance, University of Colorado, and professor of law in Standford University, respectively.

On Limits in number of seats held by an ID. The evidence  likewise point to the opposite.According to a study by Ferris, Jagannathan and Pritchard, professors in the University of Missouri-Columbia, Binghamton University and University of Michigan Law School respectively-- "We find firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We conclude that the evidence does not support calls for limits on directorships held by an individual."

My exhibit A based on first hand experience as I am honored to be in common boards with them are:  CJ Panganiban, Amb. Joey Cuisia, Mr. Washington Sycip, Mr. Oscar Reyes.

I challenge anyone to contend that these gentlemen, despite having multiple seats/full time jobs, do not perform effectively as directors in the boards they are in. Or that the quality of governance in the corporations they serve will improve if they resign, as compelled to by  regulation.

What then assures  independence in the actions of ID's ? From my own experience -- it is the commitment of the controlling shareholders to the highest quality of corporate governance.  These shareholders seek out men and women with solid reputations who share this commitment, who can contribute diverse and independent views for the long term success of the corporation.

How about the ID's themselves-- how do we ensure they act with independence?  At the end of the day, the one thing that assures independence is an ID's  regard for a reputation of a lifetime of integrity, probity, diligence.  Which the person will not risk when put to the test.

In fact, one can argue that the more board seats, and longer more solid  reputation built, the more independent such ID's likely to be.  ( Ever heard the adage if you want something done-- give it to a busy man? )

Why do good corporations, their majority shareholders and management, seek out such independent minded men?   It is not just by what they can contribute due to their experience, knowledge and wisdom, but indeed by their well earned reputation that they do not compromise integrity.   The companies, in turn, are letting the world know that their corporate governance practice can withstand scrutiny by such men and women.  We should not shackle such good aspirations with ill-advised fiats like limits on term or number of seats of IDs.

The particular case of limits on even non-ID is even more serious.  This effectively disenfranchises owners, the value and job creators, from overseeing their own companies.  I requested PSE to tally the number of individuals who will be affected-- those with 5 or more board seats. There are 53.

B. The risk of over-regulation.

In the U.S. I understand the number of listed companies have dropped from 8 k to 4 k in under A decade, a combination I think of overregulation and readier assess to capital without listing with the growth of private equity funds and in a world slushing with liquidity.  Here in the Phl we have the lowest number of listed companies in ASEAN, and the one with the lowest growth in listings. Perhaps, not coincidentally, we are also at the cellar of "ease of doing business" of the World Bank in ASEAN.

Scoring and ranking of corporate governance as is now pushed in ASEAN is fine, provided the scorecard is well developed and acculturated -- I have issues with it. And is not pursued obsessively. Otherwise it too becomes a  case of shortermism.

But what we need to watch out for is over regulations-- which create a compliance mind set, or worse -- uncertainty, red tape, compliance costs, delays,  and eventually deterioration in governance.

My worry is the drift seems to be to regulate more at a time when our regulators, well intentioned and diligent  though they are, are already overburdened.   In the 2015 edition of the World Bank's Ease of Doing Business, we are ranked 161 of 189, the lowest in ASEAN 6, behind Indonesia and Vietnam. On starting a business, we have the most number of procedures at 16 steps and will take 34 days. Singapore takes 2.5 days, Malaysia 5.5 days.

I therefore welcome the intent to shift  to "comply or explain" model similar to the rest of ASEAN, in addition to scoring , as a basic approach. Rather than strict fiat. The language, though, of the draft CG blue print is confusing.  In "comply or explain", "explain" should mean "disclose to the public" not "explain to the SEC who would then have the power to reject the explanation as unsatisfactory". That to me is not "comply or explain", but "comply or comply".

Why am I concerned over this?  There are a number of new areas in the draft CG blueprint that go way beyond what is now in law.

For example, there is an entire section on "Duties to Other Stakeholders". If these duties were limited to those in law or by mutual contract, I would not have a problem. I am concerned however over possibly ambiguity once we stray from "fiduciary responsibility to the company and its shareholders " to "duties to other stakeholders".  Just to site possibly far fetched examples to make a point--

Will Directors be  duty bound to heed the  clamor,  say of labor unions, or even, SharePhil or ICD  against labor contractualization even if this is allowed under our laws?  Or by Greenpeace against a coal plant even if it has the approval signature of DENR, local govt and all of the 150 other signatures to start a power plant?  Who defines who is a stakeholder?

