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

The Most Important Appointment

The Most Important Appointment

March 3, 2019 | 10:13 pm

By Romeo L. Bernardo

We mourn the passing of Governor Nesting Espenilla. A profound loss to his family and friends, to the BSP which has been his home since UP days and to our country and people. As a tribute to him and his work, I am sharing the introduction of an interview Christine Tang and I did for GlobalSource Partners (globalsourcepartners.com) in January 2018.

‘CONTINUITY ++’

His job was going to be “the most important appointment” that President Rodrigo Duterte was going to make. That was what Finance Secretary Carlos Dominguez told the President, who was then less than a year in office, about his upcoming choice for the next governor of the Bangko Sentral ng Pilipinas (BSP). The Secretary made sure to let the President know that if it were up to him, he would prefer someone in the mold of Amando Tetangco, the highly-regarded and multi-awarded BSP Governor who, for 12 years, was a stabilizing anchor to the Philippine economic ship.

It was thus the most awaited announcement in the local financial community at the start of 2017, a time of high anxiety due to political and economic uncertainties here and abroad. The President bided his time in naming Mr. Tetangco’s successor, and in the interim contributed to the air of uncertainty with his unorthodox style and outspokenness, including threats against the Anti-Money Laundering Council (AMLC), chaired by the BSP Governor, which raised more fears that he would name a political ally to ensure the AMLC’s cooperation in his drug war.

Nestor A. Espenilla, Jr.’s name was finally announced around dinnertime on May 8, instantly putting economic watchers and the financial community in a celebratory mood. Commentators toasted the President for choosing wisely, someone not known to him personally; they saluted Secretary Dominguez for helping the President choose wisely with, we heard, a very, very short list of candidates; and praises went to the BSP for having nurtured and trained a bright and talented young economist into a mature central banker who easily stepped into the leadership role when the time came.

Mr. Espenilla took office on July 3, 2017, perhaps the most well-rounded in central banking of all those who came before him. His career in the BSP (previously, the Central Bank) spanned over 30 years, starting in economic research, then international operations, then supervision and examination of financial institutions, where he rose to Deputy Governor in 2005. Like his predecessor, his was a crisis-tested professional life, going way back to the 1980s debt crisis, followed by the Asian Financial Crisis in the 1990s, and the Global Financial Crisis a decade later. Graduating magna cum laude, Mr. Espenilla held a BS in business economics degree from the University of the Philippines where he also earned a masters in business administration (MBA). He also had an MS in policy science from the Graduate Institute of Policy Science in Tokyo, Japan.

Those who knew Governor Espenilla were one in saying that his rich experience, high intelligence, and humble and easy disposition equip him well to continue the legacy of Governor Tetangco in shaping the BSP to be “alert, nimble, responsive and able to provide the stability necessary to give direction that the market needs at any time,”while breaking new ground in the Philippine’s quest for greater financial inclusion and capital market development, and in facing new challenges coming from increased global economic and financial integration and disruptive technology.

I share the hope of the financial community and general public that once again, authorities will choose wisely and well to ensure “Continuity ++” in our central bank and our country’s finances. To do otherwise risks gains made to bring us on a much higher growth path of 7-8% annually to improve our people’s lives. Even the lower end of this range is ambitious. Our forecast for GlobalSource Partners is only 5.8-5.9% over the next two years, among the less upbeat. This is what said in our Chinese New Year cum Valentine’s Day report :“The Days of Swine and Roses.”

“The economy’s recent performance, where higher domestic demand growth led to higher import leakages, suggests that growth rates approaching 7% are unlikely in the short term. Too, monetary tightening last year that raised interest rates by a total of 175bp will exact some pain on consumer and business spending. Thus, despite falling inflation and some reinforcement from election spending, we think that output growth will continue to slide and fall below 6% as opposing forces weigh on domestic demand components.

In particular, while household spending can rely upon the usual support from overseas remittances, growth is expected to remain in low single-digit, with friendlier foreign worker policies in Japan counteracted by tighter visa policies in the US even as countries in the Middle East continue to grapple with fiscal problems and favor local-hire policies. Likewise, while the BPO industry is looking at continuing jobs expansion, the sector grew markedly slower last year and remains under threat not only from adoption of AI technologies but also from uncertainty in the business climate as the mid-term elections near with government’s proposed reform on corporate taxation passed over by Congress. Fiscal spending, which has been a key driver of recent growth, may also hit speed bumps in the near-term associated with the delayed passage of the national budget, election spending bans and potentially, closer scrutiny of budgetary processes that may have permitted quicker procurement recently. Continuing strain from net exports is also expected.”

THE MOST IMPORTANT LEGISLATION

The one counterweight to these headwinds is the recent reform of our rice policy, an on-and-off effort of over 35 years, finally achieved by a strong and purposeful administration. Against wrong-headed populists and well-heeled profiteers, the Dominguez team and Congress passed The Rice Tariffication Law. This is transformational — in ending rice price-induced inflation, in reviving our moribund agriculture, in reducing malnutrition and poverty, in making our manufacturing sector more wage competitive. It will also stop NFA corruption and save taxpayers tens of billions annually.

