Business World
Introspective
The current electricity shortage in the country is stirring up memories of the power crisis in the early 1990s when daily blackouts of as long as 12 hours in Manila pushed investors to the exit causing economic output to contract.
I wrote a report a week back for GlobalSource, a global network of independent analysts, explaining how the current shortage differs from that of 20 years ago, noting that:
1. Power outages today are not due to an acute shortage of power generating capacities but have been triggered by an El Nino-induced drought, hence the surprising severity especially in Mindanao, which relies on hydroelectric plants for over 50% of its electricity needs.
2. Severe power outages have so far been limited to Mindanao; in comparison, power interruptions in Luzon, which depends much less on hydroelectric plants (about 10% and less than 1% in Visayas), have been intermittent and of much shorter duration.
Thus, in the near term, from a macroeconomic perspective:
3. Mindanao's less than 20% contribution to economic growth (vs. two- thirds for Luzon), while not insignificant, is not expected to cut into overall growth appreciably.
4. Despite the more than doubling of spot prices, the impact on electric bills are expected to be muted as utilities are allowed full recovery only on 10% of their purchases from the wholesale electricity spot market (WESM) while any excess purchases are recoverable based on time-of- use rates of the National Power Corp. (NPC).
The big picture
Still, beyond election and short-term macroeconomic risks, incidents of massive blackouts in a country that has a history of power shortage and where competitiveness is dragged down by high power costs, tend to undermine investor confidence further and raise the hurdle rate on investments. This risks underinvestment all around resulting in an inability to expand the country's growth frontier, thus bringing forward to the present the issue of long-term supply adequacy.
The Department of Energy's power supply and demand outlook does not provide much comfort. For Luzon, government estimates the critical period, when existing generating capacity will not be able to meet peak demand plus a 23% reserve margin, to come as early as 2011. Private industry estimates range from 2012 to 2014, which nevertheless also point to the need for capacity additions today.
Meanwhile, the critical period has come and gone for Visayas, which has been experiencing rotating blackouts for a couple of years already before the construction of a new baseload coal plant, expected on stream by the third quarter this year. Mindanao is also expected to face power shortages this year, albeit the current severity has not been anticipated.
In sum, the supply/demand outlook reveals the need for immediate new investments in power generating capacity, especially considering the three year lead time needed to get all the requirements and financing for building power plants. Indeed, industry experts are one in saying that shortages even in Luzon would have happened already had it not been for the following developments: (i) lower economic growth due to the global financial crisis, (ii) higher dependence of recent past growth on the services sector which is less energy intensive, versus the manufacturing sector which has been losing out to China, (iii) rehabilitation and better maintenance of privatized plants which have translated into higher energy sales, and (iv) functioning of the WESM with peak/off-peak pricing that encourages optimized energy dispatch to improve returns and spread out power demand.
Work in progress
To be sure, investor interest of late can be gleaned from successes in government auctions of existing assets - after much delay, over 80% of government's power generating assets is finally in private hands. It has been much more difficult to get them to put up new baseload plants without open access, where electricity buyers of a certain size can freely shop for suppliers.
Thus far, investors find simply buying existing public generating assets the easier route to participating in the local power industry. Moreover, the transition supply contracts that come with the plants help to ease the way into complete merchant plants that will operate in an uncertain regime.
The Energy Regulatory Board is expected to soon issue rules on open access on a voluntary basis, ahead of the Power Sector Assets and Liabilities Management Corporation (PSALM) achieving the threshold. It is hoped that this will help investors see the emerging landscape and make business decisions to address Luzon's power needs anticipatorily.
Also, the WESM, introduced in 2006, continues to have rules that undermine price discovery and is thus unable to telegraph shortages through price signals. Instead, it has been observed that WESM prices have tended to be artificially depressed due to the operation of government's must run plants whenever there are supply disruptions on the private side that results in spot prices not reflecting the true scarcity of electricity.
Unlike fiscal sustainability which boils down to a taxing problem, it is less clear to us, based on the economic platforms presented so far by leading presidential contenders, how the winning candidate will tackle power sector issues, which are in truth much more complex. Even if the next administration learned the lesson of 20 years ago, i.e., to be anticipatory and not wait for a crisis to happen before acting which imposes huge costs on the economy, rules have changed under the Electric Power Industry Reform Act (EPIRA). EPIRA now bars government, except with Congress's approval, from doing what the Ramos administration did in 1992- 93 to solve the power crisis then, i.e., enter into energy purchase contracts with independent power producers.
A worst case scenario, if the next administration dilly-dallies, will see a repeat of the end of Aquino administration power crisis that will seriously damage investor confidence, pull down economic output. and lead to expensive solutions that will affect the country's long-term competitiveness. A rough calculation, based on the $1-million-per megawatt rule of thumb for costing power plants, indicates that every foregone 1% of GDP growth translates into over P70 billion of loss per year for the economy, which is enough to pay for a 1500-MW power plant. When viewed in the context of a negative growth rate in 1991 and near zero in 1992, the losses can be quiet staggering if the next administration fails to avert another power crisis.
We remain optimistic though that with memories of the last crisis still fresh in the minds of people now holding decision-making posts, the next administration will have enough political will to iron out kinks in the present setup and do enough to give comfort by way of improved regulatory and macroeconomic environment to investors and lenders before reserves dwindle further in the main grid. If investors continue to shy away, we expect it to be able to find interim measures involving public provision that do not run afoul of the EPIRA, a far second best option though.
This was based on a report with the same title by Christine Tang and the column writer for Global Source, a network of independent analysts.
Mr. Romeo Bernardo is board member of The Institute for Development and Econometric Analysis, Inc. and managing director of Lazaro Bernardo Tiu & Associates, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Monday, April 5, 2010
Monday, March 15, 2010
The good, bad, and somewhat stupid
Business World
In an earlier column, I wrote about The Fiscal Imperatives for the Next Administration (No Money, No Honey) focusing on tax policy reform needed to sustain macro-stability and provide the much-needed resources for infrastructure and social spending.
This time, allow me to talk about how our government uses, well or badly, fiscal policy tools to help members of society who need help, focusing on recent programs for the poor and the elderly.
The good: Conditional cash transfers
Learning from the successful experience of two dozen countries, notably Indonesia and Brazil, to get maximum bang for the taxpayer buck to help reduce poverty, the administration, with the full technical and financial support of the World Bank, launched its own conditional cash transfer program under the banner of Pantawid Pamilyang Pilipino Program (4 Ps). It provides a monthly stipend of up to P1,400 (P500 per household for health and nutritional expenses and P300 per child for educational expenses up to a maximum of three children) to the poorest households of a community provided the children are kept in school. The DSWD selects the beneficiaries based on the targeting system developed for the program.
Despite apprehensions that this may end up being no different from many past programs done in the name of the poor that have ended up at best as wasteful political showcases, this program is showing good early results. Children are going back to school and getting immunized, while their mothers are having pre- and post-natal care. What it can achieve at the end of the day is to break, for the next generation, the cycle of poverty - poor nutrition, poor health, poor education, and resulting unemployment and impoverishment.