Someone was telling me also of initiatives to compel gender balance. Here I will be at my most provocative.  To me this is both intrusive and unnecessary.  On two grounds.

First, I think it is just a matter of time before women take over.  We are seeing this everywhere, in UP, there are more women in the college of law. And in the college of medicine, it is the men who are given a quota.  In the BPI, already a third of our Board are women, and the majority of management corps are female.

Second, let me ask a question -- is it not the height of regulatory heavy handedness to make women in corporate boards mandatory, when they are no longer  even mandatory in some marriages?

With that I end my remarks,  I think I have been provocative enough.

Credit Issues and Risk Management Practices

ACRAA Financing and Rating Infrastructure

Credit Issues and Risk Management Practices

October 16, 2015, Hotel Intercon, Makati City

When I was invited by good friend Santi to be part of a panel for this conference, i did so on the condition that i did not have to prepare anything. And without knowing who are the participants.

Now, that I know you are much more expert on the field than I, am feeling quite intimidated.  It is just that i could not say no to Santi, who i should call Uncle Santi, as he is a friend and school mate of my mother in law.

So let me start by begging everyone’s indulgence for this somewhat generalist appreciation of the subject and rambling impressions

My own experience starts in the nineties on the government side at the Dept of Finance, then later an occasional adviser on both policy and a few PPP projects on the transactions end.  And finally, I now do see some of this at a high level as a Board director at a bank, and companies in power, telecom.

I was given the assignment of “macro view”, so perhaps I can get away with glossing over.  As the first speaker, meant to get the ball rolling, provide the framework, Santi said.

The best macro framework on the subject I was able to find is from the World Economic Forum. They reduced the subject into two big slides. We have all seen these before, but allow me to flash them briefly.

1.     First the various risk factors, divided between political and regulatory, arising during the three phases of the project.  There are nine which are project specific, and i enumerate them. Cancellation and change of scope risk, environmental and other permit risk, community risk, expropriation risk both sudden and creeping, breach of contract risk, asset specific regulation risk, concession duration/renewal risk, asset transfer risk, decommissioning risk. Then there are the five that affect a sector or entire economy—

Change of industry regulation, taxation risk, currency transfer risk, judicial risk, and corruption/market distortion risks.   I believe you have had two days of discussion of these in various sectors, which unfortunately I was unable to join.

2.     On the mitigation side, WEF has a beautiful three story house. One floor is private sector measures—made of four rooms: appropriate use of financial instruments, with two beds one risk guarantees and political risk insurance, another on tradeable instruments and ownership structure.  And three others very interrelated-- effective interaction with the public sector, inclusive community engagement, and responsible business conduct.

3.     A second floor is on what the public sector needs to do. We are all familiar with these, and are aware of limitations in emerging economies in government’s ability to deliver on these. I enumerate them for completeness, and you can view them on the screen. Five rooms--  robust infra regulation and contracts, general stability of laws and regulation, reliable and efficient administration, reliable dispute resolution mechanisms, international commitments such as international investment agreements and transnational programs like the TPP.

4.     There is a third floor of joint public-private measures. The key room here is the management of risk perception and return expectation. And the elements that go into this are preparing projects rigorously, a dedicated marketing team, proper sounding out of the market and proper preparation of tender.  In the Philippines, the involvement of development partners like ADB, AusAid, et al, which supported the PPP Center via the hiring of international transactions advisers, have been critical.

Having presented this really broad view, allow me to share some issues that have come my way over the years on managing the risks in infra.

1.     Political and regulatory risks from design to operation. Proper risk allocation. The party who can best carry the risk should bear it, is a cardinal precept in risk allocation/ structuring of a PPP.  The principle is simple to appreciate but not so easy to implement in practice. Negotiating the appropriate risk sharing has often been most difficult. In the case of the Philippines, in a recent example of mass transport, insistence by government that private sector carry the risk associated with risks of increases in taxes by local governments have led to long delays and failures in bidding before the lesson was learned. 

At an earlier period when I was in government in the early 90’s, the Ramos administration, the sovereign has had to take demand risks for power via a take or pay contract.  And this was an important to do in a situation where there was no capital market, weak or no experience in BOT. It did what had to be done—address a power crisis. Power was restored in good time, and the administration and the country regained confidence of the people and investors. 

