Economy, Fiscal issues, Oil deregulation

How to bring down oil prices by as much as Php10 per liter and why it is justifiable

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(Photo: ABS-CBN News)

Suspending the imposition and collection of the 12% value-added tax (VAT) and the additional excise taxes under the TRAIN (Tax Reform for Acceleration and Inclusion) Law could immediately bring down the prices of oil products by more than Php8 to as much as Php10 per liter. This is urgent as oil prices continue to soar, and with inflation further accelerating to a fresh nine-year high at 6.7% in September.

While the Bangko Sentral ng Pilipinas (BSP) claims that inflation may have already peaked last month, projections such as that of the US-based Energy Information (EIA) peg even higher global oil prices in the fourth quarter of 2018 due to lingering supply concerns.

Removing oil taxes now is also justifiable and fair, considering that apparently in just nine months (Jan to Sep 2018) the government may have already almost equaled their full year 2017 collections from the VAT on diesel and gasoline, based on estimates. Total revenues from excise taxes on oil products in the first six months of the year, on the other hand, are 181% higher than what was collected during the same period last year according to an official Department of Finance (DOF) preliminary report. All these mean that government can afford to forego additional windfall oil tax revenues, if only to protect the public from further taking a hit from escalating cost of living.

Unabated price hikes

Oil firms advised that starting Oct 9, the price of diesel will again go up by Php1.45 per liter; gasoline, Php1.00; and kerosene, Php1.35. These upward adjustments will bring the total increases for the year at Php14.95 per liter for diesel; Php14.37 for gasoline; and Php14.00 for kerosene. The latest increases are the ninth straight round of oil price hikes (OPH) in as many weeks, and the twenty-ninth for the year.

With the recent OPH, the common price of diesel in Metro Manila is now at almost fifty peso per liter (Php49.75) while gasoline (RON 95) is already the approaching sixty-two-peso mark (Php61.50). At these levels, oil prices are now at their highest in nominal terms in the past decade.

The VAT is equivalent to Php5.97 per liter for diesel and Php7.38 per liter for gasoline (or 12% of their respective common price). The TRAIN Law’s additional excise taxes, meanwhile, is at Php2.50 per liter for diesel and Php2.65 for gasoline for this year. Thus, removing both from the current common price will translate to an immediate reduction of Php8.47 per liter for diesel and Php10.03 for gasoline. (See Table)

Oil prices, TRAIN excise & VAT as of Oct 9

Suspending the oil VAT and excise taxes under the TRAIN Law should be doable for the government since doing so would no longer adversely impact its revenue generation from petroleum products. Economic managers projected international crude oil prices to be at just between US$45 to 60 per barrel and the foreign exchange (forex) rate at just Php48 to 51 per US dollar for 2018. Actual Dubai crude prices for the year, however, have ranged between US$60 to 80 per barrel while the forex rate is averaging Php52.48 per US dollar so far this year.

Windfall revenues

In other words, the Duterte administration has been collecting windfall revenues from the 12% VAT on oil products due to incessantly increasing prices as a result of higher than anticipated Dubai crude prices and a weaker peso. The DOF reported that overall VAT collections in the first semester of 2018 have reached Php179.95 billion, or about Php1.51 billion higher than what was raised during the same period last year.

While the DOF also said that VAT collections in the first half were 19% short of the government target for the period, this was not due to lower revenues raised from the oil VAT, which as mentioned have certainly skyrocketed due to higher pump prices. Apparently, small and medium enterprises (SMEs) and self-employed individuals that used to remit the VAT before the TRAIN Law became effective are now using other tax options under the new law. But that VAT collections in the first semester are still slightly higher than last year’s first half total is indicative of how much windfall the government has raised from rising oil prices.

There is no publicly available data on how much revenues that government has raised so far from the oil VAT. But using the average common price in Metro Manila for 2018 and based on domestic oil consumption data as of 2017 (as monitored and reported by the Department of Energy or DOE), VAT revenues from diesel and gasoline can be estimated. At a Php43-per liter average common price and daily consumption of almost 29.91 million liters, diesel generated about Php42.29 billion in VAT revenues from Jan to Sep 2018. At a Php55-average common price and daily consumption of almost 17.02 million liters, gasoline generated around Php30.78 billion in VAT revenues during the same period.

That’s about Php73.06 billion in VAT revenues from diesel and gasoline. For comparison, at an average common price of Php32 per liter in 2017 for diesel and Php46 for gasoline, total VAT collections from the two oil products for full year 2017 may have reached an estimated Php76.21 billion.

