Managing the growth dampeners

No Free Lunch
By Cielito F. Habito
Philippine Daily Inquirer

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Last week, I cited seven drivers that could keep our economy’s full-year growth above 7 percent this year and next. Space constraints kept me from balancing off the analysis with offsetting growth dampeners, so I will address those downsides this time. Let me state at the outset that notwithstanding these, I remain optimistic that the economy can breach the seemingly conservative forecasts, hovering around 6.0-6.5 percent, being announced by various institutions. But this will not come without some extraordinary effort on the part of government, especially now that everyone’s eyes are on what it would do in its final two years in office.

My friend and fellow economic analyst Romy Bernardo, who produces Philippine economic forecasts for Global Source, doesn’t share my optimism. He has engaged me in a friendly bet (with a free lunch—if there’s such a thing—at stake) that growth this year would be “just a shade above 6 percent,” consistent with estimates I’m seeing from most analysts of late. In his BusinessWorld column yesterday, he cites five growth dampeners that lead him to be more circumspect: (1) delays in public typhoon reconstruction, (2) the daytime ban on trucks in Manila that is disrupting port operations, (3) a potentially damaging El Niño weather disturbance by midyear that can extend to early 2015, (4) still tentative recovery in goods exports, and (5) an impending tightening of monetary policy.

Of the five, El Niño, which is marked by a periodic significant rise in sea surface temperatures, may well be the least avoidable. State weather authority Pagasa has already monitored significantly higher sea surface temperatures in April. It warns of drier conditions, decreased rainfall and possibly stronger storms as El Niño manifests its presence in June. In our last severe El Niño episode in the latter half of 2009 through early 2010, full-year agriculture production dropped by 0.7 percent and 1 percent in those two years, respectively. Note, though, that this did not stop us from achieving a hefty 7.3 percent gross domestic product (GDP) growth in 2010, propelled by 12.1-percent and 7.1-percent growth in industry and services, respectively. With another El Niño episode widely anticipated this year into early next year, deliberate moves to mitigate its effects on agricultural production can already be taken. For example, in anticipation of the severe 1997-98 El Niño episode, the Ramos administration consciously undertook water-impounding projects in the most vulnerable parts of the country.

Bureaucratic inertia may so far be holding back typhoon-related reconstruction and rehabilitation activities, which I identified as one of the peculiar growth drivers this year. But this is not something we cannot overcome; we just need to get our act together. The same can be said on the truck ban issue. Resumption of more normal export markets would be a bonus, but again, shrinking exports in the first half of 2013 never stopped us from being the fastest-growing economy in Asia at the time. Meanwhile, tightening the money supply is entirely the call of the Bangko Sentral ng Pilipinas, which can avoid it if the more direct causes of rising inflation could be effectively addressed.

Could we again breach 7-percent economic growth this year, then? I’d say we can if government can act swiftly and decisively to ensure that the above factors will not be an impediment to achieving such growth. We must overcome start-up difficulties and crack the whip on the various government entities involved in the Yolanda reconstruction program, especially with the typhoon season again fast approaching. We must find a satisfactory solution to the truck ban conundrum that will keep commerce promptly flowing normally again. We must redouble efforts to diversify our export portfolio to further reduce overdependence on unstable electronics for our export earnings. We must address the cost-side causes of recent price increases, to preclude having to tighten money supply to the point of stifling growth. And we must already put in place necessary countermeasures against potential El Niño-induced droughts.

Is it quixotic on my part to talk about 7-percent growth, and up this year and next, when most official forecasts are saying 6 percent-6.5 percent? Well, consider the following: Early last year, the International Monetary Fund saw our 2013 growth at 6 percent, after initially predicting 4.8 and upping it later to 5 percent. The Asian Development Bank placed our growth outlook at 6 percent for both 2013 and 2014. The World Bank had forecast 6.2 percent (it raised this to 7 percent by October, but cut it again to 6.9 percent in December). The United Nations projected 6.2 percent; HSBC said 5.9; Banco de Oro had 6.5; Global Source initially said 5 percent, then upped it to 6.1; and the Focus Economics consensus forecast as of early last year was 5.6 percent. Government’s official 2013 projection was 5.5 percent-6.5 percent. In the end we got 7.2 percent, well beyond everyone’s forecasts.