2.     However, the story does not end there, the improvements in the credit situation of the country and the excess in power reserves as a result of reduced demand with the onset of the Asian Financial Crisis, became reasons for the succeeding administration of Pres. Estrada to contend that earlier contracts were overly generous and to pressure the private proponents to renegotiate the contract.   I have read such actions referred to in the literature as creeping expropriation

3.     The contracts were only mildly renegotiated by reducing the current charges in exchange for lengthening the project life. I think it helped maintain the sanctity of contracts that IFC was an equity investor and JEXIM a creditor in a number of them.   So this particular risk mitigation seemed to have worked in this instance.

4.     Much more recently, most of us are quite familiar with an internationally recognized and awarded Manila Water concessions, hailed as the biggest water privatization in 1997, where, the government contracting party unilaterally disallowed certain cost recovery components provided for in the concession agreement upheld for 17 years.   The matter has been under international arbitration and has also been brought up to the Philippine Supreme Court.  IFC was also a small equity investor here as with two Japanese companies, Mitsubishi (with Manila Water) and Marubeni (with Maynilad), but this did not seem to have swayed the government side.

5.     A further example of not honouring contracts signed by earlier administrations is this dispute that Shell with Philippine authorities has with respect to Malampaya natural gas project—again over a tax issue.  In this case, the Philippine Dept of Energy is on the side of Shell but it is not being allowed by a constitutional body, the Commission on Audit to comply with its contractual obligations on a question that goes back to interpretation of the contract and laws. I believe this is going to international arbitration in Singapore. Such provisions for international arbitration have been an important part of risk mitigation, but not always full proof. As can still be challenged in Philippine courts, under grave abuse of discretion clause in the Constitution. I will talk about how this loophole can perhaps be mitigated by recourse to MIGA, at least for foreign investors.

6.      I am aware of is Phl toll roads fare adjustment.  As I understand it, here the regulator simply has not acted on what was agreed to be automatic adjustment per contract for the past three years. I guess Mr. Franco will be talking to us about that. 

I am not sure how unique the Philippines is in this problem of inter-administration compliance with stipulated tariff adjustments and contractual payments obligations.   As the Philippines moves from projects with attractive real estate plays and with an existing cash flow as in the case of extension of a toll road or mass transport operation, into those that require availability payments like a prisons, the issue of reliability of government payments come into greater play.  Especially for a country like ours where Congress is a separate branch and the budget appropriation is an annual process, without multi-year obligations other than for debt service.  I guess this issue of “bankability” of such projects is something that will be addressed by Mr. Montes.

There is a wide range of insurance products that are available to cover country and political risks.  Private commercial insurers would offer great flexibility and speed, albeit at rates reflecting market perceptions of the specific country risk, which may be overly pessimistic. As different insurers may have quite different perceptions, it is advisable for the investor to retain an experienced specialized broker.  Bilateral risk coverage programs are available in many countries (but seldom in emerging market countries) in support of their nationals. Rates may be to some extent subsidized but coverage is often conditioned by national commercial or political priorities.

 The Multilateral Investment Guarantee Agency (MIGA), where I have been involved in the negotiations of the Charter in the 80’s, is the major international agency operating in this field and has rather unique characteristics.  Being a member of the World Bank Group, its coverage is available to nationals of all member countries, with the only exception of local investors in their own country.  Rates and coverage products are in line with the market, but its distinctive feature is the cooperative relationship with the host member country, which defuses the political dimension (often confrontational) inherent in bilateral insurance programs. I note that MIGA would cover the non payment of arbitral awards.

Finally, some mitigating measures, at least if only for delays, can be built into the structure of the contracts themselves.  As credit rating agencies looking after interest of bond investors, you are more concerned, perhaps even more than bankers like me, about even delays in debt service.  So here perhaps such risks can be covered by some form of limited recourse to sponsors or a waterfall  and other payment terms and profiles that adjust to the differences in preferences between bankers, bond holders and equity owners.  

I stop here and happily pass the mike.

TRIBUTE TO FRANCIS VARELA, ‘RAGING INCREMENTALIST’, BIG BIKE ENTHUSIAST

Posted on September 14, 2015 11:40:00 PM

Aug. 29 was a very sad day. Francis M. Varela, undersecretary of the Department of Education (DepEd), perished in a motorcycle accident. Mourning the loss of such a good man, in every sense of the word, tributes flowed. At least three saw print in national newspapers.

