Economy

PH economy in 2011 (Part 1): Flawed development plan

There is nothing in the 400-page Philippine Development Plan (PDP) 2011-2016 that could create the conditions for inclusive growth as it adheres to the same flawed development paradigm of neoliberal globalization (Image from the NEDA)

First published by The Philippine Online Chronicles

The political noise generated by the showdown between Malacañang, the Arroyo camp, and the Supreme Court (SC) towards the end of 2011 drowned concerns on the anemic performance of the economy. Critics of President Benigno S. Aquino III even argue that the energy of government is being spent too much on going after Mrs. Gloria Arroyo. Consequently, they said, important issues like the slowdown in economic growth are left unaddressed. The most rabid allies of Arroyo even go as far as claiming that Aquino is reversing the supposed gains achieved by the economy during the previous administration.

However, the deteriorating economic performance and social conditions are not simply the result of Aquino’s mismanagement as often alleged by critics and the political opposition. Much of it is due to the lack of real policy reforms that can shift the course of the economy from that taken by Arroyo and previous governments. This has been the underlying reason behind Aquino’s continuing failure to turn the economy around and improve the lot of our people.

Inclusive growth?

In March, the Aquino administration approved the Philippine Development Plan (PDP) 2011-2016 which details the policies and programs that it intends to pursue throughout its term. Supposedly, the primary aim of the plan is inclusive growth that is unlike the trickle-down and jobless growth the economy had in the past. To achieve inclusive growth, the PDP promotes good governance and anti-corruption that are expected to create massive job opportunities and reduce poverty.

But aside from being couched in good governance and anti-corruption rhetoric, the PDP does not offer anything substantially different from past medium-term plans. There is nothing in the 400-page document that could create the conditions for inclusive growth as it adheres to the same flawed development paradigm of neoliberal globalization. Like its predecessors, Aquino’s PDP is skewed towards building the most favorable environment for profit-seeking foreign business and their local partners.

Even the much ballyhooed good governance campaign of the administration has been reduced to issues that affect investment decisions and cost of doing business in the Philippines, including the enforcement of contracts and competition measures. Such pro-business environment could only come at the expense of the toiling masses and other oppressed sectors including small Filipino industries.

To conceal the bankruptcy of globalization policies like its centerpiece program public-private partnership (PPP), Aquino is scaling up the foreign debt-funded conditional cash transfer (CCT) scheme. According to the PDP, the CCT “shall be the cornerstone of the government’s strategy to fight poverty.”

By insisting on a development model that depends on unreliable external sources of growth mainly from the US and other advanced capitalist countries, Aquino’s PDP is oblivious to the glaring failures of past medium-term plans and the lessons of the ongoing global crisis. Since 2008, many developed countries have been implementing protectionist measures, which for the PDP, are “policies that distort competition” and “are the main impediments to growth.”

For big business

To achieve inclusive growth, the PDP has set a target of an annual expansion in the real gross domestic product (GDP) of 7-8% and an annual net employment increase of one million jobs from 2011 to 2016. The PDP aims to do this by promoting what it described as areas with “the highest growth potentials and generate the most jobs.” The PDP listed them as tourism; business process outsourcing (BPO); mining; agribusiness and forest-based industries; logistics; shipbuilding; housing; electronics; and infrastructure.

It is not by chance that these are the same priority areas being lobbied for government promotion by the Joint Foreign Chamber of Commerce of the Philippines (JFC) to supposedly increase investment and create jobs in the country. The JFC is composed of the chambers of commerce of the US, Japan, Europe, Canada, Australia-New Zealand, and South Korea as well as the Philippine Association of Multinational Companies Regional Headquarters.

This underscores how medium-term plans, including Aquino’s PDP, are shaped not by the specific development needs of the country and its people, but by the particular interests of outside investors forever looking for the most profitable means to cash in on the domestic economy. Filipino micro, small, and medium enterprises (MSMEs), on the other hand, are still reduced to mere adjuncts of foreign business and exporters, and not as dynamic players in domestic production.

The PDP’s priority areas are long held as supposed drivers of growth and employment but have until today continued to fail to induce sustained economic growth, much less address the chronic job scarcity and reduce poverty. They fail because while they may attract some capital and create some jobs, they are not anchored on any long-term national industrialization plan that promotes and relies on domestic production and consumption. They have always been driven by what is profitable for foreign investors and what meets the appetite of the global market, specifically of the developed world.

This has been the case, for instance, in foreign-dominated extractive industries like mining, agribusiness, and forestry which have only plundered the country’s natural wealth to satisfy the need for raw materials of advanced capitalist economies. Export-oriented manufacturing, including electronics, has only exploited cheap Filipino labor and has no significant linkages to the domestic economy. The fast rising BPO industry, meanwhile, is also illustrative of how “growth” has become detached from the specific requirements of the domestic economy as it caters to First World industries and produces jobs that are alien to most unemployed Filipinos.

