DoF open to LGUs takeover of nat’l gov’t functions

July 15, 2018 | 9:44 pm

THE FINANCE department is open to devolving some functions of the national government to local government units (LGUs) to comply with the Supreme Court ruling on internal revenue allotments (IRAs).
“We need to sit down with the LGUs and work out what programs they will implement… we will look at the proposals and then we have to ask the cabinet (to determine) how we will divide the functions,” Finance Secretary Carlos G. Dominguez III told reporters late Thursday.
Luzon Regional Development Committee Chairman Hermilando I. Mandanas, a former Batangas governor and for representative for the province’s 2^nd district, proposed to devolve some of the national government’s functions to LGUs.
Mr. Mandanas, who filed the petition with the Supreme Court that led to a ruling expanding LGU entitlements to national government revenue, proposed that the implementation of conditional cash transfers, farm-to-market roads, fertilizer subsidies, and medical equipment procurement, among others, be transferred to LGUs.
However, Mr. Dominguez said: “I don’t know if the President will agree.”
He noted that the department will wait for the final resolution from the high court before making any moves.
“The motion for reconsideration (MR) depends on what comes out… The court might say that the rulling applies 10 years from now so why will we file an MR? But we can’t afford a one-time payment. For sure we cannot afford that,” he said, referring to the possibility that the national government may have to pay arrears to LGUs dating back to the 1992 enactment of the Local Government Code.
“The key actor here is not us, the key actor here is DBM (Department of Budget and Management). They are the ones to determine who is going to be affected. If there’s money, it’s fine. Then they can allocate the budget,” Mr. Dominguez added.
He said that the Finance department estimates the total liability of the national government at between P1-1.5 trillion since 1992, the effectivity date of the Local Government Code, or Republic Act No. 7160.
The estimates are similar to those provided by Mr. Mandanas and Budget Secretary Benjamin E. Diokno.
The court expanded the definition of national government revenue to which LGUs are entitled. The national government pays out the LGU share of national revenue via IRAs.
The high court, sitting en banc, announced on July 3 that it voted 10-3 in favor of including all national taxes in the calculation of IRAs, not just those collected by the Bureau of Internal Revenue.
Mr. Dominguez also expressed doubts about some LGUs’ capacity to deliver their own programs, and noted that devolving some functions should not affect other national government projects.
“We also don’t know what functions they will take over. We cannot just give them the money and say: ‘We’re leaving you in charge.’ I don’t think we can do that,” he said.
“This is a lot of money. It will not really starve (the government of revenue), but it will be difficult. And again, we have to make sure that the national projects, like the roads, are going to be coordinated,” he added.
Many LGUs are dependent on IRAs as their primary source of revenue, even though the law allows them to generate taxes on real property and on businesses, among other fees and charges.
“Not everybody is created equal. Some are very good. Some are not, some have political problems,” Mr. Dominguez said. — Elijah Joseph C. Tubayan

End of Kuwait OFW ban to raise May remittances — HSBC

July 15, 2018 | 9:42 pm

By Melissa Luz T. Lopez
Senior Reporter
REMITTANCES may have grown by over 9% in May following the lifting of a deployment ban on overseas workers to Kuwait, HSBC Global Research said.
Bank economists estimate a 9.2% increase in remittances from overseas Filipino workers (OFWs) for the month. If realized, this will follow a 12.7% increase posted in April, when money sent home by OFWs hit $2.347 billion.
The Bangko Sentral ng Pilipinas (BSP) will report latest remittances data today. Remittances totaled $2.31 billion in May 2017, up 5.5% year on year.
HSBC expects a sustained recovery for these cash transfers, sustaining year-on-year growth since a 9.8% contraction recorded in March. Month-on-month growth for May is expected to come in at 7.5%.
“Remittances growth has been robust across regions with the exception of the Middle East, where remittances have declined on a yearly basis since the beginning of the year due partly to restrictions on Overseas Filipino Workers’ deployment to Kuwait at the start of the year,” HSBC said in a report released over the weekend.
“We expect this to recover toward the end of the year now that the ban has been lifted and for remittances growth to remain broadly in line with its historical trend of 5-6%.”
Remittances from the Middle East dropped 10.5% over the past few months to $2.249 billion from $2.512 billion during the same year-earlier period after a repatriation order issued by President Rodrigo R. Duterte for Filipinos in Kuwait in February, followed by a deployment ban amid reports of abuse.
The ban was in place for several weeks until the two nations signed an agreement in early May. In the interim, remittances from Kuwait declined by 8.9% from a year earlier.
Cash transfers from OFWs provide extra money for their families back home, supporting domestic activity and overall economic growth. The remittances also help offset imports and help improve global trade balances.
Remittances have totaled $9.353 billion as of the end of April, up 3.5% from a year earlier.
The central bank expects remittances to hit another all-time high and grow by another four percent in 2018, a record $28.06 billion in 2017.
In the four months to April, the United States remained the biggest source of remittances with a total of $3.167 billion, followed by Saudi Arabia ($745.771 million), United Arab Emirates ($733.906 million), Singapore ($581.005 million) and Japan ($510.665 million), according to BSP data.