I still clearly recall how back in the 1990s, when President Fidel Ramos’ dynamic leadership had the Philippine economy riding high, we at the National Economic and Development Authority were constantly seeing our annual growth targets being overshot. Have we simply become too accustomed to expecting less of ourselves, and have yet to get comfortable with the new reality that we can in fact do much better, even as we have in fact been doing so since 2010?

Romy and I do agree on one thing: There remains much for government to do, especially if I am to win our little bet. And it’s a bet he says he’d love to lose.

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Water now and for tomorrow

Introspective, Business World
Posted on June 30, 2013 08:21:53 PM

THERE HAVE recently been emotional calls in media and in the streets for reduction in water tariffs, much somewhat disconnected from considerations of quality of service and investments needed to maintain standards. I feel it useful to revisit a column I wrote in Jan. 2011, "A PPP Success Story," that goes back to why PPP was adopted to solve what was rightfully called a "water crisis" (http://romeobernardo.blogspot.com/2011/01/a-ppp-success-story-business-world.html).

Let me start with some disclosures. I had sat on the MWSS Board back in the 1990s as Finance undersecretary when work on its privatization started. I have keenly kept tabs of developments in the "largest water privatization in the world" since then and became very familiar with the regulatory regime as an advisor of one of the concessionaires, Manila Water. I am also a consumer, sharing a desire to pay the least for the best.

Readers of my past column know that I am greatly impressed by how water services have improved tremendously since my days in the government. Manila Water’s early achievements in slashing non-revenue water, raising water deliveries by over 2.5x, doubling the number of customers and at a 24-hour water availability service level are, most importantly, meeting health standards which I understand is being replicated in the west zone since the entry of Metro Pacific in late 2006.

In a span of six years to 2012, Maynilad has also reclaimed 600 mld of water by reducing non-revenue water from 66% to 43%, raising volume of water deliveries from 629 to 1,200 mld, and serving eight million customers (from six million) with 24/7 water availability, including some 1.7 million in poor communities.

The improvements in service delivery came after the two concessionaires poured in a combined ₱105 billion in investments (₱60 billion for Manila Water from 1997 to 2012 and ₱45 billion for Maynilad under MPIC) to expand and upgrade the water and sewerage network. Judging from the state of the country’s other infrastructure, including water facilities in other major cities in the country, government would never have had the resources to make similar investments, on the aggregate equivalent to 1% of last year’s GDP, for water distribution.

Unfortunately, this important detail is often lost in the emotionally charged debate on water tariffs, with some sectors even considering the mere fact that tariffs have been rising since 1997 the singular proof of the failure of privatization. Granted that the annual growth rate in water tariffs post privatization may seem high, the evolution of water rates needs to be assessed not only against the above investments to expand and upgrade the system but also their historical and forward-planning contexts.

Two historical facts stand out. A well-known "twin" event is the almost immediate shock to debt servicing cost of the two concessionaires due to the Asian financial crisis in 1997 followed the next year by a shock to revenues due to a severe El Niño drought. Both were extraordinary events that could not have been anticipated in the concessionaire bids and thus, led to unexpected, extraordinary adjustments in water tariffs.

The second, less well-understood historical fact is the design of the privatization contest where the winning bidders were chosen based on lowest submitted tariff. Understandably, the objective at the time of the reformers was to secure broad-based buy-in for water privatization by asking consumers to pay less. Some would say that the resulting bids, at deep discounts to then existing rates, planted the seeds of "high" water tariffs today. Had the contest been designed based on highest concession fee, similar to what was done for the NAIA Expressway, the initial tariff rate would likely have stayed at ₱8.78/m³ (not ₱2.32/m³ for the east zone and ₱4.97/m³ for the west) and government would have received a windfall from the winning bidders.