Allow me to share excerpts of the testimonial by Dr. Felipe M. Medalla during the DepEd necrological service. Dr. Medalla, former dean of the UP School of Economics, former long serving chairman of the Foundation for Economic Freedom (FEF), had worked with Francis in FEF. FEF is an advocacy group for sound economic governance founded by a number of us in the mid-’90s. Francis raised the first P1 million to help it get started, and later served as its President. Many of us in FEF, like Francis, had served in government, and sought to continue to make a difference -- “raging incrementalists” we call ourselves half in jest.

From left: Mr. Bernardo, Francis Varela, Alan Ortiz, President of SMC Global Power Holding, and Atty. Ferdinand Tolentino, former Deputy Executive Director of the PPP Center, in Caliraya.

I’m here to honor Francis as a friend and in behalf of the Foundation for Economic Freedom or FEF. Francis was a former president of FEF and I was a former Chair. Until Francis joined DepEd (and in my case, the monetary board), we were both very active and vocal members of FEF because of what our advocacy-oriented NGO believes in -- that good governance, transparency, accountability, good economic and financial analysis, market forces and competition together can contribute significantly to improving Filipino well-being -- not just for those who are already well-off but especially for those who are so disadvantaged that they are not in a position to articulate why the policies that are being peddled by some interest groups supposedly for their benefit often do exactly the opposite.

Francis of course fought against corruption, as pointed out by some of the previous speakers. His record in DepEd would attest to that.

But he was very much aware that reducing corruption is not enough, since focusing solely on reducing corruption in an economic environment where people are driven by distorted prices and wrong incentives will, at best, improve Filipino welfare only marginally. Francis and the FEF believe that self interest, guided by a moral compass and disciplined by competition and the rule of law, could be quite consistent with social welfare.

What impressed me most about Francis is that he was so passionate about advocacies for better public policies, in spite of his own awareness of the capacity of those who benefit from the bad policies to thwart reform efforts. In short, that his own analysis often told him that many of the reform advocacies and efforts may not bear fruit did not stop him from trying.

And Francis believed that short cuts such as non-democratic ways of changing society are likely to back fire. There’s no Messiah that would solve our economic and social problems. And the converse must be true: long journeys require many small steps.

In short, Francis believed that we should all do our share.

And if a lot of people fight for the causes they believe in, they can bring about small improvement, which taken together could count for quite a lot.

It therefore did not surprise me that Francis joined the DepEd as an Undersecretary.

After all, won’t it be a bit hypocritical to call for reforms from the outside and refuse to be part of reforms from the inside when the opportunity to do so comes along. Of course, the financial and personal sacrifices for Francis to do so must have been significant, but Francis being Francis, these would not have stopped him from serving.

In sum, passion and patience both describe Francis very well.

How can someone so passionate be so patient? (It of course helped a lot that he was so handsome and charming.) Well, the 2 P’s must be glued together by a third P -- Patriotism. Francis loved our country. But even these three P’s might not be enough. They must be supported by a strong intellect and good analysis. And it was therefore very fitting that Francis championed three P’s of a different kind in DepEd -- public-private partnership.

By the way, some of you may be surprised that Francis is getting tributes from people who are at least twenty years older than him. But Francis is truly much wiser than his years on earth. And because of those relatively few years, we are all better off.

Allow me to end this column by touching on a side of Francis that tragically consumed him -- motorcycle riding.

It is not easy to explain this diversion, passion really, which seem more like an insanity to people who do not have the DNA for it. And reasons for riding can be varied and personal.

It’s been said that riding a motorcycle is freedom and vulnerability, adventure and wanderlust, meditation and therapy, merger of man and machine; technology and art, camaraderie with the boys, a quantum of solace, epic pointlessness, transcendence, life. And for many, we knew it from the moment we first tried a motorcycle as teenage boys -- perhaps even before.

This transcendental meditative state is captured well by Milan Kundera in the Unbearable Lightness of Being. “The man hunched over his motorcycle can focus only on the present instant of his flight. He is caught in a fragment of time, cut off from both the past and the future. He is wrenched from the continuity of time... in other words, he is in a state of ecstasy.”

I went the first night of Francis’ wake to console with his family.

Wenna, his wife, and their children were inconsolable, in shock at the tragic event of the morning. I tried again on the third day, unsuccessfully -- Wenna was fatigued.