SRA seeks imposition of retail price caps for sugar

July 15, 2018 | 9:40 pm

THE Sugar Regulatory Administration (SRA) is asking the Department of Agriculture (DA) to include sugar in the list of agricultural products that will be subject to the department’s suggested retail price (SRP) system.
In a statement over the weekend, SRA Administrator Hermenegildo R. Serafica said that an SRP for sugar will “ensure that the consumers are protected and not taken advantage of.”
“The high prices of sugar are brought about by the erroneous perception being circulated by enterprising individuals that there is a shortage in sugar,” he added.
“Some are taking advantage of the issue of the lack of sugar for bottlers and using this to raise prices even for standard refined and raw sugar, where there is no shortage.”
The SRA monitors sugar prices in supermarkets three times a week, Mr. Serafica said. It found a grocery chain that has set “exorbitant prices well above the prevailing price” on the sugar, though he did not identify it.
As of June 10, the SRA’s data indicate a prevailing prices for raw sugar in wet markets and supermarkets at P50 per kilogram (kg) and P55 per kg, respectively.
Both the SRA and DA pointed to speculators as the reason behind rising retail prices amid low farmgate prices.
“The shortage is in the bottlers’ grade or premium refined sugar required by beverage companies such as Coke. This type of sugar has very specific quality requirements and standards that can be met by only a handful of sugar refiners in the Philippines,” he added.
“Since it is the end of the milling season, our refiners are constrained by the availability of bagasse to fuel their boilers for refining.”
Bagasse is a byproduct of sugarcane fiber after cane juice is extracted.
In June, the SRA allowed the importation of 200,000 metric ton of sugar.
Last week, Agriculture Secretary Emmanuel F. Piñol said that the department is considering a review of the sugar importation policy.
He alleged that traders who were supposed to supply sugar to bottlers and processors redirected their stocks to the commercial market instead.
Mr. Piñol also said last week that the DA is set to review other farm commodities “with volatile prices” which can be put under an SRP regime. The DA is looking into poultry and hogs as the next group of agricultural goods for which price ceilings will be set.
Eight commodities — regular-milled rice, some types of fish, onion and garlic — currently are sold under SRP rules. — Anna Gabriela A. Mogato

DPWH pushes for CALAX partial opening by Dec.

July 15, 2018 | 9:38 pm

THE Department of Public Works and Highways (DPWH) is pushing for the completion the Laguna segment of Metro Pacific group’s Cavite-Laguna Expressway (CALAX) project by December despite construction delays caused by heavy rains.
Public Works Secretary Mark A. Villar told reporters after an inspection of the site on Saturday the December target is “doable.”
“There are challenges like the weather. But so far they have been resolved… We expect to fast-track the construction of CALAX, Mr. Villar said.
The president of MPCALA Holdings, Inc. told reporters in early July the construction of segments 7 and 8 of CALAX, which are on the Laguna side, is now 45% complete, though delays are expected.
“The target as you remember is December 2018 for segments 7 and 8. But because it’s raining every now and then, the most likely completion date would be first quarter next year,” MPCALA President Luigi L. Bautista said on July 5.
He added, “Very soon we will be launching the impoundment works. The impoundment works are critical there because it’s already raining. We have to build the impoundment so we can complete the carriageway.”
Mr. Bautista noted, however, that the original timetable is to have the CALAX completed by December 2020, so the expected delay is still within those bounds.
The Laguna segment of CALAX stretches from Laguna Boulevard to Mamplasan, Biñan. It is expected to cut travel time between the two points to 10 minutes from the current 20 minutes.
As for the Cavite segment, Mr. Villar said construction is expected to begin by the third quarter after an environmental compliance certificate (ECC) was issued by the Department of Environment and Natural Resources (DENR).
“We’ll start initial construction this year. As soon as we get the ECC, we’ll begin construction. We’re just waiting for the writ of possession from the courts,” he said.
He added that the right-of-way for the Cavite segment is expected by mid-2019.
The Cavite segment of CALAX covers the 28-kilometer, four-lane road with bridges, interchanges, toll plazas and ancillary facilities.
The CALAX project is a 45.29-kilometer four-lane toll road that will connect the South Luzon Expressway (SLEx)-Mamplasan interchange to the Cavite Expressway (CAVITEx).
MPCALA Holdings, the tollways unit of Metro Pacific Investments Corp. (MPIC), is the government’s private concessionaire for CALAX.
MPIC is one of three key Philippine units of Hong Kong-based First Pacific Co. Ltd., the others being Philex Mining Corp. and PLDT, Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a majority stake in BusinessWorld through the Philippine Star Group, which it controls. — Denise A. Valdez

E-vehicle industry sees 2018 as ‘tipping point’

July 15, 2018 | 9:36 pm

By Victor V. Saulon
Sub-Editor
THE Electric Vehicle Association of the Philippines (EVAP) expects sales of electric jeepneys to hit 500 units this year, up from the 200 in 2017, with the group expecting a “tipping point” for the industry.
Rommel T. Juan, EVAP president, said the industry’s optimism is largely brought about by the public utility vehicle (PUV) modernization, which is expected to boost sales of the four-wheel electric vehicles after a slow start in recent years.
“Maybe by the end of the year, we’ll be able to release about 500 units,” he said in an interview. “There were only few units released last year, maybe less than 200.”
EVAP has 57 active members, most of whom are involved in local production, assembly, supply and distribution of electric vehicles and parts.
“This year is the tipping point, with the PUV modernization and the deployment of the DoE (Department of Energy) electric tricycles,” he said.
The Department of Transportation’s PUV modernization program has a target to upgrade around 200,000 public utility jeepneys in the next six years, about 10% of which will be electric jeepneys. To support the scheme, the Department of Trade and Industry and the Board of Investments are putting in place an Eco-PUV program to provide incentives to both the electric vehicle platform suppliers and body builders.
The DoE has committed to deploy around 1,600 to 1,700 units to the local governments of Marawi, Valenzuela, Muntinlupa, Las Piñas and Pateros. This will come from the 3,000 units that the government contracted with Japan’s Uzushio Electric Co. Ltd. and its local unit Bemac Electric Transportation Philippines, Inc. The rest of the units have not been committed but the DoE is considering a number of applications.
“In the automotive industry it has to be seen first. When you see the vehicles, that is when you would want to buy. The more vehicles we have on the road, the more demand will happen,” he said.
Mr. Juan said since the country started manufacturing electric-vehicles, a total of 5,000 have been produced by local vehicle makers, most of which are electric tricycles. He said about 15,000 electric motorcycles are imported each year on average.
He said the PUV modernization resulted in inquiries from dealers, who are fast-tracking the manufacture of electric jeepneys.
He said many members of EVAP are currently enjoying the income tax holiday being offered by the government, but the association continues to ask for tax- and duty-free importation of electric vehicles.
“Six, seven years that we’ve been pushing for it,” he said.
He said the 30% tariff on EVs is what the association is asking to be removed plus the import taxes and duties for vehicle parts such as the motor, controller, charger and batteries. If these incentives are given, he said EVs would be more competitive.
For instance, the cost of the Outlander model of Mitsubishi Motors Philippines Corp. will go down to P2.5 million from the P3.4 million with the existing taxes, he said.
“In other countries, [the electric vehicle industry] is a highly subsidized industry and that is really the price you pay if you want to improve the environment and to promote low carbon initiatives of electric vehicles,” he said.

