Saturday, July 21, 2018

BWorld 232, Effects of fare control

* This is my article in BusinessWorld last Monday, July 16.

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.

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.

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.

See also:

Comparative quarterly growth of China, Germany and US

GDP quarterly growth of the Big 3.
(1) China keeps high growth but decelerating this year. 
(2) Germany picking up speed but decelerating also this year. 
(3) USA picking up speed, consistently.
Data source: Trading Economics.

Many anti-T will be unhappy to see numbers like this. For them, Mr T is "evil, insane, misogynist,..." he should be leading the US economy to oblivion.

And now reports:

(1) Initial Jobless Claims Plunge To Lowest Since The '60s
by Tyler Durden   Thu, 07/19/2018 - 08:36

(2) More Winning: American Jobless Claims Drop to Lowest Level Since 1969
By John Binder  19 Jul 2018Washington, D.C.

“The number of Americans claiming unemployment has now dropped to the lowest level as of last week since December 1969, the Bureau of Labor Statistics reports. Jobless claims decreased by 8,000 to 207,000 as of July 14.”

The tax cut, bureaucracy cut, spending cut on certain programs like climate junkets and bureaucracies, other market-oriented reforms in the US must have contributed to this generally positive development.

Friday, July 20, 2018

BWorld 231, Lessons from the Energy Policy Development Program

* This is my column in BusinessWorld last July 12, 2018.

Next week, the Energy Policy Development Program (EPDP), a USAID-funded project implemented by the UP Economics Foundation, will have its last lecture and the launch of a book that incorporates conferences, lectures, and seminars the program has sponsored over the last four years.

Among the EPDP lectures that I enjoyed — all held at the UP School of Economics (UPSE) — were those given by the private sector players. Here are some key points they made followed by my comments.

1. “Natural gas: Addressing the energy trilemma and powering our energy needs” by Mr. Giles Puno, First Gen, August 2017.

“Government support [is] crucial for LNG development… (1) Holistic and defined energy mix to direct planning and investments, (2) Incentivize LNG through fiscal and non-fiscal policies, (3) Secure LNG Off-take, similar to how Malampaya was underpinned.”

The first two points sounded like they were seeking special treatment from government and this is wrong. Setting the energy mix should be done by the market, not government. Government should stay out of building or financing or guaranteeing the construction of the LNG terminal and let interested private players put their money where their mouth is.

2. “Retail Competition and Open Access (RCOA): The Power of Choice” by Mr. Miguel Aboitiz, Aboitiz Power, Sept. 14, 2017.

“Benefits of RCOA for contestable customers: (1) they have more choices with respect to pricing and contract structure, (2) they are not subsidizing other customers, (3) they can choose the type of power they want or they can even decide to contract with a financial entity instead of a power plant owner, (4) they can choose from a variety different contract structures, (5) they are in full control of their generation costs.”

True. RCOA is among the best provisions of the EPIRA law of 2001. It liberalizes and allows the contestable customers to move away from geographical monopolies (private DUs or electric cooperatives) and allow them, to choose from three dozen or so retail electricity suppliers (RES).

3. “Enhancing Fair and Economic Competition” by Dr. Francisco L. Viray, Phinma Energy, Oct. 5, 2017.


Above must be balanced in real time for the power system to be stable (Power System Stability), and it is consistent with ‘Causer’s Pay Principle.’”

The above equation is a big and explicit warning to advocates of “renewables only” lobbyists, activists, and developers. Demand is high in the Philippines with its 106 million population that expands 1.7 million a year, net of death and migration. Losses from scheduled maintenance shutdowns and unscheduled shutdowns can be substantial, especially if the power plants are old and aging. So high demand plus high losses would require high supply at stable, predictable capacity.

4. “Optimization of Supply” by Mr. Chrysogonus F. Herrera, MGen, Oct. 26, 2017.

“Where do we go?

(1) Let the market under EPIRA sort itself out (after all, it is working and gestating new investments); (2) A mandated “Generation Mix Policy” is a straitjacket to be avoided. It does not help reduce rates; (3) Coal is indispensable in keeping rates low and supply reliable; (4) Cheap and reliable power secures economic development and global competitiveness.”

Amen to Chris’ points. The EPIRA, the Wholesale Electricity Spot Market (WESM), and RCOA are all working and running full steam.

A government-mandated power generation mix is wrong and often cronyism-inspired. Let the electricity consumers decide what is good and desirable for them. Make sure that cheaper and reliable electricity supply is available.