Removing onerous taxes

These are, of course, just estimates and actual collection figures may differ, perhaps even widely. But there should be no significant disparity between the comparison of oil VAT revenues between 2017 and 2018, whether estimates or actual collection data. The point is that government can decide to stop collecting more oil taxes now to immediately ease the burden of the public, even simply based on the fact that they have already collected enough.

Meanwhile, excise taxes collected from all petroleum products reached Php18.03 billion in the first six months of 2018, or almost thrice of the excise taxes collected from oil products in the same period last year, according to initial DOF data. That should be more than enough given how inflation has rapidly accelerated this year with increasing oil prices under the TRAIN Law as one of the primary culprits.

The whole point of raising taxes is to send back the generated resources to the people in the form of key economic and social services as well as programs and projects that benefit them and the country. But if the taxes are so onerous especially for the poor such as the VAT and excise taxes on petroleum products, they become an unnecessary burden and are oppressive. They negate whatever supposed benefits the people expect to get from the government. For the government to insist on collecting such taxes is unacceptable.

Imagine, for instance, a jeepney driver or small fisher whose income has been substantially eroded by increasing diesel and gasoline prices. Public education or health services, even new roads and bridges funded by their taxes are meaningless amid high prices that deprive them of decent living. Then there is the question of whether these tax resources are actually used for public interest and welfare given how corruption remains rampant in the bureaucracy not to mention that many programs and projects funded by these resources are anti-poor by design.

On the contrary, removing the VAT and excise taxes on oil now will have an immediate favorable impact on household budgets. ###

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Governance, Human rights, Military & war

Militarizing development work: Army chief Rolando Bautista as DSWD head

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(Photo: The Philippine Star)

By appointing Army chief Rolando Bautista as the next DSWD Secretary, Pres. Duterte is transforming government’s social welfare and development work into one big Civilian Military Operations (CMO) for counterinsurgency.

This has serious implications, among others –

  1. It will undermine genuine development work. Already limited public resources intended for development will be further and more systematically diverted for military purposes. Gains will be measured not in development terms but whether target rebel groups have been weakened.
  2. Poor communities that require assistance will be held hostage by the military agenda as government assistance would be contingent not on their actual and urgent needs but on their support and cooperation with the military’s counterinsurgency campaign.
  3. It will make the job of civilian development workers more difficult and could even put them at risk as they will be seen as agents of the military, who many communities distrust because of their atrocities.

Thus, instead of development and peace, militarizing development work with Bautista’s appointment as DSWD chief will actually bring greater poverty and conflict. ###

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Economy, Oil deregulation

Another “record” for Duterte: Oil prices highest in 10 years

Today’s oil price hikes (OPH) bring the nominal prices of diesel and gasoline to their highest levels in a decade. Oil firms announced that they will increase the price of diesel by Php1.35 per liter today and gasoline by Php1.00.

With these upward adjustments, the common price of diesel in Metro Manila is now pegged at Php48.30 per liter. The last time the prevailing pump price of diesel was higher was on Oct 1, 2008 when diesel in Metro Manila was retailing at a range of Php46.95 to Php49.09 per liter.

On the other hand, the common price of gasoline (RON 95) in Metro Manila is now at Php60.50 per liter. The last time that the prevailing pump price of gasoline in the capital region breached the Php60-mark was on Jul 21, 2008 when unleaded gasoline was retailing at a range of Php59.20 to Php61.07 per liter.

The announced OPH today is the eighth straight in as many weeks and the 28th overall. Total price increases for the year is Php13.50 per liter for diesel and Php13.37 for gasoline. The increases include the impact of Pres. Duterte’s TRAIN (Tax Reform for Acceleration and Inclusion) Law that added Php2.80 per liter in the pump price of diesel and Php2.97 for gasoline.

Overall, since Pres. Duterte took over, the common price of diesel in Metro Manila has already ballooned by Php20.35 per liter and gasoline by Php19.35.

Taking advantage of automatic weekly price adjustments under the Oil Deregulation Law, oil firms also appear to be implementing much higher price changes than what global price movement and forex fluctuations supposedly warrant. This simple profiteering has allowed oil firms to pocket about Php1.41 per liter in additional profits from diesel, and around Php2.53 per liter from gasoline.

Meanwhile, liquefied petroleum gas (LPG), according to the Energy department, is also now retailing in Metro Manila at Php705 to Php866 per 11-kilogram (kg) cylinder tank after oil firms increased LPG prices again yesterday (the eighth time this year). Before Pres. Duterte took over, the price range was only Php400 to Php650. Put another way, the most expensive LPG before Duterte became President in 2016 is still much cheaper than the “cheapest” LPG under him today. ###

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Economy, Oil deregulation, Privatization

“Red October” Day 1: What’s destabilizing the Duterte regime?

