PH rice import dependence rising amid weakening global production

Rice import liberalization harms both the consumers and rice farmers, and only the foreign and domestic private traders reap the benefits.

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In the past two decades, imported rice has been accounting for an increasing portion of our domestic consumption. Prior to the 1995 birth of the World Trade Organization (WTO), the country’s rice import dependency ratio (i.e., the extent of dependency on importation in relation to domestic consumption) only averaged 2.45% (1990 to 1994 average). In the latest available 10-year average (2006 to 2016), the ratio has risen by 4.5 times to 11.06 percent. In the immediate 10 years since the WTO (1995 to 2005), the average ratio was 11.24 percent.

Despite increasing dependence on cheaper imported rice, the retail price of rice has continued to rise. The average annual inflation rate for rice accelerated from 4% in 1996-2006 to 5.7% in 2006-2016. Apparently, more rice imports do not necessarily translate to lower retail prices. Yet, to tame rising rice prices and ease faster overall inflation, the Duterte administration’s answer is further liberalization of rice imports through the Rice Tariffication Bill(RTB). Already passed by the Houselast month, a Senate RTB counterpart is expected before the year ends.

The RTB will liberalize rice trade by removing the quantitative restriction (QR) on imported rice. This entails scrapping the current minimum access volume (MAV) which caps rice imports at 805,200 metric tons (MT) with a 35% in-quota (e.g. within MAV) tariff. Rice imports outside the MAV are slapped with a 40% tariff. In lieu of a QR, a general tariff will be imposed.

Rice tariffication and liberalization is a Philippine commitment to the WTO but repeatedly postponed in the past due to the socially sensitive nature of rice as an agricultural commodity. The Duterte administration used the soaring price of riceto justify finally replacing the rice QR with tariff, selling the idea that the entry of more imports will bring down local prices. As of the third week of August, well-milled rice retails at Php46.35 per kilo (10% higher than a year ago) and regular milled rice at Php42.85 (13% higher).

According to government’s economic managers, tariffication could reduce the priceof rice by as much as Php4.31 per kilo and lessen inflation by at least one percentage point. Rice production in Thailand and Vietnam, the country’s main sources of rice imports, is pegged at Php6 per kilo. In the Philippines, production cost is said to be double that amount.

While not a guarantee to lower prices in the long run, opening up the rice sector to unbridled imports leaves the country’s rice security at the mercy of an unpredictable and increasingly unreliable world market. This as 95% of Philippine rice imports come from just two countries whose own domestic production is either slowing down or declining. Globally, rice production has been steadily decelerating in the past four decades.

At the same time, the already precarious livelihoodof up to 20 million Filipinos who rely on the rice sector, including some 2.5 million rice farmers, gets more insecure than ever.

Rice production in Vietnam, which accounts for almost 69% of Philippine rice imports (2010 to 2016 average), and in Thailand, which comprises 26%, has been weakening in the past four decades. In Vietnam, rice (paddy) production decelerated from an annual growth of more than 5% in the 1980s and 1990s to 2.2% in the 2000s, and 1.6% this decade. Thailand’s rice production slowed down from a yearly growth of 3% in the 1980s to 2.1% in the 1990s, before recovering to 3.1% in the 2000s. But this decade, Thai rice production is actually contracting by 3.1% every year.

Other Southeast Asian countries that are also among the world’s major rice exporters (and potential Philippine suppliers) are experiencing production declines as well. Myanmar’s rice (paddy) production went down from an annual growth of 4.9% in the 2000s to a yearly contraction of 3.1% this decade. Cambodia is still posting a 3.8 growth since 2010, but it’s twice slower than its annual expansion of 7.4% last decade.

Our own rice (paddy) production has decelerated to 1.2% this decade from a more than 3%-annual expansion in the 1990s and 2000s and about 4-5% in the 1960s and 1970s. Worldwide, rice production has been continuously slowing since the 1980s when annual growth was pegged at 3.2 percent. This declined to 1.8% in the 1990s; 1.2% in the 2000s; and 1.1% in the 2010s.

