Presidential race: Continuity or change

Philippine Daily Inquirer

01:03 AM August 10th, 2015

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

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

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

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

‘Only the beginning’

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

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

More mass appeal

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

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

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

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

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

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

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

Grace factor

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

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

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

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

Escudero has had a falling out with Binay afterward.

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

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

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

Duterte

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

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

Priority reforms

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

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

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

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

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

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

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

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

Reaction: Energy Policy and Development Program Forum "Demand Aggregation and Supply Auctioning of Power in the Philippines"

Promoting Transparency and Competition for Economic Efficiency in Power Supply Contracting: An EPDP Policy Forum 

7 August 2015

by: Romeo Bernardo

Secretary Balisacan, Secretary Monsada ( and her all women power team), USAID Director Gloria Steele, Dean Solon, Prime Minister Virata, my former boss and mentor. Friends in the industry, academe and civil society.

Organizers asked me how I should be identified. I opted for my jobs as consultant, which I have been since leaving the Dept of Finance a long time ago. In the early 90’s, addressing the power crisis was one of the major challenges for government.

In the interest of full disclosure, let me mention my affiliations in the power sector—to establish my credibility (or perhaps in the eyes of some, my lack of it).

I serve as an independent director in Aboitiz Power, a diversified power company active in generation, distribution and retail. I am also an Independent Director in Phinma, a diversified holding company with interests in Trans-Asia, a power generation company.  I am Connected with the Ayala group, as a Director in BPI and Globe. AC is now quite active in power generation, fossil fuels and renewables.

I likewise hold the post of Vice Chair of the Foundation for Economic Freedom, which has been a loud voice in pushing least cost approaches for the benefit of consumers and taxpayers in embracing renewable energy.

Finally, I serve as the Private Sector representative in the Steering Committee of the EPDP, the organizer of this forum.  I was invited in that capacity, and I guess as a panellist in this forum, based on my broad even if not intensive exposure in power.  Hopefully, with biases cancelling each other out. I apologize for any remaining ones. Let me state the obvious – I speak only for myself.

2.  I congratulate economics gurus  Raul and Ruping for their very comprehensive, insightful, balanced, clear presentations.  And Prof Wally del Mundo, my co-panel reactor.  Commendations to Secretary Monsada for her presentation, and for now carrying the burden to make this Circular work. Frankly, I thought the Circular could have benefited from waiting for these studies of Prof. Fabella and Alonzo,  and more public consultations. 

Nonetheless, it is an improvement vs.  an earlier version.  In any event perhaps should be read  as general guidance—and it is up to the ERC and others to flesh it out,  and all industry players to work together in crafting  architecture that best meet  the objectives  of secure, reliable, quality, least cost  electricity for our country.

I will make two general points:

a)   We need to be careful in our diagnosis of why our power cost is relatively high. And what we need to do to bring it lower.

b)   While there can be no disagreement on the value of more competition in supply contracting, the question is, what is the best way of achieving this? I bring out some issues with the way the Circular has approached this.

3.  Why is Philippine power cost high?  Things to be done. And not done.

A table in the presentation of Raul shows Philippines’ power cost is much higher,  especially for the residential sector, even after removing taxes and subsidies.  I have come across another study by International Energy Consultants, an Australian firm, that Philippine power prices are aligned with the region and elsewhere after correcting for subsidies, taxes etc.

The differences could perhaps be explained by differing capture or assumptions on taxes, and especially subsidies,  which can be non-transparent. In several neighbouring countries government policies provide subsidies in excess of 50 percent to consumers. They also provide subsidies in the form of frozen tariffs, sale of fuel to utilities at below market rates and utility losses shouldered by government.

In doing such country comparisons, we should also be mindful of the ff:

a)     Load factor – the country with the higher load factor for demand will have lower rates. In general, the more industrialized the country, the higher the load factors.

b)     Scale and plant mix—Indonesia, Malaysia and Japan have grids and demand growth that is large enough to accept larger, more efficient supercritical plants. The first supercritical plant in the Philippines will only be built three years from now (Quezon Power 2).

c)     No Flexibility – regulatory rules require supply provided by a plant to a regulated entity to come from that plant only unless the plant has a forced or planned outage. If allowed, suppliers can mix and match, and then costs could be lowered by P 0.15-0.20 /kWh.

d)    Geographical challenges-- Adjustments for density for a country like Singapore vs. archipelagic like Philippines.        

In addition to these, we need to be aware of the evolution of the sector since the introduction of EPIRA that have added to costs and delayed supply, with adverse power tariff consequences.

e)     Growing pains from regulatory uncertainty, and contracting, approval and construction bottlenecks have delayed new plants.  The average time it takes to build a baseload  power plant in the Philippines is probably double elsewhere.  Just getting approvals, coupled with overcoming NIMBY opponents, is an ordeal.

f)  Legacy costs of stranded assets, delays in privatization of assets, compounding interest costs.

g)     Sharp increases in the price of coal and oil, until quite recently, have pushed up power rates and led observers to think EPIRA is not working. 