Synergy between the CFO and CEO

July 15, 2018 | 9:34 pm

A mentor once said, to create value in an organization, the following must be present: strong leadership, strong partnerships that break organizational boundaries, and a perfect opportunity to exploit. In this article, we would like to discuss how a strong partnership between the CFO and the CEO can help companies adapt to the continually changing business landscape.
KEY ALLIES IN VALUE CREATION
When new opportunities and threats, such as digital, are transforming whole sectors and causing CEOs to question their strategy, operating model and team, CEOs need a firm ally and business partner by their side. One such partner is the CFO, who can be a strong advocate and support for growth. CFOs can be strategic advisors to the CEO, being aware of where the market and competition is heading.
Surprisingly though, in a survey of 652 CFOs across the world, EY found that while a majority of CFOs have increased collaboration with the CEOs and report greater involvement in corporate strategy driven by a focus on growth, CFOs still consider their most significant contribution as being cost discipline champions and managing budgets.
CFOs need to strike a balance between control and growth. They need to be able to display agility and flexibility — both personally and organizationally, as the organization’s strategy and economic situation evolve. Tony Klimas, EY Global Finance Performance Improvement Advisory Leader, has seen this tension at play in many organizations. In his experience, the CFOs that have successfully made the transition to business partner are those that have taken a step back from finance operations, and are focused on taking a strategic view on how they build and structure the finance function.
“To partner in a strategic way with the CEO, CFOs need to redefine the principles of the finance function,” Tony says. “Many CFOs have the will and the drive to be a business partner to the CEO, but the change just can’t come from them. They need to ensure the larger finance function has a balanced skill set that covers cost control, treasury, analytics and strategic forecasting. The CFO should be able to trust his finance leadership team and keep some distance from each of these activities in order to dedicate more time to collaborating with the CEO on strategic matters.”
For CFOs to maintain their role as a key ally to the CEO, CFOs must always be at the table during key discussions or asked for their input on strategic decisions. According to the same CFOs survey respondents, organizational boundaries and a lack of demand from CEOs for insight from finance into strategic issues are the top two barriers preventing a closer relationship between the CEO and the CFO.
The onus on the CFO to become a value creation-focused business partner to the CEO falls upon them both. So what does it take to become trusted allies? Commitment must be made by both parties to strengthen the CFO-CEO alliance:
• CFO commitment — Develop the right strategic skills and mind-set and build a finance function with the right balance of skills to give the finance leaders the breathing space to step away from the details.
• CEO commitment — Break down the organizational barriers that CFOs still perceive as barriers and rethink the contributions they require from their CFOs.
DRIVING AND ENABLING THE SHIFT TO DIGITAL
Digital technologies do not respect tradition. They destroy hierarchies, trample over sector boundaries, democratize information and make large, traditional businesses ask hard questions surrounding their own companies’ future and relevance. And digital technology is only just getting started. That said, CFOs and CEOs must develop a strategic response to external risks and opportunities and disrupt their own organization’s business and operating models. Both should know how digital can create new sources of value. Surprisingly, of the 652 CFOs surveyed, only 50% consider the shift to a digital business model to be a high or very high priority for their organization, and less than half feel they make a significant or very significant contribution to the shift to a digital business model. This suggests that CFOs have yet to recognize the impact digital is likely to have on their organization, or what their role is in positioning the organization to adapt and secure its relevance.
While many CFOs surveyed feel that digital sits outside their area of responsibility, they should realize that they can play an important role in championing and embedding digital within their organization. Some of the digital priorities that both the CFO and the CEO can work together on include:
1. Develop a business strategy that is fit for a digital world and make the disruptive investment calls required, including developing and managing a portfolio of digital investments with a variety of profiles, from quick wins to strategic bets.
2. Use data analytics to anticipate digital disruption, measure performance and respond quickly. CFOs are uniquely positioned to gather and analyze data from across the organization, which can provide an early warning indicator of any potential disruptive threats and opportunities. By sharing their insights, CFOs can help the CEO and the organization better develop strategic responses and consider pre-emptive changes to the business model in the face of increasing competition.
3.CFOs and CEOs can work together to create a governance framework that puts digital at the heart of the business, including management decision making. Currently, many organizations’ governance arrangements still do not take into account the digital economy. This includes assessing the readiness of the board for digital leadership, the overall digital talent pipeline and whether the existing digital capacity is enough to ignite digital business model innovation. Ruby Sharma, a Principal for the EY Center for Board Matters, says digital experience on the board can help guide management through changes in business models and disruptive forces.
4. Manage the tax, legal and regulatory risks of digital and support digital growth plans. It is absolutely important that CFOs, together with the Tax Directors, sit down with the CEO to explain how changes in the business model will transform their tax model. This will help ensure that risks are anticipated, while at the same time, help develop tax strategies that support digital growth ambitions. Not doing so poses greater controversy, including intense media and regulatory scrutiny and the risk of reputational damage.
As we can see, creating a powerful synergy between the CFO and the CEO, and potentially, other C-level executives, can redound positively on a business’ overall performance.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Rossana A. Fajardo is the Advisory Service Line Leader of SGV & Co.

How competitive is the Philippine economy today?