The credit for this program goes to highly regarded DSWD Secretary Esperanza Cabral, and of course, the full support of President Gloria Macapagal Arroyo who clearly saw not just the economic soundness of the program, but also its political benefits. (A professor friend who served in the Estrada administration quipped that the appointment of the right person for DSWD secretary is one area where President Arroyo did better than his boss.)
The bad: Nfa
Ask any good economist what is the biggest waste of government resources in recent years and he will readily point to the NFA program of rice subsidies. As a subsidy program it fails the needs test since the subsidized rice is available to all, whether rich or poor. Indeed, studies have shown that less than 25% of the poor have access to NFA rice. Worse, it is quite likely that a large fraction - maybe more than half - of the rice is sold by the NFA at the official government price to some lucky people who repack the NFA rice and re-sell them at market prices. According to a recent World Bank study, it costs the NFA an estimated average of P5 to deliver P1 of subsidy to the poor, the big number reflecting the wastes, leakages, and the governance deficit in its administration. It does nothing for the poor farmers who especially at a time of high rice prices (like now) are deprived the benefits of a remunerative price. On a more fundamental level, it distorts market signals and misallocates resources in the agricultural sector and rest of the economy. Finally, it is very expensive: in 2008, NFA lost P37 billion per data from the Philippine Institute of Development Studies. According to the World Bank, this may have racked up to P63 billion in 2009 (coming from losses that averaged only P5 billion annually in earlier years).
Many studies have been written on why NFA needs to be re-engineered, and how better off consumers and farmers would be if funding is redirected as targeted subsidies to poor consumers and invested in productive assets like rural infrastructure to help farmers. (You can view the most recent one in the November quarterly report of the World Bank - Towards an Inclusive Recovery at http://siteresources.worldbank.org/INTPHILIPPINES/Resources/PHLQuarterly November2009FINAL.pdf) Indeed, generations of technocrats in NEDA, Finance, and the Department of Agriculture, assisted by multilateral and bilateral institutions, have tried to push for reform without success. The vested interests are just too entrenched, and the rents too much.
Contrast the cost of NFA with the cost of the conditional cash transfer. The P10 billion this year under the 4Ps program will benefit around 3.5 million people. Consider what this means: If we had shut down NFA last year and diverted the P63 billion to a conditional cash transfer program, we would have been able to cover 100% of the country's poor (against the 25% with NFA), with each household receiving 7 times the benefits!
(The next president, whoever he may be, can't do better than reappoint Secretary Cabral to see this program move to a higher level, perhaps refined to include conditions covering other socially desirable objectives like reproductive health. NB. I have never had the privilege of meeting Dr. Cabral.)
The somewhat stupid
Despite strong recommendation from the secretary of Finance for her to veto it, the President recently signed into law a bill that would give exemptions from VAT for purchases of senior citizens for restaurant food, medicines, transportation, and movies. Like many tax exemption bills, one cannot find fault with the objectives - in this case to help the elderly, most of whom no longer receive current income. Indeed one can even argue that the amount of tax leakage is not that large, at least compared to NFA deficits, only P1.68 billion per DoF estimate; so it is not that bad from a fiscal standpoint.
However, it is somewhat stupid. Why? Because there are so many other ways of helping the elderly without reaping the unintended consequences of creating a loophole in the VAT system that create a compliance and administration nightmare, or be vulnerable to abuse by crooked traders and BIR agents. The most straightforward way is the one suggested by the Department of Finance: simply raise the discount from 20% to 30%, thus restoring the savings to the elderly that the VAT law is supposed to have deprived. The stores will simply recoup this additional expense from sales to other customers.
This will also keep the integrity and efficiency of the VAT system, one which is self policing - somebody's credit is somebody else's payment - and does not create precedence for others to clamor for the same. (Doesn't society care for the young? Why not exempt children's medicines and baby milk from VAT? How about purchases of the handicapped? Or of our soldiers, teachers, or OFWs?)
If we want to help the elderly poor, how about conditional cash transfer for them? Isn't this much better than this prime example of poorly thought out, politics of pander, VAT exemption for seniors that subsidizes in proportion to one's purchases, to the richer, the more subsidy and for the poorest, nada?
More fundamentally, if we are to improve revenue collection and maintain macrostability, we need to make our tax system - already complicated, full of discretion and loopholes - simple and easy to administer. Let us not overburden it further. Let us instead use expenditure policy to help the poor and the elderly, or for that matter all other sectors asking special support like industries seeking/enjoying fiscal incentives. This way, it is transparent, targeted and needs based, and subject to annual evaluation if still deserving, all under the discipline of a budget process.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
In an earlier column, I wrote about The Fiscal Imperatives for the Next Administration (No Money, No Honey) focusing on tax policy reform needed to sustain macro-stability and provide the much-needed resources for infrastructure and social spending.
This time, allow me to talk about how our government uses, well or badly, fiscal policy tools to help members of society who need help, focusing on recent programs for the poor and the elderly.
The good: Conditional cash transfers
Learning from the successful experience of two dozen countries, notably Indonesia and Brazil, to get maximum bang for the taxpayer buck to help reduce poverty, the administration, with the full technical and financial support of the World Bank, launched its own conditional cash transfer program under the banner of Pantawid Pamilyang Pilipino Program (4 Ps). It provides a monthly stipend of up to P1,400 (P500 per household for health and nutritional expenses and P300 per child for educational expenses up to a maximum of three children) to the poorest households of a community provided the children are kept in school. The DSWD selects the beneficiaries based on the targeting system developed for the program.
Despite apprehensions that this may end up being no different from many past programs done in the name of the poor that have ended up at best as wasteful political showcases, this program is showing good early results. Children are going back to school and getting immunized, while their mothers are having pre- and post-natal care. What it can achieve at the end of the day is to break, for the next generation, the cycle of poverty - poor nutrition, poor health, poor education, and resulting unemployment and impoverishment.
The credit for this program goes to highly regarded DSWD Secretary Esperanza Cabral, and of course, the full support of President Gloria Macapagal Arroyo who clearly saw not just the economic soundness of the program, but also its political benefits. (A professor friend who served in the Estrada administration quipped that the appointment of the right person for DSWD secretary is one area where President Arroyo did better than his boss.)
The bad: Nfa
Ask any good economist what is the biggest waste of government resources in recent years and he will readily point to the NFA program of rice subsidies. As a subsidy program it fails the needs test since the subsidized rice is available to all, whether rich or poor. Indeed, studies have shown that less than 25% of the poor have access to NFA rice. Worse, it is quite likely that a large fraction - maybe more than half - of the rice is sold by the NFA at the official government price to some lucky people who repack the NFA rice and re-sell them at market prices. According to a recent World Bank study, it costs the NFA an estimated average of P5 to deliver P1 of subsidy to the poor, the big number reflecting the wastes, leakages, and the governance deficit in its administration. It does nothing for the poor farmers who especially at a time of high rice prices (like now) are deprived the benefits of a remunerative price. On a more fundamental level, it distorts market signals and misallocates resources in the agricultural sector and rest of the economy. Finally, it is very expensive: in 2008, NFA lost P37 billion per data from the Philippine Institute of Development Studies. According to the World Bank, this may have racked up to P63 billion in 2009 (coming from losses that averaged only P5 billion annually in earlier years).