5. “Delivering Clean and Green Energy to the Philippines” by Mr. Stewart Elliott, Energy World Group (EWG), Nov. 23, 2017.

“Pagbilao LNG Hub Terminal and 650MWCCGTpowerplant…”

Throughout his presentation, Mr. Elliott never mentioned things like “government fiscal and non-fiscal incentives for LNG terminal and development” at all. He just wants stable long-term policies not subject to arbitrary changes midway. Amen to this kind of investment attitude.

6. “Optimal Investment Decisions in Generation” by Mr. Eric T. Francia, Ayala Energy, Feb. 8, 2018.

“Investment Imperatives: (1) Diversify portfolio, (2) Further expand coal plants for baseload needs, (3) Explore gas/diesel for intermediate, peaking and ancillary, (4) Continue investments in renewables and build capabilities in storage, (5) Geographic diversification, (6) Strengthen balance sheet and multiple sources of funding, (7) Ensure cost competitiveness.”

This is practical advice from one of the country’s biggest business conglomerates, the Ayala Corp. It recognizes the practicality of coal and gas while pushing their corporate advocacy for renewables with storage.

7. “Cheap Electricity for a First World Philippines: The 24/7 Solar-Storage Revolution” by Mr. Leandro Leviste, Solar Philippines, Feb. 22, 2018.

“Solar is now the least cost for all peaking, mid-merit, and baseload requirements, and will thus comprise the vast majority of additional power generation capacity from hereon in the Philippines.”

Far out. If solar is indeed the “least cost,” we should have abolished the feed-in-tariff (FIT) scheme of guaranteed high price for 20 years for solar, from P9 to P10+/kWh when coal-gas prices are only P4-5/kWh and can be reduced to P2/kWh at off-peak hours.

The continued demonization of coal — articulated explicitly by Mr. Puno and Mr. Leviste in their presentations — is based on emotionalism and desire for government partiality, for two reasons.

One, our coal use until 2017 remained small compared to our Asian neighbors, only 13.1 mtoe or less than 1/2 of Vietnam, only 1/3 of Taiwan, 1/4 of Indonesia, 1/7 of South Korea, 1/9 of Japan, and 1/144 of China. And yet that small coal consumption provided 50% of total electricity production in the Philippines in 2017.

Two, even in developed and “green” Asian economies like Japan, South Korea, and Taiwan, solar and wind energy production remains very small, which speaks of their non-reliability and non-dependability and may even be part of economic underdevelopment, if pursued to the max (see table).

The market and the consumers, not government, not the environmental activists and renewables developers, should set the appropriate energy mix. This is one of the important lessons, explicit or implicit, that one will derive from attending or reading the various lectures at EPDP.

See also:

Weekend Fun 65, Go Bato sa Senado

I got this photo from Florin/Pilo Hilbay's fb and tw, very witty:

may sungay.
mabilis tumakbo."

The term "mabilis tumakbo" (runs fast) refers to his plan to run for Senator next year. He denies he plans to run, of course, but the photos, streamers and events are louder than his denial.

Bong Go is the personal assistant of President Duterte now, and even when he was the Mayor of Davao City. Part of the Davao group of politicians and bureaucrats.


Another Duterte official, also a Davao official, is former PNP Chief Gen. Bato dela Rosa, now head of Bureau of Corrections (BuCor). He is retired from PNP so he went to another bureaucracy.

Go-Bato, Davao group ito, trusted two ni Duterte ito.

See also:

Tuesday, July 17, 2018

BWorld 230, US-China ‘trade war’ and PH federalism

* This is my column in BusinessWorld last July July 9, 2018.

Among the big topics that dominated last week’s global and national reports are (a) US-China ‘trade war’ which technically means equalized high tariff (EHT), and the hard push for Charter change towards federalism by the Duterte-appointed Constitutional Commission (ConCom).

The US-China EHT or ‘trade war’ officially started last Friday, July 6. The US slapped 25% tariffs on imports from China worth $34 billion and the latter immediately slapped a higher tariff on equivalent value of imports from the US. There will be a follow up EHT from the US up to $550 billion worth of imports from China and the latter is expected to have its counterpart.

Meanwhile, funds have fled stock markets of countries that are expected to be net losers of this trade spat. China’s Shenzhen and Shanghai are the worst-performing stock markets in the world this year, having suffered a -19.1% and -16.9% drop in index values year to date (Ytd) or from January 02 to July 06, 2018, largely because of this EHT spat.

In comparison, the US’ DJIA experienced only a -1.5% decline year to date.