Labor export

Whether or not these industries could help generate a million jobs a year remains to be seen, but as it is, the target is too modest for the promised economic growth under the PDP to be inclusive. Job scarcity has been at its worst since the past decade, mitigated only by the growing export of overseas Filipino workers (OFWs). In 10 months this year, the country has been deploying 4,441 OFWs every day, higher than last year’s 4,214.

And as if an implied admission of the absence of a comprehensive program for domestic job creation, the PDP endorsed labor export as a policy, defining employment generation as “all forms of employment… whether at home or abroad.” On top of mitigating the jobs crisis, labor export, said the PDP, has also become a steady source of foreign exchange and capital, and help fuel domestic consumption. These are the supposed “benefits” of labor export that the Aquino administration is unwilling to forego and instead pursue through strong domestic job creation. But aside from the incalculable social dimension of forced labor migration, labor export is also anti-development in the long run as the domestic economy is deprived of invaluable human resources.

Justified by its stated goal of creating jobs, the PDP is explicit in its intent to promote the interest of corporations. At the same time, it is silent on the quality of jobs that it intends to produce or in particular, how the rights and welfare of workers will be safeguarded and advanced. Due to the single-minded purpose of the PDP to attract more foreign investment to generate jobs, it is likely that the ongoing assault on workers’ rights to job security, to unionize, and to receive wages that allow for decent living, among others will continue and worsen. Under the PDP, tripartite councils shall be strengthened to ensure “industrial peace”, often a euphemism for subverting workers’ resistance, instead of the government assuming a more proactive role in defending the rights and welfare of wage earners.

Infra for profits

As envisioned in the PDP, infrastructure development will serve the overall goals of inclusive growth and poverty reduction in two major ways – first, as a priority area for private investment and as a producer of jobs; and second, as support to economic sectors and as a provider of equitable services, including housing, health, and education. At the heart of government’s efforts to accelerate infrastructure development is the PPP scheme, thus ignoring the decades of harmful experience under privatization. PPP first became a national policy through the structural reforms imposed by the International Monetary Fund (IMF) and the World Bank in the late 1980s during the first Aquino administration.

The case of privatized water and power infrastructure is most telling; private investors are assured of profits through over-generous and anomalous incentives and even bailouts, which exacerbated the fiscal burden of government. User fees have also gone up excessively to the great detriment of consumers especially because the target of privatization has been the basic infrastructure like utilities. These are the sorts of problems that the PDP will aggravate with its avowed promotion of PPP. Under Aquino, the fees at the country’s toll roads have already hugely increased while similarly exorbitant fare hikes face commuters of the LRT and MRT.

Meanwhile, the administration is also proposing specific amendments to the Build-Operate-Transfer (BOT) Law or Republic Act (RA) 6957 (as amended by RA 7718) to set the legal basis of the so-called regulatory risk guarantee. The said guarantee will oblige government to shoulder the “losses” of a PPP investor in case a local court, regulator, or Congress stopped it from imposing a questioned user fee. These issues easily offset whatever economic gains the country gets from additional and improved infrastructure. Worse, even the supposed economic gains are suspect. Due to the flawed neoliberal framework of the PDP, infrastructure development will merely serve the narrow profit agenda of foreign business and their local partners instead of helping lay down the foundation for genuine national industrialization.

Dole and smokescreen

Finally, the PDP has also set “social development” among its agenda, and will “focus on ensuring an enabling policy environment for inclusive growth (and) poverty reduction.” One of the main strategies to meet the social development component of the PDP is the provision of CCT to the poor.

Under Aquino, the scope of the CCT has been expanded tremendously and the program that Arroyo started with just several thousand beneficiaries in 2007 now intends to cover 4.3 million households by end of the PDP. For 2012 alone, the CCT program targets 3 million households with a proposed budget of P39.5 billion (from just P10 billion in 2010). This massive expansion in scope and budget is not backed by any thorough assessment on whether the program has actually contributed to sustained poverty reduction, not to mention that it is funded by $805 million in growing foreign debt that has long been debilitating the economy and depriving the poor of much needed social services.

As it is, even the target of 4.3 million households is still just a fraction of the ever growing population crippled by joblessness or lack of livelihood amid ever rising cost of living – social ills that ironically are being aggravated by the same globalization policies of the PDP. With the absence of programs that can produce long-term, productive jobs, and address the structural roots of poverty such as implementing genuine land reform and dismantling the neocolonial economy in favor of national industrialization, the CCT at best, could only provide temporary dole to a small portion of the poor. For Aquino, the CCT’s best purpose is to smokescreen the failed neoliberal policies of past Philippine development plans in order to justify the present. Meanwhile, questions on the CCT program have also been raised recently by the Commission on Audit (COA), which found out that cash allowances had been provided to families who are not qualified beneficiaries. #

To be continued (read here)

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Economy, Fiscal issues, Privatization

Aquino’s 2012 budget: Diretso sa tubo (Part 2)

Aside from creating more profit-making opportunities for private business through the PPP, the 2012 budget is also focused on creating the most favorable conditions for investors. (Photo from mylot.com)

First published by The Philippine Online Chronicles

Continued from Part 1

To fund his Public-Private Partnership (PPP) initiatives, President Benigno S. Aquino III is proposing in his 2012 budget an amount of P8.6 billion for the Department of Transportation and Communications (DOTC) and another P3 billion for the Department of Public Works and Highways (DPWH). The said amounts are for the various PPP ventures of the two agencies, including for the preparation of business cases, pre-feasibility and feasibility studies.

