PIDS: Bridging the gap between knowledge and power

Posted on March 27, 2016 09:19:00 PM

Outside of beauty contests and boxing, there are few lists where the Philippines takes top place. Thus, it is a source of particular pride for me to banner in this column that the Philippine Institute for Development Studies (PIDS) was recognized once again as the top social policy think tank in Asia and among the top 50 in this field globally. This high recognition was given by the University of Pennsylvania’s Think Tank and Civil Societies Program (TTCSP).

            

Commenting on this recognition, PIDS President Dr. Gilbert Llanto observed: “Despite having only a handful of researchers compared to other better endowed research institutes in the region and in the Philippines, PIDS has consistently made significant contributions and influence on Philippine development policy through its active and close collaboration with government agencies, academic and research institutions, and international organizations.”

Its current board includes Planning Secretary Emmanuel Esguerra as ex-officio Chair (succeeding now Competition Council Chairman Dr. Arsenio Balisacan), Dr. William Padolina, Atty. Rafael Perpetuo Lotilla, UP President Alfredo Pascual (incoming Trustee), and Dr. Llanto, who succeeded Dr. Josef Yap. PIDS was first recognized by TTCSP under Dr. Yap’s watch.

I congratulate President Llanto, his predecessors, and the PIDS Trustees, Fellows and staff over four decades of its distinguished life. Its establishment trace back to the vision of Dr. Gerardo Sicat, then Planning Secretary, who saw the need for a think tank to help government planners and policy makers in the executive and legislative branches of government address broad issues of development. While it is a state-funded think tank, PIDS’ fathers imbued it with some independence by giving it a corporate structure and some measure of fiscal autonomy. Moreover, under its charter, its Trustees are not appointed by the Philippine President but are self-electing with staggered terms.

PIDS Fellows are known experts in their fields, and include not just economists in different areas of specialization, but also sociologists, public health specialists, demographers, statisticians, lawyers, etc. who individually and collectively contribute to its rich body of independent evidence-based research, as well as respond to the need for quick policy briefs of officials.

In recent times, PIDS Fellows have appeared, and made their mark in various Senate and Congressional Committees that deliberated on the following: cabotage law, competition policy, taxation of incomes, sin taxes, CCT, SUC’s and scholarships, budget planning, customs and tariff modernization, a bill now awaiting the President’s signature.

It has a rich trove of literature, 1000 completed studies, on these and other areas built over the years, straddling a wide field -- macroeconomics, public finance, trade and industrial policies, health economics, foreign direct investment, housing finance, urban development, governance, agrarian reform, food security/rice policy, just rattling off items I have in the past researched on. (You can find more about PIDS and its research library in www.pids.gov.ph)

Under Dr. Llanto’s watch, it has done several impact evaluation studies on the effectiveness and impacts of key government programs and projects to ascertain whether they are achieving their intended objectives and to ensure that government resources are used wisely. It has likewise trained a large number of bureaucrats on the art and science of impact evaluation.

In the coming years, Gilbert is focusing on doing studies on easing the regulatory burden in various sectors. PIDS researchers are also looking at the supply chain of tuna, a major export industry, and other sectors in manufacturing to follow. In transport, they will be examining the regulatory burden in the land transport sector. This year’s annual public policy conference will focus on the need to build resilient systems -- economic resilience for example in the face of interconnected global risks and external shocks.

As I finish my two terms as a PIDS Trustee with pride and gratitude, I recall what James McGann said about think tanks. “Think tanks seek to bridge the gap between knowledge and power. The role of think tanks is to link the two roles, that of policy maker and academic, by conducting in depth analysis of certain issues and presenting the research in easy-to-read condensed form for policy makers to absorb.”

Globally recognized PIDS has achieved this and through its active live public policy engagements in conferences, Congress, media, even more.

Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations and board director of Institute for Development and Econometric Analysis, Inc. (IDEA)

romeo.lopez.bernardo@gmail.com

Yes, New Taxes 2: Low Hanging Fruit

Posted on February 28, 2016 08:28:00 PM

In the first installment of this column (“Yes, New Taxes,” Feb. 1), we emphasized the need to raise revenues to cover catch-up infrastructure, to offset revenue gives for equity reasons in favor of low to middle-income salaried workers, and to align our corporate income tax regime with our peers to attract investments and create jobs. Moreover, we also need to provide for advance commitments of the administration that go beyond 2016, notably increases in government salaries over the next three years.

 

Where can all these come from? Let us do some math on how much this would cost.

For simplicity, expressing these in percent of Gross Domestic Product (GDP).

1. Additional spending for infrastructure to raise it to a minimum of 5% of GDP, same as our neighbors, from the present 2%-3%. Needed: additional 2%-3% of GDP or around P200 billion-P300 billion each year.

2. Adjustment in personal income tax exemptions to correct for “bracket creep,” the bloating of income due to inflation that does not reflect real purchasing power. Needed: 0.5% of GDP.

3. Reduction of corporate income taxes to 25% (same as Indonesia and Malaysia) from the current 30%, the highest in ASEAN. Needed: 0.6% of GDP

4. Salary increases under EO 201, Needed: 0.5% of GDP every year for the next three years. Or a total of 1.5% by 2018.

When this is totaled, the required amount ranges from P450 billion to P500 billion, or roughly around 5% of GDP every year. This does not even count other new expenditure claims like the modernization of the AFP and the indexed increases in the pensions of soldiers.