I felt the need to apologize: a decade ago, I lent Francis my spare big bike that got him restarted on riding, against the better judgment of the women in our families.

An opportunity finally presented itself during the DepEd memorial.

I very contritely condoled and offered my hand in sympathy. She looked at me straight and her first words were: “I remember, you lent him his first bike”. Perhaps seeing my eyes well with tears, she smiled and said -- “He loved riding with a passion... A week he is unable to ride, ang sungit sungit (he’s grumpy) the whole week.”

I can only console myself by believing that Francis died doing something he loved. The family he left behind can only find consolation in the knowledge that the good die young and God has called him to come home.

Francis was the essence of virtue. We who knew him well mourn the dimming of a flame that brightened our gray world.

Romeo L. Bernardo is Vice Chairman of FEF and is a Board Member of the Institute for Development and Econometric Analysis.       

http://www.bworldonline.com/content.php?section=Opinion&title=tribute-to-francis-varela-&145raging-incrementalist&8217-big-bike-enthusiast&id=115298

Remarks on the launch of Toti Chikiamco’s book “The Way Forward: The Path to Inclusive Growth”

Remarks on the launch of Toti Chikiamco’s book –

“The Way Forward: The Path to Inclusive Growth”

National Bookstore, Glorietta, Makati City

Aug 26, 2015

Launching of Toti Chikiamco's book - "The Way Forward: The Path to Inclusive Growth", August 26, National Bookstore, Glorietta. Below picture of author and FEF President Toti Chikiamco with Sen Sonny Angara, Sec. Arsi Balisacan, FEF Senior Advisers PM Cesar Virata and Dr. Gerry Sicat, and Fellows of the FEF. FEF is the Foundation for Economic Freedom

Sec Arsi Balisacan, Sen. Sonny Angara, PM Virata, Dr Gerry Sicat, Senior Advisers of FEF, FEF Fellows, fellow fans of Toti Chikiamco:

Foundation for Economic Freedom Chairman, Bobby de Ocampo’s, apos-tolic work required his presence across the seas. He therefore asked me to convey his apologies, and his happy congratulations to Toti Chikiamco.  And his warm thank you Toti, on behalf of FEF and all the Fellows,   for your kind dedication of this volume to us. And for your resolute dedication to FEF, as its President-CEO since 2011.

Bobby de Ocampo would have loved to be here.  The genesis of FEF goes back to early 90’s, when he was Finance Secretary. FEF's philosophy was shaped by the circumstances and govt thinking of that time -- the unleashing of private sector energies through market friendly reforms and good governance.  Indeed this is thinking that traces back to reforms from an earlier period pushed by PM Virata and Dr. Sicat.

Please forgive a bit of nostalgia from this new senior citizen. FEF's started as an impromptu  dinners club-- to some extent it still is--  of like minded people who came from different careers, but found themselves united by  common cause on orphaned issues of the day.  I think the catalyst was the P1 peso per litre Leung Levy in early 90's which was opposed by everyone-- communists, rightist putschists, some business groups like the Federation of Phl Industries, CBCP, you name it.

All except for guys who on their individual capacities, were writing, talking, pushing for this necessary measure to stabilize the country’s fiscal situation and nurture development. Who then decided to meet every now and then  for dinners, KKB or  with rotating host,  to see how they might be listened to more, how to educate the public, especially legislators and policy makers, and how they might help reformers inside government who badly need support and encouragement.

These impromptu dinners, included from government--we at the DOF--Ernest Leung, later Bobby De Ocampo, and at NEDA--Dondon Paderanga. The academe/UPSE then dean Philip Medalla, Raul Fabella, Ruping Alonzo, Dante Canlas.  From   the private sector, civil society—PM Virata,  Mahar Mangahas, Ramon del Rosario, Francis Varela, Alex Magno, Bong Montes, Simon Paterno, Tony Abad, Alan Ortiz,  and Toti Chikiamco. Though it was Mahar Mangahas who gave FEF its name - a Chicago boy at heart-- and ex DOF guys who made funding from bilateral grants happen, it was Toti who was the most consistent, persistent and coherent as a publicly intellectual. His weekly columns which had a strong following among “shakers and movers” as one official termed it contributed much to shed light, provide broader perspective on the issues of the day.  He likewise lent his pen on the various advocacies of the FEF.