Aquino has tasked the DOTC and DPWH to implement his first 12 PPP projects. PPP Center data show that the DOTC is handling eight projects worth P95.3 billion for the privatization and expansion of the light rail transit (LRT) and metro rail transit (MRT) and another P16.7 billion for the privatization and development of airports in Bohol, Albay, Palawan, and Puerto Princesa. On the other hand, the DPWH is in charge of four projects worth more than P44.9 billion for expressway projects in Luzon.

These projects are on top of the numerous other PPP initiatives that will be handled by the DOTC and DPWH under the medium-term plan of the Aquino administration.

Another major recipient of the 2012 PPP support fund is the Department of Agriculture (DA), which will receive P2.5 billion for right of way, infrastructure, and other related support. The DA and its attached agencies are in charge of 16 PPP projects for medium-term rollout worth at least P55.8 billion for irrigation, post-harvest facilities, and agribusiness ventures, among others.

(Download the complete list of Aquino’s PPP projects here)

PPP for social services

But aside from infrastructure development, Aquino is also expanding the use of PPP schemes to the delivery of social services. One is the P3-billion government counterpart funding to rehabilitate, maintain, and operate 25 regional hospitals. Another is the P5-billion fund for school building construction through PPP, wherein the contractor will undertake the financing, design, construction, and maintenance of classrooms and turns them over to the Department of Education (DepEd) after completion.

In his budget message, Aquino also said that the administration is employing the Multi-Year Obligational Authorities (MYOA) to encourage private participation in the
construction, operation, and maintenance of school buildings, health centers, and other basic government infrastructures. MYOA is an authority released by the Department of Budget and Management (DBM) to enable an agency to enter into a multi-year contract for locally-funded or foreign-assisted projects.

The DepEd has been ordered by the President to pursue PPP projects for the construction of elementary and secondary schools (amount still to be determined) “as public funds are not being able to fully cover the needs of an increasing school population”, according to the PPP Center. DepEd Secretary Armin Luistro has also recently bared his agency’s plan to establish privately-run public schools
supposedly to address critical shortages in the public school system.

Department of Finance (DOF) Secretary Cesar Purisima, on the other hand, said that the government will be bidding out contracts for the construction of 10,000 school buildings within the year. Purisima said the private contractors will build and maintain the school buildings while the government will pay them over a period of time.

Meanwhile, the DOH will handle 11 PPP projects for medium-term rollout worth at least P7.9 billion, including the construction of the Philippine Health Insurance Corp.’s (PhilHealth) building, hospital staff housing facilities, use for commercial operations of hospitals’ unused lands, research facilities and materials, air transport service, commercialization of the Philippine Orthopedic Center, and use of information and communication technology (ICT).

All in all, the 2012 strategic support fund for PPP projects of the DepEd, DOH, DOTC, DPWH, and DA is pegged at P22.1 billion, of which P8 billion are fresh funding for PPPs in education and health.

Budget cuts

While allotting P8 billion and P5 billion in new funding for PPP initiatives in health and education, respectively, the supposedly Diretso sa Tao budget has either frozen or cut the allocation for key items to sufficiently meet the growing public health and education needs.

According to the Coalition for Health Budget Increase (CBHI), for instance, the Maintenance and Other Operating Expenses (MOOE) of five Metro Manila-based special hospitals and 18 local hospitals nationwide have been kept at their 2011 levels. Also, the Personal Services budget of the five special hospitals and of 16 local hospitals nationwide has been reduced.

In addition, the budget for Service Delivery Programs has been cut by almost a billion pesos while the budget for Health Facilities Enhancement Program has been slashed by more than two billion. Also, the subsidy for indigent patients for confinement or use of specialized equipment has been totally scrapped, according to the CBHI. It said that at least P90 billion, or more than P40 billion higher than Aquino’s proposed 2012 allocation, is needed to provide immediate relief to the health needs of the people.

The same thing is true with the education budget. Activist youth group Anakbayan has pointed out that the budget for 50 State Universities and Colleges (SUCs) will be slashed by P583 million. Meanwhile, despite the seemingly huge P31.5-billion increase in the DepEd budget, its allocation can only plug 27% of the backlog in classrooms, 19% of the backlog in desks, and 13% of the shortfall in teachers.

Pro-business budget

The country’s experience with PPP in the past three decades has been awful, to say the least. Various PPP initiatives in the power, water, road, and mass transportation sectors, among others, have all resulted in exorbitant user fees and onerous debts all in the name of assuring the profits of private business. The proposed regulatory risk guarantee of Aquino to further entice the private sector in his PPP program will surely worsen the public cost of privatization.