We also need to be aware of remaining constraints that need to be addressed: putting in place the enabling infrastructure like WESM (including an independent market operator), building up the transmission system, strengthening NEA guarantees and support for rural cooperatives, etc.

Most importantly, we look to more progress in rolling out open access. This will encourage more competition, eventually down to the household level – the holy grail for a competitive electricity sector.  A supportive regulatory environment is essential.

We should recognize that amidst the challenges, there has been progress.  Much  more competition is in play. New entrants have been coming in.

This chart shows how much of the new plants are coming in from new players, I have counted around two dozens, from a handful pre-EPIRA. 

Finally, not only should we build on this progress, we should not add unnecessarily to the cost of power. I have in mind expensive renewables supported by FIT. 

Right now this adds an additional P 0.04 per kWh to our power bill. With a) the drop in the average WESM prices from P 5 to P 3 expected to prevail with lower cost of oil and coal, b) the second batch of installation targets, and c) reserve power and transmission outlays needed to support RE; FIT all can easily add P 0.20 per kWh to our bill. 

Our Foundation for Economic Freedom, which counts both Professors Raul and Ruping as Fellows, has been noisily advocating for auctioning these FIT subsidies since over four years ago.  If ever a case existed for more transparent and competitive award process, this was it as this involves allocating subsidies – an entitlement from the public. And selling to only one party, government.   I am delighted to hear the DoE and ERC now finally committed to this course for any future FIT installation.
.

The point of all of this is to say  that we need to study more carefully the  causes of the observed high cost of power, continue to address those issues.  

4. Let me now go to some observations on the DoE circular, echoing, amplifying issues raised by Dr. Fabella.

a)  Demand aggregation.  Demand aggregation only works when aggregating the same kind of demand, and even then, some combinations will give you better outcome than a single plant type. Let me illustrate this point with a chart on the cost curve of types of plants—coal, LNG and oil.

As you can see, depending on plant capacity factor and volume, the economics of what is the least cost changes.  Lowest cost is not least cost.  And that a portfolio of plants may be needed to arrive at least cost. And this portfolio will differ depending on the size of the DU, customer base. And the DU’s requirements will differ at various points in time, as individual supply contracts lapse.

The demand profile of the various DUs can be very different—think of MERALCO, electric cooperatives, or DUs serving economic zones with cement and other manufacturing plants.  

Some utilities are so large relative to their grids that aggregating with any other utility will not benefit them. They are likely to end up indirectly subsidising other utilities. Meralco is such a case. It represents 70% of the Luzon grid.

 The differences among DUs are not just in their demand profile, but also their financial health.  Aggregating a financially weak DU’s demand with a strong one, will result in a less advantageous deal than if the latter contracted on its own. What does this mean in terms of guarantees that government will need to provide, and loosening of disciplines on electric cooperatives?

Where this leads me is to encourage voluntary aggregation but not mandate it. It can certainly make sense for the electric cooperatives and smaller DUs with similar customer profiles to band together.  And indeed this is happening with the support of government/USAID. Prof Wally and his team have  been instrumental in this, deserving of commendation.

b) How about compulsory auctions under a “uniform template”?

I am unsure how such a template can be formulated given: a) the differences in  situations of DUs –  demand profile, credit profile, timing of  lapses of contracts, etc., and  b)  the basic  heterogeneity of supply contracts. As well defined by Dr. Fabella, the commodity is a bundle of characteristics –  price, duration, delivery dates, risk-sharing, reliability, high cost of failures. 

Or what is the role of the Third Party which just adds a layer of cost? It is not accountable to the DU nor its customers in the event of failures or delays in the process, nor the selection of an unfit provider without back-up.   

c) How do you have a fair, unified, aggregated procurement rules and methodology for plants of different sizes (5MW to 600MW), technologies (coal, gas, geothermal, solar, wind, biomass, diesel, hydro)?  This can easily be done in the short term using Contracts For Differences (a derivatives contract covered by standard ISDA provisions ).  But wait...this is effectively not allowed under the Circular.