(Photo from AP/Bullit Marquez/The Philippine Star)

It’s “Red October” Day 1. Who or what is destabilizing the Duterte government today?

The oil companies. Oil firms announced that they will be implementing another round of oil price hikes starting Oct 1. Pilipinas Shell is hiking its LPG (liquefied petroleum gas) price by about Php2.36 per kilogram (kg) while Petron Corp. will also increase by Php2.35. These translate to an increase of almost Php26 for an 11-kg cylinder tank usually used by households. Including the previous increases since Pres. Duterte took over, LPG prices have already ballooned by an estimated Php216 to Php246. Further, starting Oct 2, oil firms will also implement a big-time price hike for diesel, gasoline and kerosene. Oil companies already announced that they will hike the price of diesel by Php1.35 per liter; gasoline, Php1.00; and kerosene, Php1.10. This will be the eighth straight week of unabated oil price hikes and would be the 28th overall for the year. Since Duterte became President, the price of diesel has already soared by more than Php20 per liter (Php13.50 this year alone) and gasoline by more than Php19 per liter (Php13.37 this year). (Read more on the latest oil price hikes here.)

The private water concessionaires of the MWSS (Metropolitan Waterworks and Sewerage System). Starting Oct 1, Maynilad Water Services Inc. will be billing its customers an additional Php0.90 per cubic meter for its basic charge under its rebased rates approved by the MWSS-Regulatory Office. This is on top of the Php0.11 per cubic meter increase due to the quarterly foreign currency differential adjustment (FCDA). Manila Water Corp.’s basic rates will likewise increase by Php1.46 per cubic meter due to rate rebasing while it will charge an extra Php0.02 per cubic meter due to the FCDA. Both rate rebasing and FCDA are mechanisms created under the privatization of MWSS that allow the private water concessionaires to adjust rates in order to pass on to the consumers all the costs of running the water services system and at the same time guarantee their profits. The rate hikes this “Red October” under the rate rebasing are just the first in four installments of increases with the three others to be implemented in Jan 2020, Jan 2021 and Jan 2022 – the second half of the Duterte presidency (that is if he is still in power).

Earlier, the Department of Economic Research of the Bangko Sentral ng Pilipinas (BSP) has estimated that inflation for September could reach 6.8%, with a range of 6.3% and as high as 7.1 percent. If the central bank’s forecast happens, this would be the ninth straight month of accelerated inflation and will be the highest in nine years. Pres. Duterte’s economic managers have repeatedly assured the public that inflation will ease in the latter part of 2018. But with the continued climb in oil prices, water rates, food prices (made worse by the impact of typhoon Ompong that destroyed almost Php27 billion worth of crops) and other basic goods and services, this appears to be a very optimistic forecast.

Rising prices and the inability or outright refusal of the Duterte administration to reverse current policies that allow unabated price hikes such as oil deregulation and water privatization, as well as its continued insistence on additional taxes under the TRAIN (Tax Reform for Acceleration and Inclusion) that further bloat prices are fueling social unrest and instability. The latest Pulse Asia survey showed that rising prices are the most urgent concern of Filipinos along with other economic concerns such as increasing workers’ pay, reducing poverty and creating more jobs.

As it hunts for “Red October”, the Duterte administration should look at itself instead, and not at the communists and their supposed co-plotters. Apparently, its own economic policies – together with its repressive schemes – are the ones destabilizing and isolating the regime. ###

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Labor & employment

Richest Filipinos and ‘Endo’ kings are Duterte’s friends

(First published by Bulatlat.com) — The Department of Labor and Employment (DOLE) has recently released a list of 20 firms that it said are engaged or suspected to be engaged in labor-only contracting. Some of the country’s largest companies topped the list, including Jollibee (14,960 workers); Dole Philippines (10,521); and PLDT (8,310).

Conspicuously absent in the list are known supporters of the Duterte administration.

One is SM, which is known for its chain of malls that hires thousands of contractual workers. According to Labor Secretary Silvestre Bello III, SM was not included in the list because it promised to regularize a total of 10,000 workers. He said that they are “satisfied” already with the retail giant’s commitment. But still, such promise does not justify the absence in the DOLE list of perhaps the most notorious and known biggest employer of contractual workers in the Philippines.

