Water woes — just the facts

Introspective By Romeo L. Bernardo

December 15, 2019 | 10:18 pm

First of two parts

The President unleashed a torrent of expletives on the two Metro Manila water concessionaires for supposedly “onerous” contracts. I tried to understand why. After all, this major privatization, undertaken in 1997 during the Ramos administration to respond to a water crisis, was a celebrated case of a working public private partnership and was awarded multiple times for the transparency and design of the bid process and for its success in addressing the core problem of poor water services provision, especially its inclusive business model of connecting millions of poor communities. The concession agreements were subsequently extended during the Arroyo term in recognition of this success and in order to enable more investments in water and sewerage services to be done, pursuant to the Clean Water Act.

So indeed, why? The best I can come up with is this: the President felt he was dealt a bad hand through no fault of his and has not been properly briefed on the background and history of this water PPP.

More specifically, the missteps and inactions of the last administration that have led to:
a) non-investment in raw water that resulted in the water shortage last summer and;
b) non-adjustment in tariff rates in accordance with the contract based on a flawed re-interpretation of the treatment of corporate income taxes (which deviated from the practice over the past 17 years) that has resulted in government losing in international arbitration, which now this administration has to pay.

(See my column: Never waste a good crisis, April 2019, BusinessWorld. https://www.bworldonline.com/never-waste-a-good-crisis-2/).
On top of this frustration for being in the hot seat, the President’s anger may have been driven by certain mis-appreciation of the facts about the water service business.

1) Is water free?
Yes, in its natural state. But to deliver safe drinking water to the taps in our homes require investments in storage and treatment facilities and underground distribution networks. These investments that yield high economic and social returns are not free.

Ask the 3.7 million mostly poor informal settlers who were unconnected to the pre-privatization water distribution system. They had to either take a whole morning going to a natural water source or buy their water by the pail at 10 times the cost of what they are now paying under the multi-awarded “Tubig Para sa Barangay” in the east zone where they were organized by Manila Water Co., Inc. into communities and connected to its network. Add to this, the medicine bills and lost hours of work and missed classes when they’s get sick from dysentery due to poor water quality pre-1997.

The reality is that it takes billions of pesos of investments to bring clean potable water to our homes. And, unlike businesses that have declining costs with volume, water is the opposite. As the concessionaires try to connect farther communities in hilly areas with sparser populations, unit costs go up, especially with increased demand for sewerage service which, incidentally, costs three times that of fresh water to put in place.

What is the score card of the two concessionaires in connecting people and in reducing the wastage from leakages and theft (non-revenue water or NRW)?
Here it is. (See the Table. — Ed.)


To achieve all these, the Manila Water and Maynilad have had to invest P166 billion and P208 billion respectively. Critics like giving out profit numbers of these companies without reference to the huge amounts of their investments. When that is done, the average Return on Invested Capital (ROIC) is around eight to 10 percent annually during the past five years, which is comparable to water concessions in other emerging market countries.

And by reducing the NRW through these massive investments and more efficient management, they have prevented a water shortage despite the failure of past administrations to put up a single new water source. Indeed, not a single stone was turned or shovel lifted, after tying the hands of the concessionaires from making such investments.

The amount of incremental water provided by the two concessionaires by reducing NRW is equivalent to the water output of three Kaliwa dams. The one Kaliwa dam that the last administration has talked about for six years and this one for three, but which has yet to be started, will cost P 12.2 billion using Chinese ODA.

2) Contracts were “onerous”?
The facts are that these contracts were diligently prepared and carefully reviewed by various agencies and professionals in government and expert consultants.

Preparing, reviewing, approving, and signing authorities for the original contract included: then MWSS (Metropolitan Waterworks and Sewerage System) management led by Dr. Angel Lazaro III, the entire MWSS Board led by Department of Public Works and Highways (DPWH) Secretary Gregorio Vigilar and his Chief of Staff Mark Dumol, Dept of Finance Secretary Roberto de Ocampo and undersecretaries, the Cabinet Level Privatization Committee, the National Economic and Development Authority (NEDA) Board whose secretariat was headed by Planning Secretary Cielito Habito, Justice Secretary Teofisto Guingona and his Usec Presbyterio Velasco, Chief Presidential Legal Counsel Rene Cayetano, Corporate Legal Counsel Oscar Garcia, Executive Secretary Ruben Torres, and, finally President Ramos himself (who is known for demanding CSW — complete staff work). A similar though less lengthy process was followed on the contract extension which was signed by President Gloria Arroyo and Finance Secretary Gary Teves. Additionally, consultants were engaged — the key ones were International Finance Corporation/World Bank (as the principal adviser for privatization), which in turn engaged NERA from the UK (as economic advisers), Sogreah, a French engineering firm (as process consultants), audit firm Punongbayan and Araullo, and lawyers ACCRALAW (led by attorney Eusebio Tan) and Cleary Gottlieb (led by Lee Buccheit) over a period of a year.

The concessionaires were asked to bid on this contract competitively in both 1996 (there were four highly qualified consortia involving the best names locally, and the leading global water companies which bid) and then again in 2007 when the original west zone concessionaire, the Benpres-Lyonnaise des Eaux consortium, went bankrupt and the contract for Maynilad had to be re-bid. The fact that 50% of the original proponents failed is the best demonstration that there was absolutely no guarantee of returns, no sweetheart deal as contended.

Moreover, government tends to review Public-Private Partnership (PPP) contracts with today’s lenses without reference to the context at the time the contracts were entered into. This was done, I suspect by the Department of Justice in the review reported in the news without consulting the many people then who were involved in drafting, reviewing, and approving the contract.

Had they reached out, they would have appreciated the dramatically different situation then versus now in the conditions of the country and the MWSS. Contract terms offered needed to be appropriate to these conditions and global standards and requirements to attract the best qualified bidders.
Let me just cite a few facts:

1.) PPP then was very new. There were only a handful of contracts to serve as precedents in water or even other sectors, and thus the structure was perceived to be high risk considering especially regulatory uncertainty. The Philippines did not have a clear regulatory regime on water and thus had to develop an innovative “regulation by contract” scheme. A big part of the risk mitigation aspects of this depended on a performance undertaking by the Republic as represented by the Finance Secretary, and the provision of international arbitration for dispute resolution.

2.) The Philippines’ credit rating was below investment grade, interest rates on treasury bills were at double digits, our government debt to GDP and budget deficits to GDP were much higher, as was the external debt to GDP, the current account in deficit, while foreign reserve coverage was only two months’ worth of goods and services versus eight today.

3.) The MWSS then was a mess, very inefficient, there was intermittent water supply, very high water leakage and theft (NRW over 60%). It was over-staffed but had low productivity, was highly indebted, and with high technical risks — nobody knew the condition of the pipes, so this added to the risk premium.
Insofar as “onerous” provisions, let me try to respond to some of the points reported in the newspapers.

1.) The contention that “government interference” was not allowed under the contracts. This is completely false. The facts are that at every step, government is involved in rate setting in what is, after all, a public private partnership.
These steps include: a.) in setting the parameters in the concession agreements, b.) setting the service levels for both piped water and sewerage, c.) determining and auditing which expenditures are prudent and efficient, d.) determining the cost of capital that the concessionaires will receive, adjusted to market every five years, and, finally, e.) approval of the tariffs schedules after proper public hearings that derive from steps a.) through d.). The Republic simply undertook in the Performance Undertaking to respect this procedure.