But even more alarming is the greater intrusion of profit-oriented investors in the most basic social services. The costs of running of hospitals and schools will certainly rise as PPP contractors expect not only to recover their investment but also to earn profits, which distorts the nature and role of public schools and hospitals. The increased cost will either be directly passed on to the patients and students through higher user fees or to the general public through the regulatory risk guarantee, or both.

From a fiscal point of view, PPP also does not guarantee that the budgetary woes of the government will be resolved based on the country’s own experience. Similar outcomes are evident in other countries. A recent study, for instance, by the Washington-based group Project on Government Oversight (POGO) found that the US government actually spends more when it hires private contractors to provide services than when the government itself is undertaking such tasks.

Anti-development

Aside from creating more profit-making opportunities for private business through the PPP, the 2012 budget is also focused on creating the most favorable conditions for investors, particularly in those sectors that the administration deems as growth and employment drivers. They include tourism, electronics export, and business process outsourcing (BPO), among others.

P9.2 billion, for example, has been allocated for access roads to tourist destinations on top of airport projects that will also be pursued through PPP. P500 million, meanwhile, has been assigned to the Commission on Higher Education (CHED) to focus the curricula of SUCs on BPO and tourism as well as agriculture and infrastructure development.

But these priority areas for development have long failed to spur sustained economic growth, much less address the chronic job scarcity and reduce poverty. They fail because they are not anchored on any long-term national industrialization plan that promotes and relies on domestic production and consumption. They have always been driven by what is profitable for foreign investors and what meets the appetite of the global market, specifically of the developed world.

Dole-out for the poor

The only semblance of Diretso sa Tao in the 2012 budget is the P39.5 billion allocated for the controversial Conditional Cash Transfer (CCT) program. For 2012, the CCT targets 3 million households with a proposed budget of P39.5 billion or P18.3 billion higher than this year’s budget. Aquino aims to cover 4.3 million households by the end of his term.

Such massive expansion in scope and budget is not backed by any thorough assessment on whether the program has actually contributed to sustained poverty reduction, not to mention that it is funded by $805 million in growing foreign debt that has long been debilitating the economy and depriving the poor of much needed social services.

As it is, even the target of 4.3 million households is still just a fraction of the ever growing population crippled by joblessness or lack of livelihood amid ever rising cost of living – social ills that ironically are being aggravated by PPP and other flawed development programs that the 2012 budget supports. Thus, the CCT is simply being used by the Aquino administration to sell his proposed national budget as Diretso sa Tao but at its core is Diretso sa Tubo. #

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Consumer issues, Power industry, Privatization

Power lords

San Miguel Corporation cornered 41.3 percent of privatized generating plants and IPP contracts in terms of capacity (Photo from allvoices.com)

(Continued from Part 2)

The restructuring of the power industry under EPIRA facilitated the creation of new private monopolies that lord over not only the distribution but also the generation of electricity. The dominant position of these monopolies, controlled by billionaires in Forbes’ list of richest Filipinos and their foreign partners, is bound to further intensify under Aquino’s public-private partnership (PPP) program.

Privatized power plants and IPP contracts

Out of the 7,665.88 megawatts (MW) in capacity of privatized generating plants and IPP contracts, Danding Cojuangco’s San Miguel Corporation (SMC) cornered 41.3 percent while the Aboitiz group bagged 28.5 percent. Other major buyers include the Consunjis (7.8 percent) and the Lopezes (7.4 percent). American firm AES Corporation accounted for a significant 7.8 percent. South Korean companies SPC Power and K-Water have a combined 5.8 percent. (It includes the Angat hydropower plant that was put on-hold by the Supreme Court.) Five companies accounted for the remaining 1.4 percent.

The costs of these transactions total $6.69 billion. SMC accounted for 35.9 percent of the said amount; Aboitiz, 30.2 percent; AES Corp., 13.9 percent; K-Water, 6.6 percent; Lopez, 5.7 percent; Consunji, 5.4 percent; and others, 2.3 percent. (See Table 1)

In terms of overall generating capacity, the restructured Philippine power sector is now dominated by just three companies – San Miguel Power Corporation (20 percent), Lopez-owned First Gen Corporation (17 percent), and the Aboitiz group (15 percent).

Government through NAPOCOR and PSALM has 30 percent. (See Chart 4) SMC’s rise as a major player in the power industry is truly phenomenal considering that it has only started venturing in the industry in 2008.

These are the same groups that also control the biggest distribution utilities (DUs) in the country. SMC and the Lopez group, for example, control MERALCO with 27 percent and 6.6 percent, respectively. (Manny Pangilinan’s Metro Pacific controls 45 percent.) MERALCO is the largest DU in the Philippines with a franchise area covering 24.7 million (about 25% of the national population) in 31 cities and 80 municipalities. It serves Metro Manila, Bulacan, Rizal, and Cavite as well as parts of Laguna, Quezon, Batangas, and Pampanga.

The Aboitiz group, on the other hand, controls the second and third largest DUs – the Visayan Electric Company (VECO) and Davao Light and Power Company. VECO serves Metro Cebu covering four cities and four municipalities. Meanwhile, Davao Light serves Davao City and Panabo City as well as three municipalities in Davao del Norte. Aside from these DUs, the Aboitiz group also controls Cotabato Light and Power Company, San Fernando Electric Light and Power Company, and the DUs serving the Subic Freeport zone, Mactan export processing zone, and the West Cebu industrial park.