Early in its term, the next administration needs to think about its fiscal program so it can pursue its investment and expenditure program confidently and responsibly without courting macro instability and a credit downgrade. While there is headroom to increase debt due to historic low levels of debt to GDP, credit markets look at the medium term. Unless there is clarity that the medium term fiscal program is sustainable, interest rates will rise, crowding out government development spending and dampening private investment.

Secretary Cesar Purisima, recently deservedly recognized Best Finance Secretary for the sixth time, is cited as saying there is no need to impose new tax measures in order to boost collection -- “I think we need to continue to use technology to make sure that we improve the efficiency of tax collection.” (Phil Star, Feb. 26 -- “Incoming government does not need to impose new taxes” -- Purisima ).

Indeed, improving collection efficiency should be government’s first resort. At the same time, we call attention to the limits of administrative measures, as evidenced by experiences of many countries that this is at most around 0.5% of GDP per year.

In the last 5 years, despite heroic, some would say excruciatingly painful, efforts of the BIR, tax to GDP only rose from 12.1% in 2010 to estimated 13.8% in 2015. If one takes out the effect of the increase in effective tax rates on sin taxes (see Part 1 of column), the net effect of administrative measures over the entire five years is only 1% of GDP. Of course, the figure is a conservative estimate since there were other moving parts that brought down collection -- for example the drop in oil prices that reduced the base. But clearly, 1% is nowhere close to the 5% of GDP we calculated as needed over the medium term.

We do agree with Sec. Purisima that there are ample opportunities for using technology to improve collections. As discussed in Part 1, how BIR/DoF used security stamp taxes to ensure that smuggling and evasion do not rise with the higher sin taxes in cigarettes -- and coming soon in alcohol -- is a model case study on smart and resolute use of technology.

A logical extension on use of technology is plugging smuggling in oil products -- a problem that has vexed our country for decades.

It has been estimated by industry experts, investigative journalists, and a variety of government officials over the past few years that at least 20% of all diesel and gasoline sold at retail in the Philippines has been smuggled into the country -- which means that the government is unable to collect a large portion of the tax that should be paid on these fuels.

In a paper published in October 2015 by the Asian Development Bank, the bank encouraged governments to institute sophisticated fuel marking programs as a proven way to increase government revenues, improve fuel quality and combat criminal activity.

Fuel marking can be the parallel to the successful security stamp program the government instituted here last year.

A well-run fuel marking program puts a high-tech marker (in effect -- a tax stamp) in all legally imported and locally refined fuel before it is distributed. Just like with a cigarette tax stamp, when fuel is then tested throughout the country at retail and commercial sites, any fuel that is found not to have the proper fuel marker is illegal -- and thus subject to confiscation, and the illicit trader is subject to fines, closure and if necessary, criminal prosecution. Deterrence that fuel marking creates has been proven in many countries with similar problems.

Still in the area of oil taxes, the very sharp decline in oil prices provides an opportunity to capture some of it by imposing a variable tax that goes up when oil prices are low, and down when prices are high. This is can also correct for the erosion in the real value of the excise taxes on oil. Just like tobacco and alcohol products until two years ago, oil excise taxes are not indexed to inflation, and thus steadily dropped from 1.1% of GDP in 1997 to only 0.1% of GDP currently. (See graph)

At this time when our thoroughfares sometimes look like giant parking lots during rush hour, a good way to package this variable oil tax is as short-term response to reduce traffic, while at the same time addressing the traffic problem at the roots by earmarking collections for building and upgrading of mass transport and road systems.

The savings of the country from the global oil price drop is around $6 billion annually. If only a third of this is captured via a variable oil tax, we can have $2 billion incremental revenue collection -- around 1% of GDP, thus also restoring oil excise tax to GDP ratio to its 1997 level.

The next installment of this column will talk about other potential revenue sources, rationalizing fiscal incentives, reducing unnecessary exemptions, and tariffication of quantitative restrictions on rice.

The last measure, will not only bring down the cost of rice, historically twice to thrice our neighbors’, but can bring new revenues of P25 billion to P30 billion every year, and save government P4 billion from annual budget subsidy and stem further explosion in unpayable NFA debt (around P 150 billion) guaranteed by the Republic.



Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations and board director of Institute for Development and Econometric Analysis, Inc. (IDEA)

romeo.lopez.bernardo@gmail.com

Yes, new taxes!

In 2009-2010, one of then Senator Benigno S. C. Aquino III’s campaign promises was “no new taxes” -- a promise his administration kept only technically. And thankfully so, as “new taxes” were needed in 2010, and as I will discuss at the end of this column, will be needed in 2016-2017, as part of a comprehensive fiscal reform program for our country to scale up to our peers.

 I said “technically” because of the sin tax increase/reform done in 2012 which was presented as a tweaking of an existing tax, and not a “new tax” despite its big impact on -- and for -- the taxpaying public. It was a long delayed adjustment to make up for decades of erosion in the real value of the tax, but at the same time there was an increase in the effective tax rates, as well reform in the structure by unifying rates and incorporating an annual 4% increase.

By packaging it as a health measure aimed especially at discouraging the young from smoking and earmarking the incremental revenues to fund universal access to health care, its prime movers -- the Department of Finance (DoF), Department of Budget and Management, Department of Health, supported by the World Bank, World Health Organization, the International Monetary Fund, and other development partners -- were able to form a broad coalition of public support for it. This included constituencies for better economic governance and for public health. The Action for Economic Reform was at the forefront of this mobilization. Business organizations like the Makati Business Club, and our Foundation for Economic Freedom (which has five former Finance Secretaries in its rolls) were proudly also part of it. On the public health side were Health Justice, New Vois Association Phils., Philippine Cancer Society, Philippine College of Physicians, etc.