This is Part One of this column. The second and concluding part will cover other supposed “onerous conditions” relating to recoverability of the corporate income taxes from tariffs, the extension of the contract, and the possible consequences of government terminating the contract unilaterally.
For those who wish to understand the subject more fully, I would refer you to:

1. “The Manila water concession: a key government official’s diary of the world’s largest privatization,” by Mark Dumol
http://documents.worldbank.org/curated/en/118971468776361965/The-Manila-water-concession-a-key-government-officials-diary-of-the-worlds-largest-water-privatization
2. Built on Dreams, Grounded in Reality: Economic Policy Reform in the Philippines by National Scientist and Prof. Emeritus Raul Fabella, https://asiafoundation.org/resources/pdfs/BuiltonDreamsGroundedinReality.pdf
3. Tap Secrets: The Manila Water Story by Virgilio C. Rivera, Jr.,
https://www.gwp.org/globalassets/global/toolbox/case-studies/asia-and-caucasus/cs_450_tap_-manila.pdf
4. The video tape of the Senate Hearings of Dec. 11, Chaired by Senator Grace Poe. In this link: https://www.facebook.com/sengracepoe/videos/845201489268434/





Romeo L. Bernardo is Vice-Chairman of the Foundation for Economic Freedom and GlobalSource Partners Philippine Advisor. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations and was a Trustee of the MWSS from 1995 to June 1996, six months before award of the concessions.

romeo.lopez.bernardo@gmail.com

Momentum: questions and introspections

November 10, 2019 | 8:49 pm

ON Oct. 23, my three co-authors and I launched our book titled Momentum: Economic Reforms for Sustained Growth.

Our book editor, noted veteran journalist Roel Landingin, explains what it’s all about: “In this collection of newspaper columns published from 2008 to 2019, five of the country’s leading economic commentators — Romeo Bernardo, Calixto Chikiamco, Emmanuel de Dios, Raul Fabella and the late Cayetano Paderanga — put forward observations and recommendations on some of the most intractable problems facing economic progress in the Philippines. But the essays do not always dwell on economic analysis and prescription: they also delve into broader themes ranging from motorcycle riding, US China rivalry; Mark Twain, basketball and working in government among others.“

Why the title Momentum?

In the welcome remarks of the evening, Foundation for Economic Freedom President Toti Chikiamco explained on our behalf:

“Truth to tell, we kicked around a few ideas. Prof. De Dios suggested ‘Wokenomics,’ derived from the current urban slang, ‘Woke,’ which means to be awake and always conscious of perceived injustices. However, after a few discussions and several late night dinners, we settled on the more prosaic but more apropos ‘Momentum,’ with the subtitle ‘Economic Reforms for Sustaining Growth.’”

“The word is appropriately ‘Momentum’ because the Philippines has broken from its boom and bust cycle in the past. It’s cruising along at 5-7% GDP growth, which is among the fastest in the region, and no doubt due to reforms in the past. The big question now is: how to sustain and even accelerate economic growth?

“We hope this book supplies the answer. It’s a curated collection of the author’s articles in BusinessWorld, which they wrote as members of the board of IDEA, or the Institute of Development and Econometric Analysis, the economic research organization that the late Dondon Paderanga founded and where he invited us to be board members. This book is also a loving tribute to our late friend Dondon.

“This book was made possible by friends and supporters. I don’t have to cite them, but they know who they are. They may not exactly espouse the same ideas as the authors, but they share with us a love of country and desire to keep the momentum of economic growth. Thank you again. We promise to distribute the book as widely as possible, perhaps enter it into the public domain after a certain period, to enrich the discourse on the economic direction of the country.”

At the launch at the Fairmont Hotel in Makati, we were most honored by the attendance of such public sector luminaries as former President Fidel Ramos, former Prime Minister Cesar Virata, Central Bank Governor Ben Diokno, Chief Justice Artemio Panganiban, Monetary Board Member Philip Medalla, Representative and Professor Stella Quimbo, Competition Commission Chair Arsenio Balisacan, Senator Serge Osmeña, former Secretaries Gerry Sicat, Roberto de a Ocampo, Gary Teves, Romulo Neri, Popo Lotilla and General Joe Almonte; and business leaders and executives such as Endika and Montxu Aboitiz of AEV, Oscar Reyes of the MVP group, MAP President Riza Mantaring, ECOP President Serge Ortiz Luis, SHEDA Chair Jeff Ng, Bulletin Chair Basilio Yap, BusinessWorld Editor-in-Chief Roby Alampay, Harvard Alumni Association President Anthony Abad ( who kindly and superbly emceed) and others too many to mention.

The book enjoyed generous advanced praise — well deserved for 80% of the book — thanks to my four co-authors, in whose brilliance I happily bask.

Here are excerpts from some of our “reviewers”:

From Chief Justice Panganiban: “If ever there would be a Supreme Court for economic matters, I think the authors of this book easily constitute its members (or at least, some of the more sagacious) and the book would contain their landmark ponentias to be read, re-read and obeyed not only by lawyers and economists but more importantly by the policy makers of our country and the general public as well.”

From Cesar Virata: “Can we present the writings of these ‘raging incrementalists’ before the Executive and Legislative Branches as their certified agenda in July 2019? I encourage readers to adopt advocacies prescribed in this compendium of ideas.”

From Stella Quimbo: “Dear policy maker, do the country a favor. Read this book. It contains the roadmap to economic Shangri-la.”

From former President Ramos’ National Security Adviser, Jose Almonte: “The nation is grateful to the talented economists who are the authors of this book. Their thoughts and writings in the last decade have helped form an intellectual consensus that paved the way for reforms to address the root cause why this country is among the least developed in this part of the world.”

From House Ways and Means Committee Chair Joey Salceda: “A choice selection of illuminating columns from BusinessWorld written in the last decade by five of our country’s most distinguished economists whose counsel I seek before providing advice to Presidents or House Speakers, or more so when I push legislation in Congress.”

From Johanna Chua, Citibank Head of Economics for Asia: “What I find refreshing in these essays is that ardent partisan politics has not obfuscated the clarity of economic arguments. The most seasoned intellects of this country can look through the longer historical lens of experience to form a pragmatic assessment of policy trade offs, regardless of who is running the country.”

From Arsenio Balisacan: “Founded on decades of experience in policy advocacy and rigorous economic thinking, the ideas contained in this book show the way forward for the country to realize its development ambitions. Policy makers, program managers, reform advocate, practitioners, and teacher and students of development and the Philippine economy would do well to pay attention — and act.”

And from Ben Diokno, himself an economics professor and opinion writer-leader, who spoke during the book launch: “The book Momentum, authored by some of our brilliant economists, will surely provide us with insights on the significance of economic reforms for sustaining growth… As I’ve always considered myself a reformist, I laud all the people involved in this book. May we keep the momentum going to achieve sustained, strong, balanced, and inclusive growth.”

Our comrade-in-arms in the Foundation for Economic Freedom, former Finance Secretaries Bobby de Ocampo and Gary Teves, and former National Economic and Development Authority Secretary now Monetary Board Member Philip Medalla, wrote similarly glowing endorsements way of an insightful extended Foreword.

