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

The Duterte administration 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.

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(Photo from 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. ###

Oil prices under Duterte

As we face another round of oil price hikes this week, here’s a look at how oil prices have skyrocketed so far under the Duterte administration. Before Duterte took over, the common price of diesel in Metro Manila was Php27.95 per liter while gasoline (RON95) was pegged at Php41.15. Today, these have jumped to Php42.85 and Php58.07 per liter, respectively. In some gas stations in Metro Manila, diesel is being retailed by up to almost Php48 per liter, and gasoline by almost Php61. Prices in other regions are even higher.

Prior to this week’s oil price adjustments, the TRAIN law accounts for 28% of the total price hikes in diesel, and 31% for gasoline. When gas stations implemented the TRAIN in mid-January this year, the common price of gasoline and diesel in Metro Manila immediately jumped by more than Php4 to almost Php6 per liter. Thus, while it is true that the TRAIN law is not the sole reason behind the recent spike in oil prices and consequently of faster inflation rate, it is certainly a major contributor.

Deregulation, which allows automatic oil price adjustments based on supposed global oil price movement and forex fluctuations, accounts for the rest. But is it true that government is helpless as its economic managers like to claim? Remember that like the TRAIN law, deregulation is a government policy. As such, it can be changed if only the Duterte administration has the political will to protect the public interest, especially the poor but also even the middle class who are reeling as well from escalating prices. Sadly, this is not the case. #

(Read more on how TRAIN law and oil deregulation are oppressing the people here – https://goo.gl/AMcgz8)

Bangis ng buwis sa langis

Sabi dati, “matira matibay”. Pero sa ilalim ni Digong at ng kanyang mabangis na buwis sa langis, “matira mayaman”.

Alam ba ninyong mula nang i-deregulate ang industriya ng langis sa bansa at patawan ng mga dagdag na buwis, apat hanggang limang ulit na mas mabilis ang pagtaas ng presyo ng diesel at gasolina kumpara sa bilis ng pagtaas ng minimum wage ng mga manggagawa?

Pero para kay President Duterte at mga alipores n’yang neoliberal, hindi pa sapat ang kalbaryong ito ng mamamayan.

Dobleng-dagok pa ang hinaharap natin ngayong linggo sa taas-presyo ng mga produktong petrolyo.

Unang dagok – muling nagtaas ng presyo ang mga kumpanya ng langis dahil pa rin daw sa galaw ng presyo sa world market. Sa lumabas na report sa media, nasa 80 centavos per liter ang OPH (oil price hike) sa gasolina, 55 centavos sa diesel, at 55 centavos sa kerosene.

Deregulated ang industriya ng langis sa bansa. Awtomatiko ang pagbabago sa presyo linggo-linggo sa mga gasolinahan para raw i-reflect ang galaw ng presyo sa world market. Ito ang ikatlong sunod na linggo ng OPH sa pagsisimula ng “ma-Digong bagong” taon natin.

Pangalawang dagok – inaasahang ipatutupad na ngayong linggo ang excise tax sa langis sa ilalim ng TRAIN (Tax Reform for Acceleration and Inclusion). Sa naunang pahayag ng DOE (Department of Energy), nasa Php2.97 per liter ang OPH sa gasolina, Php2.80 sa diesel, at Php3.30 sa kerosene – kasama ang 12% VAT (value-added tax).

Ibig sabihin, aabot ang big time OPH sa Php3.77 per liter sa gasolina; Php3.35 sa diesel; at Php3.85 sa kerosene sa pinagsamang impact ng TRAIN at deregulasyon.

Kung tutuusin, doble ang kubra ng gobyerno sa langis dahil sa TRAIN. Pasok sa kwenta ng VAT sa presyo ng langis ang excise tax (at iba pang buwis) sa iniimport na petrolyo. Dahil itataas ng TRAIN ang excise tax, tataas din ang koleksyon mula sa VAT sa langis. Syempre pa, lahat ng ito ay papasanin ng publiko.

Napakabigat nito lalo na para sa mahihirap nating kababayan na direktang tatamaan ang kabuhayan. Halimbawa, sa isang iglap, ang gastos sa langis ng isang tsuper ng jeep ay lolobo nang lampas Php100 sa maghapong pasada (batay sa konsumo na 30 liters ng diesel). Ang gastos ng mangingisda sa balikang byahe sa laot ay tataas nang halos Php38 (sa konsumo na 10 liters ng gasolina).

Pambili na sana ito ng isa hanggang tatlong kilo ng bigas (Php27 per kilo na regular NFA rice o Php37 na regular commercial rice) pero kukunin pa ng gobyerno sa mga pamilyang hindi na nga halos makahinga sa pagsisikip ng sinturon.