Many studies have been written on why NFA needs to be re-engineered, and how better off consumers and farmers would be if funding is redirected as targeted subsidies to poor consumers and invested in productive assets like rural infrastructure to help farmers. (You can view the most recent one in the November quarterly report of the World Bank - Towards an Inclusive Recovery at http://siteresources.worldbank.org/INTPHILIPPINES/Resources/PHLQuarterly November2009FINAL.pdf) Indeed, generations of technocrats in NEDA, Finance, and the Department of Agriculture, assisted by multilateral and bilateral institutions, have tried to push for reform without success. The vested interests are just too entrenched, and the rents too much.
Contrast the cost of NFA with the cost of the conditional cash transfer. The P10 billion this year under the 4Ps program will benefit around 3.5 million people. Consider what this means: If we had shut down NFA last year and diverted the P63 billion to a conditional cash transfer program, we would have been able to cover 100% of the country's poor (against the 25% with NFA), with each household receiving 7 times the benefits!
(The next president, whoever he may be, can't do better than reappoint Secretary Cabral to see this program move to a higher level, perhaps refined to include conditions covering other socially desirable objectives like reproductive health. NB. I have never had the privilege of meeting Dr. Cabral.)
The somewhat stupid
Despite strong recommendation from the secretary of Finance for her to veto it, the President recently signed into law a bill that would give exemptions from VAT for purchases of senior citizens for restaurant food, medicines, transportation, and movies. Like many tax exemption bills, one cannot find fault with the objectives - in this case to help the elderly, most of whom no longer receive current income. Indeed one can even argue that the amount of tax leakage is not that large, at least compared to NFA deficits, only P1.68 billion per DoF estimate; so it is not that bad from a fiscal standpoint.
However, it is somewhat stupid. Why? Because there are so many other ways of helping the elderly without reaping the unintended consequences of creating a loophole in the VAT system that create a compliance and administration nightmare, or be vulnerable to abuse by crooked traders and BIR agents. The most straightforward way is the one suggested by the Department of Finance: simply raise the discount from 20% to 30%, thus restoring the savings to the elderly that the VAT law is supposed to have deprived. The stores will simply recoup this additional expense from sales to other customers.
This will also keep the integrity and efficiency of the VAT system, one which is self policing - somebody's credit is somebody else's payment - and does not create precedence for others to clamor for the same. (Doesn't society care for the young? Why not exempt children's medicines and baby milk from VAT? How about purchases of the handicapped? Or of our soldiers, teachers, or OFWs?)
If we want to help the elderly poor, how about conditional cash transfer for them? Isn't this much better than this prime example of poorly thought out, politics of pander, VAT exemption for seniors that subsidizes in proportion to one's purchases, to the richer, the more subsidy and for the poorest, nada?
More fundamentally, if we are to improve revenue collection and maintain macrostability, we need to make our tax system - already complicated, full of discretion and loopholes - simple and easy to administer. Let us not overburden it further. Let us instead use expenditure policy to help the poor and the elderly, or for that matter all other sectors asking special support like industries seeking/enjoying fiscal incentives. This way, it is transparent, targeted and needs based, and subject to annual evaluation if still deserving, all under the discipline of a budget process.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Monday, January 11, 2010
Nat'l leadership and our collective future
Business World
Our country is at a crossroad. Results of the May elections, an orderly transfer of power, and no less, the person who will occupy the country's CEO position, will define the course of our collective future for at least the next six years.
There have been worrisome declines in objective indicators of global competitiveness, governance and transparency, economic freedom, and credit rating since 1998 (see World Economic Forum: Global Competitiveness Index, www.weforum.org;Trans-parency International:Corruption Perceptions Index, www.transparency.org; The Heritage Foundation: Index of Economic Freedom, www.heritage.org; and Standard & Poor's, www.standardandpoors.com). While it may be argued that there are factors that contributed to this decline beyond the control of the national leadership, say, economic tsunamis like the Asian and global financial crises, such consistent RELATIVE declines over such an extended period compared to peers outside and within our neighborhood, cannot but be attributed to leadership failure- if not to malign, then benign, neglect.
It has not always been this way, and more importantly, need not be. For example, can there be good reason for us to be ranked 144 out of 183 in a World Bank report released two weeks ago on ease of doing business, even below Pakistan, Bangladesh, the West Bank and Gaza, and down there with troubled countries Zimbabwe and Afghanistan? Or worse, continue on a downward descent?
Assuredly none. I earlier wrote about a study that my LBT colleague and I did for the World Bank Growth Commission (chaired by Nobel Prize winner Michael Spence) on the political economy of reform during the Ramos years (http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
In it, we looked at what it took the Ramos administration to successfully push for reform (in telecom de-monopolization, water privatization, and oil deregulation) working against strong special interests (e. g., from affected businessmen, labor constituencies, political ideologues) and using instruments, both formal and informal, at the disposal of the presidency in an environment of weak, lethargic or sometimes obstructive/compromised institutions, including an underdeveloped and poorly motivated bureaucracy.
It finds, no surprise, that leadership matters crucially.
The personal qualities and experience of the leader for the most difficult job in the country matter much. His ability to think strategically; the clarity of this national vision and its articulation; his ability to attract, inspire, manage, and forge cohesion in a first- class team; his ability to build coalitions and political consensus and educate the public and get their support to overcome obstacles and persevere; and other leadership attributes and management skills come out as elements for success in pushing reforms in a difficult terrain.
Mr. Ramos has had preparation for leadership at an early age. A West Point graduate with degrees in Engineering and an MBA, he honed his executive skills over decades within the military and civilian bureaucracies and his political skills in dealing with politicians and the public in areas of peacekeeping and development. As former Finance Secretary Roberto de Ocampo quipped explaining his successes upon receiving the Finance Minister award from Euromoney in 1996, A finance secretary has many key decisions to make; not least of them, which president to serve.
The case studies as well showed the importance of timing. A new president has six years to make a difference. He and his team cannot solve everything in one go - indeed some problems may be so intractable, or be met with overwhelming political opposition, that if he started on them first, he would have sown the seeds, and demonstrably shown, abject failure early on, in what may become the signature of his administration.
He needs to hit the ground running, and score early, and impressive, victories that build confidence and get the public fully behind him for more difficult items down the road of his reform agenda. During the Ramos administration, the immediate problem, and opportunity, was getting the economy on track after debilitating outages that saw GDP contract by 0.6% - to put back the lights both literally and in terms of business confidence. This was achieved in a record time of 15 months, thanks to Ramos's no- nonsense leadership and empowerment of known achievers: Energy Secretary Del Lazaro, recruited from a distinguished career in the private and briefly in the public sector, and NPC President Sonny Viray, a Phd in Electrical Engineering and dean of the UP College of Engineering.
Such a victory set the stage for reviving investments and rallying public support behind other reforms to improve global competitiveness, including bringing to the next stage, the trade and investment liberalization started earlier, deregulation, privatization/public-private partnerships, fiscal consolidation, that has contributed importantly to the resilience of the Philippine economy even during the Asian crisis and the more recent global financial tsunami. The improvements in objective indicators of competitiveness and governance/transparency, economic freedom, and credit rating since 1992 are a matter of record as have been their deterioration since 1998.