SM tycoon Henry Sy has taken advantage of the EPIRA as well. His One Taipan Holdings (30 percent), State Grid of China (40 percent), and Calaca High Power Corporation (30 percent) control the National Grid Corporation of the Philippines (NGCP). NGCP holds a 25-year concession agreement (CA) with government to operate the country’s transmission system beginning in January 2009.

No transparency or competition

Cross-ownership in distribution and generation, which EPIRA allows, makes claims by advocates of neoliberal power restructuring about transparency and competition in pricing an outright lie. EPIRA’s unbundling of rates, for example, is practically meaningless even if a consumer can see in his or her monthly bill how much he is paying for generation and distribution. Market abuse is not prevented even if rates are unbundled due to cross-ownership. This has been clearly illustrated in the operation of the EPIRA-created Wholesale Electricity Spot Market (WESM).

The WESM, which has been operating in Luzon since 2006, is meant to among others “provide and maintain a fair and level playing field for suppliers and buyers of electricity”. But cross-ownership negates whatever benefits that the WESM is supposed to offer. The intention of the WESM is to make rates more competitive by offering prices other than those set in the bilateral contracts. EPIRA even capped at 50 percent the power requirements that DUs can source from their own generators and the rest they must get from other IPPs and the WESM.

However, the WESM itself is dominated by the same generators that are related with the DUs. IPPs connected with MERALCO, for instance, account for 42.6 percent (SMC with 24.8 percent and Lopez, including Quezon Power, 17.8 percent) of the 11,652-MW capacity registered at the WESM. The Aboitiz group, meanwhile, comprises 13.1 percent. The huge shares of these groups to the WESM-registered capacity make the spot market vulnerable to manipulation and speculation. Case in point was early last year when the price of electricity at the WESM reached an unbelievable P68 per kWh at one point during the height of the El Niño.

The high WESM prices have been blamed by MERALCO for the monthly increases in its generation charge last year. The latest adjustment in MERALCO’s generation charge worth 51 centavos per kWh, announced last Tuesday, is again being blamed at the high increases in the WESM, where rates jumped by P1.89 per kWh. MERALCO IPPs, on the other hand, increased their rates by a smaller 16.2 centavos per kWh.

Energy insecurity

Finally, the country’s energy security has remained precarious under EPIRA. The rotating brownouts experienced in different parts of the country last year is a tell-tale sign that the power crisis has not been resolved by privatization. In Mindanao, for example, the power shortage reached as high as 700 MW in March 2010 that led to rotating brownouts of as long as 8 hours daily. Government quickly blamed the El Nño because Mindanao gets more than half of its power supply from hydroelectric plants.

But apparently, the deeper issue is not drought but government neglect. During the Aquino administration, for instance, Mindanao’s power mix was 75 percent hydro while peak demand was 800 MW, according to a former NAPOCOR president. In 2010, DOE data show that hydro accounted for a relatively smaller 51.8 percent of installed capacity in Mindanao while peak demand was 1,288 MW. Thus, the El Niño could not be solely blamed for the shortage since no significant additional capacity has been put in the region. This should have been the job of government but because of EPIRA, it focused on selling the assets of NAPOCOR instead of installing additional capacity.

Even Luzon was not spared from rotating brownouts during last year’s El Niño. Aggravating the low levels in Luzon’s major dams were the uncoordinated shutdowns implemented by privately controlled power plants. They include SMC generation plants Sual and Limay as well as the Lopez plants that use natural gas from Malampaya. The power supply shortfall reached 641 MW, which could have been easily offset by Luzon’s excess capacity and thus avoid the rotating brownouts. But because EPIRA has dissolved government’s role in ensuring power supply, there is no mechanism in place to fill the gap resulting from plant shutdowns.

Ten years is enough

Its proponents argue that EPIRA must be given a chance to work because once fully implemented, the country will surely reap its promised benefits. They cite the impending implementation of the so-called open access and retail competition. Under this system, power consumers will have the opportunity to choose their suppliers. But then again, the industry has already been monopolized by a few players making the supposed option to choose an illusion.

For its part, the Aquino administration and its allies in Congress have worked for the amendment of EPIRA to extend the so-called lifeline subsidy. But it still does not address the exorbitant and rising electricity rates that Filipino consumers are forced to shoulder. Besides, the subsidy is being paid for by other consumers and does not come from the pocket of MERALCO or government.

Ten years of EPIRA is enough. Its defects could not be corrected by simple cosmetic amendments. It is fundamentally wrong to allow the narrow profit agenda of private companies and banks to take over a sector as strategic as the power industry.