By its own account, the SM Group has more than 94,500 employees which include various companies under the conglomerate engaged in banking, financing, property, retail, malls, hotel, resorts and entertainment. According to one estimate, nine out of 10 SM employees are contractual workers.

Another is San Miguel Corporation (SMC). The diversified conglomerate (with operations in food and beverages, packaging, fuel and oil, power, and infrastructure) is said to employ around 20,000 workers, of whom only about 1,000 are regular workers.

What could possibly explain the exclusion of these giant conglomerates – two of the biggest not only in the Philippines but also in the Asian region?
The obvious answer is their close ties with President Duterte.

Among the country’s major business groups, SM has been one of the most supportive to the current regime. Its top officials are among the select tycoons that share an intimate dinner or travel abroad with the President to look for business opportunities, and invited to government events to show support to centerpiece Duterte programs like the “Build, Build, Build”. Along with state-run banks, SM Group’s BDO Unibank is financing Duterte’s contentious modernization program for jeepneys.

Its officials have publicly defended the controversial war on drugs and also offered the free showing of government’s anti-drug ads in SM cinemas nationwide. They supported the administration’s warming up of ties with China even as the latter has occupied and militarized Philippine-claimed territories in the South China Sea.

SM was founded by the country’s only trillionaire Henry Sy Sr. who has been the richest Filipino for over a decade now. Sy’s already massive wealth has been rising astronomically under Duterte – from just below US$14 billion in 2016 to US$18 billion in 2017 and further to US$20 billion in 2018. That’s almost a 54 percent increase in just three years.

SM aims to cash in on closer Philippine-China ties under Duterte. China is the world’s largest consumer market and the second biggest economy that could soon topple the US as number one. For Filipino oligarchs, the potential for profits is vast.

On top of the already seven malls it has in China, SM is building a “supermall” in the major port city of Tianjin (said to rival the size of the US’s Pentagon building) as well as residential projects in various key Chinese cities. With closer bilateral ties, Chinese tourists are also flocking the country, benefitting SM’s interests in resorts and entertainment.

An even more vocal apologist of the Duterte administration is SMC, especially its head honcho Ramon S. Ang. The SMC president was among Duterte’s campaign contributors in 2016 giving an undisclosed amount and perhaps other forms of support as Ang wasn’t even listed in the official Statement of Contributions and Expenditures (SOCE). Ang also offered to buy Duterte a private jet (worth as much as US$65 million) that he could use as President while donating Php1 billion to the Chief Executive’s pet campaign, the war on drugs.

Like Sy, Ang’s fortune has also vastly grown in the past three years. From a reported net worth of US$1.21 billion in 2016, his wealth has more than doubled to US$2.5 billion in 2018. Duterte’s infrastructure push apparently also pushed up Ang’s riches, which also include interests in construction.

Like SM, SMC has been capitalizing on Duterte’s programs. SMC is among those most aggressive in expanding in Mindanao particularly in establishing vast plantations and constructing infrastructure. In partnership with Malaysia’s Kuok Group, the conglomerate is developing about 18,495 hectares of forestlands covering four Davao del Norte municipalities for oil palm production. Just last August 2016, SMC also opened a 2,000-hectare industrial estate in Malita, Davao Occidental that also has a 20-meter deep seaport that can accommodate container vessels.

SM and especially SMC are among the leading proponents in Duterte’s “Build, Build, Build” infrastructure development program, including through the controversial unsolicited route. SMC alone accounts for 53 percent (P1.59 trillion) of the cost of all unsolicited proposals (P3 trillion) that have pitched to the Duterte administration. These include the P700-billion New Manila International Airport; the P338.8-billion Manila Bay Integrated Flood Control, Coastal Defense and Expressway Project; and P554-billion expansion of the Metro Manila Skyway and the South Luzon Expressway (SLEX).

SM (together with the Ayala group), on the other hand, has submitted an unsolicited proposal to build a P25-billion 8.6-kilometer elevated toll road that will supposedly help decongest traffic along EDSA. But as SM itself admitted, the main objective of the toll road is to increase access to its Mall of Asia complex. Through its BDO Unibank, SM also aims to profit from the “Build, Build, Build” by lending to project proponents or operators.

One of the major campaign promises that Duterte made was ending “endo” (end of contract scheme or contractualization). But two years into his presidency, that promise has remained largely unfulfilled.

With the biggest employers of contractual workers like SM and SMC as Duterte’s biggest backers, that should not come as a surprise.

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Consumer issues, Economy, SONA 2018

SONA 2018: How much have prices increased in Duterte’s first two years?