The take-away from all this is not that our country is doomed to take one step forward, and then two steps backward, but that it is possible to reverse the decline. For our next CEO, improving fiscal performance, side by side with a well thought-out and executed infrastructure and social spending program, including through transparent public-private partnerships, would be a good place to start. Our collective future depends on it.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc., managing director of Lazaro Bernardo Tiu & Associates, Inc., and was undersecretary of finance during the Aquino and Ramos administrations.
Our country is at a crossroad. Results of the May elections, an orderly transfer of power, and no less, the person who will occupy the country's CEO position, will define the course of our collective future for at least the next six years.
There have been worrisome declines in objective indicators of global competitiveness, governance and transparency, economic freedom, and credit rating since 1998 (see World Economic Forum: Global Competitiveness Index, www.weforum.org;Trans-parency International:Corruption Perceptions Index, www.transparency.org; The Heritage Foundation: Index of Economic Freedom, www.heritage.org; and Standard & Poor's, www.standardandpoors.com). While it may be argued that there are factors that contributed to this decline beyond the control of the national leadership, say, economic tsunamis like the Asian and global financial crises, such consistent RELATIVE declines over such an extended period compared to peers outside and within our neighborhood, cannot but be attributed to leadership failure- if not to malign, then benign, neglect.
It has not always been this way, and more importantly, need not be. For example, can there be good reason for us to be ranked 144 out of 183 in a World Bank report released two weeks ago on ease of doing business, even below Pakistan, Bangladesh, the West Bank and Gaza, and down there with troubled countries Zimbabwe and Afghanistan? Or worse, continue on a downward descent?
Assuredly none. I earlier wrote about a study that my LBT colleague and I did for the World Bank Growth Commission (chaired by Nobel Prize winner Michael Spence) on the political economy of reform during the Ramos years (http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
In it, we looked at what it took the Ramos administration to successfully push for reform (in telecom de-monopolization, water privatization, and oil deregulation) working against strong special interests (e. g., from affected businessmen, labor constituencies, political ideologues) and using instruments, both formal and informal, at the disposal of the presidency in an environment of weak, lethargic or sometimes obstructive/compromised institutions, including an underdeveloped and poorly motivated bureaucracy.
It finds, no surprise, that leadership matters crucially.
The personal qualities and experience of the leader for the most difficult job in the country matter much. His ability to think strategically; the clarity of this national vision and its articulation; his ability to attract, inspire, manage, and forge cohesion in a first- class team; his ability to build coalitions and political consensus and educate the public and get their support to overcome obstacles and persevere; and other leadership attributes and management skills come out as elements for success in pushing reforms in a difficult terrain.
Mr. Ramos has had preparation for leadership at an early age. A West Point graduate with degrees in Engineering and an MBA, he honed his executive skills over decades within the military and civilian bureaucracies and his political skills in dealing with politicians and the public in areas of peacekeeping and development. As former Finance Secretary Roberto de Ocampo quipped explaining his successes upon receiving the Finance Minister award from Euromoney in 1996, A finance secretary has many key decisions to make; not least of them, which president to serve.
The case studies as well showed the importance of timing. A new president has six years to make a difference. He and his team cannot solve everything in one go - indeed some problems may be so intractable, or be met with overwhelming political opposition, that if he started on them first, he would have sown the seeds, and demonstrably shown, abject failure early on, in what may become the signature of his administration.
He needs to hit the ground running, and score early, and impressive, victories that build confidence and get the public fully behind him for more difficult items down the road of his reform agenda. During the Ramos administration, the immediate problem, and opportunity, was getting the economy on track after debilitating outages that saw GDP contract by 0.6% - to put back the lights both literally and in terms of business confidence. This was achieved in a record time of 15 months, thanks to Ramos's no- nonsense leadership and empowerment of known achievers: Energy Secretary Del Lazaro, recruited from a distinguished career in the private and briefly in the public sector, and NPC President Sonny Viray, a Phd in Electrical Engineering and dean of the UP College of Engineering.
Such a victory set the stage for reviving investments and rallying public support behind other reforms to improve global competitiveness, including bringing to the next stage, the trade and investment liberalization started earlier, deregulation, privatization/public-private partnerships, fiscal consolidation, that has contributed importantly to the resilience of the Philippine economy even during the Asian crisis and the more recent global financial tsunami. The improvements in objective indicators of competitiveness and governance/transparency, economic freedom, and credit rating since 1992 are a matter of record as have been their deterioration since 1998.
The take-away from all this is not that our country is doomed to take one step forward, and then two steps backward, but that it is possible to reverse the decline. For our next CEO, improving fiscal performance, side by side with a well thought-out and executed infrastructure and social spending program, including through transparent public-private partnerships, would be a good place to start. Our collective future depends on it.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc., managing director of Lazaro Bernardo Tiu & Associates, Inc., and was undersecretary of finance during the Aquino and Ramos administrations.
Monday, November 23, 2009
The fiscal deficit
Business World
My colleague, Ms. Margarita D. Gonzales, and I just gave an update on the Philippine fiscal picture in light of recent announcement by the Department of Finance of the end-October numbers to fund managers and holders of Philippine RoPs, who are subscribers to Global Source, a network of independent analysts. This is what I told them:
- The headline clearly is we have already breached government's full- year deficit ceiling (P250 B, 3.2% of GDP) with the year-to-date deficit already at P266.1 billion.
' The national deficit continued to widen as revenues weakened - down 7.6% yoy in October (down 4.8% Jan.-Oct.), still due to an economic slowdown and, more so, tax-reducing measures (e.g., lowered corporate income tax, minimum wage exemptions, reversion to franchise taxes in lieu of other taxes for electricity transmission).
' BIR collections declined again in October (down 5.1% yoy Jan.- Oct.) while BOC collections fell considerably during the month (down 15.7% yoy Jan-Oct ).
- The finance secretary's official comment has been that the department will continue to work harder and endeavor to be more effective in implementing our tax administration measures, hoping that Congress will also support them in their bid for revenue enhancement measures that can bring in sustainable sources of revenues for the government.
' Finance department now expects a P280 B deficit (3.6% of GDP) factoring in sale of SMC shares, but without that , about P300 B (3.8% of GDP)
- Here at GlobalSource Philippines, we are sticking to our assessment made in our last quarterly outlook report. The breach of the official target is in line with our expectations as we look to a number closer to 4% of GDP in 2009 (about P310 B).
- Unfortunately, there is little hope now for narrowing this year' s fiscal gap:
' One, because of the recent typhoons/floods, collections can be expected to weaken further (with calamity losses tax-deductible and possibly some leniency for humanitarian reasons) while there is now even greater pressure for the government to continue spending (for reconstruction and rehabilitation).
' Two, the touted improvement in administrative measures are not expected to add that much to the equation.
' Three, the SMC sale, expected to yield P50 billion or almost one percent of GDP, which is what the government is banking on, involves legal hurdles over ownership. This is a case that has been pending for years, and unlikely to be decided before yearend.
