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