With all of these advocates, and the leadership of the President, the Finance Secretary, the Senate President, the Speaker of the House and the Committee Chairs, it passed but only after exciting deliberations and drama.

It quickly yielded dividends, total alcohol and tobacco excise tax collections upped by 85% in 2013 and a further 14% in 2014. This increase contributed P101.4 billion or 1% of GDP in the first two years. The tax to GDP was only 12.1% at the time the Aquino administration took over in 2010; in 2014, it stood at 13.6%.

The improvements in collection are explained not just by the higher effective tax rates, but by improvements in plugging tax evasion. At the time the law was being deliberated, likely increase in evasion and smuggling was the strongest argument of those opposing it.

The critical administrative reform here is the introduction of security stamp taxes, a feature that is required under the Tax Reform Law passed in 1997 during the Ramos administration, but which the tobacco lobby has been able to obstruct for 15 years of the succeeding administrations. That is, until Bureau of Internal Revenue Commissioner Kim J. Henares came along.

In a transparent competitive bidding in 2013, the BIR and its partner in this project, the APO printing office, selected a provider of a highly secure stamp tax system -- IRSIS, a consortium of Israeli and Philippine companies.

Two years later, 95% of cigarettes sold nationally bear security stamps. Enforcement is aided by an innovative monitoring project conceived by the Department of Finance, and sponsored by the World Bank. A couple of hundred part time data collectors with smart phones scour the country doing “whale sighting” everywhere cigarettes are sold. The whale is the icon chosen by the BIR for the stamps -- I thought most apt for the proverbial big fish BIR has been trying to snare since I was in the DoF in the 90s. (Ok, the whale is not a fish.)

The granular data collected for these whale sightings can be seen in the DoF Web site (dof.gov.ph) showing percent compliance by brand and by locality. Clearly, a powerful aid in monitoring tax compliance, instilling deterrence and for penal enforcement.

Commissioner Henares has announced security stamp taxes will forthwith be required also for alcohol products. A similar marking system is being contemplated for oil products by Bureau of Customs Commissioner Alberto D. Lina.

This tax policy and administrative reform program has been widely applauded. The Philippines’ credit rating was boosted by three notches, contributing to lower cost of borrowing of both government and the private sector, creating additional headroom for social and infrastructure spending.

Lower interest rates have also fueled private investments especially in housing, bringing direct benefits to our people. Health benefits were likewise palpable as smoking prevalence dropped from 29% in 2012 to 26% in 2014 in the general population, most strikingly among the young from 35% to 18%.

The sin tax reform program and its fruits have been impressive, but clearly not sufficient. Why?

1) Our infrastructure spending in the last 7 years has ranged from a low 1.4% of GDP to a high 2.1% according to the Philippine Institute for Development studies -- half of the 5% average in our neighbors. And we are paying the price for it -- in terms of gridlocks in roads, airports, seaports, lack of mass transport, no piped water outside Metro Manila, inadequate sewage systems, etc. The next administration will need to ramp up infrastructure spending to at least the same level of 5% of GDP -- preferably higher as one presidential candidate aims for.

2) Our latest tax to GDP (in 2014) at 13.%, is only 1.5 percentage points higher than at the start of this administration, below our peers. And far from the 15.3% record achieved in 1996 during the Ramos administration. Despite the heroic efforts of Commissioner Henares, there are limits in yield from tax administration reform, review of tax regulation and their reinterpretations. This has been the experience as well in other countries.

3) Additional spending commitment done by Congress for the next three years -- most notably increase in salaries, will add 0.5% of GDP every year for the next three years to the budget. The fiscal deficit though manageable at around 2%of GDP over the past five years, will be under pressure as a result of these advanced budget claims. Also from likely higher interest rates in both domestic and international markets. While our public debt to GDP of around 50% is comfortable, sharp increases in deficits will risk our newly minted investment grade rating.

4) The country has become tax uncompetitive. The corporate tax rate in the Philippines at 30% is much higher than countries in ASEAN which range from 17% for Singapore to 25% for Indonesia and Malaysia. Moreover, individual income taxes, especially on the low income levels have become inequitable as inflation pushed them up into brackets that were intended for the rich. Needed lowering in both corporate and personal income tax rates will require compensatory revenue measures elsewhere.

5) More fundamentally, our tax system needs drastic reform. Too complex, too many exemptions with debatable benefits, too narrow a base, too cumbersome and costly to comply with, and too prone to corruption despite well meaning efforts of its leadership.

A future column will float directions for a tax reform program, to include a variable tax on oil and other fuels, rationalization, perhaps a guillotine, on tax incentives and exemptions, including those in favor of senior citizens like me -- a perverse regressive subsidy paid for by the more numerous young poor. There are many other such exemptions and redundant incentives favoring groups and sectors that need to go.

Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations and board director of Institute for Development and Econometric Analysis Inc. (IDEA)

http://www.bworldonline.com/content.php?section=Opinion&title=yes-new-taxes&id=122380

Managing political risks of infrastructure projects

Posted on January 03, 2016 07:55:00 PM

Credit information and rating pioneer and friend, Santiago “Santi” F. Dumlao, Jr., secretary-general of the Association of Credit Rating Agencies in Asia (ACRAA), invited me to speak on political risk management for infrastructure public-private partnership (PPP) at an ACRAA seminar late last year. Allow me to share excerpts from my talk:

“My own experience on the subject starts in the nineties as Undersecretary in the Deparment of Finance, then later as an occasional adviser on policy for the Asian Development Bank (ADB), the Japan International Cooperation Agency (JICA), and a few PPP projects on the transactions end.