' Also, prospects are weak for other planned privatizations judged by the recent bid failure of a Metro Manila property (FTI complex in Taguig) and the loud protestations by politicians over alleged possible midnight asset sales by an outgoing administration (including protests over the sale of a supposedly hicstorical property in Fujima, Japan).
' Finally, we already see a narrowing (if not closed) window for passage of tax reforms (especially new measures) over the next few months given the May 2010 elections. In fact, it would be best if nothing comes out of this Congress. Why? Given we are already in election season, the risk is that what comes out will be the exact opposite of what is needed as what happened with the Comprehensive Tax Reform package in 1995.
y A good example of a bad measure is recently proposed legislation by an influential congressman, which seems to have the support of the finance secretary, to encourage voluntary advance tax payments to generate P100 billion for flooding reconstruction by offering a discount to the taxpayers. This kind of revenue anticipation, apart from causing confusion in government finance statistics time series data, can only cost government more than if it simply borrowed from a very liquid debt market. Clearly, for taxpayers to find this attractive, the discount government needs to give will have to be at least equal to taxpayers' cost of borrowing, which is much higher than government's own cost of borrowing.
- Now, let us let us look at the prospects for 2010:
' We note that government is sticking to its existing deficit target (P233.4 B, 2.8% of GDP).
' We however are not so optimistic that this is achievable (will likely still breach 3% of GDP given the circumstances, e.g., still tepid growth, lack of needed new tax measures).
' Notably, the tax effort ratio could shrink to pre-2006 levels this year, i.e., the range just prior to the introduction of the expanded VAT, and significant improvement will definitely require that new fiscal reform measures be implemented.
- But, as we had stated in our latest quarterly report, we aren't that worried about the impact on financial markets for a few reasons:
' The continued high level of remittances (up 8.6% in Sep, up 4.2% Jan-Sep, defying previous expectations of a decline) as a robust current account allows a healthy amount of dollar borrowing (enough to calm the peso bond market, and allowing even a pre- funding of next year's requirements) while keeping liquidity conditions loose.
' A deficit of the size currently expected has already been factored in by the markets for 2009 with the consensus that such is manageable.
' Though the deficit will likely not narrow by much next year, it would still be an improvement over this year's fiscal gap ;and we have greater hopes that reform measures can be successfully pushed with the entry of a new and more popular administration.
- In short, while emerging fiscal concerns are certainly daunting with the poor state of government finances and embedded revenue and spending millstone, the new political environment gives us a promising window to animate the country/economy and improve growth potentials over the next six years helping the new government to achieve hoped-for medium-term fiscal consolidation (i.e., reining in future deficits and bringing the debt ratio back on a downward trajectory).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
My colleague, Ms. Margarita D. Gonzales, and I just gave an update on the Philippine fiscal picture in light of recent announcement by the Department of Finance of the end-October numbers to fund managers and holders of Philippine RoPs, who are subscribers to Global Source, a network of independent analysts. This is what I told them:
- The headline clearly is we have already breached government's full- year deficit ceiling (P250 B, 3.2% of GDP) with the year-to-date deficit already at P266.1 billion.
' The national deficit continued to widen as revenues weakened - down 7.6% yoy in October (down 4.8% Jan.-Oct.), still due to an economic slowdown and, more so, tax-reducing measures (e.g., lowered corporate income tax, minimum wage exemptions, reversion to franchise taxes in lieu of other taxes for electricity transmission).
' BIR collections declined again in October (down 5.1% yoy Jan.- Oct.) while BOC collections fell considerably during the month (down 15.7% yoy Jan-Oct ).
- The finance secretary's official comment has been that the department will continue to work harder and endeavor to be more effective in implementing our tax administration measures, hoping that Congress will also support them in their bid for revenue enhancement measures that can bring in sustainable sources of revenues for the government.
' Finance department now expects a P280 B deficit (3.6% of GDP) factoring in sale of SMC shares, but without that , about P300 B (3.8% of GDP)
- Here at GlobalSource Philippines, we are sticking to our assessment made in our last quarterly outlook report. The breach of the official target is in line with our expectations as we look to a number closer to 4% of GDP in 2009 (about P310 B).
- Unfortunately, there is little hope now for narrowing this year' s fiscal gap:
' One, because of the recent typhoons/floods, collections can be expected to weaken further (with calamity losses tax-deductible and possibly some leniency for humanitarian reasons) while there is now even greater pressure for the government to continue spending (for reconstruction and rehabilitation).
' Two, the touted improvement in administrative measures are not expected to add that much to the equation.
' Three, the SMC sale, expected to yield P50 billion or almost one percent of GDP, which is what the government is banking on, involves legal hurdles over ownership. This is a case that has been pending for years, and unlikely to be decided before yearend.
' Also, prospects are weak for other planned privatizations judged by the recent bid failure of a Metro Manila property (FTI complex in Taguig) and the loud protestations by politicians over alleged possible midnight asset sales by an outgoing administration (including protests over the sale of a supposedly hicstorical property in Fujima, Japan).
' Finally, we already see a narrowing (if not closed) window for passage of tax reforms (especially new measures) over the next few months given the May 2010 elections. In fact, it would be best if nothing comes out of this Congress. Why? Given we are already in election season, the risk is that what comes out will be the exact opposite of what is needed as what happened with the Comprehensive Tax Reform package in 1995.
y A good example of a bad measure is recently proposed legislation by an influential congressman, which seems to have the support of the finance secretary, to encourage voluntary advance tax payments to generate P100 billion for flooding reconstruction by offering a discount to the taxpayers. This kind of revenue anticipation, apart from causing confusion in government finance statistics time series data, can only cost government more than if it simply borrowed from a very liquid debt market. Clearly, for taxpayers to find this attractive, the discount government needs to give will have to be at least equal to taxpayers' cost of borrowing, which is much higher than government's own cost of borrowing.
- Now, let us let us look at the prospects for 2010:
' We note that government is sticking to its existing deficit target (P233.4 B, 2.8% of GDP).
' We however are not so optimistic that this is achievable (will likely still breach 3% of GDP given the circumstances, e.g., still tepid growth, lack of needed new tax measures).
' Notably, the tax effort ratio could shrink to pre-2006 levels this year, i.e., the range just prior to the introduction of the expanded VAT, and significant improvement will definitely require that new fiscal reform measures be implemented.
- But, as we had stated in our latest quarterly report, we aren't that worried about the impact on financial markets for a few reasons:
' The continued high level of remittances (up 8.6% in Sep, up 4.2% Jan-Sep, defying previous expectations of a decline) as a robust current account allows a healthy amount of dollar borrowing (enough to calm the peso bond market, and allowing even a pre- funding of next year's requirements) while keeping liquidity conditions loose.
' A deficit of the size currently expected has already been factored in by the markets for 2009 with the consensus that such is manageable.
' Though the deficit will likely not narrow by much next year, it would still be an improvement over this year's fiscal gap ;and we have greater hopes that reform measures can be successfully pushed with the entry of a new and more popular administration.