Pero ang bad news pa, karugtong ng OPH ang pagtaas ng iba pang bayarin. Sa leeg na yata ng mahihirap gustong ilagay ng pamahalaan ang pinahigpit na sinturon. Samantala, ang mga super yaman, may discount pa para sa kanilang luho sa ilalim ng TRAIN.

Bago pa ang TRAIN ni Digong, matagal na tayong pinahihirapan ng deregulasyon at ng buwis sa langis. Nagsimula ang deregulasyon noong 1996. Kung ikukumpara ang kanilang real prices (adjusted for inflation) ngayon at noong simula ng deregulasyon, lampas-doble na ang presyo ng gasolina at diesel.

Ang estimated increase ng real price ng diesel sa pagitan ng 1996 at 2018 ay nasa 131% habang sa gasolina naman ay 118 percent. Sa parehong panahon, ang real wage ng mga minimum na sahurang manggagawa sa Metro Manila ay lumaki lamang ng 27 percent.

Pumatong sa halos lingguhang OPH sa deregulasyon ang mga pabigat na buwis gaya ng naunang excise tax na ipinataw sa mga produktong petrolyo noong 1996; ang 12% VAT (value-added tax) noong 2005; at ngayong taon, itong dagdag na excise tax dahil sa TRAIN. (Tingnan ang chart sa taas)

Sabi dati, “matira matibay”. Pero sa ilalim ni Digong at ng kanyang mabangis na buwis sa langis, “matira mayaman”. #

TRAIN: Si CEO, ang kanyang luxury car at si manang tindera

Si manang tindera at kapwa mahihirap nyang suki ang magbabayad sa matitipid ni CEO sa kanyang luxury car.

(Larawan mula sa expatch.org)

Isipin n’yo ito –

Kapag bumili, halimbawa, ang presidente o CEO ng isang malaking kumpanya ng luxury car gaya ng Toyota Alphard 3.5 V6 na ang presyo ay nasa Php3.28 million, makakatipid siya nang hanggang Php337,000.

Si manang tindera sa sari-sari store na kailangang bumyahe sa Divisoria para mamili ng mga paninda ay maaaring magbabayad ng dagdag-pasahe sa dyipni nang hanggang Php4, o hanggang Php8 kung balikan. Magiging mas mahal na rin ang bibilhin nyang mga paninda gaya ng yosi na tataas ang presyo nang Php2.50 bawat kaha at softdrinks na tataas nang Php12 kada litro. Kailangan ni manang tindera ng mas malaking puhunan, habang maaaring liliit naman ang kanyang dati nang maliit na kita.

Si manang tindera at kapwa mahihirap nyang suki ang magbabayad sa matitipid ni CEO sa kanyang luxury car.

Ito sa simpleng salita, ang ibig sabihin ng TRAIN (Tax Reform for Acceleration and Inclusion) para sa mayaman at mahirap.

Nakakalula ang laki ng sahod ng mga CEO ng mga dambuhalang korporasyon sa bansa. Ang average na sahod ng CEO ng Metro Pacific Investments Corp. (MPIC) at Meralco nina Manny V. Pangilinan ay nasa halos Php8 million kada buwan. Ang mga CEO na nasa Ayala ay sumasahod ng halos Php7 million kada buwan. Sina Ramon Ang sa San Miguel Corp. (SMC), sumasahod kada buwan nang halos Php6 million. Si manang tindera? Swerte nang kumita ang kanyang pamilya ng Php2,700 sa isang buwan (batay sa 2015 Family Income and Expenditure Survey o FIES ng gobyerno).

Directors-Salary-v2
Mula sa Entrepreneur Philippines

Noong 2016, ang tinubo ng top 1,000 corporations sa bansa na kontrolado nina Pangilinan, Ayala, Ang at iba pang super rich kasama na ang mga dayuhan ay umabot sa Php1.24 trillion, mas malaki pa nang halos 15% sa tinubo nila noong 2015.

Yan lang ang deklarado o alam ng publiko. Magkano pa kaya ang totoo? Kaya walang epekto sa kanila ang anumang taas-presyo sa mga produkto o serbisyo. Sila nga ang may monopolyo sa mga produkto at serbisyo sa bansa at lahat ng taas-presyo ay ipinapasa sa pobreng mamimili. Laruan lang sa super rich ang mga luxury cars, tapos makakatipid pa sila nang daan-daang libo kapag bumili ng mga ito?

Sa kabilang banda, marami sa mga Pilipino ang gaya ni manang tindera na umaasa sa informal economy bilang nagtitingi ng produkto o nagbibigay ng serbisyo gaya ng mga drayber ng traysikel at dyipni, o mga tindera sa karinderya. Wala silang buwanang sahod. At marami sa kanilang kostumer ay mga galing din sa informal economy. Ibig sabihin, hindi sila makikinabang sa mas mataas daw na take home pay dahil sa mas mababang income tax. Pero tiyak na tataas ang kanilang gastos.