The closing remarks of National Scientist Raul summed the evening and the book: “On behalf of the authors of Momentum, Romy, Toti, Noel, Dondon, and myself, let me express our deepest thanks to all our donors and patrons; to our families; and to the dear friends who took the time to read and comment on the volume… Our thanks go as well to BusinessWorld, the op-ed home of our revolving column, ‘Introspective’; to Roel and Neil who shepherded the publication of the book; to the collective Fellowship of FEF who by joining the often strident policy debates forced us to clarify our own policy stances; and to Dondon’s baby, IDEA, of whose Board we remain members.

“This has been quite a journey, and I am extremely lucky to have had the company of Romy, Toti, Noel, and Dondon while undertaking it: Romy of the boundless curiosity; Toti of the principled pugnacity; Noel of the serene profundity; and Dondon the visionary who roped us more or less willingly into the ‘Introspective’ family.

“Contrary to impression, however, we are not woven of the same ideological fabric: Noel is the committed liberal democrat; I am more of the Deng Xiaoping pragmatist; Toti and Romy are raging incrementalists. Noel’s baccalaureate is Atenista, Toti’s and Dondon’s are La Sallista, Romy’s is Maroonista and mine is Seminarista. Dondon, Romy, Noel, and I but not Toti are bound in the UP School of Economics. Still, the collective light of reason that we seek and that shines on us together is stronger by far.

“A few principles make up the collective light that guides us: that the market and the rule-of-law together can work miracles; that government is best that enables the market; that it is silly to trifle with [it].

“Once more, therefore, our profound thanks to all of you, friends and fellow travelers, who joined us in this milestone moment. With you, the journey, if still littered with more failures than triumphs, is itself already a reward. Together, we will continue — to quote Dylan Thomas — to ‘Rage rage against the dying of the light.’”

P.S. The Foundation for Economic Freedom, a co-publisher of Momentum, won the 2019 prestigious Templeton Prize from the Atlas Network — a competition involving think tanks and public advocacy organizations worldwide — on Nov. 7 in New York City, for its work on the removal of restrictions on agricultural patents. The removal of restrictions on about 2.5 million agricultural patents is the subject in one of Calixto Chikiamco’s articles in Momentum.

To order Momentum, call 3453-2375 or send an e-mail at fef@fef.org.ph.

Romeo L. Bernardo is Vice-Chairman of the Foundation for Economic Freedom. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Citira, Pifita: Now na!

October 6, 2019 | 9:34 pm

Congratulations are due to House Speaker Alan Peter Cayetano and Ways and Means Chair Joey Salceda on the swift passage of the Corporate Income Tax and Incentive Rationalization Act and Passive Income and Financial Intermediary Taxation Act in the House of Representatives. Memorably tagged CITIRA and PIFITA by Congresman Joey, it is now being heard in the Senate Ways and Means Committee which is most ably chaired by lawyer and economist Senator Pia Cayetano.

At the last hearing, I was privileged to read the statement of support of former Finance Secretaries and noted economists in favor of these pending tax reform packages. Signatories included former Prime Minister Cesar Virata, former Senator and Finance/Executive/Foreign Affairs Secretary Alberto Romulo, Former Finance Secretaries Roberto de Ocampo, Jose Isidro Camacho, Margarito Teves, and Former Planning Secretaries Cielito Habito and Arsenio Balisacan.

The collective wisdom and experience of this group in the field of fiscal and economic governance is unparalleled, gained not only during their years in office, but also in the leadership positions they now occupy. Our full statement can be accessed on this link — www.dof.gov.ph/index.php/former-dof-secretaries-eminent-economists-join-top-legislators-in-seeking-urgent-passage-of-remaining-tax-reform-packages/.

The last two sentences read: “All these reforms are necessary if the Philippines is to move forward to a future with no extreme poverty by 2040. Together, we stand ready to support these reforms in any way we can. We urge both houses of Congress to recognize the great merits of the Comprehensive Tax Reform Program and pass the remaining packages at the soonest possible time.”

Urgency is truly called for, since this congress has less than a year before election fever grips the nation and everything is pushed back for at least three more years. And the country, especially the poorest citizens, cannot wait. Philippine poverty incidence stands at over 21% vs. 11% for Indonesia, 9% for Thailand, 7% for Vietnam. (Source ASEAN Key Figures, 2018, aseanstats.org)

Moreover, the world does not stand still. This is especially relevant for CITIRA which will affect the behavior of investors, the job creators. In the ASEAN, our corporate income taxes (CIT) rates stand out uncompetitively at a high 30%, even as our ASEAN peers, which now average 22%, are moving swiftly to further lower them. (See the column of Atty. Benedicta Du-Balabad, “CITIRA and the ASEAN Tax War,” Philippine Daily Inquirer.)

To lower the corporate income tax to 20% faster, quick action is likewise needed to rationalize fiscal incentives to cover for foregone revenues from there. The strongest objections are coming from locators in PEZA (Philippine Economic Zone Authority) zones, championed by the Joint Foreign Chambers of Commerce, and the PEZA Administrator (though disowned by its Chairman and Board). Though unsubstantiated by specific data, the apprehension has been sown that any departure from the status quo of “forever incentives” will lead to huge job losses.

Recent data suggest otherwise. That as literature and research finds, incentives are not what drives FDI (foreign direct investment). And the fears of massive exit of FDI due to recent initiatives of the Department of Finance on incentives rationalization may be exaggerated.

On this, the remarks of Prof. Renato Reside of the UP School of Economics during the Senate hearing is worth quoting. He and his UP colleague, then-former Planning Secretary and now Monetary Board Member Philip Medalla, separately did the seminal work on the case for rationalising fiscal incentives as early as the mid-1990s. (See “Reside, Towards Rational Fiscal Incentives (Good Investments or Wasted Gifts),” 2006. http://www.econ.upd.edu.ph/dp/index.php/dp/issue/view/42.) These have informed bold but sadly failed efforts of five administrations.

“… based on global experience with tax incentives, certain investors get benefits they may not need, certain incentives are redundant. And while certain benefits cannot be attributed to them, there will certainly be costs to granting them. But CITIRA aims to substitute inefficient for more efficient incentives, not take them away so the question is how adjustment will take place when shifting to lower tax rates, tax credits and tax allowances and accelerated depreciation to reward marginal additions to R&D, employment and investment levels. For sure, additional investment and hence employment will also be spurred by more efficient incentives, lower tax rates and more targeted incentives.”

A possible compromise has been mentioned by Department of Trade and Industry Secretary Ramon Lopez. A UP and foreign trained economist, he served as a Director in NEDA (National Economic and Development Authority), as a top corporate executive, and as champion of SMEs at Go Negosyo, and is thus well placed to see all sides. He is recommending a longer phase-in period for the new incentive scheme for well-defined PEZA locators.

The thinking of the Foundation for Economic Freedom (FEF) is aligned with this:

“We support the phasing out of all incentives except temporarily for a small subset of labor intensive industries which unless the CIT is 25% or lower are likely to move out to other countries without incentives. Such exemptions can be phased out when the CIT is aligned with the lower CIT rates in our neighboring countries.”

Now a note on PIFITA. This well-studied bill crafted by the Department of Finance officials and consultant team, goes a long way in simplifying, harmonizing taxation of financial instruments, towards developing our capital market. The FEF has a reservation on the proposed presumptive capital gains tax of 0.1 percent per trade, as this will create friction costs that will impair liquidity and trading, and at the end hurt issuers, especially government, the biggest issuer, as well as savers. Taxing capital gains from debt securities trading as regular income would be more efficient and friendly to the development of the market.