There is now an opportunity for yet another milestone legislation. By amending the archaic Public Services Law (Commonwealth Act no. 146, 1936) we will open up the country to foreign direct investments in strategic sectors, such as transport and telecommunications, making such needed services more available, creating jobs, and improving the competitiveness of the Philippines. Increased foreign direct investments can also help finance the growing current account deficit. There is an opening in the resumed session of Congress in May to bring this to the finish line. Our Foundation for Economic Freedom urges the Executive and Legislative branches to give this top priority.

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

To the Duterte Administration: pay attention to Agriculture!

February 10, 2019 | 8:42 pm

Introspective

By Romeo L. Bernardo

The recent spike in rice inflation and its harm on the macro-economy and poverty incidence has focused attention to long-standing failures of our agricultural sector. This is evident in comparative statistics vs. peers, e.g. farm productivity (see table below), agriculture sector growth, rural poverty incidence.

Failed policies over decades: tunnel vision on rice self sufficiency ( rice related spending accounts for over 70% of public spending for agriculture), the neglect of other crops and aqua resources where the Philippines has higher actual or potential comparative advantage, and a seriously flawed agrarian reform program that has only transformed landless peasants into “impoverished landowners,” as National Scientist Raul Fabella has found in his research.

I would invite you to read Prof. Fabella’s column, “CARPER: Time to let go” (Oct. 28, 2013),and my other fellow Introspective columnist and Foundation for Economic Freedom (FEF) President Calixto Chikimaco’s more recent “Agriculture, Agriculture, Agriculture” ( November 2018) for a deeper analysis of why we are where in this hole.

Looking forward, may I share with readers our FEF Statement calling for action. Some personal annotations are in italics.

TO THE DUTERTE ADMINISTRATION: PAY ATTENTION TO AGRICULTURE!

We, the Foundation for Economic Freedom, are calling on the Duterte Administration to pay special attention to agriculture because low agricultural productivity and anemic agricultural growth will increase the risk of a return of high inflation and will drag down the economy as it has in 2018.

Agriculture posted a measly 0.56% growth in 2018, way below population growth of 1.6% pa, exposing the dismal performance of this sector. Climate change and weather disturbances cannot be blamed because our ASEAN neighbors are posting healthy growth rates despite similar weather disturbances.

Without significant improvement in the agricultural sector, the government cannot hope to alleviate poverty in the rural areas where most of the poor people live.

Poor agricultural productivity will remain also a drag on the Philippine economy. High food costs translate into high wages and uncompetitiveness of our manufacturing and export sectors. Agricultural products also serve as inputs into food manufacturing. Therefore, high agricultural input costs mean high manufacturing costs and poor competitiveness.

On enhancing agricultural productivity, we ask the Duterte Administration to do the following:

1. Ensure that the P10 billion competitiveness fund for affected rice farmers under the Rice Tariffication Law be properly used to increase agricultural productivity with tight measures to prevent misuse and leakages. (We are all too familiar with past examples of bad, possibly criminal, spending — election linked fertilizer and pesticide programs, most loans under the WTO adjustment fund that went bad, “farm to pocket roads,” and suspicious procurements by NFA. This will need to be addressed more strictly in the IRRs of this new law. A straightforward use should be to directly assist affected marginal rice farmers , along the lines of the Conditional Cash Transfers program. Another would be to support much needed farm mechanization to realize greater efficiencies.)

2. Make rural infrastructure a significant component of the country’s Build-Build-Build Program.

3. Certify the Public Service Act Amendments as urgent in order to increase foreign investments in shipping and ports and thereby lower logistical costs for farmers trying to reach the market.

4. Amend the Comprehensive Agrarian Reform Law to reverse the fragmentation of farmlands, make CARP lands bankable, and enable efficient farmers to expand beyond the legal ownership limit of five (5) hectares.

5. Increase the budget for agricultural research and development, especially for research into crops that will be resistant to climate change.( I would add here, revisit and revamp broken agriculture extension program. This has been ill-designed under the Local Government Code — devolved to the municipal level, when it should have been done at the provincial.)

6. Liberalize sugar imports in order to make local sugar production more competitive and to lower the input costs of our food export manufacturing sector. (Although we are bound under ASEAN to 5%, all imports now are required to pass through the Sugar Regulatory Commission. Another NFA-like situation that has already led to the exit of a large multinational investor in a beverage company because of inability to source their sugar requirements efficiently. )

To these six, allow me to add a couple more:

7. Urgent action to utilize the P80-billion coco levy funds to revive the long-neglected coconut industry. This industry employs 3.5 million Filipinos; 60% and their families live in poverty.

8. Refocus public financial institutions to support agriculture and rural development, especially the LANDBANK and the Development Bank of the Philippines. Over the years, they seem to have been distracted into simply duplicating commercial banking services of private financial institutions, instead of doing development. As a corollary, scrap the failed Agri-Agra Credit Reform Act which mandates banks to lend a certain percent of their portfolio for agrarian and agriculture activities. No private commercial bank has been able to nearly comply and all prudently chose to pay the fines instead of risking money of depositors on bad performing loans. Ultimately it is just a bad tax that raises the cost of credit to all.

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