(Photo from Xinhua/Rouelle Umali)

The first two years of the Duterte presidency have been without a shortage of controversies. Endless allegations of human rights abuses related to its bloody drug war and recently its oppressive anti-tambay campaign (both targeting the poor) continue to face the administration. Tyranny has reared its ugly head as President Rodrigo Duterte placed Mindanao under Martial Law and intensified the militarization of the rural areas. Extrajudicial killings that target activists, journalists, and even local politicians are on the rise amid a reign of worsening impunity.

Its push for federalism through Charter change(Cha-cha) is widely seen as an attempt not just to perpetuate the current regime but to concentrate further political power in the hands of Duterte and his clique. With deepened control over Congress, Judiciary and the military through patronage, harassment and a combination of both, and with the backing of both the US and China, Duterte has been laying the groundwork for an authoritarian rule not unlike the Marcos years.

But while creating the illusion of consolidation of political power, all these are actually creating instability and greater conflict. Underneath this social unrest is the deteriorating living condition of millions of Filipino families. Indeed, as the Duterte presidency resorts to more repression and curtailment of human rights to assert its narrow political agenda, the overall economic direction it pursues only serves to accelerate the impoverishment and exclusion of the people.

This has been most felt by the public and most pronounced in the form of increased prices of key commodities and higher charges for basic services that have defined the state of the economy in the first two years of the Duterte administration. Looking at data culled from various government agencies and media reports, sharp increases were recorded in the pump prices of oil products; in the rates of public utilities like electricity, water and transportation; as well as in the retail prices of several basic food items.

More expensive food items and public utilities

The price of diesel under Duterte has already increased by almost 60%; gasoline by more than 33%; and LPG, by 23 to 45 percent. Residential rates charged to ordinary households by the Manila Electric Co. (Meralco) have jumped by 14 to 23% in the past two years. Water rates, on the other hand, are higher by 5% (Maynilad) to 8% (Manila Water). The minimum fare in jeepney has also been hiked by an equivalent of 29%, and by 9% (aircon) to 11% (regular) for buses. In addition, the flag down rate for taxis is 33% more expensive today. (See Table 1)

Table 1 utilities under Duterte SONA 2018

Among the food items, the largest relative increases in prices were observed in vegetables with some doubling their retail prices and others posting more than 60% price hikes. Significant increases were also noted in the retail prices of fish (14-20%); meat (14-27%); sugar (8-14%); and commercial rice, in particular the cheaper varieties consumed by most households (regular milled rice, 8%-hike; well-milled rice, 11%). (See Table 2)

Table 2 basic goods under Duterte SONA 2018

These significant increases in the prices of basic goods and services are captured by inflation rate data, which measure how fast prices are rising. For six straight months this year, the inflation rate has been steadily acceleratingand has already reached 5.2% in June, the highest in at least the last half decade. The rate of price increases today (January to June 2018 average inflation rate of 4.3%) is five times faster than it was during period immediately preceding Duterte’s term (January to June 2016 average inflation rate of 0.8%). (See Chart)

Chart inflation under Duterte

For most Filipino families, especially the poor and those in the lower income brackets, the rising costs of these basic needs mean tremendous pressure on household budgets. Also, the poorer the family, the larger they spend for food and to a certain degree for utilities (including housing) relative to their income as the latest Family Income and Expenditure Survey (FIES) of the Philippine Statistics Authority (PSA) shows. To illustrate, 59 to 60% of total expenditures of those with an annual income of less than Php100,000 go to food compared to 35% for those with Php250,000 or more. (See Table 3)

Table 3 family expenditures by type

TRAIN, neoliberal policies and Duterte’s accountability

What explains the rapid rise in prices especially in recent months? To deflect accountability, Duterte’s economic team points to global factors that are beyond the control of government such as the increasing world prices of oil and weakening peso against the US dollar (thus making imports more expensive). These economic managers are some of the country’s most rabid advocates of neoliberalism, a model of economic development that transfers control of economic factors from the government or public sector to the profit-driven market forces and private sector, taking the form of liberalization, privatization, and deregulation as well as fiscal reforms to lessen state subsidies and increase tax collections.

However, it is obvious that prices are climbing up because of the past neoliberal economic policies that the Duterte administration chose to continue and the new neoliberal programs that it has started to implement, chief among them the Tax Reform for Acceleration and Inclusion (TRAIN) Law. Implemented since January 2018, the TRAIN Law while lowering the personal income tax for also introduced additional taxes for socially sensitive goods such as oil products, triggering a spike in inflation as shown in the chart above.