“First, let’s identify the various risk factors.

“Nine are project specific: cancellation and change of scope risk; environmental and other permit risk; community risk; expropriation risk (both sudden and creeping); breach of contract risk; asset-specific regulation risk; concession duration/renewal risk; asset transfer risk; and decommissioning risk. Then there are five that affect the entire sector or economy -- change of industry regulation, taxation risk, currency transfer risk, judicial risk, and corruption/market distortion risks. A whole lot of these risks can only be managed through a concerted and realistic commitment from the public and the private stakeholders since both have a clear interest in the success of the PPP.

“On the mitigation side the private sector must consider several measures: first, an appropriate use of protective financial instruments (one on risk guarantees and political risk insurance and another on tradeable instruments and ownership structure). But there are also three others which are very much interrelated and most important to prevent problems -- effective interaction with the public sector, inclusive community engagement, and responsible business conduct.

The second component of a PPP’s success is about what the public sector needs to do. We are all familiar with these, and are aware of limitations in emerging economies in government’s ability to deliver on these: robust infrastructure regulation and contracts, general stability of laws and regulation, reliable and efficient administration, reliable dispute resolution mechanisms, international commitments such as international investment agreements and transnational programs like the Trans-Pacific Partnership.

“These undertakings should result in joint public-private measures. The key room here is the management of risk perception and return expectation. And the elements that go into these include rigorous project preparation, the creation of a dedicated marketing team, a proper sounding out of the market, and proper preparation of tender.

“In the Philippines, the involvement of development partners like ADB, JICA, Australian Aid, et al., which support the PPP Center and line agencies via the hiring of international consultants, including transactions advisers, have been critical.

“Some issues on managing the risks in infrastructure are:

“The party that can best carry the risk should bear it since it is a cardinal precept in risk allocation/structuring of a PPP.

“However, the principle is simple to appreciate but not so easy to implement.

“In the case of the Philippines, in a recent example of mass transport, insistence by government that private sector carries the risk associated with the possibility of increased taxation by local governments led to long delays and failures in bidding before the lesson was learned. Similarly, the regulatory and/or licensing functions should be under the control of the one agency contractually responsible to avoid the problems that have affected the mining sector.

“At an earlier period (early ’90s), the sovereign has had to take demand risks for power via a take or pay contract.

“And this was an important to-do in a situation where there was no capital market, unclear regulatory structure, and limited experience in Build-Operate-Transfer. It did what had to be done -- address a power crisis. Power was restored in good time, and the administration and the country regained confidence of the people and investors.

“However, the story does not end there, the improvements in the credit situation of the country and the excess in power reserves as a result of reduced demand with the onset of the Asian Financial Crisis, became catalysts for the succeeding administration to revisit contracts and to pressure the private proponents to renegotiate.

“The contracts were only mildly renegotiated by reducing the current charges in exchange for lengthening the concession/project life.

“I think it helped maintain the sanctity of contracts such that the International Finance Corp. (IFC) was an equity investor and the Japan Export-Import Bank, a creditor in a number of them. So this particular risk mitigation seemed to have worked in this instance.

“Much more recently, under the Metropolitan Waterworks and Sewerage System (MWSS) concessions, hailed as the biggest water privatization in the world in 1997, the government-contracting party suddenly and unilaterally disallowed certain cost-recovery components provided for in the concession agreement operating for 17 years. The matter has been under international arbitration. IFC was also a small-equity investor here as with two Japanese companies, Mitsubishi (with Manila Water Co., Inc.) and Marubeni (with Maynilad Water Services, Inc.), but these investments, and its international implications, did not appear to have been given importance by the current administration.

“A further example of idiosyncratic reinterpretation of contract and Philippine laws after more than a decade of successful operations involves a dispute between Shell-Oxy regarding the Malampaya natural gas project -- again over a tax-related issue. In this instance, the Philippines’ Department of Energy is on the side of Shell but it is not being allowed by the Commission on Audit to comply with its contractual obligations.

“A similar case for toll roads operated by Metro Pacific Investments Corp. where a simple straightforward automatic toll adjustments per parametric formula under the concession agreements have been disregarded over the past three years by the current Toll Regulatory Board.

“Just like the MWSS concessions, these two are headed for international arbitration in Singapore. Such provisions for international arbitration have been an important part of risk mitigation. It would be most desirable for the credibility of a country, especially its PPP program that arbitral awards are complied with promptly. However, as we have seen in the MWSS case this has not been so.

“As the Philippines moves from projects with attractive real estate plays and/or with an existing cash flow as in the case of a toll road extension or a mass transport operation, into those that require availability payments like prisons, hospitals, schools, the issue of reliability of government payments come into greater play, especially for a country where the budget appropriation is an annual process, without multi-year obligations.

“The credibility, and hence the success, of a PPP program hinges on government’s track record in complying with their contractual undertakings. A perception of uncertainty in that respect constitutes the essence of political risk. It is therefore to a substantial extent within the control of the authorities to make sure that such risks do not materialize. However, in an imperfect world, both the public- and the private-contracting parties should recognize pragmatically the merits of ‘just-in-case’ protective measures.

“There are a wide range of insurance products that are available to cover country and political risks.

“Private commercial insurers would offer great flexibility and speed, albeit at rates reflecting market perceptions of the specific country risk, which may be overly pessimistic. Bilateral risk coverage programs are available in many countries (but seldom in emerging market countries) in support of their nationals. Rates may be to some extent subsidized but coverage is often conditioned by national commercial or political priorities.