It is estimated that lifting the QR on rice will double the volume of the country’s rice imports in five years. For the already impoverished Filipino rice farmers, this means a sharp drop in income (some projections say by around 29%) as rice that are 100% cheaper to produce in Thailand and Vietnam due to heavy subsidies flood the domestic market.

Government allays fears of more bankruptcy among rice farmers through the proposed six-year Rice Competitiveness Enhancement Fund (Rice Fund) where all the duties collected from rice imports would be supposedly used to support small rice farmers. The central bank estimates an additional Php28 billion in annual revenues from rice tariffs that could be used to help prepare rice farmers for competition from imports through the Rice Fund.

But this was the same promise made to vegetable farmers and fisher folk most affected by WTO tariffication in 1995 with the Agricultural Competitiveness Enhance Fund (ACEF). Marred by corruption and mismanagement issues, the fund only ended up favoring agribusiness corporations as small farmers and fisher folk were further impoverished by massive agricultural imports.

In fact, since its introduction more than two decades ago, ACEF’s initial six-year life has been extended and reformed several times – the most recent in 2016, with implementation starting this year– because it has failed to achieve its stated objectives of protecting and preparing the farmers and fisher folk.

As mentioned, the influx of cheaper imported rice has not resulted to cheaper retail prices for consumers. The monopoly control that big private traders have over imported rice and those procured from local farmers allows them to keep retail prices high even as farmgate prices are depressed. Privatization and deregulation of its functions on palay procurement, rice importation, marketing and price control have made the National Food Authority (NFA) inutile in affecting prices. Inefficiency and corruption made the situation even worse.

Even as the price of rice continued to increase, the farmer’s share to retail prices is actually lower today. Prior to the WTO, farmer’s share to consumer peso (i.e. how much of the price paid by the consumers goes back to the rice farmers) decreased from 30.5% (1990 to 1994 average) to 28.3% in 1995 to 2005 and just slightly climbing up to 28.6% in 2006 to 2016. Note that the actual amount that goes to the rice farmers is much lower due to usury and landlessness that eat into their share in prices.

Liberalization harms both the consumers and rice farmers, and only the foreign and domestic private traders reap the benefits. Tariffication and the promotion of more imports give these private traders even greater control over the rice industry. ###

Sources of data: Philippine Statistics Authority (PSA); Food and Agriculture Organization (FAO)

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

Prices today are rising five times faster than they were before President Duterte took over.

(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. ###

The curious case of NEDA’s Php10,000

NEDA (National Economic and Development Authority) did not say that a family of five could live decently with Php10,000 a month, according to Rappler’s “Fact-Check”. End of debate?

Actually no. While NEDA may not have directly referred to the Php10,000 as enough for decent living, the whole issue is what the amount of Php10,000 represents.

That “hypothetical” amount – the budget of an average Filipino family, said NEDA – was in fact based on the official poverty threshold fora family of five (i.e., Php9,140 as of first semester 2015, latest official data).

The PSA (Philippine Statistics Authority) defines poverty threshold this way:

“Food threshold is the minimum income required to meet basic food needs and satisfy the nutritional requirements set by the Food and Nutrition Research Institute (FNRI) to ensure that one remains economically and socially productive. Poverty threshold is a similar concept, expanded to include basic non-food needs such as clothing, housing, transportation, health, and education expenses).”

For the government, that is around Php10,000.

And there lies the problem. Using the ridiculously low poverty threshold as reference to show that the impact of high inflation and the TRAIN law on ordinary households is tolerable highlights the basic flaw of government’s appreciation of the true extent of poverty in general and of the impact soaring prices and regressive taxes in particular. #

Inflation surges for 5th straight month since TRAIN law

Inflation as of May 2018There is no end in sight for high prices under President Duterte.

Inflation rate has reached a new 5-year high this May at 4.6 percent. It has been continuously accelerating every month since the TRAIN Law took effect in January 2018.

Even Duterte’s economic managers could not say whether inflation has already peaked. This means that the public should brace for more surges in prices of basic goods and services in the months ahead.

By the second half of the year, for instance, we are looking at big-time increases in water rates in Metro Manila (earlier reports indicated a basic charge hike of Php8+ to Php12+ per cubic meter) as well as in LRT-1 fares (Php5-7) thanks to privatization. Public transport fares will likely increase too amid deregulated oil price hikes.