Additional taxes on petroleum products under TRAIN aggravated the impact of the two-decade old Oil Deregulation Law which allows oil firms to automatically adjust pump prices every week. This year (up to July 17), oil prices have increased already by a total of Php6.45 per liter for diesel; Php6.00 for gasoline; and Php6.70 for kerosene. TRAIN accounts for 30% of the total price hikes for diesel and 33% each for gasoline and kerosene.

Without government regulation on price adjustments, the oil industry has also been further opened up to abuses and price manipulation. For instance, oil firms have implemented oil price adjustments that are about Php0.80 per liter (diesel) to Php1.26 per liter (gasoline) more than what the supposed movements in global oil prices and foreign exchange rates warrant (for the period January 1 to July 10, 2018); meaning oil players could be charging the public more than what they should. Of course, this only considers the import costs and does not factor in yet the far larger (and more important) impact on domestic pump prices of monopoly pricing at the global level. (How these estimates are made is discussed herebased on available data at the time.)

All these combine to make the price of oil exorbitant, which is crucial because of the strategic role that oil plays in making the economy run (manufacturing factories, power plants, transport, etc.) and has a domino effect on consumer prices, services and the overall costs of living. Fare increases for public transport are the direct and most visible impact of increasing oil prices.

The privatization of public utilities, meanwhile, has exposed the people to unabated increases in user fees such as what the captured markets of Meralco, Manila Water, Maynilad and other private electricity and water service providers are being subjected to. Liberalization of agriculture made the country highly dependent on food imports (including rice, vegetables and meat), thus exposing the people to the vagaries of the global market where speculators and monopolies dominate (aside from the local cartels such as in rice), even as our own small food producers and farmers are neglected amid lack of genuine agrarian development.

No ease in the rise of cost of living

The bad news is that the prices of basic goods and services are not seen to ease anytime soon as the administration persists in its neoliberal direction. Duterte’s Cha-cha, for instance, is about neoliberalismin the economy as much as it is about federalism. When implemented, Cha-cha will pave the way for foreigners to take over and run, among others, the country’s public utilities that could result to even higher user fees for electricity, water, telecommunications and transport as these strategic sectors become further detached from national interest and public welfare. Cha-cha will also allow foreigners to own agricultural lands that could further undermine domestic food production and consequently the costs of food while poor farmers are further displaced from their means of production.

Already, huge increases in water ratesare looming again under Maynilad (seeking more than Php11 per cubic meter hike in its basic charge) and Manila Water’s (Php8.31 per cubic meter) privatization deal with the government that allows them to increase their basic charge every five years (on top of various periodic, automatic adjustments) and to pass on questionable charges to consumers, most notably their corporate income tax. LRT-1 fares could also jumpby Php5-7 as part of government’s privatization contract with the consortium of the Ayala family and Manny Pangilinan’s group that allows them to hike their basic fare every two years.

And lest the public – still reeling from the impact of the first wave of increases under the TRAIN Law – forgets, more tax hikes (and consequently, spikes in consumer prices) are coming under Duterte’s tax reform program. The TRAIN law mandates that the excise tax for diesel, pegged this year at Php2.50 per liter, will climb to Php4.50 in 2019 and further to Php6 in 2020. For gasoline excise tax, the schedule is Php7 this year, and then Php9 and Php10 in 2019 and 2020, respectively.

Duterte’s tough guy personality and foulmouthed rants unseen before from a President may have in the beginning amused a public too weary of sweet-talking traditional politicians. But amid the ever-rising costs of the people’s basic daily necessities, Duterte is steadily being exposed as the same despised trapo who covet power while abandoning the interests and welfare of the people.

It certainly does not help that the public’s legitimate concern on skyrocketing prices is being met with apathy by the chief architects of Duterte’s flawed neoliberal economic program such as Budget Secretary Benjamin Diokno’s crybaby remark. Unconditional cash transfer and Pantawid Pasadadiesel subsidy for jeepney drivers to mitigate the impact of TRAIN, aside from already delayed, are band aid solutions that will not reverse the long-term impact of high prices.