Si manong tsuper ng dyipni ay magbabayad ng dagdag na Php2.80 kada litro ngayong taon sa diesel habang si manong traysikel drayber ay may taas-gastos sa gasolina nang Php2.97 kada litro. Si manang may-karinderya ay tataas ang gastos sa LPG nang Php12 kada tangke (11-kg). Batay ito sa pahayag ng DOE.

Paano ang mga magsasaka at mangingisda – na pinakamataas ang poverty incidence sa lahat ng sektor (kapwa nasa 34% sa pinakahuling official data) – na umaasa sa kerosene, na tataas nang Php3.30 kada litro dahil sa TRAIN (pinakamalaki sa lahat ng produktong petrolyo) bilang pang-ilaw, pangluto at sa paghahanapbuhay?

Ngayong taon pa lang yan. Sa susunod na 3 taon, lalo pang tataas ang presyo ng langis dahil sa TRAIN, bukod pa sa halos linggo-linggong oil price hike dahil sa deregulasyon. Binibilang pa lang natin ang direktang impact. Ang pagtaas sa presyo ng langis (at kuryente bunga pa rin ng TRAIN) ay may domino effect sa presyo ng iba pang produkto’t serbisyo.

Lampas 15 million ng mga may-trabaho sa bansa ang walang regular na buwanang sahod o hindi nga sumasahod kahit nagtatrabaho, katumbas halos ng 37% ng kabuuang bilang ng employed noong 2017, kabilang ang gaya nina manang tindera at manong drayber. Paano pa kaya ang mga walang trabaho na nasa 2.4 million batay sa pinababang unemployment rate ng gobyerno?

Pero maraming ordinaryong manggagawa o empleyadong may regular na sahod ay hindi rin naman makikinabang sa TRAIN. Walang madadagdag sa sahod ng mga dati nang sumasahod ng minimum wage o mas mababa pa na bumubuo sa halos kalahati (46%) ng lahat ng manggagawa sa Pilipinas. Pero papasanin nila ang pagtaas ng mga presyo’t bayarin dahil sa TRAIN.

Kakarampot na nga ang minimum wage sa bansa. Bago pa ang impact ng TRAIN, ang minimum wage ay wala na sa kalahati ng tinatayang cost of living (hal. sa NCR, nasa Php1,130 ang cost of living kada pamilya kada araw kumpara sa arawang minimum wage na Php512). Paano kung maging mas mahal pa ang mga bilihin at serbisyo dahil sa dagdag-buwis?

Babawiin din ng taas-presyo dahil sa dagdag-buwis ang sinasabing pagbaba ng personal income tax. Kahit ang mga mataas-taas ang sahod at may pambayad pa, halimbawa, sa Uber o Grab ay hindi ligtas. Nagsabi na ang Grab ng taas-singil sa pasahe nang aabot sa Php13 dahil sa TRAIN. Mas mataas na ang gastos sa gasolina ng mga de-kotseng middle class. Hindi pa pinag-uusapan na inaalis ng TRAIN ang dating tax exemption na hanggang Php100,000 para sa 4 na dependents (hal. anak) ng isang taxpayer (o Php25,000 kada dependent) bukod pa sa personal exemption na Php50,000.

Isang paraan ang progresibong pagbubuwis para tiyakin ang makatarungang pamamahagi ng yaman ng isang lipunan. Pero kung ang mahihirap ang papasan ng buwis para sa maluhong pamumuhay ng mayayaman, hindi lang iyan regressive, pang-aapi na iyan. #

SONA 2017: What’s in it for China in Duterte’s ‘Build, Build, Build’?

Big infrastructure lenders like China and Japan profit not only from the interests accruing from their loans to build rails and roads. The larger gains they make are from the conditionalities they tie to these loans.

President Rodrigo Duterte with President Xi Jinping of China (Photo from Etienne Oliveau/Reuters, Aljazeera)

In his second State of the Nation Address (SONA), President Duterte as expected mentioned his grand infrastructure plan. There was special mention of China that Duterte said generously offered money for his “Build, Build, Build” program.

“If your Congress has no money, we will give you money” was what the Chinese supposedly told him, the President said in his speech.

Duterte in his SONA made the Chinese offer look like simple altruism and generosity. But in reality, on top of making Chinese imperialism appear benign, using soft power by bankrolling the country’s hard infrastructure profits China’s economy in various ways.

No debt crisis?

The concerns that Duterte’s infrastructure plan would result in a heavy debt burden are valid. After all, the price tag of what economic managers call as the “boldest infrastructure development program” in recent history is a whopping Php8 to 9 trillion.