July 15, 2018 | 8:58 pm

(Second of two parts)
In overall competitiveness, the Philippines is only better than Cambodia, Laos, and Myanmar today. We have been overtaken by Vietnam and Indonesia in most competitive indicators in the last two years. This is not to say that the Philippines did not improve. We did, especially between the years 2010 to 2015. In the last two years, however, the rest of the region accelerated their reforms while the Philippines remained static given the disruption of the national elections and the period of adjustment of the new administration.
Having said that, let us now compare the state of the economy today versus how it was three years ago, before President Duterte took over.
Looking through the data, my immediate assessment is that the economy remains fundamentally strong, albeit showing cracks that could bite us in the back, if left unaddressed.
Gross Domestic Product (GDP), per se, has been growing vigorously. It expanded by 6.9% in 2016, 6.7% in 2017, and 6.8% in the first quarter of 2018. It is worth noting that this is the first time since our post-liberation era that the Philippines has grown beyond 6.5% for ten consecutive quarters.
On the demand side, the drivers of the economy have been government consumption, capital formation, and consumer spending. The latter, however, has slowed down this year due to the rising prices of commodities.
On the supply side, the service sector expanded by 6.8% in 2017 and further to 7% in the first quarter of 2018. Industry grew by 7.3% in 2017 against 7.9% in 2018. These numbers are relevant as it shows the extent by which our industrial sector continues to grow faster than the service sector. It proves that the country’s manufacturing base is expanding and that industrialization is well on track.
Growth in agriculture remains dismal at 2.4% in 2017 and 1.5% in the first quarter of 2018.
Overall, GDP growth in 2017 was higher than the a 5.8% recorded in 2015. The average economic growth during the Aquino administration was 6.3%.
As a result of rapid economic expansion, per capita income has increased correspondingly. On a price adjusted viewpoint, it stood at $6,875 in 2015 and improved to $8,229 in 2017. In other words, the average income of the Filipino increased by 20% over two years.
Unemployment and underemployment rates have also improved. From 5.7% and 16.1% in 2015, respectively, to 6.3% and 18.5%, in 2017.
The improvement in the country’s unemployment position was a result of a corresponding rise in foreign direct investments and the jobs they created. From $6.64 billion in 2015, FDIs peaked to an all time high of $10.05 billion in 2017.
Investment in infrastructure is the centerpiece of the Duterte administration. The ratio of infrastructure spending to GDP improved from 4.3% in 2015 to 5.3% in 2017. Note, this is the first time in 50 years that the ratio breached the 5% level. If the intentions of the Duterte administration are to be fulfilled, spending on infrastructure will accelerate to over seven percent from 2019 to 2022.
TOXIC INFLATION
The otherwise rosy picture of the economy is negated by rising inflation. Last month, inflation peaked at 5.2%, bringing the first semester average to 4.3%. Inflation was negligible in 2015 at only 1.41%.
Last month was the fourth successive month in which inflation exceeded the BSP’s comfort zone of 2-4%. Spiking inflation is a result of the TRAIN Law and the higher taxes on fuel, automobiles and other commodities like sugary and alcoholic beverages, tobacco etc. This resulted in successive price increases in transport and logistics, electricity, food and beverages, clothing, housing, education and health care.
To deal with higher prices, households inevitably tap into their savings. This results in a drop in savings rates and available funds that would otherwise be used for investments, making the economy less productive.
High inflation also induces monetary authorities to increase interest rates, if only to temper it. This, in turn, makes credit more expensive for both manufacturers and service providers. The high cost of money will inevitably be passed on to the consumer through higher prices. Mortgage and consumer loans will also become more expensive, making it more difficult for people to purchase homes, cars, and appliances.
High interest rates mop up liquidity in the market. This dampens consumer spending and drags GDP.
For exporters, the high cost of money, logistics, and power make it more difficult for them to compete in the global marketplace. In fact, the steep decline of Philippine exports has already begun.
High inflation causes fluctuations in exchange rates. The continuous drop of the peso is testament to this. The volatility of the peso affects exports, imports, and business transaction across borders. It also breeds business uncertainty. Potential investors will think twice before investing in our shores given our unstable prices and erratic currency
High inflation has multiple toxic effects that can blunts the benefits of our 6%+ GDP growth.
RISING DEBT
Our rising debt is a cause for worry.
Public debt has increased from $115.6 billion in 2015, to $129.16 billion as of end-2017. Last week, government announced its plan to borrow a whopping $22.4 billion (P1.189 trillion) to finance its spending plan for 2019. This is on top of the $16.75 billion (P888.23 billion) it will borrow this year.
Public debt to GDP ratio was around 41% in 2015 and is likely to increase by at least three percentage points due to government’s increased borrowings. This is manageable should our balance of trade and current account be healthy. Problem is that both are deteriorating.
As of the end of 2017, the trade gap (exports minus imports) posted a deficit of $28.786 billion, the largest in our history. For the first five months of the year, the deficit was already at $15.77 billion. All indications show that Philippines is headed for a record breaking deficit of $30 billion this year.
Imports are growing in strides due to our need mineral fuel, as well as iron and steel used for government’s infrastructure program. We have also been importing massive amounts of equipment and machineries. All these are productive assets, which is a good thing.
However, our exports have not been growing at a pace that could help offset our mounting import bill. It has in fact decreased by 5%, year on year. Merchandise exports amounted to only $26.914 billion from January to May, a slide from $28.33 billion for the same period in last year. Government’s goal of increasing exports by nine percent is no longer attainable as our manufactures become less competitive.
The deficit is also widening in our current account (the balance of accounts that takes into consideration trade in goods, trade in services, investment incomes, and transfer payments). From a surplus of $601 million in 2015, we swung into deficit territory in 2017, clocking in -$2.52 billion. It is seen to worsen to $3.1 billion this year. OFW remittances, income from the IT-BPO and tourism as well as foreign direct investments are no longer enough to cover our forex expenditures.
Thus, we can expect the peso to weaken further.
There is nothing wrong with amassing debt, so long as you can pay for it. Problem is, our Gross International Reserves (GIR) have been deteriorating too. GIR is the amount of foreign currency deposits, bonds, gold and special drawing rights held by a country.
From a high of $86.12 billion in September 2016, it fell to $80.669 billion in end-2017 and plummeted further to just $77.68 billion last May. The recent decline is steep.
The Philippines is far from a debt crisis, but our rising debt levels coupled by our eroding current account and foreign reserves is a cause for worry.
WHAT’S NEXT?
The time of President Ramos saw the rise of the electronics industry. President Arroyo’s era is credited for the development of the IT-BPO industry. The Aquino administration ushered-in the resurgence of the manufacturing sector and public private partnerships. It is still unclear what industries the Duterte administration is championing.
Mind you, infrastructure development is not an industry — infrastructure is merely an enabler of industries.
The need to develop new industries is now more urgent than ever since our main foreign exchange earners are in jeopardy. In IT-BPO, artificial intelligence will soon replace voice-based business process outsourcing. More than a million call certain agents, and the revenues they generate, stand to be obliterated sooner than we think.
In electronics, there is now a generation of integrated circuits and semiconductors. Unless we attract the manufacturers of these technologies or provide incentives to our existing manufacturers to upgrade their facilities, the $32 billion annual revenues earned from this industry is bound to decline.
Simply put, we need to develop new export winners. Experts suggested that the Philippines can be competitive in agro-industrial products, shipbuilding, household appliances, and chemicals, among others. Whatever it is, the Department of Trade and Industry must work double time to develop these industries. We need new foreign exchange earners and we need them now, if only to remain economically solid.
This assessment of the economy should give us the right perspective as the President delivers his State of the Nation Address this week.