But perhaps the key inputs to understanding the more recent evolution of water tariffs are the size, timing and nature of investments needed to meet service targets that can keep customers satisfied. Contrasting utility services (water, electricity, telephone) during typhoon Milenyo, UP professor and Inquirer columnist Randy David, a Manila Water customer, explained the uninterrupted water service as likely arising from a service culture that is based on "anticipation of possible disruptions, adequate preparation for emergencies, regular maintenance of the delivery system, a continuity team that is activated in times of disaster, and provision of substitute services during prolonged interruptions of regular service ("Public Lives: Decency and public utility firms," PDI, Oct. 15, 2006)".

The mandate to cover the entire concession area requires the concessionaires not only to provide the above service quality to existing customers but to undertake expansion plans (a) with future population growth in mind and (b) involving more difficult terrains in less populated areas, as well as (c) invest in less tangible and thus, less appreciated sanitation and sewerage services that have health and environmental benefits beyond the confines of the concession area. By the nature of a network service, all this would have to be borne by existing customers even if they do not directly benefit from expansion of piped water services to hilly Antipolo.

At the end of day, the water bill of Metro Manila residents, amounting to an average 3% of household income, remains within international standards of affordability, i.e., 5% of income. One also cannot ignore statistics showing that despite the massive capital infusion and superior operational metrics (24-hour water availability, low NRW, etc.), the two concessionaire’s water charges are also among the lowest in major cities in the country. For example, a 30-m³ consumer in the east zone is billed ₱458 for his water consumption compared with same volume water bills in Metro Cebu (₱463), Iloilo (₱509) or Baguio (₱1,137). The differences are even starker for those consuming up to 10 m³  even while the service quality in these areas are more like those of pre- privatization MWSS.

Note too that Manila Water rates compare well also versus other Asian cities. Based on a 15-m³ consumption, Manila Water dollar rate (0.26/m³) falls in the middle of Jakarta (0.59), Beijing (0.47) Bangkok (0.27), New Delhi (0.19), Hanoi (0.19), Kuala Lumpur (0.18) and Phnom Penh (0.16). Few of these have achieved close to the performance standards of Manila Water -- the reason the company has received mandates to run and introduce the same kind of improvements in three of these countries in collaboration with local partners. MWC has received prestigious international awards for providing for the urban poor, environmental sustainability and for operating efficiency from The World Economic Forum, INSEAD, IFC/World Bank, and the International Water Association. It has also been written up as a case study of a successful reform undertaking by the Harvard Business School, the International Finance Corporation, the World Bank Growth Commission and others.

One particularly noteworthy work was penned in 2011 by former UP School of Economics Dean Raul Fabella, also our only living National Scientist in Economics with whom I am honored to share this "Introspective" column space as a fellow Trustee of IDEA. His Chapter 4, "The Privatization of the Metropolitan Waterworks and Sewerage System: How and Why It Was Won," in the book "Built on Dream, Grounded on Reality"(http://asiafoundation.org/publications/pdf/996) 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 sewerage services than the state. It is now considered a singularly successful structural reform in the annals of Philippine political economy."

I have heard Sec. Purisima refer to this privatization in a public forum as a most successful PPP, which bears emulation. The administration of President Aquino has pinned its hopes on PPP to deliver needed infrastructure to address woeful backlog, raise the productivity and performance of the economy, and improve the quality of life of our people, while keeping to its fiscal program.

Amidst calls for short-sighted tariff reductions, I truly hope that Philippine authorities will take the long view that seriously considers the quality water service requirements of present and future water consumers and safeguards the environment. And faithfully implement the MWSS Concession Agreement with continuity, consistency and fairness. Future private investments throughout the country  in water and in other needed infrastructure critically hinge on it.

Romeo Bernardo was Finance undersecretary during the Aquino 1 and Ramos administrations, and board director of Institute of Development and Econometric Analysis, Inc.