It is worth noting that the Philippine Stock Exchange (PSEi) is the 2nd worst-performing stock market in the world after China.

Several business uncertainties in the Philippines this year helped pull down the PSEi: (a) sharp rise in inflation rate after TRAIN 1 law, (2) changes in fiscal incentives and corporate income tax under TRAIN 2 bill, (3) wholesale closure of Boracay island for six months, (4) political uncertainties due to rabid federalism and Charter change hard sell by the government, (5) “Iglesia ni Duterte” vs “idiotic God” pronouncements, among others.

The PSEi level is also -1.2% compared to past three years, indicating that the gains under the previous administration have been wiped out under the Duterte government. This further shows that the federalism hard sell is misguided for at least three reasons.

One, a big and bureaucratic national government on the top will have another layer of big and bureaucratic state governments in the middle, aside from expanding municipal/city and provincial governments.

Two, federalism is no guarantee for economic prosperity nor political maturity.

While several developed economies have federal structures, the same can be said about some failing economies.

And three, the current Congress that will finalize the contents of the revised Constitution is too handicapped by clear lack of independence from the Duterte presidency. Thus, potential desires by this administration for continued stay in power beyond 2022 can easily be granted by Congress.

Trade protectionism is wrong as it penalizes the consumers while fattening the protected local players. “Trump protectionism” is similarly ill-intentioned but “Xi/China protectionism” is even worse. A move towards equalized low or zero tariff is needed.

The hard sell for Federalism is wrong as it will penalize local businesses and entrepreneurs with more national and local/state taxation and regulations while fattening many national and local/state agencies and bureaucracies. A move towards shrinking national taxes and agencies should have been done before federalism is pushed.

See also:

Monday, July 16, 2018

One News 2, Interview on inflation, TRAIN, BBB, cha-cha, federalism

Last Friday, July 13, at One News, Cignal TV, 4:30-5:30pm, "The Chiefs" hosted by Ed Lingao and Roby Alampay. Panelists were NEDA Sec. Ernesto Pernia, fellow BWorld columnist Andrew Masigan and me. Topics covered were the high inflation rate, BSP and interest rates, TRAIN 1 and TRAIN 2, Build-build-build (BBB), charter change and federalism.

Among the points that I articulated are the following:

1. TRAIN 1 law (the various tax hikes to more than cover the "revenue losses" of personal income tax (PIT) cut) is the main reason why the jump in PH inflation rates in 2018 is the highest in East Asia. Sec. Pernia disagreed of course, blaming the high world oil prices, Peso depreciation, high anticipation by businesses of price spikes, etc.

2. TRAIN 2 bill now in Congress should aspire for corporate income tax (CIT) cut from 30% to 15%, not just 25% as planned by the DOF, then the various reduction or abolition of various fiscal incentives can be done.

3. VAT should decline from 12% to only 8%, then reduce significantly the number of exempted sectors.

4. PH economic growth is a given, inevitable even if our President is a dog or a horse. Main reason is our big and young population, 106 M people with net increase of 1.7 M a year, net of death and migration. It is a big number of consumers, big number of workers and entrepreneurs.

5. BBB is possible without tax-tax-tax that we have under TRAIN law. We have NLEX, SLEX, NAIAEX, TPLEX, etc. without tax hikes. The key is to retain integrated PPP scheme, not hybrid PPP as being done by the Duterte administration. This shift to hybrid PPP is mainly to favor China and therefore, is a corrupt policy. Sec. Pernia denied this.

6. Charter change has been proposed mainly to change the economic protectionist provisions of the 1987 (current) Constitution but it is relegated now. The draft Constitution is heavily focused on political changes and little on the economic provisions.

7. Federalism is pushed hard not to spur economic development as claimed by ConCom and the Duterte administration, but to spur more political development. The current big national government and current expansive LGUs (city/municipal, provincial governments) is not enough, they will create a new layer of elected and appointed officials of state governments in the middle.

Thanks Roby for the invite, thanks Andrew for these pictures.

See also: One News 1, On prohibition of sugary products in stores near schools, July 14, 2018

Update, July 16:

Posted by One News in their fb page,

BWorld 229, CoA should consider benefits of Malampaya project

* This is my article in BusinessWorld on July 05, 2018.

When developing economies attract multinational companies, they reap benefits. These developing economies get to have more commodities and services that otherwise would remain untapped for a long time. And, as a result, they also earn more revenues, taxes, and royalties even if these economies spent very little. Moreover, technology transfer from multinationals to developing economies is enabled as local professionals are hired to operate, maintain, and upgrade facilities.

