By Andrew J. Masigan

THE Consumer Protection Group of the Department of Trade and Industry (DTI) has a lot of explaining to do. Earlier this year, the group, under the supervision of Undersecretary Teodoro Pascua, facilitated the passage of Department Administrative Order No. 17-02 (later on, amended by DAO 17-05), a statute that affects the supply and price situation of cement in the country.

For those unaware, cement, in the local marketplace, generally comes from two sources — local manufacturers and pure importers. Local manufacturers are also allowed to import the commodity should factory output prove insufficient to fill demand. This, in effect, makes them manufacturer-importers.

Having both manufacturers-importers and pure importers compete in the local marketplace has kept prices down while ensuring that locally manufactured cement matches, if not, supersedes, the quality of their imported counterparts. This delicate interplay of price, quality, demand, and supply has kept cement prices at P197/bag as compared to P300/bag in 2015. Everybody benefits from this stable price environment.

DAO No. 17-02/05 breaks this delicate equilibrium.

See, the intent of the DAO is to deter the importation of cement in order to give local manufacturers sufficient protection from an influx of imported alternatives. To this, the DAO mandates pure importers to comply with burdensome regulations in the importation process.

Among these regulations is that pure-importers are required to post a security bond worth 10% of the declared value of their imports. In addition, they must obtain an Import Commodity Clearance (ICC) before the goods are allowed to clear customs. None of these regulations are required of manufacturer-importers.

The effects of these regulations on pure importers run deep.

Apart from putting a strain on their working capital, they must also contend with several rounds of product testing before the ICC can be released. This means, the cement ages in the port, shortening its shelf life in the market.

The ICC requirement is an unnecessary burden since cement brought in by both pure importers and manufacturer-importers generally come from the same source, both of which have PS certifications. It gives manufacturer-importers an undue advantage what with a longer shelf life to work with and less cost of money.

EFFECTS ON THE CONSUMER
The burdensome requirements imposed by the DAO have driven many pure importers out of business. Those who are still operating are barely surviving. Meanwhile, manufacturer-importers are getting stronger by the day given the absence of fierce competition.

It is only a matter of time before pure importers are driven out of the market altogether. When this happens, a cartel can emerge among the few manufacturer-importers with the power to choke supply and drive prices up.

This becomes particularly relevant when you consider the size of the cement industry.

As everybody knows, one of the strong legs of the economy is the construction sector. Buoyed by the infrastructure boom and double digit growth in manufacturing, housing and the office property sectors, demand for cement peaked at 720 million bags last year with substantial increases expected this year. One can imagine the effect of what a mere P50 per bag increase could mean to the looming cartel — a windfall profit of some P36 billion! Scandalous profits at the consumer’s expense.

The presence of a cartel will inevitably translate to higher building costs. This, in turn, will cause Juan de la Cruz to absorb more expensive housing prices, higher toll fees for road use and higher rental rates for commercial spaces.

REGULATORY ACTION
How this passed the diligent scrutiny of DTI Secretary, Ramon Lopez is beyond me. I have known the secretary for many years and know, for certain, that he will never do anything to compromise the Filipino consumer. It seems out of character especially since part of the mandate of the DTI is to regulate big industries with the view of protecting public interest against price manipulation and inferior products.

I am inclined to believe that DAO No. 17-02/05 was bamboozled by the Consumer Protection Group as its passage was done in haste. I say this because the Consumer Act of the Philippines mandates all DAOs to be published in two newspapers of general circulation at least once a week for no less than one month, before such DAO takes effect. This should give all affected parties time to prepare or state their opposing case to the DTI, if need be.

Such was not the case.

Instead of complying with the law, DAO No. 17-02/05 explicitly stated that it “shall take effect immediately after seven days following its publication in a newspaper of general circulation.” The unwarranted rush in implementation left many to question the motives behind the administrative order.

DAO No. 17-02/05 becomes particularly questionable since it is in violation of the tenets of fair competition. After all, equal protection of the law means entities which are similarly situated must be similarly treated. The extraordinary burden levied upon pure importers contradicts this principle.

Granted, we must protect the interest of our manufacturers over imported substitutes. This argument can only hold true if our manufacturers do not engage in importation themselves. Fact is, they do. So to exempt them from regulation does not equal the playing field, it distorts it to the manufacturer-importers’ advantage.

Exacerbating the situation is that DAO No. 17-02/05 was not even legally vetted.

The Philippines, as signatory to the World Trade Organization and ASEAN Trade in Goods Agreement is obligated not to create unnecessary obstacles to the free flow of good and not to create trade-restrictive conditions. The DTI, in effect, caused the Philippines to violate these international treaties.

DAO No. 17-02/05 raises red flags because it benefits only the manufacturer-importers, to the detriment of the general public.

The case is now being heard at the regional trial courts of Makati City. Those affected (the pure importers) petitioned the courts for a temporary suspension of the DAO’s implementation. The petition was denied. The case will be elevated to higher courts. Meanwhile, let’s hope that the cartel won’t make its move and destabilize the stable price environment we enjoy today.

Andrew J. Masigan is an economist.