The poorer families obviously are the hardest hit but even middle-income households are also not spared.

Transport service Grab has been hiking their rates with impunity, taking advantage of the lack of a reliable mass transport system. Meanwhile, some 170 private schools in NCR have jacked up tuition by 5-15% this school year, which will hit monthly household budgets as most pay on installment basis.

Duterte’s economic managers assure the public that inflation will eventually taper off later in the year. What this means is that prices will continue to increase although at a slower pace than they are doing today. This assumes that global oil prices and foreign exchange rates will move favorably, which is difficult to bank on amid worsening geopolitical uncertainties.

Further, because the downstream oil industry is deregulated, government does not have the needed policy tool to ensure that the public and the economy are protected from sudden and drastic and often speculative increases in global oil prices. Not to mention that the industry remains monopolized and the prices dictated.

Oil continues to be one of the biggest drivers of high inflation in the country. According to the joint DBM-NEDA-DOF statement, oil price increases contributed 0.70 percentage points to the 4.6% May inflation. But increasing petroleum prices also pushed up food prices, with fish and seafood and bread and cereals, for instance, significantly contributing as well to the May inflation with 0.65 and 0.56 percentage points, respectively per NEDA data.

What is certain is that the impact of the additional taxes on consumer prices under the TRAIN law is permanent unless they are removed. Including the latest (June 3) oil price adjustments, the TRAIN law accounts for 29.3% of the total increase in diesel prices this year; gasoline, 32.6%; and kerosene, 34.4 percent.

Blog 08 Table OPH TRAIN

Amid all these, people do not simply complain but make concrete policy proposals that could at least provide immediate relief, such as removing the additional taxes under the TRAIN law.

But typical of the Duterte administration, we get responses ranging from the arrogant (e.g., Budget Sec. Benjamin Diokno’s crybaby remark) to the ludicrous (e.g., Finance Sec. Carlos Dominguez’s claim that the public’s supposed wasteful spending of their additional income under TRAIN is further driving prices up). #

Jeepney phaseout could hurt commuters, too

“Fare increases would serve as an incentive to move forward to modernization” – LTFRB

The Land Transportation Franchising and Regulatory Board (LTFRB) claims that its controversial jeepney modernization program only has the interest of commuters in mind. Phasing out the jeepneys and replacing them with vehicles that use modern engine (Euro 4) and designed to provide utmost safety (speed limiter, CCTV) and comfort (bigger space, wi-fi) will surely benefit the riding public, the said government body likes to stress.

To be sure, all these features and amenities that the LTFRB and Department of Transportation (DOTr) promise are welcome for commuters. What transport officials do not say is what or how much it would cost for the riding public to enjoy the supposedly modernized jeepneys under their plan.

At the hearing of the House of Representatives (HoR) on the modernization program, LTFRB chair Martin Delgra III said: “fare increases would encourage drivers and operators to take part in the modernization program, as these would cover losses, inflation or fuel price increases and serve as an incentive to move forward to modernization.”

DOTr Secretary Arthur Tugade also earlier said that the program is “designed to strengthen [and] to guarantee the profitability of the jeepney business”.

Clearly, the supposed modernization will not be cheap not only from the point of view of jeepney drivers and small operators but also of the commuters.

As fares are not subsidized by the state, commuters will have to shoulder the full cost of the pricey vehicles including interest payments owed to the banks, cost of maintaining and operating the units and their required terminals, taxes and fees owed to the government, income of drivers and operators, etc.

Taken with the unabashedly pro-big business policy direction being charted by the Duterte presidency, the threat of skyrocketing fares becomes even more imminent. Consider, for instance, the proposed Public Service Act amendment or House Bill (HB) 5828, one of the priority and urgent legislative measures of the administration. If passed by Congress, HB 5828 would allow public services like transportation to set rates (or fares) that would give its operators the maximum profit rates based on existing market condition. If that amount translates to a minimum fare of Php15, Php20 or even more, commuters will be left with no choice. Worse, deregulated rates or fares is also an option as stipulated in the Malacañang-backed HB 5828. Deregulated fares will actually be easier to implement with the planned beep cards. Now combine this with the long deregulated oil industry and the result would be catastrophic for commuters.