Economic managers, however, assure the public that they have everything figured out. The plan is that government appropriations, not debt, will mainly fund the so-called “golden age of infrastructure”. The Finance department’s tax reform package aims to raise Php157 billion in additional revenues a year; the version passed by the House could generate Php130 billion.

At Php8 to 9 trillion, the annual cost of building infrastructure from 2017 to 2022 would be Php1.6 to 1.8 trillion. Clearly, the additional revenues from the tax package will not be enough even as it bleeds the poor dry.

In reality, the infrastructure program would be mostly debt-funded. But again, the public is being told that a debt crisis will not rear its ugly head. In fact, the Budget department expects that by the end of President Duterte’s term, the debt-to-GDP ratio would even fall to 38.1% from 40.6% in 2016.

Such optimism hinges on the economy not only sustaining its expansion but posting even more rapid growth. To outpace debt, the gross domestic product (GDP) must grow by 6.5 to 7.5% this year and 7-8% between 2018 and 2022.

It is tough to be as upbeat as administration officials given the structural weaknesses of the economy and amid a global crisis. For this year, debt watchers and creditors put Philippine GDP growth at 6.4 to 6.8% – below the range being hoped for by the economic managers. That’s the most bullish the projections could get.

Whatever rate the GDP grows by, the budget deficit is sure to increase as government ramps up infrastructure spending. The plan is to let the budget shortfall climb to 3% of GDP as infrastructure spending reaches as high as 7.4% of GDP.

While a bigger deficit means greater borrowing, there is supposedly no need to be anxious as the Budget department claims they will borrow in a fiscally sustainable way. Eighty percent of the deficit would be funded by domestic debt and only 20% foreign. Such borrowing mix lessens foreign exchange risks that could cause public debt to balloon.

Chinese and Japanese loans

But a review of what the Duterte administration has identified as its flagship infrastructure projects tells a different story. To be sure, the flagships – numbering 75 as of June – are just a fraction of the more than 4,000 infrastructure projects that government plans to do. They nonetheless represent the largest ones in terms of cost and are the top priorities for implementation.

Of the 75 flagship projects listed by the National Economic and Development Authority (NEDA), 48 will be funded by foreign debt or official development assistance (ODA). Only 14 will be bankrolled through the national budget or General Appropriations Act (GAA). Just two projects are planned to be implemented via public-private partnership (PPP) while 11 have yet to be identified which mode to use.

As of June, only 53 out of the 75 flagships have estimated costs totaling PhpPhp1.58 trillion. Of the 53, 41 are ODA-funded projects worth Php1.40 trillion. The remaining Php181 billion would be funded through the GAA. In other words, almost 89% of the total cost of projects with already determined amounts will be paid for by foreign debt. (See Tables below)

Flagship infra summary

Notes: ODA – Official Development Assistance; GAA – General Appropriations Act; PPP – public-private partnership; TBD – to be determined (Based on data from NEDA) 

Just nine of the 41 ODA-funded flagship projects have identified donors/creditors, based on NEDA’s June list. These are Japan with three projects worth Php226.89 billion; China, three projects (Php164.55 billion); South Korea, two projects (Php14.06 billion); and World Bank, one project (Php4.79 billion).

The Chinese and Japanese are backing the Duterte administration’s largest mega-projects, an indication of how the two economic behemoths see “development cooperation” as one of the key arenas of their competition in the region. Japan is funding the Php211.46-billion PNR North 2 (Malolos-Clark Airport-Clark Green City Rail); Php9.99-billion Cavite Industrial Area Flood Management Project; and the Php5.44-billion Malitubog-Maridagao Irrigation Project, Phase II.

Meanwhile, China is bankrolling the Php151-billion PNR Long-haul (Calamba-Bicol); Php10.86-billion New Centennial Water Source – Kaliwa Dam Project; and Php2.70-billion Chico River Pump Irrigation Project.

Although not yet identified in the latest NEDA list, various media reports also link Chinese and Japanese loans to other big-ticket rail projects. These include the Php134-billion PNR South Commuter Line (Tutuban-Los Baños); the Php230-billion Manila Metro Line 9 (Mega Manila Subway Project – Phase 1); as well as the Mindanao Rail Project, of which the first phase (Tagum-Davao-Digos) costing Php35.26 billion will be funded via the GAA. (See Table below)

ODA flagship 1

ODA flagship 2

ODA flagship 3.png

Source: NEDA

Download NEDA’s entire list here

Gains beyond interests

Over-reliance on debt is obviously problematic but by itself tapping concessional loans to build much needed infrastructure is not a wrong policy. Sadly, ODA is shaped not by genuine development cooperation but by the narrow agenda of lending governments and the corporate interests they represent. Thus, potential economic and social development gains for a borrowing country are greatly weighed down by bloated costs of ODA-funded infrastructure.