Andrew J. Masigan is an economist

Is there an Imperial Manila?

July 15, 2018 | 8:57 pm

Is there an Imperial Manila? It sounds traitorous to call Manila “Imperial,” as if Manila were not Filipino but a state apart, like the foreign imperial colonizers that Filipinos — united as a people — fought against to win independence and recognition as one country and one nation.
Have we not purged ourselves of the factionalism and regionalism that almost thwarted the revolutionary fight for independence from Spain in 1898? We think we have cleansed ourselves of that, in 120 years of unified democratic self-governance. Noticeably, there is now much less of regional groupings and social identification as Visayan, Tagalog, Bicolano, Cebuano, Ilokano, etc., — and the more ready declaration is “I am Filipino.” That almost all Filipinos now speak the national language above the 185 languages of the Philippines identified in the Ethnologue (Languages of the World 18^th ed., 2015) says we are a united people.
This derogatory name “Imperial Manila” is unfairly divisive at this time, when the country is just rising in the socio-political and economic world, at last to stand shoulder-to-shoulder with other developing countries — after being called “The sick man of Asia” for the excessive foreign debts that fed the corruption in the 14 years of the Ferdinand Marcos dictatorship. It is painfully embarrassing that the pejorative title on the country’s political and economic center, Manila, should be inflicted upon it by the leader of the country — voted in as president by 16 million voters (29.4% of registered voters and 14.6% of all Filipinos).
“It (the current system) is an excuse for them (elitist politicians) to hang on to power in Imperial Manila. They have always been there in one single office, running the Philippines,” Rodrigo Duterte said in a speech during the election campaign (Agence France-Presse June 28, 2016). He promised to end the domination of “Imperial Manila” with a radical shift to federalism that he says is vital to fighting poverty and ending a deadly Muslim separatist insurgency (Ibid.).
After much to-and-fro on whether there shall be a Constitutional Convention of elected delegates as after the 1986 EDSA People Power Revolution, or a Constitutional Assembly convened from among the current legislators, President Duterte instead formed a 22-member Consultative Committee (ConCom) to prepare a draft federal constitution (ABS-CBN News Feb 14, 2018). Former Chief Justice Reynato Puno, who penned the Freedom Constitution of the revolutionary government of President Corazon Aquino in February 1986 chairs the ConCom. The one other prominent member of the ConCom is former Senate President Aquilino Pimentel Jr., who was Local Government Secretary in Corazon Aquino’s presidency, and chief author of the Local Government Code of 1991. When asked what’s wrong with the 1986 Constitution that it has now to be radically changed, both professed that proliferate political dynasties must be dismantled as they and the other ConCom members also firmly believe that federalism will decentralize power from “Imperial Manila” (Ibid.).
In 144 days, the Concom submitted the proposed federal constitution to President Duterte (philstar.com July 9, 2018). The day after, the President approved the ConCom’s draft, except for his (Duterte’s) request that the transitory provisions should provide for an elected president during transition (BusinessWorld July 10, 2018).
Duterte is expected to endorse the draft to Congress during his third State of the Nation Address on July 23. Presidential spokesperson Harry Roque said that the submission was a significant step in realizing Duterte’s goal of a shift to federalism (philstar.com July 9, 2018).
Is it federalism at all costs?
Even former Senate President Juan Ponce Enrile who was released from detention for a pending plunder case, and who agrees with President Duterte on most other issues, said “the draft federal charter submitted by the Consultative Committee that was later approved by President Rodrigo Duterte is too big of a government…the cost of federalism would be too much for the Filipino people to bear…It will burden the people too much with taxes, and the economy I don’t think it can shoulder the cost of this huge government that is being proposed” (gmanewsonline July 13, 2018).
Benjamin R. Punongbayan, founder of Punongbayan & Araullo, one of the Philippines’ leading auditing firms analyzed “the current national taxes; the existing national debt, its refinancing, and greenfield borrowings; and the transfer of national assets to see how all these fall into place in federalism’s objective of giving the states freedom of action and of moving them away from the domineering authority of Imperial Manila” (“Federalism, Money, and Taxes,” BusinessWorld, Part 1: May 28; and Part 2: May 30, 2018).
Punongbayan brought out the predicament of businesses, specially businesses operating nationwide, in “establishing how a business entity’s revenue is recognized for each state and how the entity’s cost and expenses are allocated among its operations in the various states” (Ibid.).
For example: “where sales are initiated in one state and concluded when the sold goods are delivered to a user located in another state, there must be a clear rule as to which state the sales should be reported,” he said. While existing accounting standards may suggest treatments, these standards are entity-focused and not geography-focused. Recognition of income and expenses by businesses will be confused, under a federalist setup and the by-passing of “Imperial Manila” (as a central clearing house). Therefore, an applicable tax rule must be established to make the treatment clear, Punongbayan says. Income taxes, customs duties, value-added tax (VAT) and even the gross receipts taxes will have to be overhauled (Ibid.)
“There is really no need for federalism,” Punongbayan says. “The present unitary government can revise the national tax allocations such that it retains only what the national government needs and the balance allocated to the provinces on a fair basis” (Ibid.). Funny, but in the ConCom draft, taxes and fees to be collected by Federal Regions (Article XII — Fiscal Powers and Financial Administration) have been whittled down from earlier generous entitlements to only 11 local taxes already collected under existing Local Government administration rules. There’s no avoiding Imperial Manila.
I told you so, former Chief Justice Hilario Davide says. “All such goals and objectives can adequately and sufficiently be accomplished by merely, but effectively and efficiently implementing the relevant provisions of our present 1987 Constitution for strong local autonomy and decentralization” (BusinessWorld Nov. 22, 2017).
“A shift to federalism is a lethal experiment. A fatal leap. A plunge to death. A leap to hell,” Davide says.