EPIRA has resulted in the doubling of power rates and intensification of private monopolies. At the same time, it failed to address the financial problems of NAPOCOR and the country’s energy security. Only NAPOCOR’s creditors and private local and foreign companies have benefitted from power restructuring. For these reasons, there is a clear and urgent need for our policy makers to seriously rethink the law and work for its repeal. (END)

Read Part 1 – 10 years of EPIRA: what went wrong? and Part 2 – The curious case of NAPOCOR debts

Also read The role of foreign lenders, investment banks, and credit rating agencies in Philippine power sector reform

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Privatization

LRT, MRT fare hike: no other recourse but to protest

Today’s (February 4) public consultation on the LRT and MRT fare hike organized by the Light Rail Transit Authority (LRTA) and the Department of Transportation and Communications (DOTC) confirmed two important issues.

First, that the fare hike is indeed meant to pass on a bigger share of the debt burden to LRT and MRT commuters. The presentations of the technical staff of the two government agencies confirmed, in so many words, what we have been saying all along. Current fares are enough to cover the core expenses of operation and maintenance. But the onerous terms contained in the contracts created huge and even unnecessary debts for government.

Download the Powerpoint presentations of the LRTA here and the DOTC here.

Consider, for instance, the slides below which I lifted from the Powerpoint presentation of the DOTC on MRT. The first slide shows that the total income of the MRT in 2010 was P1.916 billion, of which P1.904 billion were generated from passenger fares.

However, as shown in the next slide, MRT expenses reached P8.52 billion during the same year which the DOTC said resulted in a government subsidy of P6.6 billion to bridge the shortfall in revenues (that was only P1.92 billion).

The next question is what makes up the P8.52 billion in expenses? The third slide below breaks down the P8.52 billion (the figures in the slide add up to P8.52 billion) and shows that operating costs comprise only 7.6 percent of the total and maintenance costs comprise only 13.9 percent. A huge 61.1 percent represents the Equity Rental Payment, which refers to DOTC payments for the 15 percent return on investment (ROI) that government guaranteed private investors in their Build Lease Transfer (BLT) agreement. Another 13.6 percent represents debt payments that government also guaranteed in the BLT.

The LRTA presentation on LRT 1 and 2 tells the same story about the so-called losses and subsidies that government wants to reduce by making commuters pay more. The slide below shows that the consolidated revenues of LRT 1 and 2 in 2010 was P3.089 billion but spent P2.928 billion for operation expenses. The LRTA also spent P3.556 billion for interest payments and others resulting in a net loss of P5.902 billion.

Add to these expenses the amortization of principal worth P2.341 billion and capital expenditures of P648 million, as shown in the slide below, further pushing the LRTA deficit in 2010 to P8.927 billion, which government claims is the cost of subsidy. In other words, of the P8.927 billion in so-called subsidy, P5.269 billion or more than 59 percent represents interest and principal payments for loans.

If you consider that almost 8 out of 10 LRT and MRT commuters are ordinary workers and employees and students, passing on an increasing portion of these debts, which include onerous loans, through a fare hike is a major, major injustice.

Secondly, LRTA administrator Rafael Rodriguez also confirmed that the public consultation is optional and therefore has no real bearing on the decision of Malacañang to increase the fare in LRT and MRT. This means that despite the opposition of those being consulted, students in this particular case, the LRTA and DOTC, as ordered by President Aquino, can still proceed with the fare hike anyway.

The consultation ended with the expected “We will study your concerns”, which was the gist of the closing statement made by DOTC Undersecretary for Rail Transport Glicerio Sicat. He also said that they will consider the option of lowering the increase and giving fare discounts because of the concerns raised by the students. This, however, dismissed altogether the issues of onerous debts, mass transport as public service, privatization as the driving motive behind the fare hike, and other major policy issues that were raised during the open forum.

Therefore, the commuters have no other option now but to continue and further intensify the protests until the Porsche-driving President backs down on his decision to raise the fares.

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Privatization

Public consultation on LRT/MRT fare hike starts today as Pangilinan offers to buy MRT for $1.1B

Servicing debts through higher user fees will cancel out the social and economic gains from LRT/MRT

One of the most basic questions that we have been asking DOTC and LRTA officials is what constitutes their estimated full cost fare of P35.77 for LRT 1, P60.75 for LRT 2 and P60.03 for MRT. Sadly, we have not been given a detailed and exact answer (the closest is the rule of thumb that 85 percent of cost in large infrastructure projects is made up of debts) in our several dialogues with them. Even the documents that have been given us do not provide the answer. Thus, we have only made assumptions on what comprises the full cost fare (for instance, read here and here) based on data made available to us by the authorities.

The full cost fare is one issue that we hope to finally get a detailed answer from the LRTA and DOTC in the public consultation on the LRT and MRT fare hike today (February 4) and tomorrow. (Bayan and other groups are participating in the consultation. You may download Bayan’s position paper, which will be submitted to the LRTA during the consultation, here.) If you’re wondering why this is so important, it’s because the crux of government’s argument for a fare hike is that they could no longer continue “subsidizing” the gap between the current fare and the supposed full cost fare.

