Time was when the Philippines held the dubious distinction of being a “Latin American country in the East.” Its growth episodes were short and spasmodic; “boom and bust” aptly describes its longer horizon; investment was at a canter; its till was perennially made empty by waste and venality; and government encroached into the market mindlessly. That was also Latin America Post-WWII. The current development tragedy, Venezuela, is the latest and most virulent example of the Latin American disease presided over most times by populist caudillos who supplanted the imperfect market with their own populist-socialist mishmash.
Populist autocrat Hugo Chavez, riding the tailwind of the oil export bonanza, made fiscal profligacy a virtue and, for a while, Venezuela was the star of inclusion as poverty incidence fell by half. His rating was sky-high. Meanwhile he made life increasingly difficult for the market players by government takeover of oil facilities, utilities, banks and other commercial enterprises. When the world price of oil collapsed, successor Nicolas Maduro doubled down on Chavez’s policies and resorted to price controls, rationing and massive printing of Bolivar Fuerte (“Bolivar Muerte” in Caracas jokes) to support the populist entitlements. This emptied the supermarket shelves as the cumulative inflation rate went haywire — 53 million percent since 2016. In 2014 and 2015, Venezuela topped off the global misery index; worker take-home pay dropped from $360/month in 2012 to $20/month in 2018; poverty incidence rose to 76% in 2018. As hunger became the norm, Venezuelans started for the border. Caracas earned the epithet “crime capital of the world.” All the gains from 2000 and much more were lost in the ensuing two decades. The pattern on populist autocrats is reaffirmed: they buy short-term gains at the price of long-term misery.
Filipinos thought the Latin American Disease was behind us. The administration immediately preceding the current one had, for all its fumbling, managed a new normal growth: high GDP growth (6.5% on average) and with Manufacturing leading the way (7.58% vs. 6.51% on average, the latter no past administration had matched. The current regime promised to match or exceed this new normal. Its record? In the 2.75 years of the current watch, GDP growth, though still fast, has now slowed (around 6%) and Manufacturing even more so relative the Service sector (5.60% vs. 6.85%, see chart below). We hope this is just a hiccup in the new normal trajectory which is predicated on high investment rate. But with the investment environment headed for turbulence, who knows what the next three years will bring.
Since the Singapore arbitral court ruling awarding P11 billion to the concessionaires Manila Water and Maynilad, Malacañang now threatens to declare the contracts null and void and expropriate the two companies because of so-called onerous provisions. The concessionaires, under tremendous duress, offered to waive the damage award owed them. There was a rush to anoint the Malacañang for being right again. But might does not make right! Nor does a waiver make evidence of guilt! The waiver in fact, even if accepted, is a bad precedent. If the government gets away with raping the contract today, what will keep it from a repeat rape tomorrow? No PPP contract is safe. Any investment of significance can be targeted. Only the cronies will invest.
The government is now out to force feed a new contract on the concessionaires. As press reports have it, the new contract will drop the income tax holiday and the resort to arbitral courts provisions. The government says it wants to have a say on the water tariff.
But government does have a say on the water tariff within the original contract. The rate rebasing exercise every five years since 1997 is precisely to decide on tariff adjustment petitions based on performance. In 2002, the government regulator Metropolitan Waterworks and Sewerage System (MWSS) denied, on the basis non-performance on NRW (non-revenue water) performance undertaking, the petition of Maynilad, then under the Lopez group, for a tariff increase to recoup a claim of P8 billion. The Lopez group, unable to win its case in neutral venues and unable to procure further financing to meet obligations, went bankrupt in 2003. If the government backs its claim with hard evidence in an impartial court, it wins. If it only intimidates as it trifles with the rule of law, it will be rebuffed. Recall that our own Supreme Court in 2015 reaffirmed with finality the 2014 Philippine court of appeals decision, following government defeats in arbitral courts, that the Philippine government indemnify Piatco, the contractor for NAIA Terminal 3, the full amount ($327 million plus interest) for unlawful expropriation.
If the replacement contract violates property rights of some parties under the old contract, government must compensate the holders of those rights. “Unlawful expropriation” will cost us dearly as it did in the Piatco case. Incidentally, that the New Clark City concession contract has no similar “onerous” provisions is irrelevant: the Metro-Manila concession contracts were signed in 1997, not in 2014; the concessionaires made a risky bet in 1997, not in 2014!
The chief architect of the 1997 water privatization, former President Fidel Ramos, stated in a letter to President Rodrigo Duterte that the government negotiated in good faith in 1997 and gave its word that it will respect the sanctity of the contract. On that promise, the bidders were able to successfully negotiate with creditors for financing. The income tax holiday and the arbitral adjudication were integral parts of the viability of the contract which prompted an aggressive bid to give the consumers substantial discounts on their water tariff in 1997. In other words, they helped pave the way for the water service privatization and for better water service to the public.
On the March 2019, Malacañang went ballistic over the water crisis in Metro Manila. But who is to blame for standing in the way of long-identified water impoundment projects? Not the concessionaires. Part of the blame was actually the current regime’s as it waffled between PPP and ODA on the one hand and between Japanese and Chinese on the other on bulk water provision. But the government water regulator, MWSS, must take most of the blame for rebuffing or delaying the offers by the concessionaires to construct water security projects. The Cardona Water treatment project was long delayed; the Tayabasan East Water Source was aborted; the Kaliwa Low Intake and Kaliwa Long Term Source projects were rejected because MWSS decided that it will procure these facilities by itself! As chief regulator Patrick Ty acknowledged when asked about whose fault it was: “Yes, our fault because we kept delaying these projects.”
Would that the new decade sees the Philippines steer clear of the slippery slope to Venezuela East!
Raul V. Fabella is a retired professor of the UP School of Economics and a member of the National Academy of Science and Technology. He gets his dopamine fix from hitting tennis balls with wife Teena and bicycling.