Let me add that there are specific issues I have read in a Meralco position paper that describes complications.  Including--

a)     Uncertainty due to shifting to Retail Competition and Open Access of captive consumers may expose DUs to stranded costs, more so if there is less flexibility as a result of a uniform contract.

b)    Implementation of demand aggregation and CSP will prevent DUs from obtaining capacities from WESM when prices are low, resulting in non-compliance to their least cost objective.

c) Lowest price bid may not necessarily be the least cost. There is also the question on the quality of the GenCo participants. ( NB. If I may add, “least cost” is not the same as “least volatile cost”. A utility aiming for least cost over a long period of time can have short term high costs like the recent Nov.-Dec  2013 price spike.)

d)  There are legal issues such as the CSP may violate the DUs’ freedom to contract and the DOE overstepping its authority. "

5.       I end up pretty much where Dr Fabella did.  I am far from sure that CSP will lower cost of power in the Philippines. It may “crowd in” new generation capacity as he said, but I think there are other obstacles that are crowding out capacity that needs to be addressed.  I enumerated them in the first part of my remarks. 
.

He puts a premium on the simplest architecture on a CSP. I totally agree with such an approach.   Perhaps it is best to enhance what is in place, instead of junking it? 

And most importantly, adoption of an enhanced more transparent and competitive selection process should go hand in hand with doing away with the accounting method of verification in ERC regulatory practice.  An approach based on accounting cost and profit regulation, and not comparison against market alternatives, is completely out of sync with the whole idea of a competitive market driven power sector, the basic underpinning of EPIRA.

Thank you.

Do we have a future in manufacturing?

Business World
Introspective

Secretary Greg Domingo of the Department of Trade and Industry (DTI) and his team deserve congratulations for the long-awaited automotive industry roadmap, most aptly named CARS (Comprehensive Automotive Resurgence Strategy Program). This was the subject of a recent consultation meeting of the DTI with an “Eminent Persons Group” to get advise on the new industrial policy thrust of the government.

CARS represents several years of hard work of Undersecretary Che Cristobal and Assistant Secretary Fita Aldaba, who is also senior fellow and vice-president of the government think tank the Philippine Institute for Development Studies. They painstakingly crafted a plan and forged a difficult consensus -- especially with the Department of Finance -- on a new thinking on an industrial policy that involves government support for a program that is well-targeted, time-bound and performance-based.
The search for a national pathway to create quality jobs that will absorb almost a million new entrants in the labor market and the 11 million who are unemployed and underemployed was also the topic of a recent experts roundtable chaired by National Economic and Development Authority Secretary Arsi Baliscan. A most interesting presentation came from Asian Development Bank adviser Jesus Felipe.

Based on his study of more than 100 economies over time, he suggested that for the Philippines, the long-term challenge was not how to ignite growth, but rather how to become a modern industrial service economy. According to him, this would need economic transformation, including pushing into niches that foster “structural transformation, innovation and entrepreneurship” in close partnership with willing and able private sector. He argued that manufacturing continues to be important today despite the rise in services -- as engine of growth (economies of scale, technical progress, and learning) and as an “escalator” sector (high-productivity catch-up). The DTI’s CARS is driving in the same direction.

A few economist friends are skeptical that a government unable to collect garbage or enforce traffic laws properly can do industrial policy right. For example, National Scientist Raul Fabella, in his column last week, wrote that the government ought to “economize on limited government capacity,” focusing on its role as enabler, such as in providing required infrastructure, a role it has failed across administrations (“Of CALAX, industrial policy and the nature of the State,” June 29).

I am more confident. We can afford experimental interventions as long as public financial exposure is calibrated, there is a clear path to realizing the program’s objectives, and with the right private partners. Just like public-private partnerships in infrastructure where there have been notable successes.

Moreover, the timing is right. With progress in forging an ASEAN Economic Community, major foreign direct investors keen to participate in a growing ASEAN middle-class market are looking for new investment sites in the region, in one case in partnership with an established local conglomerate. I wonder however if CARS as designed can entice new entrants that can drive structural transformation of the kind Dr. Felipe discussed. It seems aimed primarily at the incumbent assemblers, as the barriers to entry are too high for a new participant to satisfy the conditions. (I gather the initial feedback even from incumbent assemblers is that conditions are too steep, given that their current run rates and regional production strategies are already well established.)
It may be time to consider a more fundamental change in the overall regulatory framework of the Motor Vehicle Development Program, a three-decade-old program, so that players with newer technologies and platforms can come in. Perhaps rather than stipulating processes, technologies and business conditions, it should allow for greater leeway in meeting its objectives?

For example, Executive Order 158 specifies painting and welding as necessary activities to qualify -- even when many firms have already moved to global production processes not bundled this way. Should there not be more flexibility that also takes into account already revealed
Philippine comparative advantage in automotive electronics? In 2004, electronics was 10% of the value of cars; in 2014, it was 35%, and expected to double to 70% in another 10 years.

I understand there is a serious automobile OEM (original equipment manufacturer) that has already partnered with a local established conglomerate on the feasibility of the Philippines as an ASEAN manufacturing hub. This same conglomerate has expanded its electronics manufacturing business by expanding its global footprint in China, Europe and the Americas. It has gone where the business opportunities has told them to go. A major global automobile OEM coming to the Philippines will surely attract its suppliers if it makes business sense to do so, and if there is an attractive investment framework.