“The Multilateral Investment Guarantee Agency (MIGA), where I have been involved in the negotiations of the Charter in the ’80s, is the major international agency operating in this field and has rather unique characteristics. Being a member of the World Bank Group, its coverage is available to nationals of all member countries, with the only exception of local investors in their own country. Rates and coverage products are in line with the market, but its distinctive feature is the cooperative relationship with the host member country, which defuses the political dimension (often confrontational) inherent in bilateral insurance programs, and has been very effective in anticipating and preventing problems. In the case of disputes taken to arbitration, MIGA would cover the non payment of arbitral awards arising from not honoring contract obligations with immediacy.”

Romeo Bernardo was Finance Undersecretary in the administrations of Corazon C. Aquino and Fidel V. Ramos. He is also a Board Director in the Institute for Development and Econometric Analysis.

romeo.lopez.bernardo@gmail.com

Sunday December 06, 2015 

Reduce regulatory burden!

Posted on December 06, 2015 08:50:00 PM

Foreign direct investments (FDI) into the Philippines were once again the lowest among the ASEAN-6 (Association of Southeast Asian Nations) in 2014, at 5% of total Asean-6 FDI flows, only half of the proportionate share of the Philippines to the entire ASEAN-6 economy. Our investments to gross domestic product ratio at 20% is also well below the 25%-35% range in the other ASEAN-6.

 This unhappy state of affairs of underinvestment by both domestic and foreign players persists despite unprecedented low international and domestic interest rates arising from high global liquidity and excess domestic savings from remittances and business process outsourcing. The investment response to surplus funds and improved credit rating has been relatively weak. What gives?

Analyst studies and global competitiveness surveys have pointed to three factors to explain this: (a) poor infrastructure, (b) unfriendly investment environment -- restrictions on foreign investments in the Constitution and certain laws and government policies, such as failed agrarian reform and rice policy, and (c) regulatory uncertainty and red tape. The first two have been well covered in earlier columns of my Introspective fellow columnists, Chikiamco, de Dios, and Fabella, and me. Allow me now to focus on the third. (See graphs)

Let me first cite some examples.

The 2016 Ease of Doing Business of the World Bank ranked us 103rd out of 189 countries; we are the second to the lowest among the ASEAN-6. To open a business, it takes 16 steps and 29 days. Best performing Singapore and Malaysia take 2.5 and 4 days, respectively. Even Vietnam, until recently a centrally-planned economy, is better at 20 days.

These surveys are based on what it takes to establish a small or medium enterprise. I don’t know whether we should take comfort that big companies suffer as long. I have seen a chart prepared by a major power industry player on the number of signatures it takes to get a power plant started, around 200. No wonder it takes twice as long to build a power plant here vs. elsewhere -- contributing to thin reserves and high cost power.

In the latest World Economic Forum Global Competitiveness report, 2015-2016, “inefficient government bureaucracy” climbed to the top spot as the most problematic factor for doing business in the country, from last year’s fourth place. Moreover, “complexity of tax regulations” ranked fourth, whereas elsewhere in the ASEAN it is not in the top 5 concerns.

I’m told that under Revenue Memorandum Circular 7-2014, tricycle operators, farmers, fishermen and sari-sari store owners are now required to issue Bureau of Internal Revenue-registered receipts and sales invoices without any “de minimis threshold.” The World Bank has earlier warned that “Certain tax policy regimes are both inefficient and detrimental to job creation. Enforcing the current weak tax design may yield more revenues but will have adverse impacts on jobs” (World Bank, “Philippine Economic Update,” 2014).

Then there are the big disputes arising from sudden idiosyncratic reinterpretation by regulatory bodies of contracts after more than a decade of being implemented and celebrated as successful examples of public-private partnerships. I refer to the two water concessions of the Metropolitan Waterworks and Sewerage System, the Shell-Oxy Malampaya project, and the Manila North Tollways Corp.; all are now or about to enter international arbitration initiated by the private parties against government for non-implementation of contracts in amounting to several tens of billions of pesos.

I cannot recall there being so many concurrent international arbitrations at one time.

How can Public-Private Partnership (PPP) projects for infrastructure, in the platforms of all of the Presidentiables, take off unless government can provide greater regulatory clarity and stability?

Recognizing the importance of effective and sound regulations, other countries have pursued government-wide action in improving regulatory quality. Countries belonging to the Organisation for Economic Co-operation and Development (OECD) have adopted an explicit “whole-of-government” approach to regulatory reform, which requires stakeholder engagement in extensively reviewing regulations, use of regulatory impact assessment (RIA) by oversight bodies for an evidence-based policy-making, and conduct of effective ex-post evaluation of policies.

In our region, Vietnam has made great strides in overhauling its administrative procedures. They call this reform process “regulatory guillotine.” Vietnam, in 2007, established a “Project 30” unit in their government, with the goal of simplifying administrative procedures and reducing administrative costs by at least 30%. It is no surprise then that Vietnam has continued to be ahead of us in the Ease of Doing Business rankings and has received 50% more FDIs than us.

Malaysia, in 2013, launched the National Policy for the Development and Implementation of Regulations, and has started implementing reforms in regulatory practice, such as requiring RIA for all new regulations.

Also South Korea, which was able to review over 11,000 regulations, in the process eliminating almost 50% of them, all within the span of 11 months. Over 1 million new jobs and $36 billion in FDIs were projected to be the economic gains of such regulatory cleanup.

To keep in step with our neighbors, a comprehensive regulatory package must be part of next administration’s reform pillars.