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com

Effects of fare control

July 15, 2018 | 8:56 pm

Government has the tendency to throw its weight around, especially affecting people and private enterprises that it regulates. If players are deemed “friends” or crony of the administration in power, they enjoy kid-glove treatment, allowing them to get off lightly in terms of penalties and fines. Otherwise, if the players are outside the circle, they get hefty fines or threatened with closure.
When Uber was still operating in the Philippines, the Land Transportation Franchising and Regulatory Board (LTFRB) slapped it with multiple penalties: (a) Suspension of operation for about a month or two, (b) a fine of P190 million, and (c) required Uber to give allowances to their drivers while the suspension was in effect.
Taken together, these fines plus legal costs have been estimated to reach P500 million or higher, a huge amount.
Last week, the LTFRB fined Grab P10 million for charging two pesos per minute on trips taken by its passengers, saying that it didn’t approve these fees.
Meanwhile, passengers have agreed — and continue to agree — to pay for these fares, even before they take trips using ride-sharing platforms, including Grab.
If passengers are unable to afford ride-sharing services, they have the option to take regular taxis, UV expresses, or a combination of other modes of transport.
Most commuters have refrained from using ride-sharing services owing to their cost. Only about 2.7% of the total number of commuters use ride-sharing.
FARE CONTROL
The LTFRB uses two price control policies: (a) surge price control to twice the fare amount, which was later cut down to 1.5x, and (b) abolition of P2/minute charge as a mechanism to offset the big decline in (a).
We now try to show the effect of these two measures on both passengers and drivers.
In the graph below, Pm and Pc means Market Price and Controlled/Capped Price. Likewise, Qm and Qc means Market Quantity and Controlled/Capped Quantity.

When there is no price control, when Pm prevails, passengers and drivers agree at point A and passengers get a ride soon, resulting in short waiting times.
When price control is imposed, when Pc prevails, those policies remove incentives of many drivers to go to high traffic areas to pick up passengers. This reduces the supply of drivers during the times when they are most needed and makes the supply curve shift from D1 to D2.
Passengers’ waiting times become longer, prompting some of them to take regular taxis — assuming these are readily available — or take multiple transport modes to reach their destinations.
So passengers’ demand curve also adjusts to the left, from D1 to D2. Only those desperate to get a ride-sharing service would stay and wait longer until a car arrives, and they meet at the new equilibrium or market-clearing price at point B.
The move from point A where Pm prevails to point B means movement from Qm to Qc. The difference between the two represents the unserved passengers and bookings, people who are forced to either take cabs or multiple rides.
Taking multiple rides is fine if one is wearing casual attire, or not carrying valuables such as laptops, documents, and cash, or not accompanying a child or an elderly person.
Are passengers given more “safe, convenient, affordable ride” at point B than point A?
If LTFRB Chairman Martin Delgra and party-list lawmaker Jericho Nograles are asked this question, very likely they will say: Yes.
After all, they have drivers and vehicles, all funded by taxpayers and are not subjected to long waits to get a ride.
If the ordinary passengers and ridesharing companies and their partner-drivers are asked, very likely they will say No. Passengers are forced to wait longer, even if they are willing to pay higher prices for their trips and drivers experience lower income.
FRANCHISE CONTROL
A related issue is the franchise control policy of LTFRB. It limits or puts a cap to total number of cars available for ridesharing platforms.
When Uber exited the region last April, it had 19,000 drivers in the Philippines but only 11,000 were absorbed by Grab because LTFRB did not accredit the remaining 8,000. This alone created a huge backlog in terms of getting rides.
If the LTFRB removes its franchise control policy, at least 10,000 new drivers and cars would be on the road.
That decision will help entrepreneurship and allow Filipino workers abroad to finally stay at home with their families.
The graph can also apply here.
No franchise control means the supply of cars will be at Qm and passengers and drivers can “meet” at point A. With franchise control, the supply of vehicles will be at Qc and the supply curve moves from S1 to S2.
Passengers will have longer waiting times under S2 and some will take other transportation services like regular taxi and multiple rides. So passenger demand will move from D1 to D2. The shift from Qm to Qc means more inconvenience, more unsafe passengers even if they have the extra money to pay for higher fares.
If government via LTFRB is sincere in helping the public get “safe, convenient, affordable rides,” it should remove its fare control and franchise control policies.
If LTFRB officials are retiring soon, they should aspire for goodwill from the passengers and ridesharing companies they are regulating. Retiring with ill will from the public is not a good way to leave.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.
minimalgovernment@gmail.com.