- In short, while emerging fiscal concerns are certainly daunting with the poor state of government finances and embedded revenue and spending millstone, the new political environment gives us a promising window to animate the country/economy and improve growth potentials over the next six years helping the new government to achieve hoped-for medium-term fiscal consolidation (i.e., reining in future deficits and bringing the debt ratio back on a downward trajectory).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Friday, November 13, 2009
Crude solution
Business World
Introspective
Acouple of weeks ago, President Gloria Macapagal-Arroyo issued an executive order that turned back oil prices in Luzon, which has been placed under a state of calamity, to where they were on October 15 as relief to typhoon victims. This added to an already long list of price controls temporarily placed in typhoon-stricken areas on items ranging from rice to sardines to funeral services.
The cap on fuel prices unleashed the sharpest response from the business sector, largely because of the history behind oil price controls. The industry was deregulated only in the late 1990s, and memories of shortages such a policy produced remained fresh in people's minds, not to mention the enormous subsidy cost of trying to stabilize prices.
Local business groups and foreign chambers of commerce have railed against the imposed measure. Their arguments were hard to refute - price controls would only distort supply, spur shortages, create a black market (and black market prices), lead to profit losses for oil firms, and discourage investment. Those who showed some support for the wielding of state powers highlighted the need for it to be used sparingly and within a very limited time.
Even the central bank has spoken up on the issue. A deputy governor of the Bangko Sentral ng Pilipinas (BSP) warned the public on the dangers of price controls, which he said created market distortions and affected availability of supply in the long run. A Palace economic adviser has also weighed in on the issue, arguing how price caps on petroleum products disproportionately benefited the well-to-do and resulted in revenue losses of as much as P4.5 billion (from VAT and income taxes), while opining how it was much sounder for the government to just target help to typhoon victims (e.g., through diesel discounts, discounted fuel access cards for lower-to-middle- income families, and income transfers to the poor).
But the President has kept distance from the debates, leaving it to a task force led by the energy and justice departments to decide whether or not price controls should be lifted. The task force has been meeting with the private sector but says it will need to wait for the verdict of the National Disaster Coordinating Council (NDCC) on how soon the emergency situation can be expected to end. With its hands-off policy, the Palace will also likely let the courts defuse tension, as one of the Big Three (Pilipinas Shell Petroleum Corp.) has questioned the legality of EO 839 and asked for its lifting.
The capping of oil prices may be perceived as merely a well- intentioned but wrong-headed policy designed to ease the plight of calamity victims. However, the lack of a clear effort toward consensus-building hints at a less straightforward agenda, not the first time that the country's leader would play to the gallery (e.g., less than full recovery of power costs until 2004, brief suspension of automatic indexation of water tariffs, and freezing of toll fees).
Apart from failure to confer with industry players, only a few Cabinet officials had apparently been closely consulted in crafting the measure, with the puzzling omission of the secretaries of energy, finance and economic planning and the central bank governor.
At the moment, there is a battle of wills between oil companies and government. Oil companies threaten shortages and shutdowns, while government officials and administration lawmakers warn of the full force of the law. One Palace insider describes the mood in the corridors of power as pregnant with petulance.
The danger is, the longer this is allowed to drag, the messier it becomes for the local fuel market, the harder to unwind, and the worse for the economy in general. Already, arbitrage and shortages are being reported in certain areas in Luzon where oil firms allege they have to sell at a loss, while complaints have been made about escalating prices elsewhere in the country.
The sector to watch out for is LPG (also used for household cooking), a sensitive market that will likely be the first to take a hit because of the weak financial muscle and low profit buffers of independent players who together hold more than a fifth of market share. LPG retailers have threatened to stop sales if price caps continue until December.
Inflation also becomes harder for monetary authorities to manage if the present situation continues, explaining BSP's timely take on the issue. As one central bank official cryptically confided to friends, maybe [the] measure is temporary but caution ensures it will not be permanent. Local pump prices have kept relatively steady despite the rise in world prices purportedly as a result of price wars, but will later have to follow global trends. Keeping rates below market level for a long time will only lead to price surges when ceilings are removed.
For the longer term, the present episode could mean a dilution of the oil deregulation law which the Ramos government took pains to establish. Already, Congress is looking for ways to amend the law and widen the powers of the state to correct abuses especially during special circumstances (e.g., by raising the transparency of price-setting, spurring competition by building up smaller players, or bringing back some form of price regulation).
The quickest break to the impasse would be if both government and oil players agree on a compromise - a discount for typhoon victims perhaps, as what seems to be the emerging consensus, or limiting the measure to highly distressed areas with an agreement to gradually phase in price increases elsewhere in Luzon. The NDCC could also decide that a state of calamity no longer holds, making any court case against the freezing of oil prices academic. Otherwise, oil firms could simply wait for the court system to grant a restraining order on the measure which should not be too long though the relief will be temporary.
The above scenarios still offer the administration a graceful exit from the self-inflicted dilemma.
Government trumpeters have repeatedly assured that price measures will generally be geographically, temporally, and legally bound, but the truth is how long caps on oil prices in particular can last depends entirely on the President. In the meantime, inventories have been dropping as oil importers begin to cancel scheduled purchases - from the usual three weeks to less than two, according to the energy secretary - creating a possible backdrop, some speculate, for a state-led fuel allocation plan. Listening to industry experts, one gets the feel that the longest major players can survive this game is two months and the smaller players maybe just one. Government could of course try to maximize brownie points and stretch oil firms to their limits before it finally folds its cards, but this would be at a great cost ultimately.
(This column is based on a GlobalSource report written for international fund managers entitled Crude Solution, co-authored by Margarita D. Gonzales.)
Romeo Bernardo is board member of The Institute for Development and Econometric Analysis and is managing director of Lazaro, Bernardo, Tiu and Associates, Inc.
Introspective
Acouple of weeks ago, President Gloria Macapagal-Arroyo issued an executive order that turned back oil prices in Luzon, which has been placed under a state of calamity, to where they were on October 15 as relief to typhoon victims. This added to an already long list of price controls temporarily placed in typhoon-stricken areas on items ranging from rice to sardines to funeral services.
The cap on fuel prices unleashed the sharpest response from the business sector, largely because of the history behind oil price controls. The industry was deregulated only in the late 1990s, and memories of shortages such a policy produced remained fresh in people's minds, not to mention the enormous subsidy cost of trying to stabilize prices.
Local business groups and foreign chambers of commerce have railed against the imposed measure. Their arguments were hard to refute - price controls would only distort supply, spur shortages, create a black market (and black market prices), lead to profit losses for oil firms, and discourage investment. Those who showed some support for the wielding of state powers highlighted the need for it to be used sparingly and within a very limited time.
Even the central bank has spoken up on the issue. A deputy governor of the Bangko Sentral ng Pilipinas (BSP) warned the public on the dangers of price controls, which he said created market distortions and affected availability of supply in the long run. A Palace economic adviser has also weighed in on the issue, arguing how price caps on petroleum products disproportionately benefited the well-to-do and resulted in revenue losses of as much as P4.5 billion (from VAT and income taxes), while opining how it was much sounder for the government to just target help to typhoon victims (e.g., through diesel discounts, discounted fuel access cards for lower-to-middle- income families, and income transfers to the poor).