The other tax reform packages, including Package 2+ on Sin Taxes for Universal Health Care, and Package 3 on Real Property Valuation Reform, were likewise fully endorsed by the former Finance Secretaries and the FEF.

Hopes are high that under the committed leadership in the House and the Senate, the resolute Duterte team will succeed where their predecessors have floundered — just as they did in getting the game-changing rice tariffication law passed that has lowered inflation now and for the long haul, and is en route to upgrading Philippine agriculture and reducing poverty. On the other hand, further delay will mean more uncertainty; arguably the heaviest tax — on investments, job creation, and the public good.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations He is Philippine Adviser of GlobalSource Partners, a New York-based network of independent analysts.

romeo.lopez.bernardo@gmail.com

The Duterte SONA and legacy: tail risks and politic

September 1, 2019 | 11:39 pm

Introspective By Romeo L. Bernardo

This is the continuation of my column last week sharing our presentation to international subscribers of GlobalSource Partners (globalsourcepartners.com) at a teleconference on July 23.

So how do we get from our estimate of 6% to government’s 7-8% growth target? I would describe 7-8% as aspirational, considering especially the current global trade environment that has dampened export growth. Although we said Build, Build, Build will add to domestic demand growth, there is high import leakage (40-60% per IMF). An example is cement where imports have grown by a Compound annual growth rate (CAGR) of 30% in the last three years. Also, as we said, all the building activity will aggravate strains on traffic, logistics, and power supply, not to mention that manufacturing plants have been operating at over 80% capacity for some time now.

So, growth will be 6%, maybe even 6.5%, inflation is under control especially with freer rice trade, and markets expect easier local monetary policies ahead consistent with the US Fed’s stance. For a time, there were worries about rising risks from the twin deficits, fiscal and external, in an environment of tightening global monetary and financial conditions. But these have subsided with the changed environment and, at the end of the day, we go back to the basic driver of both deficits which is domestic investment activity, both public and private, which are necessary to propel GDP growth to higher rates in the future. Also, the country has built up ample international reserves to serve as a cushion for higher current account deficits. Based on the IMF reserve adequacy computations, the Philippines has one of the highest ARA (Assessment of Reserve Adequacy) metric (1.83 as of June).

Let me add a word on the trade war. Exports, though still important, have not been big driver of Philippine growth. To illustrate, per our estimate, on a value-added basis, export earnings last year amounted to $35 billion or 11% of GDP compared with a total of $50 billion or 15% of GDP for remittances and BPO. Ten years ago, the comparative numbers were both around 14% of GDP. So, my prognosis is that while we will be affected, the overall impact will not drag growth in a major way. But neither is the Philippines expected to gain significantly from ongoing shifts in production bases. Competitiveness issues remain the key constraints in the short-term. (N.B. Since our July teleconference, trade war and global recession risks have intensified with new Trump tweets and tariffs.)

I will also add three tail risks, one is on the sustainability of Philippine Online Gaming Operator (POGO). The other is a possible power shortage, and the third is a key man risk.

First, the risk that the POGO game ends. There has been talk about Premier Xi Jinping asking for President Rodrigo Duterte’s help to do something about it, a strange request until one considers how closely the industry is perhaps tied to the Duterte administration’s China pivot. However, its continued growth, or even existence is vulnerable to change in the Chinese government’s sentiment, for example, less friendly relations with the next Philippine administration, or a crackdown on money laundering that could be initiated by Chinese authorities or multilateral watchdogs. A sudden stop would have adverse effects not only on direct employment but also on real estate prices, office space demand, and banking profitability. (N.B. POGO’s “game over” risks has increased considerably with progressively firmer diplomatic communications against it by the Chinese embassy since our July teleconference.)

My second tail risk is a power shortage. From a situation of surplus power forecast three years ago, the main grid — which includes Metro Manila services — suffered sporadic shortages and red and yellow alerts earlier this year due to unplanned outages/plant shutdowns and the El Niño drought. Reserves have grown thin due to delays in approvals of several power plants, a long story involving the Supreme Court, the Energy Regulatory Commission (ERC), weak oversight and slow regulatory response. While the ERC seems to be trying to clear the backlog, there is a tail risk that the thin reserves will grow even thinner should there be more delays before new plants come on stream to meet the growing power demand in line with GDP growth.

My third tail risk is a key man risk. If, for whatever reason, Finance Secretary Carlos Dominguez III drops out of the scene, all bets are off. Secretary Dominguez, a highly regarded business executive and technocrat, a classmate of President Duterte from kindergarten and his most trusted political ally and confidant for decades, is likely irreplaceable. Without Secretary Dominguez, it may be difficult to check populists measures that threaten macro stability.

I now come to my last topic, politics. Notwithstanding his international image as a despot, President Duterte is very, very popular locally. He enjoys the support of 85% of Filipinos nationwide and he drove the point home in his State of the Nation Address the other day by highlighting the fact that only 3% of survey respondents disapproved of him, the other 11% are “undecided.” Such approval ratings are historically unparalleled.

For a while, there were concerns that the President, with this much political capital and overwhelming influence over the country’s democratic institutions (Congress, the Supreme Court, constitutional bodies such as the Ombudsman, Comelec), and unrestrained in dealing with the media, the church, oligarchs, however he defines them, or anyone in the opposition, may try to do what it takes to change the Constitution and shift to whatever form of government that would keep him in power. At least based on what he said in his State of the Nation Address, he appears to have given up on the campaign promise to a shift to federalism (which his economic managers called “a fiscal nightmare.”) Not a word was mentioned on it during his speech and he told media afterwards that “I’m out of it.”

But he is clearly not a lame duck at this point. After the midterm elections, he has even stronger supermajority support in both houses of Congress. And, without the charter change distraction, the next one to one-and-a-half years would be good for the economic reform agenda. This is why I am very confident that the remaining tax reform packages will pass quickly.

After that, the last year, year-and-a-half of the presidency would be mostly about succession and positioning for the 2022 presidential elections. The Philippine Constitution limits the president’s term of office to a single six-year term. In one of our earlier reports, we observed that historically, only one incumbent, Cory Aquino, had succeeded in making her anointed successor, Fidel Ramos, win, and narrowly at that. History has not been kind to ex-Presidents who did not manage their succession well. Since 1986, one went into exile, one was under house arrest after being thrown out of office, one spent five years in a military hospital with a neck brace. The last president has several criminal cases hanging over his head.

President Duterte’s goal then for 2022 is to choose a successor who will keep him out of harm’s way. This is where his daughter and her HNP (Hugpong ng Pagbabago) party come in. The daughter is Davao Mayor Sara Duterte, who rose to fame decades ago by punching, on camera, a local government executive who went against her orders in an incident involving the demolition of shanties. Like the father, she is a very popular figure and the betting at present is that she will be the anointed one.

But it is too early to say who the “Presidentiables” will be in 2022, much less who will prevail. Random names I’ve heard include any of three Villars (ex-Senator Manny Villar, ranked richest in the Philippines by Forbes magazine, his wife Cynthia who topped the last senatorial race, and their son, current Public Works Secretary Mark), Senator Grace Poe (who ran and lost to President Duterte), and Senator Manny Pacquiao, the Pacman.