Do the small operators benefit from this lucrative jeepney business? Only if they could get a franchise under the demanding new guidelines of the LTFRB and meet the high capital requirement of managing a fleet of at least 10 vehicles (worth Php12 to 16 million), which is unlikely. Most of them would be certainly displaced by established business groups with access to capital (and political power). And these firms, under HB 5828, could be foreigners even. HB 5828 says transport is not a public utility and thus excluded from the constitutional restriction on foreign ownership.

Some commuters, of course, would be willing and able to pay a premium for better services. But most commuters of jeepneys are the lowest paid workers and are from the poorest households who struggle daily to make ends meet. They are the students from working class families. They are the self-employed and jobless. According to the Japan International Cooperation Agency (JICA), the average low income group households in the country have to spend at least 20% of their monthly household income for transportation. Soaring fares would push millions of Filipino commuters to greater poverty and marginalization.

What transport officials refuse to see is that modernization is not merely about replacing the old with the new. Modernization must above all be about long-term development that addresses the people’s basic needs and promotes their rights. When a society upgrades its ways of doing things, the primary objective should be to advance the interests of its people. If “modernization” comes at the expense of those who are already marginalized such as the poor jeepney drivers and commuters, then that is not development but regression. To ensure that genuine development comes with modernization, the state must play a central role.

But instead of addressing this question, the DOTr, LTFRB and President Duterte himself are creating an artificial contradiction between the interests of jeepney drivers/operators and the commuters. They absolve government of its duty to build a modern public transport system that protects both the welfare of the commuters and those who rely on it for livelihood. This as the apparent direction of the Duterte administration’s program is for big corporations to fully take over, push out the small drivers/operators and fleece the riding public with exorbitant fares.

The chronic state of disrepair of the country’s public transport system is the result of decades of government’s wrong policies, bureaucratic corruption and outright neglect.

Access to safe, efficient, reliable and affordable public transport system is a right that the state must guarantee for commuters and not a privilege for those who could afford it. What is the role of the government to ensure this? Is it simply to issue franchises and set standards? Why not start the discussion on jeepney modernization on these fundamental questions? ###

 

Maynilad says 65% of rate hike will be used to pay for its income tax

 

Manny Pangilinan and his foreign backers and financiers, who have interests in LRT, MRT and Maynilad, must be grinning widely right now.

With the public still reeling from the huge LRT/MRT fare hike, Maynilad Water Services Inc. announced that it will soon implement a significant increase in its basic charge. The average increase is P3.06 per cubic meter. What makes this rate hike as awfully unjust as the LRT/MRT fare hike is that 65% of the increase (about P1.99 per cu. m) will be used to recover the income tax of Maynilad. This was disclosed by the water firm’s Chief Finance Officer as quoted in a news report.

This means that hapless consumers will continue to pay for the corporate income tax of a highly profitable big business that has been cashing in on a basic service. In 2013, Maynilad reported a core income of P7.53 billion. (See chart below) Since 2010, its core income has been growing by more than 16% annually. Maynilad’s rising profits are mainly pushed by ever increasing water rates due to periodic and automatic adjustments allowed in its Concession Agreement with the Metropolitan Waterworks and Sewerage System (MWSS). Since taking over in 1997, Maynilad’s water rates have already ballooned by more than 500 percent. Since 2010, its all-in tariff (basic charge plus other charges) has jumped by more than 40 percent, which could further go up when the higher basic charge is implemented.

Image from Metro Pacific
Image from Metro Pacific (Core earnings represents earnings associated with business operations, and exclude earnings from goodwill, gains or losses from nonrecurring items, pension gains, legal settlements or employee stock options; source: Investopedia)

But while it has been earning billions of pesos from onerous and skyrocketing water rates, Maynilad wants to further milk the consumers dry by passing on their obligation to pay income tax to their customers. How does Maynilad justify this patently scandalous practice? A direct statement from its Chief Finance Officer: “Siyempre ang negosyante, ini-invest niya ‘yung pera niya para may return. So ang usapan dito, magkano ba ang tubo na dapat kitain ng pera na ‘yun. Importante ‘yung computation ng taxes kasi kailangan natin malaman magkano ‘yung net na iuuwi.”