The latest batch of documents that we were able to get from the LRTA yesterday through its corporate secretary Atty. Hernando Cabrera still does not give the answer despite our very specific request. The documents include, among others, the breakdown of subsidies that the LRTA received from the national government from 2006 up to the approved amounts for 2011. These subsidies total P12.85 billion but are for expansion projects and, I assume, not the subsidies that the LRTA and DOTC refer to when they computed the full cost fare. Or I might be wrong. And if this is the case, transport officials will have more explaining to do – why will they charge to the commuters the cost of expansion projects? Anyway, this also shall be brought up during the consultation. (See Table 1)

Another is the income statement of the LRTA from 2006 to November 2010 (the 2009 and 2010 figures are unaudited). The income statement supports our contention that what the Aquino administration wants to pass on to the commuters is the debt burden of the LRT and MRT and not simply the shortfall in the costs of maintaining and operating the trains. For instance, the total rail (from passenger fares) and non-rail (from rental, advertising, etc) revenues of the LRTA from January to November 2010 is P462 million more than what it spent for operation and maintenance (O&M). Revenues from passenger fares alone are P272 million higher than O&M. (See Table 2)

Interest payments and bank charges, on the other hand, reached P1.72 billion during the said period. Amortization, bad debts, and others added another P955.32 million to the expenses of the LRTA. These expenses offset the rail and non-rail revenues resulting in net losses for the LRTA of some P2.22 billion. But as I have repeatedly argued, these are not actually losses in the business sense but public investment. They are loans that government borrowed in order to enable the economy and the people achieve new or additional capability. Servicing these debts should be done through taxes (and if they’re onerous like in the case of MRT, should be renegotiated) and not through higher user fees which what government plans to do. Servicing these debts through higher user fees will cancel out the social and economic gains that the LRT and MRT create.

Meanwhile, it seems that the fare hike, which could reach as much as 100 percent, and the President’s offer to guarantee so-called regulatory risks for major public-private partnership (PPP) projects have succeeded in stoking investor appetite in LRT and MRT privatization. Just three days ago, news came out that the Metro Pacific Investments Corp. (MPIC) of Manny Pangilinan has already formally written Finance Secretary Cesar Purisima offering to buy government’s 71 percent stake in MRT for $1.1 billion. MPIC already controls 29 percent of MRT which it bought from Fil-Estate Corp.

Pangilinan’s bid is indeed tempting for the cash-strapped Aquino administration since the offer is reportedly enough to settle government’s outstanding debt in MRT. But it is bad news for the commuters who will ultimately shoulder this debt through even more exorbitant fares in the future.

MPIC itself reportedly said in its letter to Purisima that fares could go up to as high as P100 if government will bundle MRT and LRT 1 for privatization because the investor will have to pass on the cost of servicing the lines’ debt obligations of about $2.6 billion to the commuters.

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DOTC executive report on LRT/MRT fare hike: some initial points

DOTC study confirms that the LRT/MRT fare hike is meant to bolster Noynoy's public-private partnership (PPP) scheme

The Department of Transportation and Communications (DOTC) has provided a copy of the Executive Report on LRT/MRT fare restructuring. They also sent Chapter 8 of the Mega Manila Public Transport Study of 2007 which details the profile of LRT/MRT users.

This report is supposedly the same document presented to Pres. Aquino and his Cabinet economic cluster and became the basis for the Executive’s decision to increase the fare in LRT/MRT by as much as 100 percent. It validated the main points that we have already raised on the fare hike issue. For instance, it confirmed that the fare increase is meant to attract private investors. The report said that: “The proposed LRT fare adjustment is expected to… send clear signal to private sector investors that regulatory risks will be minimized in future public-private partnership projects”.

(You may download the Executive Report here and the Transport Study Chapter 8 here)

Social and economic benefits

Dated October 27, 2010, the report noted that although not profitable, the LRT and MRT play a vital social and economic role. In its opening paragraph it said: “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”. (emphasis added)

However, these socioeconomic benefits were not factored in by the DOTC study in determining the need for a fare hike. For instance, the savings of government from less air pollution and GHG emissions (i.e. public health budget) and less pressure for road expansion (i.e. public infrastructure budget) should have been computed to get the net losses or even gains from operating the LRT/MRT. The economic value accruing from reduced traffic congestion and considerable savings in travel time cost should have also been calculated to know additional potential benefits for government such as increased tax revenues.

Farebox ratio

Instead, the study merely looked at the cost of operating the LRT/MRT system which is mainly financed through passenger fares, government subsidies, and commercial development at stations and advertisements. It said that the farebox ratios or the proportion of the fare revenues to the total operating and maintenance (O&M) expenses are “projected to fall below 1.0”. This means “greater government subsidies to cover O&M costs”, said the study. It estimated that without a fare hike, government will be forced to increase its subsidies from P13.85 billion in 2010 to P17.06 billion this year.

A farebox ratio of 1.0 means that fare revenues cover 100 percent of O&M. The study did not say the basis of its projection that the farebox ratio will fall below 1.0. But in the past four years, the farebox ratio has averaged 1.39 for LRT 1 and 1.01 for LRT 2 which means that collections from passengers cover more than 100 percent of O&M. This provides more statistical evidence to our argument that fare revenues can cover O&M but the total costs are bloated by debt.