We need to bear in mind some history lessons from Philippine elections. One, in a multi-contested election, as has been recent history, a candidate without a clear majority can win. Winners have been surprises. Two, I am also reminded that “necropolitics” has defined presidential election outcomes on more than one occasion in the past. The story of both Aquino presidents. A third lesson from election history, unlike elsewhere, here it is not the early bird who catches the worm. It is the second mouse who gets the cheese.

And speaking of necropolitics, my political tail risk is the death of President Duterte in office. The President is 74 years old and rumored to be sick. His Vice-President, Leni Robredo, an opposition leader, has reportedly doubled her security detail to discourage any assassination attempt by those who may be adversely impacted by inevitable drastic changes. Even the more likely smooth assumption, as the Constitution mandates, could be disruptive — there will be changes in policy across a wide field, projects will be reviewed, there will be leadership changes across major departments.

To summarize: The key messages I would like to leave with you today are: 1.) the economy is doing well thanks to the economic team that has also been able to push for good economic reforms; 2.) the Build, Build, Build infrastructure program is moving forward with government spending reportedly up to 5% of GDP, a level that I think can be sustained through 2022; 3.) economic growth at 6% to 6.5% over the next three years is resilient but will be hard to sustain if higher than that; and 4.) on the political side… well, we don’t really know… the genius of the man is in keeping everybody guessing.

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Duterte defined: His SONA and his legacy.

August 26, 2019 | 12:11 am

Introspective By Romeo L. Bernardo

ON July 23, my colleague Christine Tang and I were asked by GlobalSource Partners New York* to do a teleconference call with our international subscribers on the topic in the headline. I am pleased to share with readers the transcript of that call. Apologies, this will have to be in two parts. The second installment will be on the risks to this cautiously optimistic scenario, and some political analysis — what the President will likely do with his abundant political capital and the odds of policy continuity post 2022.

I will talk about the following key points:

1. First, the economy under President Duterte, which is doing well in terms of economic growth and stability. The reform agenda is also progressing better than expected.

2. Second, the administration’s Build, Build, Build program, intended to usher in a “Golden age of infrastructure.” The Gold (medal) is aspirational, but efforts may yet earn the administration a Bronze.

3. Third is an assessment of economic prospects in the next three years under President Duterte. I think growth will be resilient at 6%, or even 6.5%, but will be hard to sustain if higher than that.

4. Finally, tail risks and politics.

et’s start with the economy under Duterte: so far so good.
The President’s economic management style from Day 1 has been to give his economic managers a free hand. Led by his finance secretary Carlos Dominguez III, the economic team hit the ground running and announced a 10-point agenda that hewed closely to the policies, programs and projects of past administrations. The team had its challenges along the way, for example the delay in the passage of this year’s budget and last year’s inflation spike but by and large, the economic team has been successful at maintaining macroeconomic stability, i.e., keeping growth above 6% and steering inflation back within target, it is below 3% now.
Many have also noted that under this administration, the masses have shared in economic growth, with surveys showing a lower number of people identifying themselves as poor, unemployment rates continuing to fall and the quality of jobs improving. Reasons for this include income tax cuts implemented by this administration as well as a number of social programs that have increased households’ disposable income, e.g., free college tuition, higher pensions, conditional cash transfers and universal health care. Although we and other analysts have flagged the rising fiscal costs of these and other subsidy programs, so far, the fiscal burden has been limited.
The other notable achievement of the economic team is the passage and implementation of difficult economic reform measures that have earned the sovereign credit a BBB+ ratings upgrade from S&P. On the fiscal side, the TRAIN (Tax Reform for Acceleration and Inclusion) law for example, which replaced losses from lower personal income tax with higher consumption taxes especially on oil, raised the tax effort by 1% of GDP in its first year of implementation. These revenue inflows have helped to fund higher public spending on social services and infrastructure while keeping the budget deficit at around 3% of GDP, a fiscally sustainable level, per the IMF.
Other reform measures include the game changing rice tariffication law, a reform three decades in the making that has brought down rice prices, as well as the anti-red tape law, the BSP Act, National ID and the Bangsamoro Basic Law. The next stage challenge of implementing these reform measures as designed is underway, and the political will to do so seems to be there based on the explicit statements of the President during his State of the Nation Address.

SECOND POINT

The one activity that has defined this administration’s economic program to date is the Build, Build, Build infrastructure program, my second discussion topic.

Historically, over the last three or four decades public spending on infrastructure averaged only around 2% of GDP, a far cry from the average of 5% of our neighbors. The failure to invest is showing badly in congestion on roads, rails, sea ports, air ports. Slow approval processes are also beginning to affect the power sector which has been privatized. Failure to develop water sources by government has also caused water shortages in Metro Manila.

The last administration managed to raise infrastructure spending but only up to 3% over a six-year period. What the Duterte administration did was to raise spending to 5% of GDP three years into its term. And, through an ambitious infrastructure program, it intends to ramp up spending to 7% of GDP by 2022, the end of its term. This, economic managers say, is consistent with the target 7-8% GDP growth.

But I doubt that they can achieve these targets nor do I think it desirable to ramp up infrastructure spending so quickly. Experts I talked to question not only what makes up the 5% of GDP spending but they tell me that the quality of the projects pursued so far are not all growth enhancing. Many involve maintenance works on existing facilities some of which are superfluous. IMF estimates also show low efficiency of public investments in the Philippines, suggestive of large leakages.
My take is that is that if government could only maintain infrastructure spending at the current 5% of GDP over the medium term, that would already be a big achievement, especially if that 5% is spent on good projects that have high economic returns.

In any event, at 5% of GDP, BBB will be an important driver of GDP growth in the next three years, although all the construction activity is adding to chokepoints to economic growth in the short-term and it will take perhaps two more years for us to feel the decongestion effects of ongoing projects.

THIRD POINT

This brings me now to my third discussion point, the resilience of a 6% economic growth for the Philippines.

First, let me go over the structural factors underpinning the 6% economic growth rate. Philippine GDP trend growth rate has risen from an average of about 3% in the 1990s to 4-5% in the 2000s, to above 6% from 2010 to 2018. There are three reasons behind this rising trend growth.

One is demographics. The country has a young population, over 60% are in the working age group and this number will grow by 60% over the next two decades. The growth impact of this is evident in resilient remittances and the expansion of the BPO sector that have fueled domestic consumption and raised demand for retail trade services, financial products, and a real estate boom.

The second factor is the combined impact of past reform efforts on total factor productivity. Due to the reforms beginning in the 1980s (trade and foreign exchange liberalization, opening up of telecommunications and financial sectors, privatization of power), the contribution of total factor productivity to economic growth has grown from only 0.5 ppt in the 1990s to over 2 ppt this decade (Source: BSP).

Third is the growth of the middle class, which we think will continue to feed the consumer sectors. The rising importance of the middle class is an upshot of decades of sustained high remittance and BPO sector growth, both continuing but maturing and thus expected to grow at lower single-digit rates. A recent phenomenon that has taken up the slack left by slowing remittance and BPO growth rates is online gambling. The emergence of this sector has seen an estimated 200,000 Chinese workers moving to the Philippines, pushing up demand in real estate, construction, retail trade, etc. Young, single, and earning roughly $12,000 a year, this group is adding to middle class demand with spending potential approaching 1% of GDP.

(To be continued.)