These ingredients can be our bridge to a manufacturing future -- a modern industrial service economy that Dr. Felipe spoke of. I hope these investments are made here in the Philippines. A pity if it is lost to a more forward-looking and flexible ASEAN neighbour.

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

ON THE PHILIPPINES JOINING THE AIIB WHAT’S THERE TO ‘WAIT AND SEE’?

The Aquino Administration appears waffling on the Philippines being an original member of the China-led Asian Infrastructure Investment Bank (AIIB). Last October, it signed a non-binding memorandum of understanding, together with 22 other countries, to become a founding member. Last week, this newspaper reported that the President said “The Philippines needs to be ‘very very cautious’ about becoming a member... with the government obliged to consider Beijing’s behavior in the Scarborough Shoal crisis of 2012, during which the China Eximbank called in a loan that was to fund a rail line to Clark International Airport.”

China’s Asian Infrastructure Investment Bank (AIIB) secretary-general of the Multilateral Interim Secretariat, Jin Liqun (center), leaving during a break in the Fifth Chief Negotiators’ meeting that discussed draft agreements for the China-backed AIIB, in Singapore last month. 
-- Reuters. 

This indecision is understandable. There are pros and cons that need careful weighing, with intertwined and complex political and economic factors in play.

Many in the business community applauded the government, led by the Department of Finance, when it signed up for the AIIB. This is faithful to the spirit of the Aquino-Hu Jintao 2011 meeting that “The territorial dispute shouldn't be the be-all and end-all of Philippine China relations.” Though this idea seemed to have been eclipsed by subsequent harsh exchanges, the fundamental soundness of it remains. My column last year, “Frozen” (April 2014; it can be accessed on my blogspot, http://romeobernardo.blogspot.com/2014/04/frozen.html), underscored economic ties as an important layer to our multilayered relationship with China. Our joining AIIB will be in keeping with that approach.

In the same spirit, my friend Raphael “Popo” Lotilla, University of the Philippines law professor and former energy secretary, provided precious lessons from Vietnam’s richly textured multi-dimensional ties with China over the years, centuries even (“Dealing with Dragons: Lessons from Across the Sea,” Forbes Magazine, May 2015). His article is a most insightful and fact-based telling of how Vietnam fought Chinese troops over centuries on land and at sea while at the same time engaging China, amicably and profitably, in a variety of ways, including in trade, investments and finance.

And yes, Vietnam is set to become a founding member of the AIIB. For that matter, as Popo observed, so with Taipei, “maintaining its application for membership even after its rejection as a founding member.” And as far as territorial disputes go, this one is the mother of them all!

But wait, does Asia really need another development bank? The case for it is made by an Asian Development Bank (ADB) report that says Asia requires $8 trillion in infrastructure from 2010 to 2020. This is a huge number that dwarfs the capital of the ADB ($160 billion), the World Bank ($220 billion), and other official funders. Having one more funder will surely help.

Besides, some competition is healthy. This early, so as not to be outdone, Japan has announced a $110-billion infrastructure financing package for Asia. Moreover, it has not been lost on many how some of the policies and programs of the World Bank, and to a lesser extent the ADB, have at times seem dictated by narrow interest groups in the West, oblivious to infrastructure requirements of developing countries. 

How else to interpret policies in the World Bank and International Finance Corporation that shun the financing of coal power plants even where such plants may be the only ones that makes economic sense for countries for dependable affordable power? Or take the case of a proposed $1-billion financing for highly subsidized solar plants being processed at ADB, until public scrutiny and more serious thinking within the organization shot it down. (See my column, “Renewable Energy, a Reality Check,” January 2011, blog link: http://romeobernardo.blogspot.com/2011/01/renewable-energy-reality-check.html)

In the case of the Philippines, the government’s Comprehensive and Integrated Infrastructure Program calls for $150 billion of financing in the next five years. Only 25% of this is expected to come from private sources, and the balance from development financing either on-budget or official development assistance. Assuredly, our having access to another source of concessional finance over the medium term will help.

Of course, our current constraint in infrastructure spending is not financing but execution. As a glaring example, had government spent available money as programmed, our GDP growth rate for the first quarter of this year would have exceeded the targeted 7% and not be the mediocre 5%.

And on the private side, what may well lead to underinvestment in infrastructure is the idiosyncratic nature of our regulatory regimes, exemplified in the reinterpretation of contracts by the Metropolitan Waterworks and Sewerage System for the water concessions to exclude recovery of the corporate income taxes -- after 17 years of operation.

But surely, our current situation is not one which we should take as a given if we are to achieve over the medium term the poverty reduction and greater participation in prosperity that relieving infrastructure constraints can bring.