These FEF advocacies have met with various degrees of success over the years. Raging incrementalist at heart, such setbacks under Philippine political conditions were taken as a part of the game. 

Such efforts and FEF batting scores/contribution in the reform efforts included pushing "good to haves" like adjustments in excise taxes on tobacco, alcohol, oil (check) or reform of the VAT (check) liberalization of retail trade (question mark) , privatization/PPP (notably MWSS) (check) opening up the economy to foreign investments (question mark) property rights (check with success in land patent distribution), peace and development in Muslim Mindanao (question mark).

And trying to put a stop expose such flawed policies/programs like subsidies for Napocor (check)  NFA (XXX) CARP extension (check) a central oil procurement by government (check) an overly generous Feed In Tariffs  for RE (partly check)  and  exemption of senior citizens from VAT (XXX -- something i lamented then, but now changed my mind). 

He likewise agreed to serve was our third Chairman in the early years, after Dondon Paderanga and Mahar Mangahas. More recently, we were lucky and grateful when he accepted in 2011, the more demanding job of President-CEO. Thereby breathing new life into FEF, not just as a voice for orphaned issues, or catalyst for ideas, but as an implementer of development projects. Nowhere is this more evident than in the work, that he, Elmer Mercado, Ric Balatbat and team have done in the area of property rights-land patents to be exact. The number of free patents issued before RA 10023 was only 3000 annually. After RA 10023, which he helped push through Congress, and with the 150 partnerships that FEF has forged with LGU’s in land titling, 60,000 titles each year have been issued to newly economically empowered families.

Now on Toti Chikiamco the author and on this, his third publication and compilation of works. Allow me to quote a few lines of what a few Fellow have said. Starting with our Chairman, Bobby de Ocampo.

“There are some who may think of economists as theoretical and obscure. Others may view them as simultaneously argumentative and detached. Not so economist Calixto “Toti” Chikiamco. Anyone who reads his book compiling his numerous articles and opinion pieces will probably think instead of adjectives like engaging, committed, courageous, and patriotic yet also global.

And then he ends: “Often one can feel his frustration at the country’s seeming inability to rise above mediocrity brought in no small way by political leadership that is self-serving, myopic, small minded and hypocritical, not to mention of course corrupt and bereft of vision. But still, one can equally sense his undying hope that a better day will inevitably come.”

And Professor now Monetary Board member Philip Medalla, our former long time FEF Chairman said in the foreword of his earlier work “Why We Are Who We Are": “Yet it is rather obvious that Chikiamco is neither a rent seeker nor one who has surrendered the debate to special interest groups. His columns show an intense desire to change what is wrong with our society, especially in its incentive structure. Moreover, he thinks that by writing about why many policies are so good for the privileged elite, but so bad for the most of us, he would not only be able to explain why we are who we are, but also be able to change what we are..”

And Professor Emeritus and National Scientist Raul Fabella, in his Foreword in this new book— “As some of his writings attest, he can be very eloquent on reasons for pessimism. There was a period when Toti begged to be left un-engaged, describing himself as already a “mental and emotional self-exile”.  The difference is that Toti always bounces back to fight another day.

I leave to you to read and enjoy the many sincere, engaging thoughtful words of appreciation and high esteem, in the first pages of the book, many of them from FEF fellows, including our Senior Adviser, Dr. Gerry Sicat.  He captured in a thoughtful testimonial in the book, the essence of why Toti refers to himself as a political economist in the tradition of Smith and Ricardo. "(Thus) economic problems involve the political process in order to correct them. This is one reason some of the essays carry on a political side. Solutions require convincing government and the men who compose and make decisions. The topics range from politics and economics in the large, to development issues in the small-- constitutional change, entrepreneurship, national security, wages, income and social inequity, poverty, land rights, property rights."

For those who only know Toti from his column, you should be aware that Toti has a day job as a net entrepreneur. This has enriched his writings even more—perhaps just as hardships and ordeals contribute to the shaping of an artist.  Though Toti may not quite see it gratefully that way when he rages, at times not so incrementally, against an uncompetitive exchange rate regime or public utilities especially unsatisfactory telco services, essential to BPO space where his business is.