In the case of Malampaya gas to power project in offshore Palawan, the Philippine government has attained these and other advantages: (1) more electricity production from domestic natural gas, (2) more revenues via Malampaya royalties, 60% of gross production amounting to more than P400 billion over the last 16 years (see table).

The Department of Energy’s (DoE) actual count of royalties from 2002 to 2017 is P424.7 billion. My computation above of P459.6 billion is only an estimate from a simple multiplication of $ million by the average exchange rate.

The third benefit is that some of Malampaya gas is used to power compressed natural gas (CNG) buses that ply the Manila-Southern Luzon routes. As a result, less pollution is produced.

The fourth benefit from the project is that it employs skilled Filipino professionals and engineers. Onshore Filipino staff also have the knowledge to build smaller platforms for offshore gas rigs.

With these benefits in mind, these two reports among others caught my attention:

“Shell focused on tax fight, not Malampaya extension” (BusinessWorld, Dec. 8, 2017).

“CoA: Malampaya must reimburse government P146 billion” (Philippine Star, May 17, 2018).

Under Service Contract 38 with the Department of Energy, sharing of revenues is 60-40 for the Philippine government and the Malampaya consortium, respectively. The Philippine government spent almost nothing in the high-risk and very costly exploration and drilling for gas in deep waters far out from Palawan mainland. The government just collects 60% of total revenues because it is the government.

The Malampaya consortium spent huge amounts of money and technology, risked their people in the exploration, drilling, development, and laying down heavy pipelines in seabed hundreds of kilometers to Batangas power plants. And they get only 40% of the revenues.

The consortium is composed of three companies with their respective equity participation in parenthesis: Shell Philippines Exploration B.V. (SPEX, 45%), Chevron Malampaya LLC (45%), and Philippine National Oil Co.-Exploration Corp. (PNOC-EC, 10%).

The Commission on Audit (CoA) however, has ruled several years ago that aside from surrendering upfront 60% of gross revenues to the government, the consortium must pay income taxes to the BIR/DOF from their 40% share.

That kind of thinking is scandalous for the following reasons.

One, the law where SC 38 was based, Presidential Decree (PD) 87, “The Oil Exploration and Development Act of 1972,” gives the contractor, the Malampaya consortium, the privilege of bundling the income tax within the 60% share of government.

Two, under PD 87, the government assumes zero investment cost and risk. So if the consortium did not discover huge amounts of natural gas from Malampaya, the government was not required reimburse them for expenses.

Three, it does not recognize that aside from the huge money the Philippine government receives yearly from the consortium, electricity supply is significantly bolstered especially in the Luzon grid. Coal contributes 50% and natural gas contributes another 22% of total electricity production in the Philippines in 2017. These energy sources are stable 24/7 and are not intermittent, unstable, and unreliable such as solar and wind power.

Four, the move by CoA discourages present and future investments in high risk, capital-and technology-intensive sectors that some government agencies can change rules somewhere and demand huge money midstream.

It is good that the DoE, DoF and Office of Solicitor General (OSG) in previous administrations and even in current administration did not think this way.

But the CoA remains persistent and has ordered the consortium to pay P146.8 billion or nearly $3 billion of “unpaid income taxes” from 2002 to 2017.

CoA should stop these moves and consider the many other advantages of the Malampaya gas to the Philippine economy.

There should be more big private investments in the country like the Malampaya gas development, less politics, and intrusive government bureaucracies that discourage investments.

See also:

Sunday, July 15, 2018

Elon Musk the socialist vs Elon Musk the anti-socialist

This is not from The Onion, this is from his twitter account, I simply copy-pasted.

A friend suggested that perhaps Elon associates himself with "voluntary socialism". For me that term is an oxymoron, a contradiction in terms, it does not exist. Socialism by nature is never voluntary, it is done by coercion, by force. The state will socialize the means of production -- land, factories, etc, by force and legislation.

Voluntary giving like the Gates Foundation, many others is the one that is voluntary. No one put a gun on the heads of those people and their donors to give away their own money, those folks just think that being the "richest man in the cemetery" does not make sense, so they give away their money, time and other resources while they are still alive.

Notice also that he has different definitions of "socialists" in just 2 days. June 15 socialists means people with "depressing, no sense of humor" and June 16, socialists means people seeking "greatest good for all."

Meanwhile, here's the latest paper from zerohedge about the man.

Liberal Meltdown: Furious Libs Outraged After Elon Musk Revealed As One Of Top Republican PAC Donors

by Tyler Durden, Sat, 07/14/2018 - 21:23