The wanton killings under Duterte and his repulsive tirades have sparked public outrage and the people’s protests are spreading. The unabated increases in prices and the cost of living will only add fuel to the fire. ###

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Charter change, Free trade, SONA 2018

SONA 2018: Cha-cha, US free trade deal, and all-out economic liberalization under Duterte

(US Pres. Donald Trump with PH Pres. Rodrigo Duterte at the ASEAN gala dinner in Manila on November 12, 2017; Photo from here)

Manila’s ambassador to Washington Jose Manuel Romualdez recently announced that the first round of negotiations for a bilateral free trade agreement (FTA) with the US will start in September in the US capital. The FTA negotiations, with an estimated timeline of one to two years, is the direct result of US President Donald Trump’s Manila visit in November last year where he agreed with President Rodrigo Duterte to, among others, discuss a potential FTA between the two countries.

(Based on a report which came out two days prior to the statement by Romualdez, and quoting Finance chief Carlos G. Dominguez III and US Deputy Trade Representative for Asia Jeffrey Gerrish, the bilateral FTA talks appear to be still exploratory. Nonetheless both camps are said to be “prepared to move forward” and proceed to “high-level discussions in the near future”.)  

The envoy’s announcement came as the Duterte administration shifts into high gear its charter change (Cha-cha) drive, with the President planning to endorse the draft federal charter as a priority measure and a new Constitution already ratified as early as next year per Malacañang’s target.

US remains a key player in PH economy

We may thus be seeing the real possibility of a new wave of liberalization of the economy under Pres. Duterte where foreign business interests could be allowed as much as 100% ownership of Philippine lands and public utilities, among others. Although the Duterte administration has depicted the shift to federalism as the main motive behind Cha-cha, current efforts to rewrite the Constitution remain driven, as in the past, by the persistent push of American and other foreign lobby groups to further open up the economy.

While China is rising and cultivates an increasingly more prominent role in the Philippines and elsewhere, the US (along with Japan) remains a key player in the national economy. From 2007 to 2017, the US accounted for 24.1% of the cumulative net foreign direct investments (FDI) that flowed into the country, the second largest behind Japanese FDI.

During the said period, US net FDI flows totaled US$4.10 billion while Japan had US$4.36 billion (25.6%). European Union (EU) countries’ net FDI flows to the Philippines recorded US$1.46 billion (8.6%) while ASEAN members had US$1.38 billion (8.1%). China, on the other hand, posted a measly US$84.74 million or just 0.5% of the total. (Note: the figures exclude reinvestment of earnings and debt instruments where country breakdown data are not available, per the Bangko Sentral ng Pilipinas or BSP.)

Direct bilateral trade with the US remains significant at US$168.58 billion from 2006 to 2016 or 13.3% of total trade during the period (second largest behind Japan’s 14.4%), based on data generated from the World Bank’s World Integrated Trade Solution (WITS) online database. The US is the second largest foreign market for Philippine exports, accounting for 15.6% of total exports (behind Japan’s 18.5%) at US$88.95 billion, and second largest source of imports with 11.4% of total imports (behind China’s 11.8%) at US$79.63 billion.

American businesses operating in the Philippines are bullish about the country’s growth prospects and the potential to generate greater profits here as the Duterte administration and its economic manager remain firmly committed to liberalization. In the 2018 ASEAN Business Outlook Survey conducted by the US AmCham, 85% of Manila-based executives representing US firms anticipate increased profitability from their Philippine operations while 70% expect to expand their operations in the country in the coming years. (As cited here)

Talks of a US-Philippines FTA have long been floated by various American and Filipino trade officials but have not really taken off. Under former Pres. Barack Obama, the US had focused more on plurilateral or regional FTAs, especially the Trans-Pacific Partnership (TPP) of which the Philippines – despite the previous Aquino administration’s repeated expression of interest – never became a party to mainly due to foreign ownership restrictions in the 1987 Constitution.

PH bilateral FTA with US to have TPP elements

While Trump has abandoned the TPP and now prefers bilateral arrangements, it remains the standard with which the US will pursue bilateral FTAs including with the Philippines. As one trade official put it, a US-Philippines FTA must have the elements of the TPP as a “new age” FTA, which means that it should cover not just trade in goods but also services and international standards.

The Philippines TPP readiness assessment, a 2016 report backed by the US Chamber of Commerce (AmCham) and US Agency for International Development (USAID), identified key areas of policy reforms that the country must undertake to meet the TPP’s requirements. This report could serve as a useful guide in what the US could seek in its negotiations with Filipino trade officials on the planned bilateral FTA.

According to the report, while the Philippines “is already ‘TPP-ready’ in many key respects, pursuing TPP membership will demand… further significant adjustments in the policy environment, as embodied in administrative measures, laws, and the Constitution itself.” It noted that constitutional provisions restricting foreign ownership and participation in Philippine businesses is the biggest hurdle to our TPP accession.