This synergy between public intellectual and grounded entrepreneur is summed up well by former Chairman of SGV group, also a Fellow and Trustee of FEF--Glo Tan Climaco: “Toti is an economist who passionately loves his country. He is also a businessman who competes and has to survive in the real world. This rare combination makes his essays very compelling reading for me. I find his observations and suggestions realistic and practical. Many times I learn new ideas. This book has gems of wisdom.”

Let me end now on my own final gem of wisdom—“Please buy dozens of books, and give to your friends for Xmas!”

EPDP hosts forum on power supply contracting

http://www.upecon.org.ph/epdp/epdp-hosts-forum-on-power-supply-contracting/

MANILA, 7 August 2015—The ENERGY POLICY AND DEVELOPMENT PROGRAM (EPDP), a program that aims to help government develop evidence-based energy policies and programs, convened a dialogue on competitive selection in power supply contracting entitled “Promoting Transparency and Competition for Economic Efficiency in Power Supply Contracting” on 7 August at the InterContinental Manila.

The circular promotes transparency in dealings between power distribution units and power generation companies, and finding the most cost-efficient and cost-effective options that will benefit consumers.

OIC Energy Secretary Zenaida Monsada said “EPIRA aims to create competition among generating companies where prices are market-driven, competitive, and transparent.” The recent issuance of Department of Energy Circular No. DC2015-06-008: “Mandating All Distribution Utilities To Undergo Competitive Selection Process In Securing Power Supply Agreements” on 30 June 2015 is a boost to the department’s vision of energy security and transparency in rates and charges. The circular mandates all distribution utilities to undergo competitive selection in securing power supply agreements.

Monsada added, “The Department of Energy is committed to pursue the objectives of EPIRA to achieve economic efficiency, and it needs the continued support and cooperation of the power industry stakeholders to achieve these objectives. “

USAID Mission Director Gloria D. Steele said, “We welcome the initiative from the Department of Energy to improve competition in energy power supply. A decrease in the price of electricity will bring the country one step closer to achieving a price range comparable to its ASEAN peers and more importantly, contribute to the achievement of inclusive growth in the Philippines.”

Participants from the government, private sector, and academe provided input that will inform the crafting of the department circular’s implementing rules and regulations.

The forum gathered policy makers and power supply providers, including economic planning secretary and NEDA director-general Arsenio Balisacan; development partner, USAID Mission Director Gloria Steele; the academe, Wali del Mundo; and private sector practitioner Romeo Bernardo.

Download the presentations:

Bernardo-Reaction
Del Mundo-Reaction
Alonzo-Final International Experience in CSP
Bernardo-Competitive Supply Procurement
Capongcol-DOE CSP

Fabella-Market Testing of PSA

Presidential race: Continuity or change

Philippine Daily Inquirer

01:03 AM August 10th, 2015

(From left) Interior Secretary Mar Roxas, Sen. Grace Poe, Vice President Jejomar Binay, Davao City Mayor Rodrigo Duterte

The Philippine presidential election in 2016 is shaping up as a battle between “continuity” and “change” in governance with four candidates likely to vie to be the next CEO of the land but without any clear front-runner yet in sight, according to New York-based think tank Global Source.

After President Aquino endorsed Interior Secretary Mar Roxas as his successor while framing the next presidential vote as a referendum for the “straight and righteous path,” Global Source said the aspirants would likely take guidance from their rankings in scheduled September polls of voter preference.

The Global Source commentary, dated Aug. 7 and written by Filipino economists Romeo Bernardo and Marie-Christine Tang, said the presidential election was bringing “heightened uncertainty for investors,” especially as it was emerging as a multicontender race with “no clear front-runner, specifically one who can assure bureaucrats of continuity in the executive branch, key in our view to unlocking promised state spending.”

‘Only the beginning’

Toward the end of his final address to Congress on July 27, the President attempted to recast the 2016 presidential election as a vote for continuity, saying that economic progress under his administration was “only the beginning” then endorsed the candidacy of a teary-eyed Roxas four days later, Global Source said.

“The tactic is a clever one intended to translate popular support for the President, who has managed to spring back from low ratings in the wake of the Mindanao crisis early this year, into votes for Mr. Roxas, who is lagging in presidential preference polls. If it succeeded in painting the other contender, Vice President Jejomar Binay, who is hounded by allegations of corruption, as one taking the ‘crooked’ path, so much the better,” the think tank said.

More mass appeal

But Global Source said Binay—who says he has never backed out of a fight—would not take all this sitting down.