But the President has kept distance from the debates, leaving it to a task force led by the energy and justice departments to decide whether or not price controls should be lifted. The task force has been meeting with the private sector but says it will need to wait for the verdict of the National Disaster Coordinating Council (NDCC) on how soon the emergency situation can be expected to end. With its hands-off policy, the Palace will also likely let the courts defuse tension, as one of the Big Three (Pilipinas Shell Petroleum Corp.) has questioned the legality of EO 839 and asked for its lifting.
The capping of oil prices may be perceived as merely a well- intentioned but wrong-headed policy designed to ease the plight of calamity victims. However, the lack of a clear effort toward consensus-building hints at a less straightforward agenda, not the first time that the country's leader would play to the gallery (e.g., less than full recovery of power costs until 2004, brief suspension of automatic indexation of water tariffs, and freezing of toll fees).
Apart from failure to confer with industry players, only a few Cabinet officials had apparently been closely consulted in crafting the measure, with the puzzling omission of the secretaries of energy, finance and economic planning and the central bank governor.
At the moment, there is a battle of wills between oil companies and government. Oil companies threaten shortages and shutdowns, while government officials and administration lawmakers warn of the full force of the law. One Palace insider describes the mood in the corridors of power as pregnant with petulance.
The danger is, the longer this is allowed to drag, the messier it becomes for the local fuel market, the harder to unwind, and the worse for the economy in general. Already, arbitrage and shortages are being reported in certain areas in Luzon where oil firms allege they have to sell at a loss, while complaints have been made about escalating prices elsewhere in the country.
The sector to watch out for is LPG (also used for household cooking), a sensitive market that will likely be the first to take a hit because of the weak financial muscle and low profit buffers of independent players who together hold more than a fifth of market share. LPG retailers have threatened to stop sales if price caps continue until December.
Inflation also becomes harder for monetary authorities to manage if the present situation continues, explaining BSP's timely take on the issue. As one central bank official cryptically confided to friends, maybe [the] measure is temporary but caution ensures it will not be permanent. Local pump prices have kept relatively steady despite the rise in world prices purportedly as a result of price wars, but will later have to follow global trends. Keeping rates below market level for a long time will only lead to price surges when ceilings are removed.
For the longer term, the present episode could mean a dilution of the oil deregulation law which the Ramos government took pains to establish. Already, Congress is looking for ways to amend the law and widen the powers of the state to correct abuses especially during special circumstances (e.g., by raising the transparency of price-setting, spurring competition by building up smaller players, or bringing back some form of price regulation).
The quickest break to the impasse would be if both government and oil players agree on a compromise - a discount for typhoon victims perhaps, as what seems to be the emerging consensus, or limiting the measure to highly distressed areas with an agreement to gradually phase in price increases elsewhere in Luzon. The NDCC could also decide that a state of calamity no longer holds, making any court case against the freezing of oil prices academic. Otherwise, oil firms could simply wait for the court system to grant a restraining order on the measure which should not be too long though the relief will be temporary.
The above scenarios still offer the administration a graceful exit from the self-inflicted dilemma.
Government trumpeters have repeatedly assured that price measures will generally be geographically, temporally, and legally bound, but the truth is how long caps on oil prices in particular can last depends entirely on the President. In the meantime, inventories have been dropping as oil importers begin to cancel scheduled purchases - from the usual three weeks to less than two, according to the energy secretary - creating a possible backdrop, some speculate, for a state-led fuel allocation plan. Listening to industry experts, one gets the feel that the longest major players can survive this game is two months and the smaller players maybe just one. Government could of course try to maximize brownie points and stretch oil firms to their limits before it finally folds its cards, but this would be at a great cost ultimately.
(This column is based on a GlobalSource report written for international fund managers entitled Crude Solution, co-authored by Margarita D. Gonzales.)
Romeo Bernardo is board member of The Institute for Development and Econometric Analysis and is managing director of Lazaro, Bernardo, Tiu and Associates, Inc.
Monday, November 2, 2009
Oil price controls
Business World
Introspective
The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.
To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.
If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.
The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.
Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.
Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.
As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.
At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.
The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.
Introspective
The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.
To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.
If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.
The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.
Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.
Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.
As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.
At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.
The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.
Monday, October 5, 2009
Fiscal imperative for next administration
Business World
Introspective
As one would expect, there have been a spate of nonpartisan exercises on a road map for the country post 2010 among institutions that have an interest in the long-term development of the country. I have been a participant/resource person in a number of them - including, the ADB, the Makati Business Club and the Ramos Peace and Development Foundation; the last one involving six presidentiables who were invited to present their platforms.
Giving the welcome remarks in the Ramos forum, I noted that while we keenly awaited the expositions of the aspirants, many of us are likely to believe that It is useless to try to hold people to anything they say when they are madly in love, drunk - or running for public office.
This was recently validated by good friend, economist guru Philip Medalla. He said that each time he and his collaborators from the UP School of Economics presented their road map with heavy emphasis on how to raise revenues to finance neglected public spending programs, none would publicly embrace the well-thought-out tax measures they propose, like increase in the VAT rate and oil taxes. The solution of the presidential hopefuls then (which do not include the current two front-runners) almost uniformly was, I will improve collections from the BIR and Bureau of Customs through better and more honest administration.
No one can disagree with the need for collection efficiency and honesty. However, people with first-hand experience with reform efforts in these bureaus will say that while such reforms are an essential component of a credible fiscal program and should thus be pursued with resolute political will - this will take time to yield results.
(Nor can the new government rely on privatization receipts - the bottom has been scraped with the disposal of the remaining 40% government stake in Petron.)
It does not help that the new government will inherit a practically bankrupt government, as newly resigned economic planning secretary Ralph Recto was quoted to have said last month. As a senator, he was principal author of the VAT law that is helping shore up the country's finances. In that interview, he expressed worry over the spending authorized by Congress that is contributing to future spending demands that are unmatched by corresponding revenues, i.e., the large increase in salaries and military pension over the next few years. Add to that the structural erosion in revenues that is embedded in some tax laws both passed and forthcoming (a number with doubtful economic and social justification) and the expected still weak recovery from recession keeping tax collections down. While a fiscal crisis was averted with the expanded VAT law in 2005, we are back on a worsening trajectory on all fiscal indicators, be it tax to GDP, deficit to GDP, or public debt to GDP.
Thus, absent any change in the tax structure and base, administrative reform cannot possibly generate the needed increased revenues. Nor would such a weak and incomplete fiscal program that depended on incremental improvements from administrative measures achieve the credibility demanded by the domestic markets and the international financial community to finance required infrastructure and social spending over the next six years.
We will need front-loading of strong, believable fiscal action- otherwise, it will be a case of too little too late and no money, no honey.
What are the measures that can help generate such levels of money and credibility?
The package advocated by UP economists/professor friends who have also served in senior posts in government (Dante Canlas, Ben Diokno, Philip Medalla ) included: a) reform fiscal incentives; b) reform excise taxes on cigarettes and liquor; c) increase the VAT to 15% while lowering the personal and corporate income taxes to 25%; d) adopt higher/variable tax rates on fuel products.