These include, among others, the provision of national treatment obligations (i.e., foreign investors and investments must be given treatment no less favorable than what Filipino investors and investments enjoy) to trade partners that will require the Philippines to “revisit the current range of constitutional constraints relating to nationalized industries and service sectors, and adopt policy reforms in selected areas” namely mass media, private radio networks, advertising; natural resources or mining enterprises; land ownership; public utilities; and education and practice of professions.”

If Duterte’s Cha-cha pushes through, many of the US concerns – also annually reported as foreign trade barriers by the US Trade Representative (USTR) such as its 2018 report on the Philippines and other US trade partners – would be substantially addressed.

Federal charter for all-out liberalization

In the draft federal charter prepared by the Consultative Committee to Review the 1987 Constitution, the new Article XV on National Economy and Patrimony gives Congress the authority to change by law the constitutional requirements on the lease of alienable lands of the public domain supposedly “considering the general welfare of the people and the necessities of conservation, ecology, development and agrarian reform” (Section 3). Congress can reduce or even eliminate the constitutional limit on foreign ownership or control (pegged at 60% Filipino shares of stocks) of entities that can lease a maximum of 1,000 hectares for 25 years (renewable for another 25 years).

Another is on the exploration, development and utilization of natural resources (Section 4) which shall be a shared power of the federal and regional governments. While setting a minimum requirement of 60% Filipino-ownership or control of voting capital for entities with whom the federal or regional governments can have a co-production, joint venture or production-sharing agreements, Congress is again given the power to change by law the said voting capital requirement for the “federal and regional interest of the people, and thus theoretically allow up to 100% foreign ownership or control.

Meanwhile, ownership and management of mass media is reserved exclusively to Filipinos while the advertising industry is restricted to Filipinos owning at least 70% of the voting capital (Section 12) and educational institutions at 60% (Section 15). But similarly, these constitutional requirements can be changed (reduced or removed) by Congress through legislation supposedly for “public welfare and national security” although “for this purpose, such entities shall be managed by citizens of the Philippines”. In other words, such entities can be fully foreign owned although still managed by Filipinos.

For public utilities, the proposed charter (Section 13) states that Filipinos shall own at least 60% of voting capital of a public utility which can be operated through a franchise, certificate or authorization for 25 years (renewable for another 25 years). But like in mass media and advertising as well as educational institutions, Congress can modify the voting capital requirement (allow greater foreign control or ownership) provided that management will still be reserved to Filipinos.

It is also worth noting that Philippine telecommunications which is a particular concern for the US (as pointed out in its TPP readiness assessment) may be already liberalized even before Cha-cha is implemented through the ongoing amendment of the Public Service Act (also a priority legislation of the Duterte administration) that will limit public utilities to the transmission and distribution of electricity and waterworks and sewerage systems.

Duterte to implement long-standing US agenda

Other key provisions of the 1987 Constitution pertaining to preference for Filipino investments over foreign capital have been removed entirely in the proposed new charter of the consultative committee. Most notable is the current Section 10 of Article XII which states that: “The Congress shall… reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.”

Aside from economic sectors, the so-called federal charter is liberalizing as well the practice of all professions (Section 14) which while limited to Filipinos could be opened up to foreign professionals not just through federal law but also by “international agreements providing for reciprocity” (e.g., an FTA). This modification in the Constitution is consistent with the US push to open up to foreigners the practice of professions reserved to Filipinos as noted in the AmCham/USAID TPP readiness assessment of the Philippines (e.g. on nationality requirements for senior management position).

Beyond liberalization, however, is the greater protection for American investments that the US seeks in so-called 21stcentury FTAs such as the TPP. A bilateral FTA with the US thus will likely require an investor-state dispute settlement (ISDS) provision that affords US investors with full protection under international law and allows them to sue governments for failure to provide, fulfill or ensure such protection for American investments.

In the TPP, ISDS allows foreign investors to challenge a government’s “conduct, including expropriation measures, through binding arbitration and panel proceedings.” Related to this are national treatment and most favored nation obligations that may require constitutional and other policy reforms for the Philippines, with serious implications for the country’s national sovereignty and patrimony.

Cha-cha for greater liberalization of the economy and a bilateral FTA attest to the leading role that the US continues to play in shaping Philippine economic direction even amid the rise of China as a major actor in the country especially under the Duterte administration. The biggest irony is that these long-standing agenda of the US (expressed through many previous and present initiatives of the AmCham, USAID and other US institutions) may be finally realized under a President who vows a foreign policy supposedly independent from its neocolonial master. ###

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