Big infrastructure lenders like China and Japan profit not only from the interests accruing from their loans to build rails and roads. The larger gains they make are from the conditionalities they tie to these loans such as requiring the Philippines to exclusively source from Chinese and Japanese firms the goods and services needed to build the rails and roads.

Lenders dictate the technology, design and construction of the infrastructure to accommodate their own suppliers and infrastructure firms. As such, Chinese and Japanese contractors are also favorably positioned to corner operation and maintenance contracts once the rail systems and other infrastructure are privatized under the Duterte administration’s hybrid PPP scheme.

Lastly, creditors also favor the development of infrastructure in areas where they have business interests. This explains the concentration of Japan-funded infrastructure in Central and Southern Luzon where export zones with Japanese investments are concentrated. China’s interest in building infrastructure in Mindanao is tied to its plantation and mining interests in the region.

All these make the cost of infrastructure development in the Philippines more expensive and the debt burden onerous. Tied loans for infrastructure development creates commercial opportunities for Japanese and Chinese companies that are otherwise not available to them. In China’s case, infrastructure lending in poor countries is even used to create employment for their own workforce at the expense of local labor.

At a time of prolonged global recession and slowdown in profit rates of the industrial economies, these opportunities become even more important. Alas, these opportunities only arise by undermining the debtor’s own development needs. ###

(This is a slightly revised version of an article first published as IBON Features)

LRT 1 privatization: public to bear costs of guaranteed private profits

Photo from Bulatlat.com
Photo from Bulatlat.com

It’s the same old story. We have seen it before in the privatization of the National Power Corp. (Napocor) where consumers are now being forced to pay more to shoulder stranded costs arising from sweetheart deals with private power generators. We have seen it in the privatization of the MRT where government has been insisting to hike fares to pay for financial obligations arising from guaranteed profits and debt payments. Both punish the public with exorbitant fees and drain the already scant resources of government.

The same fate awaits the Filipino people if the P60-billion privatization and line extension of LRT 1, the largest public-private partnership (PPP) project of President Benigno Aquino III to date, will not be stopped.

Those who are interested to look into the details of the LRT 1 privatization may download a copy of the draft 32-year concession agreement here. Scrutinizing the draft contract, we will see that despite the repeated denial by its officials, the Aquino administration will continue the usual practice of providing state guarantees to peddle its privatization program. And as you might expect, such guarantees will come at the great expense of the public.

Top-up provision

If the private operators of the MRT were granted with a guaranteed 15% return on investment (ROI) annually, the winning bidder for the LRT 1 privatization will enjoy a so-called top-up subsidy. The Department of Transportation and Communications (DOTC), the agency in charge of LRT 1 privatization, explained that the top-up provision will entail the government to shoulder the difference between the pre-approved fares contained in the concession deal and the actual fares that authorities will be able to actually implement.

This is essentially a profit guarantee for the private operator and can be found in Section 20 (on Concessionaire Revenues) of the draft concession agreement for LRT 1 privatization. Under the draft contract, the concessionaire will be entitled to a notional fare (Section 20.3.a) that shall be agreed upon by the government and the winning bidder to ensure the commercial profitability of the system. The notional fare would be periodically adjusted (read: increased) during the entire 32-year concession period. Section 20.4.a of the draft contract, meanwhile, states that: “In any period, where the Approved Fare is lower than the Notional Fare, the Grantors shall pay to the Concessionaire a Deficit Payment (“DP”), to reflect the difference between the Notional Fare (NF) and the Approved Fare (AF).” The Grantors refer to the DOTC and the Light Rail Transit Authority (LRTA).

Concretely, this means that if the DOTC or LRTA could not implement a certain fare level for LRT 1 as committed in the concession agreement due to strong public opposition and/or regulatory, legislative or judicial intervention, government is obliged to pay the private operator its expected revenues from such fare level. Government, of course, will be using public money. In other words, the public will not escape the greed of the private operator – whether as LRT 1 commuters (who will shoulder the fare hike) or as taxpayers (who will bear the top-up subsidy). Needless to say, prospective LRT 1 operators that include San Miguel Corp. Infra Resources, Inc.; Light Rail Manila Consortium of Manny V. Pangilinan and the Ayala group; DMCI Holdings, Inc. of the Consunji group; and the foreign consortium MTD-Samsung of Malaysia and South Korea are pleased with the deal that they will be competing to secure from the Aquino administration.

Regulatory risk guarantee

The top-up subsidy in LRT 1 privatization is a form of regulatory risk guarantee that the administration’s economic managers first disclosed in September 2010. The announcement was made ahead of the President’s working visit to the US where he promoted his PPP program to American investors. Two months later, Aquino officially declared the scheme as policy during the PPP Summit, which the government organized to jumpstart its privatization initiatives. In his speech, the Chief Executive said:

“The government will provide investors with protection against regulatory risk. Infrastructure can only be paid for from user fees or taxes. When government commits to allow investors to earn their return from user fees, it is important that that commitment be reliable and enforceable. And if private investors are impeded from collecting contractually agreed fees – by regulators, courts, or the legislature – then our government will use its own resources to ensure that they are kept whole.”