Items (a) and (b) have been on the legislative agenda of the Department of Finance for over a decade, and is still in the mill in the current Congress. While I have pushed for these in the past, both as a public servant and now as an economic commentator, my wish is that nothing comes out of this Congress. Why? Given that this is now election season, the risk is that what comes out will be the exact opposite of what is needed as had happened with the Comprehensive Tax Reform Package in the 1990s. It is best that the Department of Finance technocrats muster their energies for keeping further revenue erosion bills at bay. (It would be too much to expect a presidential veto when we are prematurely in full election fever pitch.)
Certainly then, (a) and (b) need to be pushed by the next president. All the technical work has been done there. What it will take is political commitment, and political skill.
I also support the proposed increase in VAT to 15% while lowering the personal and corporate income taxes. This move can increase the net take of government from a broad and neutral tax base, while giving a break to honest taxpayers who correctly report and pay their income taxes.
Finally, we need to increase the tax take from oil products, hand in hand with full enforcement of anti-smuggling laws. This can take the form of either a complex variable tariff as advocated by friend Ben Diokno, or a simpler increase in excise tax indexed to inflation, which I prefer. Either way, this will not be easy. The next administration will need to make the public understand that: a) taxes on petroleum products are progressive, i.e., the rich pay proportionately more than the poor - more progressive than excises on tobacco and alcohol and the VAT; b) the Philippines has lower oil taxes compared to most countries at a similar income level; c) the money they are paying will help build infrastructure that will generate investment and jobs, and provide direct assistance to the disadvantaged through social services like education and health.
It will also require determination to implement the law against oil smuggling.
None of these are easy, but not impossible for a new president who has a genuine mandate, has renewed people's hopes, and has the skill to do it.
The candidates do not need to talk of these hard measures at this time. What is needed is a leader who can walk the walk at the right time. A leader able to set the vision, rally the people to bring results in ways that are possible to accomplish at the given time and openings available and working through weak institutions and contending with strong vested interests. (The Political Economy of Reform, Working Paper No. 39, World Bank Commission on Growth and Development, Bernardo and Tang, 2008
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Introspective
As one would expect, there have been a spate of nonpartisan exercises on a road map for the country post 2010 among institutions that have an interest in the long-term development of the country. I have been a participant/resource person in a number of them - including, the ADB, the Makati Business Club and the Ramos Peace and Development Foundation; the last one involving six presidentiables who were invited to present their platforms.
Giving the welcome remarks in the Ramos forum, I noted that while we keenly awaited the expositions of the aspirants, many of us are likely to believe that It is useless to try to hold people to anything they say when they are madly in love, drunk - or running for public office.
This was recently validated by good friend, economist guru Philip Medalla. He said that each time he and his collaborators from the UP School of Economics presented their road map with heavy emphasis on how to raise revenues to finance neglected public spending programs, none would publicly embrace the well-thought-out tax measures they propose, like increase in the VAT rate and oil taxes. The solution of the presidential hopefuls then (which do not include the current two front-runners) almost uniformly was, I will improve collections from the BIR and Bureau of Customs through better and more honest administration.
No one can disagree with the need for collection efficiency and honesty. However, people with first-hand experience with reform efforts in these bureaus will say that while such reforms are an essential component of a credible fiscal program and should thus be pursued with resolute political will - this will take time to yield results.
(Nor can the new government rely on privatization receipts - the bottom has been scraped with the disposal of the remaining 40% government stake in Petron.)
It does not help that the new government will inherit a practically bankrupt government, as newly resigned economic planning secretary Ralph Recto was quoted to have said last month. As a senator, he was principal author of the VAT law that is helping shore up the country's finances. In that interview, he expressed worry over the spending authorized by Congress that is contributing to future spending demands that are unmatched by corresponding revenues, i.e., the large increase in salaries and military pension over the next few years. Add to that the structural erosion in revenues that is embedded in some tax laws both passed and forthcoming (a number with doubtful economic and social justification) and the expected still weak recovery from recession keeping tax collections down. While a fiscal crisis was averted with the expanded VAT law in 2005, we are back on a worsening trajectory on all fiscal indicators, be it tax to GDP, deficit to GDP, or public debt to GDP.
Thus, absent any change in the tax structure and base, administrative reform cannot possibly generate the needed increased revenues. Nor would such a weak and incomplete fiscal program that depended on incremental improvements from administrative measures achieve the credibility demanded by the domestic markets and the international financial community to finance required infrastructure and social spending over the next six years.
We will need front-loading of strong, believable fiscal action- otherwise, it will be a case of too little too late and no money, no honey.
What are the measures that can help generate such levels of money and credibility?
The package advocated by UP economists/professor friends who have also served in senior posts in government (Dante Canlas, Ben Diokno, Philip Medalla ) included: a) reform fiscal incentives; b) reform excise taxes on cigarettes and liquor; c) increase the VAT to 15% while lowering the personal and corporate income taxes to 25%; d) adopt higher/variable tax rates on fuel products.
Items (a) and (b) have been on the legislative agenda of the Department of Finance for over a decade, and is still in the mill in the current Congress. While I have pushed for these in the past, both as a public servant and now as an economic commentator, my wish is that nothing comes out of this Congress. Why? Given that this is now election season, the risk is that what comes out will be the exact opposite of what is needed as had happened with the Comprehensive Tax Reform Package in the 1990s. It is best that the Department of Finance technocrats muster their energies for keeping further revenue erosion bills at bay. (It would be too much to expect a presidential veto when we are prematurely in full election fever pitch.)
Certainly then, (a) and (b) need to be pushed by the next president. All the technical work has been done there. What it will take is political commitment, and political skill.
I also support the proposed increase in VAT to 15% while lowering the personal and corporate income taxes. This move can increase the net take of government from a broad and neutral tax base, while giving a break to honest taxpayers who correctly report and pay their income taxes.
Finally, we need to increase the tax take from oil products, hand in hand with full enforcement of anti-smuggling laws. This can take the form of either a complex variable tariff as advocated by friend Ben Diokno, or a simpler increase in excise tax indexed to inflation, which I prefer. Either way, this will not be easy. The next administration will need to make the public understand that: a) taxes on petroleum products are progressive, i.e., the rich pay proportionately more than the poor - more progressive than excises on tobacco and alcohol and the VAT; b) the Philippines has lower oil taxes compared to most countries at a similar income level; c) the money they are paying will help build infrastructure that will generate investment and jobs, and provide direct assistance to the disadvantaged through social services like education and health.
It will also require determination to implement the law against oil smuggling.
None of these are easy, but not impossible for a new president who has a genuine mandate, has renewed people's hopes, and has the skill to do it.
The candidates do not need to talk of these hard measures at this time. What is needed is a leader who can walk the walk at the right time. A leader able to set the vision, rally the people to bring results in ways that are possible to accomplish at the given time and openings available and working through weak institutions and contending with strong vested interests. (The Political Economy of Reform, Working Paper No. 39, World Bank Commission on Growth and Development, Bernardo and Tang, 2008
http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf).
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
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