To recall, the MWSS-Regulatory Office (RO) disallowed Maynilad and Manila Water Co. from including income tax recovery in their computation of the basic charge. Maynilad and Manila Water separately challenged the decision through arbitration led by the International Chamber of Commerce (ICC), a dispute resolution mechanism established by the Concession Agreement. Manila Water is still awaiting the result of its own arbitration case as of this posting.

More than eight million Maynilad customers are supposed to enjoy a reduction in their monthly water bill. In its decision last September 2013, the MWSS-RO ordered Maynilad to cut its basic charge by P1.46 per cu. m (which shall be distributed in five tranches at P0.29 per cu. m. per year) Now instead of a rollback, consumers are faced with a big rate increase. (Download the MWSS-RO resolution here)

The income tax is actually just one of the various issues raised by the MWSS-RO against Maynilad and Manila Water. Another is the P1 per cu. m. currency exchange rate adjustment (CERA), which the regulators ordered Maynilad to discontinue charging to its customers since a similar recovery mechanism – the foreign currency differential adjustment (FCDA), which recently also pushed water rates up – is already being imposed by Maynilad. But apparently, because of the arbitration, the CERA will remain in Maynilad’s water bill, and is now tucked in the basic charge.

Arbitration further exposes the privatization of MWSS, the region’s largest public-private partnership (PPP) deal in the water sector, as greatly anti-people and contrary to public interest. The Maynilad case clearly shows that effective public regulation is a sham in a program like PPP that is heavily biased to private corporate interests. The MWSS privatization was designed precisely to undermine government regulation as decisions are ultimately made by an arbitration panel where the concessionaire and a representative of foreign business interests have a say. ###

For background/additional information and discussion:

PNoy and the Big Water monopolies

Water arbitration: Issues and implications

Water rate hikes: Maynilad, Manila Water want P153B in future income tax passed on to consumers

Manila Water, Maynilad’s multi-million “pa-pogi” also charged to consumers

Maynilad, Manila Water ads further expose anti-consumer MWSS privatization

PH water rates among Asia’s highest

LRT/MRT fare hike and the Aquino admin’s irrational, baseless claims

Image from RILES Network
Image from RILES Network

On 4 January, the Department of Transportation and Communications (DOTC) will start implementing the controversial fare hike for light rail transit (LRT) 1 and 2 and metro rail transit (MRT) 3. The issues surrounding the fare hike have not changed, with the administration mouthing the same irrational and baseless claims to justify the increase. Meanwhile, the fare hike has been further exposed as merely benefitting big business interests. The privatization of LRT 1 as well as the DOTC admission that the fare hike will not be used to upgrade MRT 3 despite the many glitches and breakdowns illustrate this.

‘Distance-based fare scheme’

According to the DOTC Order No. 2014-14, the new formula that shall be implemented is Php11 base fare + Php1 per kilometer. It is similar to riding a taxi – the flag down rate is Php11 and the meter goes up by Php1 for every additional kilometer. The DOTC calls this a ‘distance-based fare scheme’ and is consistent with the so-called ‘user-pays’ principle.

Under this scheme, commuters of the light rail system are facing a significant increase in fares. An end-to-end trip in LRT 1 and 2 will cost commuters Php10 more. In MRT 3, the additional cost for an end-to-end trip is Php13. The fare hike ranges from 0-50% for LRT 1; 25-79% for LRT 2; and 30-87% for MRT 3, depending on the station of origin and destination. (See Tables 1, 2 and 3)

Table 1

LRT 1 old and new fares, single journey (Php)

From Baclaran to: Old New % increase
Edsa 15 15 0
Libertad 15 15 0
Gil Puyat 15 15 0
V. Cruz 15 15 0
Quirino 15 15 0
Pedro Gil 15 20 33
UN Avenue 15 20 33
Central Terminal 20 20 0
Carriedo 20 20 0
Doroteo Jose 20 20 0
Bambang 20 20 0
Tayuman 20 30 50
Blumentritt 20 30 50
Abad Santos 20 30 50
R. Papa 20 30 50
5th Avenue 20 30 50
Monumento 20 30 50
Balintawak 20 30 50
Roosevelt 20 30 50
Sources of data: LRTA and DOTC
Table 2