*https://www.globalsourcepartners.com/


Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Vox populi

June 24, 2019 | 12:20 am

Introspective By Romeo L. Bernardo

I am pleased to share with readers the political section of a primarily macroeconomic and financial quarterly report my colleague, Christine Tang, and I wrote last month for GlobalSource Partners (globalsourcepartners.com). GlobalSource Partners is a New York-based network of international analysts whose client subscribers are mostly international banks and asset managers.


And so the people have spoken — the final electoral tally showed rousing support for candidates allied with President Rodrigo Durterte at both local and national levels.

Hope and fear accompany the results, which many have taken as a referendum on the highly popular President and his policies. Amidst fears that the President’s stronger hold on power would embolden him to ride roughshod over opposition to his policies, there are hopes that the reform window opened up by a more cooperative Senate would strengthen the administration’s resolve not only to speed up implementation of its programs, especially upgrading infrastructure, but also push for longstanding proposals aimed at increasing the economy’s competitiveness and attractiveness to foreign investments. (See table above.)



The fears on the political front are that the President, in line with his rhetoric, would doggedly carry out his extreme measures for achieving law and order to the end, and, true to his campaign promise, revive his proposal to shift to a federal form of government. In the event, the latter endeavor — involving a complex and lengthy process of amending the Constitution — would most certainly dominate the legislative agenda, leaving Congress little time and energy for other priority reforms. In this regard, worriers fret that the incoming Senate has only four members in the minority bloc (one of whom is in jail) and two “independents”; seven votes are needed to block a proposal for charter change.


On the economic front, there are fears of more populist measures slipping through, as well as mid-stream rules changes for long-term infrastructure contracts. An example of the former that has made the news lately is the proposal, nearing approval in Congress, requiring security of tenure for seasonal hires that businesses argue would raise the cost of labor. An example of the latter is the ongoing Department of Justice review of existing PPP (Public-Private Partnership) contracts initiated by the President, starting with the MWSS (Metropolitan Waterworks and Sewerage System) water concession agreements with two of the country’s largest conglomerates.

Countering these fears is the hope that Finance Secretary Carlos Dominguez, the head of the economic team who appears to have the President’s complete trust, would prevail upon him to follow economically sound policies, including abandoning proposals for federalism which Secretary Dominguez publicly criticized as a fiscal nightmare. In light of the accolades heaped at the administration’s economic reforms following S&P’s decision to upgrade the sovereign credit rating, the more optimistic hope is that the President would instead use his abundant political capital to forcefully back his economic team’s reform program, starting with the remaining packages of the tax reform program. Considering that the reform window is a narrow one, one to one-and-a-half years, having the President himself champion the reforms would ensure speedier passage and less opportunity costs for the economy from the uncertainties associated with rules changes.

Should hope trump fear or the other way around? While it is quite impossible to read this President’s mind, it seems to us that it is not unreasonable to let hope have the edge over fear. After all, politically speaking, whatever the President’s plans are for ensuring effective succession planning in 2022, he would surely have his two decades-long Davao experience in mind and grasp the necessity of having a healthily growing economy to keep strong public support and dissuade challenges. We expect him to spell out his legislative agenda at his State of the Nation Address in late July.


Moreover at this time, political pundits reading the tea leaves from the outcome of the senatorial race have noticed how: 1. Senator Grace Poe, who led the race the first time she ran, has slipped to the second place; 2. the top spot has been taken by Senator Cynthia Villar, the wife of country’s richest man, Manuel Villar, a former House Speaker and Senate President who ran and lost to Benigno Aquino III in the presidential elections of 2010; 3. how unlike her husband, the lady senator does not seem to harbor ambitions for higher office; and, 4. in her speech during the proclamation of winners for the Senate, Senator Villar thanked not only the President but also his strong-willed daughter and mayor of Davao City, Sara Durterte, who was instrumental in forming a coalition of well-funded national and local parties under the banner of her own party, Hugpong ng Pagbabago, which endorsed nine of the 12 winning senatorial candidates, including Senator Villar herself.


Their conclusion? Rather than Senator Villar, the tea leaves seem to point to Mayor Duterte as the lady to watch. And that scenario should not trouble the President.


As a post script, allow me to add two things that happened since we came out with this report last month.

1. A cabinet official confided that he thinks the odds for Federalism taking off are next to nil;

2. It is likely too early to say who will be the “Presidentiables’ in 2022, much less who will prevail. I am reminded that “necropolitics” defined presidential election outcomes on more than one occasion in the past. Another lesson from election history, unlike elsewhere, here it is not the early bird who catches the worm. It is the second mouse who gets the cheese.

Finally, as a wise or wisened man said: “The Presidency is a matter of destiny.”




Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

Seeing the TRAIN Law in its proper perspective

May 13, 2019 | 12:14 am

Introspective By Romeo L. Bernardo

No surprise, TRAIN surfaced as an election issue: senators and congressmen who sponsored and voted for it are being unfairly though ineffectively targeted. Much of the conversation also missed the point that TRAIN is part of a larger national project designed to put our fiscal house in order coherently and comprehensively. This is an ambitious undertaking never attempted in past administrations where tax reform tended to be more piecemeal or driven by donor institutions like the IMF, or an actual or potential fiscal crises.

TRAIN is the first of five packages of the comprehensive tax reform program. Other packages deal with corporate income taxation and modernizing fiscal incentives; sustainable financing for Universal Health Care through increased sin taxes on tobacco and alcohol; fixing our broken property valuation system; and reforming capital income taxation. The program has always been presented by the government’s economic team as not an end in themselves, but means of making the tax system one in which everyone contributes her or his fair share of our investments in infrastructure and human development. All packages seek a fairer, simpler and more efficient system, while only two are also revenue enhancing, TRAIN and the sin tax package for the long-term financing of Universal Health Care.

The government passed TRAIN in 2017. By 2018, government attained 108 percent of its collection target and, as earmarked in the law itself, funded crucial infrastructure and social protection programs. An estimated three hundred thousand jobs were created in construction due to increased spending in infrastructure and, as of the first quarter of 2019, P22 billion were given to poor households through the Unconditional Cash Transfer program and P500 million support to qualified jeepney operators via the Pantawid Pasada program.

The measure was passed, with the support of a cross-section of business groups (including the Management Association of the Philippines, PCCI, and Go Negosyo), civil society (such as the Foundation for Economic Freedom, Action for Economic Reform), international organizations (such as the Asian Development Bank, the International Monetary Fund, and the World Bank), academe, and former Department of Finance Secretaries and Undersecretaries.

Other major elements include the lowering of the personal income tax for 99% of wage earners (a total of P111 billion in additional take home pay in 2018); a staggered increase of petroleum excise tax; repeal of 54 out of 61 special laws with non-essential VAT exemptions; adjustment of automobile and tobacco excise tax rates; and the introduction of a sweetened beverage excise tax in support of health objectives.

This early, TRAIN has yielded additional benefits to the economy. The latest was the upgrade last week of the Philippine investment grade credit rating by S&P to BBB+, surpassing countries like Italy, Portugal and Indonesia, and placing the country at par with Mexico, Peru and Thailand. This will lower the cost of borrowing of the government, at around 3 billion annually for the next 2 years, according to the Treasury, and private sector borrowers alike, and make the Philippines more attractive for investments.