While providing profit guarantees is standard practice in privatization, the regulatory risk guarantee is unique to the Aquino administration. His economic managers designed the scheme so as to avoid criticisms that he is repeating the same disadvantageous perks given to PPP investors in the past that caused the financial bleeding of government such as in the case of Napocor and MRT. But the top-up subsidy or regulatory risk guarantee is essentially the same as the take-or-pay provisions in previous PPP deals. Government and the end-users will still assume all the risks associated with operating the infrastructure while the profits of the private operator are secured.

More public debts

Where will government get the funds for the LRT 1’s top-up subsidy? To be sure, it will not come from disposable funds or public savings as the national budget deficit is still huge at P127.3 billion while the national government remains heavily indebted with more than P5.38 trillion in outstanding debt as of November 2012.

Like his predecessors, Aquino will borrow more to finance his PPP program including the profit guarantee for participating private corporations.  The National Economic and Development Authority (Neda) had earlier announced that government will tap multilateral institutions to provide for the guarantees so that when PPP investors face risk, they can still “be paid fast and immediately”. One of the multilateral lenders that made a pledge to fund the government guarantees on PPP projects was the World Bank which issued the commitment during the 2010 PPP Summit. Incidentally, the World Bank through its investment arm International Finance Corp. (IFC) is the transaction advisor of the DOTC and LRTA in the LRT 1 privatization.

Undermining check and balance

Aside from the direct financial burden that will hit the people, the regulatory risk guarantee will also further undermine the already weak system of supposed check and balance through the use of regulatory authorities, courts or Congress as a venue to protect public interest. For example, to prevent the implementation of an LRT fare hike, the people may seek relief from the Supreme Court (SC) through a temporary restraining order (TRO). The DOTC and LRTA would then be prevented from implementing the fare increase. However, the private LRT 1 operator could still collect the revenues from the fare hike through government-guaranteed Deficit Payments thus effectively negating the intervention of the High Court.

The regulatory risk guarantee was designed precisely to protect the commercial interests of the private business undertaking PPP projects from such outside intervention. Economic managers behind the regulatory risk guarantee have cited the case of the South Luzon Tollway Corp. (SLTC), the private operator of the South Luzon Expressway (Slex), which the SC stopped in August 2010 from implementing a more than 250% toll hike already approved by the Toll Regulatory Board (TRB).  Bayan Muna party-list congressman Teddy Casiño also filed a House resolution seeking for a suspension of the toll increase pending a legislative inquiry.

In reality, while DOTC officials try to differentiate the LRT 1 privatization’s top-up subsidy from the controversial guaranteed ROI present in earlier PPP projects, it appears that the former is even more favorable to the private concessionaire (and therefore more disadvantageous to the public) than the latter. The 250% Slex toll hike, for instance, arose from the guaranteed 17% ROI for SLTC contained in its 2006 Supplemental Toll Operation Agreement (STOA) with the TRB. But such guaranteed ROI became meaningless when the SC issued its TRO (although eventually lifted after more than two months). With the top-up subsidy, such risk of fewer profits due to an SC TRO or any outside intervention is eliminated.

More profits through commercial development

On top of its revenues and profits from fares and guaranteed periodic fare hikes, the winning LRT 1 bidder will also enjoy additional cash flows from project land and commercial development as contained in the draft agreement’s Section 11.4. In Section 20.7.a on Commercial Revenue, the deal further stipulates that “The Concessionaire shall be entitled to make arrangements for and charge for and collect the Commercial Revenue generated from the Project subject to Relevant Rules and Procedures.”

The development and lease of commercial spaces on LRT 1 stations and depot as well as revenues from advertising could be a potential source of income for government that could be maximized instead of resorting to steep fare hikes and/or privatization. The country’s LRT and MRT system has very low non-rail revenues which include earnings from commercial development and advertising. According to a 2007 study by the Japan Bank for International Cooperation (JBIC) cited by Senator Francis Escudero, the non-rail revenues of the LRT is equivalent to a paltry 2.6% of total revenues while neighboring countries get more than 20% from advertising and commercial leases. Clearly, there is much room to generate more revenues from commercial development for government if it will retain the LRT 1. Unfortunately, such potential source of income will also be transferred to a private business under privatization.