LRT 2 old and new fares, single journey (Php)

From Recto to: Old New % increase
Legarda 12 15 25
Pureza 12 15 25
V. Mapa 12 15 25
J. Ruiz 13 20 54
Gilmore 13 20 54
Betty Go-Belmonte 13 20 54
Araneta-Cubao 14 20 43
Anonas 14 25 79
Katipunan 14 25 79
Santolan 15 25 67
Sources of data: LRTA and DOTC
Table 3

MRT 3 old and new fares (Php)

From North Avenue to: Old New % increase
Quezon Avenue 10 13 30
GMA-Kamuning 10 13 30
Cubao 11 16 45
Santolan 11 16 45
Ortigas 12 20 67
Shaw Boulevard 12 20 67
Boni Avenue 12 20 67
Guadalupe 14 24 71
Buendia 14 24 71
Ayala Avenue 14 24 71
Magallanes 15 28 87
Taft 15 28 87
Sources of data: LRTA and DOTC

(Download the complete fare matrix for LRT 1 stored value and LRT 1 single journey; LRT 2 stored value and LRT 2 single journey; and MRT 3)

The main reason cited by the DOTC for the fare hike is the need to cut down government subsidies for the light rail system. Supposedly, government is subsidizing 60% of the cost for each passenger of LRT 1 and 2, and 75% for each MRT 3 passenger. The average fare for LRT 1 and 2 is Php14.28, implying that the ‘actual cost’ is around Php35.70. This results in a deficit of Php21.42, which represents government subsidy per passenger. Similarly, the average fare for MRT 3 is Php12.40, with the actual cost at about Php49.60 and government subsidy at Php37.20 per passenger.

Authorities estimate that around Php2 billion in such subsidies will be freed up due to the fare hike. These savings, said the DOTC, can be used for ‘development projects and relief operations’ in areas outside Metro Manila to benefit those that do not use the LRT and MRT.

Irrational and baseless

But this argument is irrational and baseless.

First, it is wrong to pit the interest of LRT/MRT commuters against the interest of those from outside Metro Manila. It’s like saying that taxes from Metro Manila should not be used to pay for the cost of building and running public hospitals in Mindanao because the people of Metro Manila do not use the said facilities. Or that government support to Mindanao’s public hospitals should be reduced, and the money be used instead for relief and rehabilitation of typhoon victims in Metro Manila. Such argument eliminates the role of government in raising revenues and distributing them to fund the various needs of the people, regardless of where they are, such as key infrastructure like mass transportation and social services like hospitals.

Second, government should support the LRT/MRT as a mass transportation system. It offers social and economic benefits that even the DOTC recognizes: “Most urban railway systems in the world are not financially viable, but are implemented for their socio-economic benefits. Our Manila Light Rail Transit (LRT) systems promote the use of high-occupancy vehicles, thereby reducing traffic congestion on the corridors served, local air pollution and greenhouse gases emissions. Besides the substantial savings in travel time cost of LRT riders, the LRT systems reduce infrastructure investment in Metro Manila road expansion”. (See “Fare Restructuring Executive Report”)

When monetized, it is possible that the benefits far outweigh the government subsidies as related literature suggests. In its study on German rail subsidies, Swiss researchers found out that rail upgrades resulted to about 1.75 billion euros in benefits from road accidents prevention and lower nitrogen emission. (See “Does Supporting Passenger Railways Reduce Road Traffic Externalities?”)

The Japan International Cooperation Agency (JICA), in its separate study, calculated that traffic congestion in Metro Manila costs Php2.4 billion daily in 2012. With a reliable public transport system comprised of a large and efficient railway system, the losses can be reversed. Government can even save as much as Php4 billion daily by 2030, according to JICA. (See “Roadmap for Transport Infrastructure Development for Metro Manila and Its Surrounding Areas”) Thus, instead of reducing the subsidies, government should even invest more in the expansion and development of the rail system.