There is less reason to waver now that more countries are joining, including developed country allies of the United States (the country most critical of AIIB). These include the United Kingdom, Germany, France, South Korea, and Australia. As of April 15, the AIIB has 57 prospective founding members, including 16 of the world’s 20 biggest economies and our fellow ASEAN countries. As a result, it is also clear now that China will not have veto power.

Officially, the reason given for the Philippines’ sudden “wait and see” attitude is concern over governance, noting lack of transparency in Chinese bilateral aid. This will be given further clarity later this June when the Bank’s charter will be finalized and up for signature. In the meantime, I would argue that the AIIB in fact helps address this concern, given the multilateral framework that enables sharing of knowledge and experience (especially from the WB and the ADB), and subjects projects and funding processes to greater scrutiny of other members.

Moreover, the reality is that China, with its $4 trillion in reserves, will continue to have bilateral facilities for projects meant to win friends, both countries and persons. And flawed projects (such as the still-born ZTE and North Rail) being pushed by one sponsor or another, from China or elsewhere, will not go away. We just need to be more vigilant, especially in watching our own public officials.

And finally, the nomination of Jin Liqun as AIIB president is reassuring. He is a no-nonsense finance executive honed in the Chinese civil service and multilateral development institutions. Early on, he was a representative of China in the World Bank (we were both there in the 1980s), later pursuing a career as an official there, and later the Asian Development Bank, where he recently retired as vice-president for operations, one rung below the president.

Romeo Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.

There’s room to grow some more, if...

BUSINESS WORLD

Posted on March 08, 2015 10:47:00 PM

 I had the privilege of being in the panel of reactors -- together with Former Socio-Economic Planning Secretary Cielito Habito and World Bank senior country economist Karl Chua -- to the lecture of Socio-Economic Planning Secretary Arsenio Balisacan, formerly professor and dean of the highly respected University of the Philippines School of Economics.

This was part of the lecture series sponsored by the Ayala Corporation in support of the outstanding policy research at the School. In the words of Jaime Augusto Zobel de Ayala, “the rigor of the thinking and the clarity of the logic” mark the economic policy studies from the School. This partnership then aims to provide a vehicle to communicate the economic policy studies of the School to the general public.

Earlier lecture speakers in this second series were Dr. Raul Fabella (“Comprehensive Agrarian Reform Program: Time to Let Go”), Dr. Philip Medalla/Dr. Johanna Dee Chua (“Philippines -- Will Financial Stability be at Risk?”), Dr. Ramon Clarete (“Going Regional: Which Mega Trade Deals Should the Philippines Join?”) and Dr. Stella Quimbo (“Should We Re-Think Income Taxation in the Philippines?”). You can access their papers at http://www.econ.upd.edu.ph/ayala-upse/?page_id=71.

The lecture by Secretary Balisacan was on the state of the Philippine economy. Below were my two cents as a reactor:

WE LEARNED of last year’s Gross Domestic Product (GDP) outcome recently. I was most happy that the fourth quarter jumped to boost the growth rate for the year to 6.1%. As some of you may know, Ciel and I have a very well-publicized bet. Our (GlobalSource) forecast early last year on record was actually exactly 6.1%. (We were also pretty much on the mark in 2013, when we forecast 7%, early in the year.)

I am often asked, how sophisticated is our econometric forecasting model given our excellent batting average? My answer: We actually have a crude one -- a single equation, but with amazing predictive power. The equation goes...the National Economic and Development Authority (NEDA) estimate times 0.9%.

Seriously, my bet with Ciel this time around was one I would have much wanted to lose (i.e. had we grown at 7%). Indeed, I do agree with him, as I do now with Secretary Arsi Balisacan and Dr. Karl Chua, that the Philippine economy has the fundamental underpinnings to go beyond its historical 4% over the past two decades, to a much higher level. We at Global Source believe 6% is now our baseline growth rate. It can be higher or lower depending on whether investments will take place, both government (for infrastructure) and the private sector (especially for manufacturing, agriculture/agribusiness).

Allow me to show some figures on how poorly we do in the investment department. Incidentally, it is also investment in these sectors that can employ the non-college educated entrants to the labor force that will spell the difference for future growth to be more inclusive, and for the unemployment/underemployment rate and poverty rates to decline from the unacceptable 25% currently.

Graph 1: Our investments-to-GDP ratio is still lower than our neighbours’ by far. There’s a bit of an uptick recently in the numbers, but we still need to catch up.

Graph 2: Savings vs. Investment -- this makes me cry. We have the domestic resources to put in investments, but instead are going out of the country. The mirror image of the positive current account over a decade that Sec. Arsi showed is high surplus savings for an economy that is starved of public and private investments. The obstacles to such have been well studied.