No need for privatization

The Philippines is among the first Third World countries to implement massive privatization of infrastructure development and operation. Early efforts were set off by conditionalities attached to loans from the World Bank, International Monetary Fund (IMF) and the Asian Development Bank (ADB) in the 1980s and 1990s. Among the big-ticket items already privatized are the Napocor assets, the Metropolitan Waterworks and Sewerage System (MWSS), the MRT, super highways like Slex, etc. Through the years, the people have been subjected to soaring and exorbitant user fees charged by the private concessionaires. Meanwhile government debt and deficit continued to balloon ironically due to, among others, privatization deals that were pursued supposedly to ease the fiscal pressure on public coffers.

Unfortunately, the Aquino administration’s PPP program will continue the long discredited and proven flawed policy of privatization such as its ongoing efforts to privatize LRT 1. Government could not even find a compelling justification to push for LRT 1 privatization. Unlike the heavily indebted Napocor and MWSS, for example, the LRTA – government operator of the LRT system – is at least generating enough revenues to finance its operation and maintenance (O&M) requirements. In 2012, the LRT 1’s gross revenues even increased by almost 10% while its farebox ratio – the proportion of fare revenues to total O&M expenses – improved from 1.10 in 2011 to 1.31 last year.  A farebox ratio of 1.0 means that fare revenues can cover 100% of O&M costs. Certainly, improving, modernizing and extending the system to Bacoor, Cavite would require additional investments and this is where the national government should step in by generating the needed funds.

Aquino could not argue that the government does not have the finances to make such investment thus the need for privatization. But if government is willing to incur more debts and guarantee the profits of whoever will win the LRT 1 project, why can’t it make the necessary investments such as through bilateral loans under concessional terms? When Malacañang was insisting on increasing the fares for LRT and MRT, its core argument was that government could no longer supposedly subsidize the system. Yet it is willing to subsidize the profits of the LRT 1 operator?

LRT 1 as a mode of mass transportation is a public investment imbued with public interest. It was never designed and intended to squeeze profits from commuters but to provide a reliable, efficient and affordable system of transportation for workers and employees, students, the self-employed, etc. Its true measure of viability is the social gains it creates for the people and the economy and not the private profits for the Ayalas and the Pangilinans, the Angs and the Cojuangcos, and their foreign partners. There’s no need to privatize it. (End)

Junking the Marcosian debt policy for people’s needs

Despite its trappings of reformist language, the Aquino administration’s budget proposals are still reflective of the same anti-people and anti-development policy thinking of the past regimes; and still emasculated by the Marcosian automatic debt servicing

Continued from Part 1

Until today, under post-Martial Law so-called democratic regimes, the Marcosian policy of automatic debt servicing and the heavy debt burden continue to cripple the capacity of government to provide sufficient social services and attend to the basic needs of the people. In an earlier research, think tank Ibon Foundation noted that Filipino taxpayers will continue to shoulder the Marcos debts until 2025, more than half a century since the late strongman imposed Martial Law.

The most controversial and biggest white elephant funded by Marcos debts and paid for by taxpayers was the $2.3-billion Bataan Nuclear Power Plant (BNPP). While we have already completed the payment for the BNPP that has never produced a single kilowatt of electricity, government continues to look for funding sources for the maintenance of the mothballed nuke plant.

These issues take more significance every time Congress prepares the national budget. Since taking over, the Aquino administration has been peddling the deception that unlike in the past, government’s priority now is the provision of social services and empowerment of the people through well-funded programs that directly benefit the poor. But as already noted, automatic payments for principal and interest continue to eat up the largest portion of public resources, including in the so-called 2013 “Empowerment Budget” of the Aquino administration.

Still way short

The Department of Budget and Management (DBM) describes its proposed 2013 national budget as an “Empowerment Budget” because it supposedly heeds the people’s demand to ensure that government resources are used for their benefit. One indicator, said the DBM, is the increase in the budget allocation for social services, which will get the lion’s share of the proposed ₱2.006-trillion budget at 34.8%, up from last year’s 33.8 percent.

Of the proposed budget for social services (₱698.4 billion), the combined allocation for basic education, health and housing is pegged at ₱365.6 billion, which represent the proposed budget for the Education and Health departments, and government’s housing programs excluding those for the soldiers and police. But this amount is just about ¼ of the needed budget to reasonably meet the demands of the people for such services. Based on urgent needs as well as international standards, it is estimated that the budget for basic education, health and housing alone should be about ₱1.4 trillion. Of the said amount, basic education accounts for ₱885 billion (as estimated by the ACT Teachers); health, ₱440 billion (Coalition for Health Budget Increase or CBHI); and housing ₱ 97billion (Ibon).

Resources for social services

There are possible sources of funding for such huge needs of basic social services but it requires a substantial reorientation in government policies and shift in priorities. Based on the 2013 budget, for instance, there are some ₱860 billion that can be tapped, partially or wholly, to fund basic education, health and housing.