Third, commuters have already been bearing their share of the burden by paying for the full cost of operation and maintenance (O&M). The farebox ratio or the proportion of fare revenues to total O&M cost measures this. A farebox ratio of 1.0 means that fare revenues cover 100% of O&M cost. From January to September this year, the average farebox ratio of LRT 1 and 2 is pegged at 1.10. Meanwhile, latest publicly available data show that the MRT 3 has a farebox ratio of 1.17 in 2012.

In relation to O&M costs, Filipino rail commuters actually pay more than commuters in North America and Europe where the public transportation system is heavily subsidized. In the US, for instance, the farebox ratio ranges from 0.12 to 0.71. In Canada, its 0.39 to 0.78; Spain, 0.41 to 0.90; France (Paris), 0.30; Germany (Berlin), 0.17; and the UK (London), 0.91. (See Farebox recovery ratio, Wikipedia)

Fourth, government expenses in LRT/MRT are bloated not because of low fares. As just mentioned, current fares, in fact, already pay for the cost of O&M. In the case of MRT, the costs swelled because of the onerous financial obligations of government arising from its build-lease-transfer (BLT) contract with the privately owned MRT Corporation (MRTC). Under this deal, government agreed to pay for the guaranteed annual 15% return on investment (ROI) of the MRTC in the form of equity rental payments (ERP), as well as the settlement of MRTC’s tax liabilities.

These financial obligations under the BLT comprise about 81% of total MRT 3 expenses, while only 19% go to O&M (based on 2012 latest available data). (See Table 4) The DOTC admitted that the MRT fare hike would go not to the much-needed improvements of the infrastructure, amid glitches and breakdowns, but to serve government’s questionable financial obligations to the MRTC. Note that half of the projected Php2-billion ‘savings’ that government expects to generate from the fare hikes will come from the MRT.

Table 4

Summary of MRT 3 financial operations, 2012

Items MRT % distribution
Expenses (Php billion) 9.33 100.0
     Opex 1.82 19.5
     BLT financial obligations 7.51 80.5
         Taxes, duties & fees 2.01 21.5
         Equity Rental Payment & admin costs 5.50 59.0
Revenues (Php billion) 2.16 100.0
     Rail revenues 2.14 98.8
     Non-rail revenues 0.03 1.2
Farebox ratio (rail revenues/opex) 1.17
Source of data: DOTC

For LRT 1 and 2, bulk of the expenses goes to debt servicing with more than 47% and depreciation of the infrastructure with almost 16% (also based on 2012 data). (See Table 5) Government, through people’s taxes, shoulders these expenses since the LRT system is a public investment. But what makes the fare hike more unjust, particularly in the case of LRT 1 that has been recently privatized, is that the people will bear an increasing share of the debt-servicing burden even as the system generates private profits for the consortium of the MVP-Ayala group (which won the LRT 1 public-private partnership or PPP project) and their foreign backers and partners. Indeed, in the context of the PPP, LRT 1 commuters and all taxpayers (including those who do not use the LRT 1) are oppressed with regular and automatic fare increases and profit guarantees and generous tax exemptions granted by the Aquino administration to the MVP-Ayala group. LRT 2, which is also in the PPP pipeline, will soon be under a similar situation.

Table 5

Summary of LRT 1 & 2 financial operations, 2012

Items LRT 1 & 2 % distribution
Expenses (Php billion) 8.37 100.0
     Opex 3.03 36.2
     Depreciation 1.33 15.9
     Capex 0.06 0.7
     Financial obligations 3.95 47.1
         Loan payments 2.43 29.1
         Interest expenses 1.51 18.1
Revenues (Php billion) 3.67 100.0
     Rail revenues 3.44 93.8
     Non-rail revenues 0.23 6.6
Farebox ratio (rail revenues/opex) 1.13
Source of data: DOTC

Applying these data to the estimated full cost that LRT 1 and 2 and MRT 3 passengers must pay will suggest that:

  • Of the Php49.60 per passenger that represent the full cost of an MRT 3 ride, about Php40.18 represent the onerous BLT financial obligations of government. This means that without such onerous obligations, the cost would only be Php9.42 per passenger, Php2.98 smaller than the current average fare for MRT 3 of Php12.40; and
  • Of the Php35.70 per passenger that represent the average full cost of an LRT 1 and 2 ride, about Php22.49 represent debt servicing and depreciation. If these will not be passed on to the commuters, the cost per passenger would only be Php13.21, Php1.07 lower than the current average fare for LRT 1 and 2 of Php14.28.