Graph 3: Likewise, on net Foreign Direct Investment (FDI) inflows, there’s a slight uptick but a lot of catching up to do vis-à-vis our ASEAN neighbours.



These should be seen not as constraints, but as opportunities.

What are the areas where reform can focus on for maximum oomph for the buck?

• Infrastructure. This creates immediate growth impact, and relieves constraints for long-term growth. There are now binding constraints on power, airport, cargo, road network and mass transport. Can we grow at 7% without courting power outage and giant gridlocks in roads, airports, piers?

• Agriculture. I don’t think Sec. Arsi will disagree too much if I said that the depressingly low productivity of this sector and lack of investments are on account of government failure over decades. We will need to see action on two areas: (1) Clarity in land ownership post-CARP (Comprehensive Agrarian Reform Program); and (2) reform in rice support policy/the National Food Authority.

Reforms here will help achieve a number of things -- bring down the cost of food which impacts directly poverty and wage competitiveness, release huge amounts of wasted fiscal resources, and attract investments from the private sector into agriculture and agribusiness.

• Manufacturing. Focus on reviving the manufacturing sector by adopting policies that favour job creation. There are a number of initiatives that have been started, and hopefully can be brought to fruition: Rationalization of fiscal incentives so that these are directed to areas with highest linkage/benefits and are performance-based, industry road maps that better coordinate efforts of government units and the private sector, and cutting red tape for setting up of businesses.

Additionally, labor laws and regulations can be made more investment friendly -- the World Bank shows we have high minimum wages vs. peers. It is in this segment where we need to create employment that benefits most the poor and unskilled.

Indeed, there is still much room to grow, maybe 7-8%, if we are able to build on the current growth drivers of remittances and business process outsourcing (BPO), and a young population and structural current account surpluses, with another leg: investments.

There are, moreover, upsides outside our shores in the horizon. Oil prices have halved to what they were, and from all indications will stay low, driven as it is more by supply forces rather than demand (vs. what happened in 2009). The raw numbers are that for every $10 drop in oil price, we save around a billion. This goes directly to the current account, adding another $5-6 billion. Oxford economics estimated as much as 1.8 percentage points GDP gain for the Philippines. This will translate into higher consumption growth numbers as the lower prices cascade to a lower consumer price index. This also means interest rates can stay low longer, with all the beneficial effects that this has on the economy. The global economy likewise benefits from this -- including important Philippine export markets.

Another upside is opportunities created by the ASEAN Economic Community (AEC), which makes the region a single market. The Philippines is seen as competitive in the services sector. Even in manufacturing, I am aware of local groups well positioned to manufacture for a multi-ASEAN country market; they just need a supportive government environment.

The AEC may also be the impetus that will drive reforms for further opening, competition and efficiency in the domestic market. We have seen that, with the Bangko Sentral recently successfully pushing for the liberalization of investments in the banking sector.

There are also downside risks. The drop in oil prices may contribute to the acceleration of Saudization policy (increasing the required Saudi nationals as percent of workforce). A quarter of our overseas workers are in Saudi Arabia. Heightened uncertainty in the regulatory and local government regimes for key infrastructures -- power, water, road and cargo handling -- is another source of downsides for public-private partnerships and long term growth.

Sec. Arsi mentioned also natural disasters as historically imposing downside surprises. Allow me to mention the man-made kind.

The boom-bust of the recent past mentioned by Sec. Arsi in part mirrors political turbulence and compromised leadership. This can happen again in 2016 if the elected leader is not credible, or if elections are not credible. We sadly saw examples of each case in 1998 and 2004. Let us do our best to make sure neither happens again.

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

romeo.lopez.bernardo@gmail.com

...and of a metro train subsify

Business World

THE GOVERNMENT should cut and minimize its subsidy to the metropolitan rail system, and allow market forces to dictate the cost of riding the MRT and LRT.

This is most likely an unpopular position, particularly since the metropolitan rail system offers a viable alternative to the public’s everyday commuting concerns. Let us explain our position on the matter.

First, the persistent and festering problems plaguing the MRT and LRT service cannot be reasonably solved if we continue the existing rate and level of government subsidy.

It has been politically expedient across successive administrations to subsidize the fares of Metro Manila train commuters. But the demonstrable mismanagement of this relatively small train system only corroborates the unsoundness of a policy that keeps fares below their economic value and marginal cost.

Train fares have stayed the same since 2003, even with the general price level nearly doubling since the beginning of 2000, while fares for other public transport modes (buses and jeepneys) have been adjusted periodically. However, train travel offers shorter and more predictable travel times, and thus should cost more. A sound fare policy will take into account the relative economic values (and competitive advantages) of every transport mode. Fare setting for the MRT-LRT and Philippine National Railways systems should not be done in isolation from the prevailing fares on non-train transport.