Surprisingly, two research papers of Government’s own think tank, Philippine Institute for Development Studies were being cited by opposition candidates to bash this reform package. These were the papers of Dr. Rosario Manasan titled “Assessment of Republic Act 10963: The 2017 Tax Reform for Acceleration and Inclusion,” 30 pages, and of Ramon Clarete, Philip Tuano et al titled “Assessment of TRAIN’s Coal and Petroleum Excise Taxes Environmental Benefits and Impacts on Sectoral Employment and Household Welfare,” 67 pages. The criticism is unfair most of all to the authors of the PIDS studies since the partisan critics were quite selective in picking up the critical elements of the studies.

I am honored to have served as a Trustee of PIDS for a decade and much appreciate how independent research by a quasi-fiscally autonomous think tank contributes valuably to public debate and formulation of national policies. It has done so effectively in such diverse fields as agriculture, land reform, reproductive health, housing finance, foreign investments, food security and rice policy, etc. as I wrote in my parting column “Bridging the gap between knowledge and power” (28 March 2016). I also know Drs. Clarete and Manasan well, and have the highest regard for them and their work.
However, allow me to register some reservations on their studies in the following respects.
a) The exclusion of infrastructure spending and social mitigating measures in the analysis of Clarete, et al, and Manasan, respectively;

b) The papers are short in proposing alternative policy direction; and

c) The authors abstract from the primary objectives of each of the components of TRAIN and that of the overall tax reform program.

At the end of the day, the most basic omission of these criticisms of TRAIN from analysts and candidates is their most partial analysis. Partial for the analysts, meaning incomplete. Partial for the candidates, meaning partisan.

They focus on the tax impact on marginalized sectors, but fail to consider the public spending and higher growth that will benefit all, especially the poorest. Public expenditure studies show that the poorest segments gain the most from social spending (e.g. education and health) and infrastructure, immediately and especially over time as these investments create jobs and raise incomes.

If PIDS will be issuing a Policy Brief for wider circulation in the future, perhaps these points could be properly reflected as well as my earlier thoughts on the larger goals of the comprehensive tax reform program – that it is part of a much larger effort to fund our much-needed investments through a tax system that is fairer, simpler, and more efficient.

The next step in this journey is to make sure government is fiscally responsible about implementing the Universal Health Care Law and that we have the means to do so in the long-term. Smokers and heavy drinkers will be accessing health services more than others, on average. They should contribute more. According to a recent Pulse Asia survey, 75% of Filipinos believe sin taxes should be raised. The elections will soon be over and the legislators will be back for 9 session days before the close of the 17th Congress. The House has already passed their version on 3rd and final reading. The ball is in the Senate’s court. It needs to go back to work and pass the sin tax package of the comprehensive tax reform program post haste.


Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations. He is Philippine Adviser of GlobalSource Partners, a New York-based network of independent analysts.


romeo.lopez.bernardo@gmail.com

On credit ratings upgrade and power shortage risk

Introspective

May 6, 2019 | 12:54 am

By Romeo L. Bernardo

The Foundation for Economic Freedom just released a statement on the recent credit upgrade, congratulating President Duterte and his Economic Team on a job well done.

“We, the Foundation for Economic Freedom, congratulate President Rodrigo Roa Duterte and his economic team for enabling the Philippines to get a ratings upgrade from Standard and Poor’s Global Ratings to BBB+ from BBB.

The ratings upgrade is attributable to the administration’s economic reforms, sound fiscal policies, and prudence in external debt management. Credit must be given to President Duterte and his economic team led by Finance Secretary Carlos Dominguez III.

The ratings upgrade will result in increased investor confidence in the economy, lower borrowing costs for the government and the private sector, and more investment inflows.

In light of lower borrowing costs to government and the private sector, the government may wish to consider shifting away from projects funded by Official Development Assistance (ODA) and its tied procurement, to ones funded via Public-Private Partnership (PPP). Overall, PPP Projects will turn out to be cheaper than ODA projects because of the incentive of the private proponent to finish the projects on budget and on time, especially with the lower borrowing costs enabled by the higher S&P ratings.

The administration should also sustain the ratings upgrade by acting quickly to solve the water shortage,power shortfalls,and infrastructure bottlenecks.

Moreover, we would like the Duterte administration to take the ratings upgrade as a challenge to push for more reforms that will drastically reduce poverty and strengthen the economy’s structural foundations. In particular, the administration should focus on agricultural growth, which had been lagging behind population growth. Its weak performance had been acting as a drag to manufacturing and the other sectors of the economy, making the country vulnerable to food price shocks.

The administration should also shore up the country’s weak export performance in order to contain the ballooning trade and current account deficits. The country cannot continue to rely on OFW remittances to finance its negative external trade position. In the meantime, the administration should also promote tourism and a stable mining policy regime in order to generate more dollars to finance the growing capital import requirements of its bold infrastructure program.”

The FEF Board equivocated a bit on issuing this statement. Because of the numerous recommendations on how we can do better, the statement may be misread as a “backhanded compliment,” a remark that “seems to be compliment[ary], but can also be understood as an insult.” It is not that,but a commendation meant in all sincerity. Our abiding desire is the success of this administration, which is also the success of our country and the economy.

Allow me to also focus on one risk factor to such success that the FEF became acutely aware of after listening to a recent dinner speaker, Energy Regulatory Commission Chair Agnes Devanadera.

Fellow FEF Fellow Boo Chanco lucidly summarized her “good and brave” remarks on the power situation in his column: “Numbers behind the power crisis,” Philippine Star, May 3. I would disagree with Boo only in his characterization of the situation as a “crisis”. Though it can certainly turn into one unless the various government agencies act resolutely and coherently.

Chair Devanadera’s chart, “On PSA Evaluation”, particularly grabbed my attention. It goes a long way in explaining why we have been having red and yellow alerts lately, beyond the more immediate cause of a “perfect storm”, the occurrence of forced outages of several plants during the peak hours of the high demand summer months. Or as a power sector colleague well explains it — “shit happens” .

Chair Devanadera’s chart shows that there are 454 Power Supply Agreements Requiring Further Action, involving 150 power plants. How long does an evaluation take and how many technical people has the Energy Regulatory Commission assigned to evaluate? Answer : 90-180 days; 14 technical personnel. Clearly, we will be in trouble if Energy Regulatory Commission stays on a business as usual course.




Thankfully, Chair Devanadera is not a business as usual person. FEF Pres. Toti Chikiamco described her as being “very open minded and approachable and with a good grasp of the issues”. Below are some proposals learned from colleagues in the power industry, including FEF Fellow and former Energy Secretary Raphael “Popo” Lotilla, and co-members in the MAP Energy Committee. ( Disclosure: I serve as an Independent Board Director in Aboitiz Power Corporation. )


1) The Energy Regulatory Commission can be more faithful to market based competition principles under the Electric Power Industry Reform Act by moving away from detailed cost based review of every PSA, an impossible task given the backlog and available technical staff. Instead of, or in addition to “the principle of full recovery of prudent and reasonable costs incurred”, it should adopt “such other principle that will promote efficiency as may be determined by the ERC” ( Section 25 of Electric Power Industry Reform Act) . For example, a simple validation of adherence to Competitive Selection Process rules to ensure arms length competitive contracting would be a fairly quick and straightforward alternative approach.


2) The Philippine Electricity Market Corporation ( PEMC) should fast-track the creation of the Power Reserve Market. This will encourage the development of standby power plants. Moreover, together with the ERC, PEMC needs to review the secondary price cap in the spot market as it distorts the true cost of electricity and discourages investment in peaking facilities.