Clearly, there is no need for a fare hike if only government will fulfill its mandate of providing a reliable and affordable mass transportation system and avoid passing on to the commuters unjust, onerous and unnecessary burden. So why then is government adamant in pushing the fare increases?

PPP and the user-pays principle

The Aquino administration’s PPP program is the underlying reason for the LRT/MRT fare hike. President Aquino announced the supposed need for a fare hike in his first State of the Nation Address (SONA) in 2010 together with his declaration of PPP – including for Metro Manila’s light rail system – as his administration’s centerpiece economic program. A fare hike and mechanisms to automatically implement and guarantee fare adjustments are meant to make PPP for the light rail system palatable to private investors.

The so-called ‘user-pays’ principle that the DOTC cited in its order is a neoliberal principle that simply means government will no longer be responsible in ensuring public access to LRT/MRT as a key infrastructure and public good. Subsidies will eventually be totally eliminated and commuters have to pay for the full cost, i.e. operation, maintenance, capital expenditures, debt servicing, etc. that would push fares to onerous and exorbitant levels. A review of the concession agreement between the Aquino administration and the MVP-Ayala consortium for LRT 1 shows how the user-pays principle will operate and oppress the commuters and general public. It is unjust because fares in LRT and MRT as a mode of mass transportation and as a public good should be premised on the people’s ability to pay and overall economic and social benefits, and thus should be supported through a progressive distribution of public resources.

Private profits at public expense

A closer examination of the profile of LRT/MRT commuters will further illustrate the oppressiveness of the user-pays principle while further supporting the need for a public good approach to Metro Manila’s light rail system. A previous study by JICA showed that almost 32% of LRT/MRT users during weekdays are students; 49% are employees and workers; and almost 10% are unemployed. This means that 9 out of 10 LRT and MRT commuters are ordinary income earners, students and jobless/job-seekers, and need substantial government support. (See “Chapter 8: Passenger Ridership Characteristics and Origin-Destination Patterns,” Mega Manila Public Transport Study, April 2007)

While commuters are burdened with unnecessary and oppressive fare hikes, big business interests will cash in big time from LRT/MRT. These business interests have close ties with the Aquino administration and in fact are the leading players in the PPP program of government. The MVP group, which also represents Indonesia’s Salim business empire, has economic interests in MRT 3 and together with the Ayala family and Australian investment giant Macquaire, will expand, operate and maintain LRT 1 through the Light Rail Manila Consortium (LRMC).

Meanwhile, the MVP-Ayala group is also positioning itself to corner the LRT 2 PPP deal, which is up for bidding this year. Other prospective bidders include San Miguel Corp. (SMC) of presidential uncle Danding Cojuangco and his right hand man Ramon S. Ang, and Japan’s Marubeni Philippines Corp. as well as other big local tycoons such as Aboitiz, Consunji and George Ty.

Petitions at the SC

Various groups have already expressed plans to question the LRT/MRT fare hike before the Supreme Court (SC). It is interesting to see how promptly the SC will act on the petitions that will be filed considering the urgency of the matter. Note that every day that passes without a temporary restraining order (TRO) on the new fares means millions of pesos are being collected from the commuters. These may no longer be returned to them in case the SC decides against the fare hike. It is extremely necessary, therefore, that the SC immediately issues a TRO to mitigate the harm on the commuters.

Another issue that must be closely watched in relation to the SC is the LRT 1 concession agreement. Assuming that the SC issues a TRO and later declare the fare hike illegal, this will not prevent the MVP-Ayala group from still collecting their additional revenues from the fare hike through ‘deficit payments’ from government under the LRT 1 PPP deal. This will make the SC decision practically futile unless the concession agreement between the MVP-Ayala group is also declared illegal. ###