Flawed DoE assumption results in baseload bloat

July 15, 2018 | 8:54 pm

Over the past four decades, solar photovoltaic (PV) prices have been dropping by an average of 9% per year. As a result, rooftop solar is the cheapest daytime source of electricity today in many countries.
In the Philippines, the levelized cost of electricity (LCOE) from solar rooftops has gone below six pesos per kilowatt-hour, cheaper than any electric utility in the country.
While commercial systems have a solar conversion efficiency of around 20%, efficiencies in research labs already exceed 45%. As these research results are commercialized, we can expect prices to continue dropping in the coming years.
Thus, we face the happy prospect of even cheaper solar electricity in the future.
The entry of solar (and wind) plants in the electricity mix results in three distinct types of power plants:
• Variable plants (solar, wind) have no fuel costs. They produce additional kW-hours at no additional cost (zero marginal cost). For this reason, in mixed grids, their output is dispatched first. The country’s Renewable Energy Act recognizes this, thus, giving them priority in dispatch. However, these plants’ output varies with the weather. Thus, variables need the next type to take up the slack during cloudy or windless days.
• Flexible plants (batteries, hydro, biomass, gas turbines) take up this slack. They can be started up or shut down each day, or as needed. Operators can ramp their output up or down. The Department of Energy (DoE) calls them peaking or mid-range. Peaking plants operate only a few hours each day, during peak hours. Mid-range plants operate longer hours but still shut down daily, during periods of lowest demand. Except for hydro, flexibles tend to cost more to operate.
• Baseload plants (coal, nuclear) must run twenty-four hours a day, seven days a week. Shutting them down frequently makes them very inefficient and raises their costs unacceptably. Like the variables, baseloads also need flexible plants on standby but for a different reason — since baseloads must run 24/7, they are only good for loads that are also 24/7. This is called the base (i.e., minimum) load. As soon as demand exceeds the minimum, flexible plants have to come online to take up the slack. As long as they run 24/7, baseload plants have low average costs. For this reason, they got dispatched first in the past. Today, zero-marginal cost plants get higher priority.
In a nut shell, cost determines dispatch priority: zero-marginal cost variables come first; low average cost baseloads come next. Flexibles take up the slack during cloudy or windless days, at night when the demand exceeds the baseload, and when no cheaper solar, wind, or baseload outputs can be dispatched.

HOW SOLAR GROWTH AFFECTS THE ELECTRICITY MIX
Electricity consumption follows a general, predictable, 24-hour pattern with two peaks — a daytime peak around 1-2 pm, and a nighttime peak around 7-9 pm. In highly urbanized areas during weekdays, the daytime peak is higher than the nighttime peak. Otherwise, the nighttime peak is higher. Either way, the baseload usually occurs around 3-4 am. The top curve in Figure 1 shows this pattern. The highest solar output coincides roughly with the daytime peak.
Grid operators must dispatch power plant outputs so that supply equals demand at all times, while keeping costs as low as possible.
Consider the first scenario (Figure 1). As solar share (orange) rises from zero to 10%, it is displacing flexible plants (green). Since solar is cheaper, this is also pulling electricity prices down. The 70% capacity share of baseloads (gray, blue) is unaffected.
In the second scenario (Figure 2, 30% solar), something significant has happened. The midday solar output is so high that the residual demand (total demand minus solar output) is now lowest at midday. The baseload has shifted from early morning to midday. Also, the baseload is now slightly lower, from 70% to around 63%. Solar is now displacing baseload plants too.
In the third scenario, with solar at 50% of peak demand, baseload share shrinks further to 43%.
THE FUTURE NEEDS MORE FLEXIBILITY, LESS BASELOAD
As the solar share in the mix rises, flexible plants are affected first and their role diminishes.
But as the solar share increases from 20% to 25%, baseload plants are affected next. At 50% solar, baseload share shrinks to 43%. At 70% solar, baseload requirement will only be 23%. At 90% solar, we will need only a few baseloads.
With the baseload share shrinking, the nighttime demand baseloads used to cover must then be met by flexibles. Beyond 25% solar, the role of flexible plants increases steadily. (Email rverzola@gn.apc.org for the full 0-100% simulation.)
Why is this trend so important?
First, because it is inevitable.
As solar prices drop, solar growth will become increasingly market-driven. People will simply decide to solarize their rooftops.
Second, because the DoE remains inexplicably blind to this trend.
DoE’s Philippine Energy Plan (PEP) 2016-2040 still assumes 70% baseload share until 2040.
Assuming 50% solar by 2040, for instance, means a baseload share in the capacity mix of 43%, not 70%, by 2040. DoE’s flawed assumption overestimates the country’s baseload requirement by 63% (70 divided by 43, minus 1), creating a huge bloat in its baseload plans.
DoE’s PEP 2016-2040 includes three more serious flaws, further raising the baseload bloat to more than 100%.
This baseload bloat will lead to stranded assets in the future because those recently constructed coal and nuclear plants will be unable to sell half of their output. The fossil industry, as in the past, will surely try to pass on the cost of these stranded assets to the consumer.
Why buy expensive, dirty electricity from the grid when we can produce cheap, clean electricity from our rooftops?
The next piece will explain the DoE plan’s three other flaws.

Roberto Verzola studied electrical engineering and economics in UP. The German foundation Friedrich Ebert Stiftung published in 2017 his book Crossing Over: The Energy Transition to Renewable Electricity (second edition, PDF is online). He is currently president of the non-profit Center for Renewable Energy and Sustainable Technology (CREST).