Of the said amount, the largest portion is comprised of the national government’s debt service burden, which is pegged at ₱782.2 billion for principal amortization and interest payments. The rest comes from programs and projects whose concept and/or expected benefits are disputed such as the conditional cash transfer (CCT) program, public-private partnership (PPP), counterinsurgency-related initiatives, privatization obligations from past projects, and tourism promotion and development. (See Table 3)

Debt servicing still represents the biggest drain in the country’s already limited resources. Adding principal amortization to interest payments, debt servicing comprises almost 32% of what the Aquino administration is planning to spend in 2013. At ₱782.2 billion, debt servicing is bigger than the budget for all social services in the current budget proposal, pegged at ₱698.4 billion or 28% of the budget including principal amortization.

As pointed out, the culprit is the Martial Law-era automatic debt servicing policy of government. This policy has greatly undermined the constitutional duty of Congress to allocate funds that will meet the pressing needs of the people. Under EO 292, government computes all public debt obligations that have to be settled and automatically sets aside the needed amount to ensure timely payments.

Meanwhile, Congress has to make do with whatever is left of government’s meager resources to budget for the social and development needs of the people. What makes this whole situation more unjust and oppressive is that most of the country’s public debt has been used for projects and/or programs that were tainted with corruption, did not benefit the people or worse, had caused more hardship to the poor. Examples include the power privatization loans from the Asian Development Bank (ADB) which have already reached around $1.3 billion since 2002.

There are many other odious loans that should be reviewed, renegotiated and/or altogether cancelled to reduce the debt burden. But EO 292 deprives Congress and the Filipino people of this policy option.

Debt-funded dole

Even the much ballyhooed CCT program is being partly funded by foreign debt worth $805 million from the ADB and the World Bank, adding to the country’s debilitating debt burden. And while adding to the debt burden, the CCT’s positive impact on alleviating poverty is also suspect. Between 2009 and 2012, the number of CCT beneficiaries ballooned from 594,356 households to more than 3 million (or an enormous 407% increase); the national budget for CCT during the same period also swelled from ₱5 billion to ₱39.4 billion (or a whopping 688% hike). But self-rated poverty, as measured by the Social Weather Stations (SWS) worsened from an average of 48% in 2010 to 51% this year.

Privatization and debt

Funding PPP initiatives, on the other hand, is problematic given the country’s experience with privatization in the past two decades. PPP schemes in the water and power sectors, for instance, have resulted in soaring and exorbitant user fees. Aquino’s plan to tap PPP to construct school buildings and health facilities is fe

ared to further marginalize the poor as fees skyrocket to ensure the profits of participating private contractors while aggravating the indebtedness of government.

In fact, the national budget has long been being undermined by the impact of such onerous PPP contracts. Case in point is the controversial build-lease-transfer (BLT) contract to run the metro rail transit (MRT) where the Aquino administration is pushing to implement a fare hike of as much as 100% to pass on to commuters the government’s debt obligations and guaranteed profits of the private investor. Another is the National Power Corp. (Napocor) which after a decade of privatization and doubling of electricity rates is still mired in deep debts reaching almost P1 trillion, portion of which will be directly shouldered by consumers through the universal charge.

Other reforms

Budget items related to government’s counterinsurgency campaign can also be diverted to basic social services. Poverty alleviation initiatives like the Payapa at Masaganang Pamayanan (Pamana) and CCT being used as part of the Oplan Bayanihan actually undermines the peace and development process by marginalizing efforts to address the root causes of insurgency (i.e. peasant landlessness) based on the fundamental principle of social justice while perpetuating the conflict and rampant human rights violations.

Aside from these items in the proposed 2013 budget, revenue generation can also be significantly increased by improving collection efficiency, reforming the tax system to maximize collections from the rich and reversing the neoliberal policies that deprived government of revenues such as trade liberalization as well as the numerous fiscal incentives to attract investors. Around ₱867 billion in new revenues can be raised from these reforms, based on Ibon estimates.

Fiscal policy for development

A national budget is important because it sets how government will use its resources. For backward countries, the issue of budget takes a more crucial role considering the scant public resources available amid the massive needs of the people and economy. In fact, for the Philippines, government needs to take a bigger responsibility to ensure that the people’s most basic needs such as education, health and housing, among others are met adequately given the chronic poverty and job scarcity.

At the same time, government must sensibly use the budget to invest in programs and policies which create the most favorable conditions for sustainable development and industrialization that will, in turn, create long-term jobs and address poverty. To achieve this, government needs a fiscal policy – tools on raising revenues and ways to spend them – that redistributes wealth and best serves the interests of the people, in particular the poor and marginalized.

Alas, despite its trappings of reformist language and deceptive increases in allocation for social services, the Aquino administration’s budget proposals, including the 2013 budget, are still reflective of the same anti-people and anti-development policy thinking of the past regimes; and still emasculated by the Marcosian automatic debt servicing. (end)