Between Roxas and Binay, the think tank deemed Binay the one with more mass appeal.

Despite the much-publicized investigations of charges of past wrongdoing, the think tank noted that Binay continued to enjoy relatively high popularity scores and in the last presidential preference poll, had a significant 11-point lead over Roxas.

“Even as the administration is trying to frame the 2016 contest as one between continuity (straight) and change (crooked), Mr. Binay, an astute politician who grew up in poverty, is playing the rich versus poor card to the hilt,” Global Source said.

Binay and Roxas had long been gearing up for this rematch since 2010 when Roxas gave way to Mr. Aquino as the Liberal Party standard-bearer only to lose the vice presidency to Binay.

“Although Mr. Binay heretofore has had the upper hand in imaginary matchups between the two, many believe that with continuing unveiling of ‘evidence’ of Mr. Binay’s vast accumulated wealth that would make his rich versus poor cry sound hollow, Mr. Roxas would quickly catch up and with the support of the administration machinery, he could soon gain the advantage,” Global Source said.

“In fact, some believe that the only thing left for Mr. Roxas to do to secure his bid is to persuade Sen. Grace Poe to be his running mate. But as Philippine presidential elections go, it is very unlikely that it will be a two-man race,” the think tank said.

Grace factor

At the moment, Global Source said Poe did not appear too keen to be Roxas’ running mate.

“After all, she scores the highest in presidential preference surveys and it seems that some in the administration party favors her over Mr. Roxas, seeing in her the same commitment to the straight path while offering a refreshing change from traditional politicians,” Global Source said.

Poe, a junior senator, is widely expected to team up with Sen. Francis Escudero on an independent ticket.

There has been bad blood between Escudero and Roxas, as Escudero supported Binay in the 2010 vice-presidential race.

Escudero has had a falling out with Binay afterward.

Several political parties have reportedly offered to adopt the Poe-Escudero team but nothing has been concluded.

“Clearly though, [Poe’s] entry into the race will benefit Mr. Binay, as she and Mr. Roxas will split the votes of those supportive of the administration. To date, she remains noncommittal about her plans and with legal issues raised about her citizenship/residency eligibility, her decision may well depend on her assessment of vulnerability to disqualification down the road,” Global Source said.

Global Source was the first institution to predict that Poe, an adopted daughter of movie actors Fernando Poe Jr. and Susan Roces, could be one of the presidential contenders in 2016 after topping the senatorial election in 2013.

Duterte

Davao City Mayor Rodrigo Duterte could be another “credible challenger” to Binay and Roxas, Global Source said, citing the media buzz created by Duterte while “supposedly not campaigning.”

“For a mayor from the South who has denied interest to seek the presidency, he seems to be in the national limelight quite a lot. Rumors persist that he is just waiting to see how he will fare in the next voter surveys (in September) and if the numbers turn significantly up, he can be prevailed upon to join the fray,” Global Source said.

Priority reforms

As the Aquino administration heads into its last mile, Global Source said reform efforts were likely to “slow to a crawl.”

In his final address to Congress, the President mentioned five priority bills—Bangsamoro Basic Law (BBL), rationalization of fiscal incentives, antidynasty law, unified uniformed personnel pension reform bill and the 2016 budget.

A sixth proposed measure, freedom of information bill, was not mentioned in the speech but was cited by the President a day later.

“While we are confident that the President has enough influence over Congress to ensure the timely passage of the budget and Congress itself may want to support pensions for uniformed personnel, we are less optimistic about the other bills,” Global Source said.

“If ever, the executive may need to accept watered-down versions of its proposals, like what happened to the recently enacted Cabotage Law, which limited foreign ships’ cargo handling to those coming also from foreign vessels. The BBL, meant to be this administration’s legacy, remains controversial and difficult for legislators facing reelection to support,” it said.

Overall, Global Source said, external risks have increased for the Philippine economy.

“Our outlook, which sees GDP (gross domestic product) growth at 6.1 percent in 2015 and 6.5 percent in 2016, is one of guarded optimism that considers robust domestic demand growth alongside softer export demand, increasing foreign investor caution, more volatile global financial markets and risk of a stronger El Niño weather disturbance,” Global Source said, adding that political uncertainties were likewise adding to the “unpleasant brew.”

http://newsinfo.inquirer.net/711549/presidential-race-continuity-or-change#ixzz3iksDnBUY