SWS: 81% against gov’t policy on Chinese intrusion

July 15, 2018 | 8:20 pm

FOUR of five Filipinos or 81% of respondents polled reject the government’s policy of allowing Chinese intrusion in the West Philippine Sea (WPS), the Social Weather Stations found in its Second Quarter 2018 Social Weather Survey.
The survey also found net trust in China falling 42 points and two grades to “bad” -35, from neutral +7 in March.
The non-commissioned survey comes a few days after the Philippines marked on July 12 its second year since winning the Hague arbitration case in its maritime dispute with China.
The poll also found 80% of respondents agreeing that the government should strengthen the Philippine military, particularly the Navy.
The survey reported 74% wanting to bring this issue to international organizations such as the United Nations or the Association of Southeast Asian Nations for a diplomatic and peaceful negotiation with China.
“Seventy-three percent (73%) said it is alright to have direct, bilateral negotiations between the Philippines and China to discuss the resolution of the issue of the claimed territories,” the poll also found, while 68% said the government should ask other countries to mediate in this matter.
The poll further showed China’s net trust rating at a “bad” -38 among those who were aware of the West Philippine Sea dispute. “The net trust rating of China was at bad levels regardless of people’s satisfaction with Pres(ident) Duterte: it was highest among those who were dissatisfied with the President, at -42, followed by those who were undecided, at -39, and among those who were satisfied with him, at -32,” SWS said.
The survey was conducted from June 27 to 30, through face-to-face interviews with 1,200 adults nationwide: 300 each in Metro Manila, Balance Luzon, Visayas, and Mindanao, with sampling error margins of ±3% for national percentages, and ±6% each for the said areas.
DAVIDE’S CRITICISM
In a related development, the Consultative Committee to Review the 1987 Constitution (ConCom) criticized retired chief justice Hilario G. Davide, Jr.’s recent remarks about the draft federal charter.
Mr. Davide over the weekend criticized the draft charter’s not citing the West Philippine Sea in its proposed Article I on national territory. He also criticized the draft charter for being “anti-Filipino,” “anti-poor,” and “pro-dynasty.”
ConCom in its statement on Sunday said Mr. Davide “betrays his confusion, lack of sincerity and lack of logic in the on-going debate on the proposal to revise the 1987 Constitution.”
Said the Concom: “The 1986 Constitutional Commission had the chance to put the words ‘West Philippine Sea’ or ‘South China Sea’ (we didn’t call it West Philippine Sea then). They did not. They did not make any loose reference to it even in the way the Article is phrased in the 1987 Constitution. They only talked of sovereignty over territory. And they abandoned the Philippine claim to Sabah, which has existed in previous constitutions.”
Mr. Davide was a member of the said commission, as the ConCom also noted.
“The ConCom draft contains in the Bill of Rights the right of the people to adequate food, decent housing, complete education, comprehensive health care, and livelihood and employment opportunities. These rights are meant for the poor,” ConCom also said regarding the “anti-poor” charge.
“By putting these in the Bill of Rights, they become demandable from the State, from the government; and the government is mandated to adopt measures and programs toward the PROGRESSIVE realization of these rights. It means that the government must — year after year — adopt comprehensive programs in these areas and increase its budget for them so that the number of Filipinos who go hungry, who have no roof over their heads, who are uneducated, who die without seeing the eye of a doctor, who have no jobs or means to have income will be reduced.”
ConCom further noted: “The ConCom draft contains self-executory provisions banning political dynasties, defining the coverage up to second-degree of relations by blood or marriage, prohibiting succession at all levels from he president to barangay kagawad, and prohibiting running or holding more than one position except one national and one regional or local position — which means of the 295 political dynasties and of the 25 million families, there will be only two families that can have not more than two positions — the family of the president and the vice-president. All others will have only one position.”
“The 1987 Constitution has one-sentence provision that leaves it up to the Congress to pass an anti-dynasty law. After 32 years, the Congress — created by the 1987 Constitution that allowed dynasties to proliferate and control the Congress — has not passed an anti-dynasty law,” the body also said.
NO RUSH
For his part, Senate Minority Leader Franklin M. Drilon said on Sunday the so-called “no-election” scenario in 2019 may pave the way for the President to appoint every mayor, governor, congressman, and even senators.
“Because there is no holdover provision in the Constitution. The officials who were elected last May 2016 elections will have to vacate their posts by June 30 of next year as provided for in the Constitution,” he said in a statement.
He said the President’s appointing powers were already upheld by the Supreme Court (SC) in the case of the postponed 2011 Autonomous Region in Muslim Mindanao (ARMM) elections. Hence, the President can extend government officials’ terms or appoint their replacement, the senator added.
The SC in 2011 declared constitutional Republic Act 10153 or the law synchronizing the 2011 ARMM elections to the 2013 regular elections. The law also allowed the President to appoint officers-in-charge for the positions of ARMM regional governor, vice-governor, and members of the regional legislative assembly until officials are duly elected in the 2013 polls.
Mr. Drilon then appealed to Congress not to rush Charter change, saying that such moves are being used to postpone the 2019 midterm elections.
“Congress should not be rushed into amending the Constitution to pave the way for federalism. Amending our Charter is not like passing an ordinary legislation. It is much harder than that. It requires comprehensive studies and deliberations. There a lot of imponderables and implications that can affect our people of today,” he said. —reports by Charmaine A. Tadalan, Gillian M. Cortez, and Camille A. Aguinaldo

Senate panel to monitor social measures in TRAIN

July 15, 2018 | 8:18 pm

THE Senate committee on public services will resume its regional inquiry on Wednesday, July 18, into the effects of the tax reform law on public services and utilities in Cagayan De Oro City, Misamis Oriental.
In a statement on Sunday, committee chair Senator Grace Poe-Llamanzares said she will seek updates from the Department of Transportation (DoTr) if it has delivered on its promise to implement its fuel vouchers program to jeepney drivers.
“We want to know about the process of distributing of the vouchers to public utility jeep operators, the government assistance due to increase prices of gasoline, and the added four million family-beneficiaries under the government’s unconditional cash transfer,” she said in a statement.
“We need to hear if the promise of the DoTr to give subsidies is true or beneficiaries, especially drivers in Mindanao(,) haven’t received it yet. What is important is helping out our fellow citizens now,” she added.
Officials from the DoTr, National Economic and Development Authority (NEDA), Department of Finance (DoF), Department of Energy (DoE) were invited to the hearing. Also expected to attend are Cagayan de Oro City Mayor Oscar S. Moreno, Vice-Mayor Raineir Joaquin Uy, and Mindanao transport leaders.
Malacañang earlier assured that the Department of Social Welfare and Development (DSWD) and the DoTr will fully implement the social mitigating measures provided under the TRAIN law in July.
The Senate panel will also tackle various measures seeking to create district offices of the Land Transportation Office in Mindanao and franchise applications of local broadcast stations.
Ms. Llamanzares’ Senate panel earlier held public hearings in Iloilo City, Iloilo, and Legazpi, Albay.
Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law provides social mitigating measures for Filipinos to cope with inflation, such as unconditional cash transfer, fuel vouchers for jeepney franchise holders, rice discounts and 10% transportation fare discounts for minimum-wage earners, and free skills training from the Technical Education and Skills Development Authority (TESDA). — Camille A. Aguinaldo

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