As a matter of equity and efficiency, fares should be set to the maximum extent possible, based on recovery of costs (operations and maintenance, or O&M) and the “users pay” principle. Government subsidy becomes justifiable only when full-cost recovery fares exceed the economic value of train travel, which by definition incorporates what the average commuter is willing and able to pay. New York City Transit prides itself on having the best recovery ratios in the United States, but manages to cover only 53% of its costs from rider fares.

When subsidies are misplaced, demand is distorted and unintended consequences abound. For example, a 2010 study showed that riders from the economically disadvantaged sector (with a monthly income of P8,000 or less) accounted for only one-third of Metro Manila train riders. The subsidy ends up benefiting, not the poor, but mainly non-poor riders who understandably flock to the cheapest transport alternative. This overflow of non-poor riders aggravates the strain on train system operations and maintenance, compounding the damage already caused by negligent management.

The 2015 budget already allocates P7.4 billion for MRT rehabilitation, while a supplemental 2014 budget contains nearly P1.2 billion for the rehabilitation of both MRT and LRT. Arguably, these funds, properly spent, might already suffice.

However, audits by international experts have confirmed that years of maintenance neglect have led to the deterioration of service quality and safety to dangerous levels.

The only other meaningful action proposed by certain transportation officials -- a government buyout of private equity interests in the MRT -- was a purely financial deal that only benefited the banks and none of the other stakeholders, most especially the riding public.

In an election year, given our patronage politics, the public has every right to worry that funds raised from the fare hikes might be diverted for partisan purposes. Such worries can only be aggravated by the lack of public consultation, transparency, and third-party oversight that surrounded the fare increase process.

In the end, misplaced subsidies do the biggest damage to those among us who have the lowest tolerance for wasted resources -- namely, the poor and economically disadvantaged. Thus, the Foundation supports not just the current fare hike, but also a series of successive fare hikes that will gradually phase out all misplaced government subsidies to Metro Manila’s train system and contribute to full rationalization of relative pricing among the various transport alternatives. The P2.3 billion of subsidy savings expected from this first fare hike is a good start, but it is only a start.

Second, we need measures that will address this subsidy concern.

Policy reforms must be instituted so that future fare setting is insulated from political grandstanding, system management is professionalized, and the present train network can expand from its current size of 79 kilometers to more than 200 kilometers by the year 2030.

Consider setting up a multisectoral oversight body -- to include civil society, the business sector, and international experts -- as a confidence builder for the public and an additional resource for the evidently inadequate Department of Transportation and Communications.

Immediately replace the current maintenance contractor with a globally reputable provider equivalent in quality to Sumitomo, the previous contractor.

Agree upon clear rehabilitation and maintenance milestones, with corresponding rewards and sanctions for over- and under-performance. People’s heads must be put on the line. Clearly specify where the additional funds generated from freed-up subsidy monies are to be used within the overall transportation sector.

Innovate additional revenue sources and cost savings in order to minimize fare hike requirements. On the revenue side, real estate and signage deals come to mind. On the cost side, automation and integration of all fare collection processes must be expedited as one of the performance milestones.

Good ideas, like train fare hikes, must not be dragged down by bad managers, bureaucrats and politicians. Sound economic policy must not be held hostage by unsound governance.

The issue of increases in the MRT and LRT fares continues to occupy media space, the streets, and the courts. I yield this space to a recent statement on this by the Foundation for Economic Freedom, an advocacy group for market-friendly reforms and good governance. While the statement is focused on tariff adjustments for MRT-LRT to achieve utmost equity and efficiency, the thinking applies with equal force to other infrastructure with both private and public benefits -- toll roads, water, power, trains, ports, airports, etc. Infrastructure inadequacy has been tagged as a top binding constraint to the country’s sustainable and inclusive growth.

An unspoken message in the statement is that the private sector will be discouraged from investing in such much-needed public-private partnership infrastructure if tariff setting impedes proper maintenance and cost recovery, and is politicized. And at the end of the day, what is the most expensive water, power or road network? Not having any:

Romeo Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.

Talkies for presentation during AC UPSE forum, 29 Jan 2013

Thank you for the invitation. An honor to share podium with Sec Balisacan, as well as Dr. Habito and WB Senior Economist Karl Chua.

I apologize for any repetitions. I have always been a follower of Prof. Arsi, and a religious reader of Ciel's column and Karl's researches-- so I guess such agreement unavoidable (I can't help wonder if we would not have had a lively and fun afternoon  if Prof Ben Diokno or  Prof Mareng Winnie were here instead of me).