In a recent Philippine Institute for Development Studies seminar (for more information, visit http://goo.gl/l2hvCj), NEDA Deputy Director General and University of the Philippines Professor Emmanuel F. Esguerra identified elements from OECD and ASEAN for best practices for good regulation. These are: internationally recognized processes, systems, tools and methods for improving quality of regulation, a system for implementing public consultation and stakeholder engagement and impact analysis of regulations to achieve desired policy objectives.

Beneath technocratic language is the political reality of bureaucratic inertia and entrenched interests in the status quo labyrinth that must be overcome.

Hopefully, our next leader will have the vision and political will and skill to take on this difficult but necessary task for the Philippines to truly travel the “tuwid na daan” to inclusive investment-led growth.

Romeo Bernardo is a Trustee of Institute for Development and Econometric Analyis and of the Philippine Institute for Development Studies.

http://www.bworldonline.com/content.php?section=Opinion&title=reduce-regulatory-burden&id=119736

The Way Forward: The Path to Inclusive Growth

Opinion

Posted on November 08, 2015 10:36:00 PM

The launching of Foundation for Economic Freedom (FEF) President Calixto “Toti” V. Chikiamco’s book, The Way Forward: The Path to Inclusive Growth, in National Book Store, Glorietta, Makati City on Aug. 26 with Senator Juan Edgardo “Sonny” M. Angara, Socioeconomic Planning Secretary Arsenio M. Balisacan, FEF Senior Advisers former Prime Minister Cesar A. Virata and Dr. Gerardo P. Sicat, and Fellows of the FEF.

This latest book of my fellow Introspective columnist, Foundation for Economic Freedom (FEF) President Calixto “Toti” V. Chikiamco is making the rounds of government and policy circles. I learned Speaker Feliciano R. Belmonte Jr. ordered 300 copies to give to congressmen. The candidates to high office in 2016 would do well to read his thematic compilation of his best columns in BusinessWorld.
 

Allow me to share my remarks on the occasion of its launch, and talk about as well of the Foundation for Economic Freedom (FEF).

Thank you, Toti, on behalf of our Chairman Roberto “Bobby” F. de Ocampo, and all the other Fellows for your kind dedication of this volume to us. And your resolute dedication to FEF as its President and chief executive officer since 2011.

The genesis of FEF goes back to early ’90s, when our Chairman, Sir Bobby de Ocampo, was Finance Secretary. FEF’s philosophy was shaped by the circumstances and govt thinking of that time -- the unleashing of private sector energies through market friendly reforms and good governance. Indeed this is thinking that traces back to reforms from an earlier period was pushed by former Prime Minister Cesar Virata and former Socioeconomic Planning Secretary Dr. Gerardo “Gerry” P. Sicat.

FEF started as an impromptu dinner club of like-minded people who came from different careers, but found themselves united by common cause on orphaned issues of the day. I recall the catalyst was the P1-per-liter Leung Levy in early ’90s which was opposed by everyone -- communists, rightist putschists, some business groups like the Federation of Philippine Industries, Catholic Bishops Conference of the Philippines, you name it.

All except for guys who in their individual capacities were writing, talking, pushing for this necessary measure to stabilize the country’s fiscal situation and nurture development. These guys who then decided to meet every now and then for dinners, KKB or with a rotating host, to see how they might be listened to more, how to educate the public, especially legislators and policy makers, and how they might help reformers inside government who badly need support and encouragement.

These impromptu dinners, included from government -- we in the Department of Finance (DoF) -- Ernest Leung, later Bobby De Ocampo, and at National Economic and Development Authority -- Cayetano “Dondon” W. Paderanga, Jr. The academe/University of the Philippines School of Economics then dean Felipe M. Medalla, Raul V. Fabella, Ruping Alonzo, Dante B. Canlas. From the private sector, civil society -- former Prime Minister Cesar A. Virata, Mahar K. Mangahas, Ramon R. del Rosario, Jr., the late Francisco Varela, Alexander R. Magno, Bong Montes, Simon Paterno, Tony Abad, Alan Ortiz, and Toti Chikiamco.

Although it was Mahar Mangahas -- a University of Chicago alumnus at heart -- who gave FEF its name and ex-DoF guys who made funding from bilateral grants happen, it was Toti who was the most consistent, persistent, and coherent as a public intellectual. His weekly columns which had a strong following among “shakers and movers” as one official termed it, contributed much to shed light, provide broader perspective on the issues of the day. He likewise lent his pen to the various advocacies of the FEF.

These FEF advocacies have met with various degrees of success over the years. With its fellows “raging incrementalists” at heart, FEF took such setbacks under Philippine political conditions as a part of the game.

Such efforts and FEF batting scores/contribution in the reform efforts included pushing “good to haves” like adjustments in excise taxes on tobacco, alcohol (check), reform of the value-added tax (check), liberalization of retail trade (question mark), privatization/public-private partnership, notably the Metropolitan Waterworks and Sewerage System (check), opening up the economy to foreign investments (question mark), property rights (check with success in land patent distribution), peace and development in Muslim Mindanao (question mark).

And trying to put a stop or expose such flawed policies/programs like wasteful subsidies for National Power Corp. (check), National Food Authority (cross), extension of a failed Comprehensive Agrarian Reform Program (check), central oil procurement by government (check), an overly generous feed-in tariffs for renewable energy (partly check).

More recently, President Toti brought the FEF from advocacy to hard core development work in the area of property rights.