3) The National Grid Corporation should review the required level of reserves, particularly regulating reserves considering the amount of variable renewable energy that is now connected to the grid. It also needs to contract for new capacity for ancillary reserves similar to what is being done by the distribution utilities. Right now, they are “free riding” on existing capacity via set asides without compensation under the Grid Code.


EPIRA is working — additional capacity have been and are being built, and electricity prices have been dropping. Government agencies and private players need to perform their respective roles.



Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the administrations of Corazon C. Aquino and Fidel V. Ramos.



romeo.lopez.bernardo@gmail.com

Never waste a good crisis

April 1, 2019 | 12:27 am

By Romeo L. Bernardo

THE leadership and the management of Manila Water squarely took responsibility for inability to provide 24-7 service in many parts of its concession area. And voluntarily waived fees in the several hundreds of millions, despite the absence of any such obligation under its concession agreement. 

Such act of corporate governance and responsibility is exemplary, and from my recall, unprecedented in the Philippines. Especially since, in the view of many, the fundamental shortcoming is not theirs, but government’s. More precisely, that of the MWSS in the last administration. Despite repeated warnings of the two concessionaires at that time, MWSS abysmally failed to develop a single water source, not a single stone was turned or a shovel lifted, even as they barred the concessionaires from developing such. The “original sin.”

I reprint below excerpts from my October 2013 column, “Being Water Secure.” MAP President Riza Mantaring described it as “prescient.” I do so to provide perspective on where we were, why we are where we are, and most importantly, the way forward.

Quote:

Water security is ensured only when long-term investment and financing for the sector are sustainably and efficiently done to meet the needs of a growing population, the economy and the environment. This was the clear message delivered at a recent forum on Water Security organized by Finex.

IFC Resident Representative Jesse Ang said in the forum that while the Philippines is not yet considered a water-scarce country, management of the resource needs to be strengthened. Former MWSS Administrator Dr. Lito Lazaro explained why: “With the improved efficiency of both Manila Water and Maynilad in reducing previously big leakages (non-revenue water) the gain to Metro Manila is almost like building a new huge dam.”

Dr. Lazaro was too modest to discuss the benefits reaped over 16 years of the highly successful “largest water privatization” in the world: the broad public welfare gains, not just in water security, but in environmental protection, health, and outreach to poor communities. In short, clean water made available to Mang Juan. As CEO of MWSS, he was one of the three architects, under the direction of President Ramos, who made this privatization happen. The other two were then DPWH Secretary Virgilio Vigilar, and Mark Dumol, his Chief of Staff.

The success story of this privatization is objectively and engagingly told in a book Built on Dreams, Grounded in Reality, by former UP School of Economics Dean and our only living National Scientist in Economics, Dr. Raul Fabella. Chapter 4, “The Privatization of MWSS: How and Why It Was Won” had this to say:

“The privatization of MWSS was clearly a triumph of the principle of comparative competence-the private sector proved more competent at the delivery of water and sewage services than the state. It is now considered a singularly successful structural reform in the annals of Philippine political economy.”

The welfare gains for the public is a matter of public record. In the Joint Statement on Water Public Private Partnership (PPP), the Foundation for Economic Freedom, the Management Association of the Philippines, the Employers Confederation of the Philippines, and Philippine Chamber of Commerce and Industries noted that the water PPP has “contributed much to improve public welfare by having more than doubled the number of customers served, provided 24 hour water service availability that meets health standards, while addressing the needs of millions in the poor communities. The improvements in service delivery came after the two concessionaires poured in a combined P105 billion in investments to expand and upgrade the water and sewage network, achieved without adding to government’s fiscal burden or public debt exposure.” They further lamented that it’s a pity that this “successful, internationally recognized model PPP has not been replicated outside Metro Manila where the water situation remains at pre-privatization MWSS standards.”

It is disturbing indeed that instead of building on this success and nurturing the greater water security achieved over the years, we now observe populist myopic demands, not just by the usual suspects from the protest industry, but by MWSS itself, for arbitrary reductions in water rates — already the lowest in the country, and compare favorably internationally. This will inevitably compromise water security over the medium and long term as needed investments for maintaining service quality and protecting the environment are neglected.

The Japanese Chamber of Commerce and Industry was quite emphatic in this regard: “We view the MWSS’ unilateral and arbitrary act of changing the terms or interpretation of the concession agreement, in total disregard of the contractual rights and intent of the parties, with grave concern.” Such unilateral populist action by government agents is referred to in regulatory economics literature as “administrative expropriation,” a form of “government opportunism” inflicted on captive investors in utilities. ( Spiller and Tommasi, Handbook of New Institutional Economics).

There are a number of issues in the dispute notices that the two concessionaires submitted for international arbitration, ranging from the computation of the appropriate discount rate (allowed rate of return) to the disallowances pertaining to past and future investments, and incredibly, a reinterpretation 16 years hence, of treatment of corporate income taxes.

The one item of contention that calls for comment is on who is responsible for investing in new raw water sources — a key element to water security. The insistence of the current MWSS management that investments in such are excluded under the Concession Agreements, and therefore disallowed in the tariff rate setting, squarely contradict the intent of the Agreements. More fundamentally, given MWSS, and government’s, dismal track record in public service provision — especially when contrasted with the two concessionaires’ — such revisionist interpretation will certainly bring us back to pre-privatization water insecurity.

Mark Dumol was categorical on what they had in mind: “Without any doubt, the original intent of the MWSS concession agreement was that all aspects of the provision of potable water, from raw water sourcing to treatment to distribution would be the responsibility of the concessionaires.”

I also consulted Dr. Lito Lazaro on this and he said “in my mind it was clear that raw water development is the responsibility of the concessionaires. How can the concessionaires be held to their targets if they are not responsible for the raw water development, since complying with the targets assumes that water is available?”

This unilateral reinterpretation by MWSS now risks all the gains achieved in one and half decades.

End of quote.

Sadly prophetic. But all is not lost. Thanks to short term measures being undertaken collaboratively by MWSS, Manila Water and Maynilad, the current supply deficit of 9 percent will likely be brought down to zero by June.

But this crisis would have been wasted, if we fail to address the roots of the problem, the non-development of new water sources. Two musts:

a) Government must fast-track the development of the Kaliwa project. We need the Duterte political will referred to by Sec Dominguez recently in connection with BBB.

b) “The private water concessionaires, being accountable for rendering water service to the public, should be allowed the option to provide raw water supply for their respective zones” ( MAP, Finex, FEF et al March 25 Press Statement).

Finally, this “crisis” would be a good trigger for government to review its basic approach for funding water and sewage. The three T’s, Taxes, Tariffs and Transfers, and the proper shares are a policy/political decision. Angat was funded by taxes. Transfers, usually from donor institutions, are limited and unpredictable. The literature is full of robust findings that tariff mode is the most sustainable. Given the still regressive Philippine tax system, and coupled with a “lifeline” rate for the poor that we have, the tariff mode is the most equitable and most conducive to conservation efforts.

In the same way that the “inflation blip” last year led to the game-changing reform of rice policy, let’s use this “water shortage blip” to address the underlying problem of lack of raw water and failure to adhere faithfully to the Concession Agreements in language and spirit.

My plea to authorities: “Never waste a good crisis.”

Romeo L. Bernardo is Vice-Chairman of the Foundation for Economic Freedom and GlobalSource Partners Philippine Advisor. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com