Non-rail revenues

The study also admitted that “Compared with urban railway lines in neighboring countries, our LRT lines are not generating substantial revenues from commercial development and advertisement”. But the DOTC did not further explore the option of raising collections from tenants and commercial establishments and advertisers that use the railway infrastructure. A study by the Japan Bank for International Cooperation (JBIC) disclosed that LRT’s non-rail revenues comprise a paltry 2.6 percent of total revenues. In neighboring countries, non-rail revenues account for 20 percent.

I asked a DOTC official why increasing the non-rail revenues to at least approximate the 20 percent benchmark is not being seriously considered. He said that substantially increasing the non-rail income of LRT/MRT will require some investment from government to develop commercial spaces. Put another way, government chose the easy route by placing more burden on commuters through a fare hike.

Alternative transportation

The study said that minimum wage earners are among the most affected groups by the proposed fare increase. But it assumed that Minimum wage earners will likely shift to cheaper alternative modes such as jeepneys and regular buses”. Under the new fare structure, regular and aircon bus fares will be lower than an LRT/MRT ride unlike today where it is cheaper to take the train. This was actually used as one of the justifications for the fare hike. For government, it is unreasonable that the fare in LRT/MRT which is a more efficient mode of mass transportation is cheaper than the fare in public buses and jeepneys.

But the DOTC failed to mention that the fare in road-based public transport modes has been increasing due to unabated oil price hikes and failure of government to stop the overpricing of the oil companies. Also, following government’s logic, does it mean that every time private jeepney and bus operators asked for a fare hike because of high pump prices, the Light Rail Transit Authority (LRTA) will also have to automatically increase LRT/MRT fares?

Impact on commuters

Aside from minimum wage earners, the study said that the fare hike will also heavily affect “students who are not granted fare discounts on LRT lines”. It claimed, however, that such impact “could be eased by the grant of 15-20% fare discounts”. As for MRT users, the DOTC said that while they face the steepest fare hike, “they are expected to afford the increase in fare with their average personal monthly income of P13,560 or 1.5 times the minimum wage in Metro Manila”. But still, fare discounts and the relative capacity of commuters to afford the higher fares do not legitimize the unwarranted fare increase.

The overall ridership of LRT/MRT is characterized by a high level of low-income and vulnerable groups that makes the fare hike anti-people. The Mega Manila Public Transport Study says that 68.1 percent of LRT/MRT users during weekdays earn below P10,000 monthly and a significant 15.3 percent earn nothing at all. Ordinary employees/workers comprise 48.8 percent of LRT/MRT ridership during weekdays while students account for 31.5 percent. Unemployed workers account for 9.5 percent. (See Charts)

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LRT/MRT new fare matrix

Activists warn commuters of an impending 50 to 100 percent hike in MRT fare as they continue to gather signatures against the increases which government plans to implement by March 1

(For the new fare matrix officially approved by the DOTC, see this article – “LRT/MRT fare hike and the Aquino admin’s irrational, baseless claims”)

Determining how much exactly the fares will increase as “provisionally” approved by the LRTA could be a little tricky. A Newsbreak article simplified the adjustments, which government hopes to implement starting March 1, by using averages for the three light rail systems – LRT 1, LRT 2, and MRT.

The second column in the table below shows the average distance that a commuter usually travels (based on data from the DOTC). The proposed fare, in the fourth column, is the new P11-boarding fee approved by the LRTA plus the average trip length (with a proposed rate of P1 for every kilometer).

This simplified presentation, however, does not show the full and actual impact of the fare hike which can only be appreciated on a per station basis using the new fare matrix approved by the LRTA. Based on this new fare matrix, a train ride (single journey ticket) from LRT 1’s Baclaran station to Roosevelt will be 50 percent more expensive (from P20 to P30) while the fare from Baclaran to Tayuman will double (from P15 to P30). A train ride from LRT 2’s Recto station to Santolan will be 67 percent more expensive (P15 to P25) while the fare from Recto to Anonas will jump by 79 percent (P14 to P25).

No new fare matrix has been released yet for MRT although transportation officials said they will also apply the P15 (minimum) – P30 (maximum) fare structure used in LRT 1 and 2. This means that a train ride from MRT’s North Avenue station to Quezon Avenue will increase by 50 percent (P10 to P15) while the fare from North Avenue to Taft Avenue will double (P15 to P30). (Update: The fare matrix for MRT released by the DOTC shows that the maximum fare would be P25 from the current P15. The highest increase would be felt by commuters riding from North Avenue to Ortigas wherein the fare will increase from the current P11 to P20, or an 82 percent hike. See Table below for details.)

Based on the matrix, the biggest increase in real terms will be P15. So a worker or a student who regularly uses the train must shell out P30 more every day or P780 more every month (26 working days a month) to afford the train ride. The lowest increase is P3 which translate to a monthly increase of P156 in transportation cost for the regular train commuter.

(See Tables)

The new fare rates will also make an LRT train ride more expensive than the average fare for ordinary and aircon buses contrary to claims by Malacanang. (See Table)

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