Thanks to him and FEF’s land rights team, the number of free patents awarded to beneficiaries leaped from just only 3000 to 60,000 titles annually by working with the Department of Natural Resources and Local Government Unit partners.

On Toti’s book, The Way Forward: The Path to Inclusive Growth, FEF’s Chairman, former Finance Secretary, Bobby de Ocampo, has this to say: “There are some who may think of economists as theoretical and obscure. Others may view them as simultaneously argumentative and detached. Not so economist Calixto “Toti” Chikiamco. Anyone who reads his book compiling his numerous articles and opinion pieces will probably think instead of adjectives like engaging, committed, courageous, and patriotic yet also global.

“Often one can feel his frustration at the country’s seeming inability to rise above mediocrity brought in no small way by political leadership that is self-serving, myopic, small minded and hypocritical, not to mention of course corrupt and bereft of vision. But still, one can equally sense his undying hope that a better day will inevitably come.”

Our Senior Adviser, Dr. Gerry Sicat, captured in a thoughtful testimonial in the book the essence of why Toti refers to himself as a political economist in the tradition of Smith and Ricardo: “[Thus] economic problems involve the political process in order to correct them. This is one reason some of the essays carry on a political side. Solutions require convincing government and the men who compose and make decisions. The topics range from politics and economics in the large, to development issues in the small -- constitutional change, entrepreneurship, national security, wages, income and social inequity, poverty, land rights, property rights.”

For those who only know Toti from his column, you should be aware that Toti has a day job as an Internet entrepreneur. This has enriched his writings even more -- perhaps just as hardships and ordeals contribute to the shaping of an artist?

This synergy between public intellectual and grounded entrepreneur is summed up well by former Chairman of SGV group, also a Fellow and Trustee of FEF -- Glo Tan Climaco: “Toti is an economist who passionately loves his country. He is also a businessman who competes and has to survive in the real world. This rare combination makes his essays very compelling reading for me. I find his observations and suggestions realistic and practical. Many times I learn new ideas. This book has gems of wisdom.”

Toti Chikiamco’s book, The Way Forward: The Path to Inclusive Growth, is available in branches of National Book Store.

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

romeo.lopez.bernardo@gmail.com

Board Independence: Reality or Myth?

Board Independence: Reality or Myth?

GGAPP Forum for Independent Directors

October 19, 2015

I congratulate Dr. Francis Estrada on his most comprehensive and educational lecture on global corporate governance practice. If  I were in the U.S. or any other OECD country, I would say "amen" and my remarks  end here.

However, we are in the Phl.  Here the  challenge is keeping  in step with these global practices, but making very sure that we "Inculturate"  to Philippine  and ASEAN situation. It is a most apt term I first heard from CJ Panganiban.

We need to sweat some of the emerging details that are now before us, for instance in the draft corporate governance blueprint making the rounds.  Let me attempt to do that now --

The theme of this symposium is a provocative one. Board Independence, Reality or Myth.  In the course of addressing the question, I beg your pardon in advance. I will try my best to be provocative.

What does the symposium title mean? When we say independent, independent from whom? And independent to do what?

The Corporation Code and the SEC Corporate Governance Memorandum, 2002   provide the answer:

"It is the Board's responsibility to foster the long-term success of the corporation and secure its sustained competitiveness in a manner consistent with its fiduciary responsibility, which it should exercise in the best interest of the corporation and its shareholders ".

I would myself interpret independence to mean, free to perform such a responsibility unhampered by forces, be it management,  the majority shareholder, or  for that matter-- any other interests--- pushing interests that  are not aligned with the corporation and its shareholders in achieving its long-term success. 

The particular subset of "independent director" is  defined in the SEC Memo to be one who is without a relationship with the corporation,   is expected to exercise a higher level of diligence in ensuring actions are in the interest of all shareholders.

The need for such independent directors especially arose from cases of misgovernance  in the west -- of the "principal agent problem" type. In many companies with defused ownership and with no controlling shareholder it has happened that  management became unaccountable to anyone, and becomes its own principal.  Addressing this incentive misalignment has been the driving force behind initiatives in OECD countries to increase the number of ID's, in fact to a minimum of majority. And to ensure that that the Chair is an ID, and other such limitations.  This is wholly appropriate in that context.

However, the situation in the Phl and the rest of Asia is quite different.

Here there are really almost no such thing as companies with defused ownership.  Here,  the principal value creators  are anchor investors, typically a family that has nurtured and grown the corporation and continues to nimbly navigate it in fast globally  changing environment.  In fact many passive  investors, not just local but global strategic investors,  put money in these companies on the premise of continuity of that anchor investor family  being in control.

In short under this model, the interests of all shareholders are generally aligned with the controlling shareholder. Think of the continuity across generations being provided by the Ayalas, Sys, Aboitiz, Gokungweis, et al.   The  advantages of this model has been well described in special section  in The Economist a few months ago. It contrasted it with the short termism observed in many firms in the west.

This difference in situations give rise to question of  appropriateness of the OECD model to Asia, where “family anchor investors” are  the value creators.  Take for example the rule that majority of the Board should be independent or that ID's should be especially empowered.  In Asia, It is not clear how requiring majority independents enhance long term shareholder value.   Especially when coupled with the preference that terms of independent directors should be short.

As well described by Chief Justice Panganiban,  the role of ID's in the Phl and similar Asian context, is an oversight role,  to make sure Board actions are for the benefit all shareholders, that  related party transactions are at arms length and disclosed, and that there is full compliance with laws of the country, especially ones on corporate behavior  and governance. That majority of the board should be independent  is not needed for this,  as rightly not provided under our laws now. And it should stay that way.