We learned of the last year’s GDP outcome this morning. I was most happy that the fourth quarter jumped to boost the growth rate for the year to 6.1 percent. As some of you may know, Ciel and I have a very well publicised bet.  Our forecast early last year on record was actually exactly 6.1 percent. (We were also pretty much on the mark in 2013, when we forecasted 7 pc, early in the year.)
I am often asked, how sophisticated is our econometric forecasting model given our excellent batting average?  I answer-- we actually have a crude one—a single equation, but  with amazing predictive power. The equation goes—

NEDA estimate times 0.9 percent.
Seriously, my bet with Ciel this time around was one I would have much wanted to lose (i.e. had we grown at 7 percent).  Indeed, I do agree with him, as I do now with Sec Arsi Balisacan Dr Karl Chua that the Philippine economy has the fundamental underpinnings to go beyond its historical  4 percent over the past two decades, to a much higher level.  We at Global Source believe 6 percent is now our baseline growth rate. It can be higher or lower depending on whether investments will take place, both government for infrastructure and the private sector, especially for manufacturing, agriculture/agribusiness.

Allow me to show some slides on how poorly we do in the investment department. Incidentally, it is also investment in these sectors that can employ the non-college educated entrants to the labor force that will spell the difference for future growth to be more inclusive, and for unemployment/underemployment rate, and poverty rates to decline from the unacceptable 25 percent presently.

Refer please to the following slides:
1.     Investments to GDP—lower than our neighbour’s, by far. A bit of uptick, but still...

2.     Savings vs. Investment—this slide makes me cry. We have the domestic resources to put in investments, but instead going out of the country. The mirror image of the positive current account over a decade that Sec Arsi showed is high surplus savings for an economy that is starved of public and private investments. The obstacles to such have been well studied.
(S-I = X-M)

3.     FDI- likewise, going elsewhere ASEAN by far—slight uptick but...
These should be seen not as constraints, but as opportunities. 
What are the areas where reform can focus on for max oomph for the buck?
1.         Infrastructure—creates immediate growth impact, and relieves constraints for long-term growth. These constraints binding now—power, airport, cargo, road network and mass transport.  Can we grow at 7 percent without courting power outages and giant gridlocks in roads, airports, piers?
2.         Agriculture policies.  I don’t think Sec Arsi will disagree too much if I said that the depressingly low productivity of this sector and lack of investments are on account of government failure over decades.  We will need to see action on two areas

a)      Clarity in land ownership post CARP, and

b)      Reform in rice support policy/NFA.

Reforms here will help achieve a number of things—bring down cost of food which impact directly poverty and wage competitiveness, release huge amounts of wasted fiscal resources, attract investments from the private sector into agriculture and agribusiness.

3)         Focus on reviving manufacturing sector by adopting policies that favour job creation. There are a number of initiatives that have been started, and hope can be brought to fruition. Rationalization of fiscal incentives so that these are directed to areas with highest linkage/benefits and are performance based,  industry road maps that  better coordinate efforts of government units and the private sector, cutting red tape for setting up business.

Additionally, labor laws and regulations can be made more investment friendly—the World Bank shows we have high minimum wages vs. peers.  It is in this segment where we need to create employment that benefits most the poor and unskilled.

The earlier slides showed how much room there is to grow, maybe 7-8%, if we are able to build on the current growth drivers of remittances and BPO, and a young population, structural current account surpluses, with another leg—Investments.

There are moreover, upsides outside our shores in the horizon.  Oil prices have halved to what they were, and from all indications will stay low driven as it is more by supply forces, rather than demand (vs. what happened in 2009). The raw numbers are that for every $ 10 drop in oil price, we save around a billion.  This goes directly to the current account, adding another $ 5 to $ 6 billion. Oxford economics estimated as much as 1.8 percentage points GDP gain for the Philippines.  This will translate into higher consumption growth numbers as the lower prices cascade to lower CPI.  This also means interest rates can stay low longer, with all the beneficial effects that has on the economy. The global economy likewise benefits from this—including important Phl export markets.

Another upside is opportunities created by ASEAN Economic Community, which makes the region a single market. The Philippines is seen as competitive in the services.  Even in manufacturing, I am aware of local groups well positioned to manufacture for a multi-ASEAN country market; needs a supportive government environment. 

AEC may also be the impetus that that will drive reforms for further opening, competition and efficiency in the domestic market.  We have seen that with the BSP recently successfully pushing for liberalization of investments in the banking sector.

There are also downside risks. The drop in oil prices may contribute to the acceleration of Saudization policy (increasing the required Saudi nationals as per cent of work force).  A quarter of our OFW's are in Saudi Arabia. 

Sec Arsi mentioned also natural disasters, as historically imposing downside surprises.  Allow me to mention the man made kind.

The boom bust of the recent past mentioned by Sec Arsi in part mirrors political turbulence and compromised leadership.  This can happen again in 2016 if the elected leader is not credible, or if elections are not credible. We sadly saw examples of each case in 1998 and 2004. Let us do our best to make sure neither happens again.