Let me now turn to the question of what will assure independence,  and effectiveness.    The draft CG blueprint as well as past SEC issuances contain measures which I think miss  the point.

The most ones most discussed pertain to term limits and number of seats.

A.  Term limits.

1. No evidence that longevity compromises independence nor  on the advantages of term limits.

2. Longer serving directors are more effective. And companies with longer serving directors perform better.

(See for example,  "the Non-Correlation Between Board Independence and Long Term Firm Performance" by Sanjai Bhagat and Bernard Black, professor of Finance, University of Colorado, and professor of law in Standford University, respectively.

On Limits in number of seats held by an ID. The evidence  likewise point to the opposite.According to a study by Ferris, Jagannathan and Pritchard, professors in the University of Missouri-Columbia, Binghamton University and University of Michigan Law School respectively-- "We find firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We conclude that the evidence does not support calls for limits on directorships held by an individual."

My exhibit A based on first hand experience as I am honored to be in common boards with them are:  CJ Panganiban, Amb. Joey Cuisia, Mr. Washington Sycip, Mr. Oscar Reyes.

I challenge anyone to contend that these gentlemen, despite having multiple seats/full time jobs, do not perform effectively as directors in the boards they are in. Or that the quality of governance in the corporations they serve will improve if they resign, as compelled to by  regulation.

What then assures  independence in the actions of ID's ? From my own experience -- it is the commitment of the controlling shareholders to the highest quality of corporate governance.  These shareholders seek out men and women with solid reputations who share this commitment, who can contribute diverse and independent views for the long term success of the corporation.

How about the ID's themselves-- how do we ensure they act with independence?  At the end of the day, the one thing that assures independence is an ID's  regard for a reputation of a lifetime of integrity, probity, diligence.  Which the person will not risk when put to the test.

In fact, one can argue that the more board seats, and longer more solid  reputation built, the more independent such ID's likely to be.  ( Ever heard the adage if you want something done-- give it to a busy man? )

Why do good corporations, their majority shareholders and management, seek out such independent minded men?   It is not just by what they can contribute due to their experience, knowledge and wisdom, but indeed by their well earned reputation that they do not compromise integrity.   The companies, in turn, are letting the world know that their corporate governance practice can withstand scrutiny by such men and women.  We should not shackle such good aspirations with ill-advised fiats like limits on term or number of seats of IDs.

The particular case of limits on even non-ID is even more serious.  This effectively disenfranchises owners, the value and job creators, from overseeing their own companies.  I requested PSE to tally the number of individuals who will be affected-- those with 5 or more board seats. There are 53.

B. The risk of over-regulation.

In the U.S. I understand the number of listed companies have dropped from 8 k to 4 k in under A decade, a combination I think of overregulation and readier assess to capital without listing with the growth of private equity funds and in a world slushing with liquidity.  Here in the Phl we have the lowest number of listed companies in ASEAN, and the one with the lowest growth in listings. Perhaps, not coincidentally, we are also at the cellar of "ease of doing business" of the World Bank in ASEAN.

Scoring and ranking of corporate governance as is now pushed in ASEAN is fine, provided the scorecard is well developed and acculturated -- I have issues with it. And is not pursued obsessively. Otherwise it too becomes a  case of shortermism.

But what we need to watch out for is over regulations-- which create a compliance mind set, or worse -- uncertainty, red tape, compliance costs, delays,  and eventually deterioration in governance.

My worry is the drift seems to be to regulate more at a time when our regulators, well intentioned and diligent  though they are, are already overburdened.   In the 2015 edition of the World Bank's Ease of Doing Business, we are ranked 161 of 189, the lowest in ASEAN 6, behind Indonesia and Vietnam. On starting a business, we have the most number of procedures at 16 steps and will take 34 days. Singapore takes 2.5 days, Malaysia 5.5 days.

I therefore welcome the intent to shift  to "comply or explain" model similar to the rest of ASEAN, in addition to scoring , as a basic approach. Rather than strict fiat. The language, though, of the draft CG blue print is confusing.  In "comply or explain", "explain" should mean "disclose to the public" not "explain to the SEC who would then have the power to reject the explanation as unsatisfactory". That to me is not "comply or explain", but "comply or comply".

Why am I concerned over this?  There are a number of new areas in the draft CG blueprint that go way beyond what is now in law.

For example, there is an entire section on "Duties to Other Stakeholders". If these duties were limited to those in law or by mutual contract, I would not have a problem. I am concerned however over possibly ambiguity once we stray from "fiduciary responsibility to the company and its shareholders " to "duties to other stakeholders".  Just to site possibly far fetched examples to make a point--

Will Directors be  duty bound to heed the  clamor,  say of labor unions, or even, SharePhil or ICD  against labor contractualization even if this is allowed under our laws?  Or by Greenpeace against a coal plant even if it has the approval signature of DENR, local govt and all of the 150 other signatures to start a power plant?  Who defines who is a stakeholder?

Someone was telling me also of initiatives to compel gender balance. Here I will be at my most provocative.  To me this is both intrusive and unnecessary.  On two grounds.

First, I think it is just a matter of time before women take over.  We are seeing this everywhere, in UP, there are more women in the college of law. And in the college of medicine, it is the men who are given a quota.  In the BPI, already a third of our Board are women, and the majority of management corps are female.

Second, let me ask a question -- is it not the height of regulatory heavy handedness to make women in corporate boards mandatory, when they are no longer  even mandatory in some marriages?

With that I end my remarks,  I think I have been provocative enough.