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

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

BWorld 228, Fare control makes it difficult to get a ride

* This is my column in BusinessWorld last July 02, 2018.

“For every action, there is an equal opposite reaction.”
— Isaac Newton (1642 — 1726) 3rd law of motion.

“Every government intervention creates unintended consequences which leads to further intervention.”
— Ludwig von Mises (1881-1973, Austrian economist)

My addition to the two related statements above is: For every government intervention and taxation, there is an equal opposite distortion.

And this is what exactly happens with a series of franchise, price, and surge control and then the per-minute charge control policies of the Land Transportation Franchising and Regulatory Board (LTFRB) in its regulation of transport network vehicle services (TNVSs) and transport network companies (TNCs).

First, franchise control.

When Uber exited Southeast Asia last April and was acquired by Grab, it had 19,000 Uber drivers in the Philippines. However, only 11,000 were absorbed by Grab because LTFRB only accredited this number. Until June this year, some 6,000 former Uber drivers were still waiting accreditation but LTFRB franchise control does not give them the chance. Some 2,000 ex-Uber drivers must have given up.

Fare control makes it difficult to get a ride

As a result, after the acquisition, ride requests reached 600,000 per day on average, making it difficult for everyone — even previous Uber users — to get a ride.

Second, price and surge control.

Even when Uber was operational, LTFRB put a cap on surge pricing on both Uber and Grab to 2x, later down to 1.5x, and this resulted in passenger inconvenience as their waiting time to get a car during rush hours became longer.

When the price is too low, the number of drivers to supply the demand is also low. A notice of “no cars available” shows up and riders’ waiting time to get a ride gets longer, if ever the car shows up. Which might mean cancellations of important meetings or inability to bring a sick person to the hospital.

When the price is too high, the number of riders will decline, or they will take the regular taxi or cheaper but lesser-known (good or bad) companies. If the trip is not very important, they may choose to postpone their trip and wait until prices decline.

Third, per-minute charge control.

TNVS charging P2 per minute is a mechanism to offset the big decline in surge pricing to only 1.5x. So even if the route and the pickup and drop-off areas have heavy traffic or are flooded, drivers will have additional incentive to take that trip. Abolition of per-minute charging therefore removes the incentive and hence, passengers will be unable to get a ride.

These three ugly interventions and regulations by LTFRB are anti-commuter and directly contradict its stated mission, “Ensure that the commuting public has adequate, safe, convenient, environment-friendly and dependable public land transportation services at reasonable rates.” Cheap but not available service is not desirable.

Now there is a fourth ugly intervention by the LTFRB. It disallows Grab the P2/minute charge but allows new players to charge that amount.

This new policy of LTFRB violates the rule of law, that a law should apply to all players with no exception. What the agency exhibited therefore is favoritism of new players while harassment of existing player. In which case, LTFRB can also be called as the “Land Transport Favoritism and Regulations Bureaucracy.”

Only about 2.7% of the commuting public use ride-hailing services, the rest use mass transportation (jeepney, bus, UV express, MRT, LRT) plus tricycle, trisikad, and regular taxi. Why is the LTFRB focusing on that segment?

LTFRB should be ashamed of its franchise control, surge control, per-minute charge control, and TNC favoritism. It should reverse these policies. It should (a) expand the number of TNC drivers, (b) allow higher surge pricing, and (c) allow the P2/minute for all players, and not play favorites.

See also:

Saturday, July 14, 2018

One News 1, On prohibition of sugary products in stores near schools

Last Tuesday, July 10, I was one of several guests on "Agenda" hosted by Cito Beltran. It was shown at 8-9am, replay at 12-1pm, then 4:30-5:30pm. Very quick interview by , about 2 minutes, Cignal TV.

Banned within school cafeteria/canteen is fine because it is the school's prerogative what can be sold/not sold inside its premise/campus.

Bigger issue is if these should also be banned in stores outside the school gate/wall, about 100 meters away from the gate.

I said that the latter move is OA and anti-entrepreneurship.

One, not all buyers of those stores are students. Depriving the stores to sell those items is lousy.

Two, there are several prohibitions already existing, like stores and shops cannot sell cigarettes and alcohol products to students and people below 18 years old. If this prohibition of selling sugary drinks and food is adopted, next will be prohibitions in selling confectionery, candies, ice cream, chocolates, cookies, soda, etc.

Government nannyism can be ugly.

BWorld 227, Inflation, taxation, and protectionism

* This is my column in BusinessWorld on June 28, 2018

Fans, allies, and supporters of Dutertenomics continue to cite high world oil prices as the reason for the Philippines’ rising inflation rates.

As expected, they maintain that tax hikes imposed by the newly implemented revenue legislation — Tax Reform for Acceleration and Inclusion (TRAIN) — have little impact on inflation.

The numbers for many countries say otherwise.

All countries were affected by high world oil prices but only a few of them have introduced higher taxes starting January 2018, unlike the Philippines. The result is indeed ugly for Dutertenomics to accept (see table).

Even with these results, certain adjustments — if implemented — will have additional inflationary pressures.

These include:

One, fare hikes on public land transportation such as jeepneys, taxi, ride-hailing vehicles, UV expresses, and buses.

Owing to higher oil prices combined with increased taxes, several vehicle operators may be forced to cut costs elsewhere — buying cheaper spare parts, for instance — if they aren’t given the chance to raise fares, at least until end-2018.

Two, wage hikes by many companies that are reeling from the uncertainties of TRAIN 2 on the removal of various fiscal incentives.

Three, another round of oil/LPG/coal tax hikes by January 2019 or half-year away.

One option that Dutertenomics and its allies has not seriously considered is the reduction of VAT from 12% — the highest in ASEAN, higher than those in Japan, South Korea, Taiwan, China, Australia — and reduce the number of exempted sectors. Prosperous Hong Kong has zero VAT or gross sales tax (GST); Malaysia has also abolished its 6% GST as a result of Mahathir’s campaign promise. Cutting VAT from 12% to 8% (Taiwan has only 5%, Singapore has 7%, Japan has 8%) or even 10% will be a good anti-inflation policy.

On the positive side, Dutertenomics is pushing for the abandonment of rice protectionism this year, liberalizing trade imports by converting quantitative restrictions into lower tariff, no cap or maximum on rice importation. They project that rice prices can go down up to P7/kilo and hence, food inflation will follow.

This is a good move but pushed rather late instead of being legislated side by side with TRAIN 1. But it is better late than never.

Besides rice, government should also consider freer trade in many other commodities — clothes, shoes, appliances, gadgets and consumer electronics, oil, etc.

And we go to the subject of protectionism.

To stop or reduce all those accusations of who’s protectionist, (1) everyone or all countries should go for zero or near-zero tariff, zero or near zero subsidy, and minimal non-tariff measures/barriers (NTM/NTBs). And (2) let this demand will come from us, consumers, not from Trump or any head of state or politician.

Free trade, zero or near-zero tariff, is beautiful and is currently done by 10 member countries within the ASEAN, done by 28 member countries within the European Union (EU).

Free trade means cheaper commodities — cheaper food and medicines, cheaper oil and gas, cheaper mobile phones and computers, cheaper cars and motorcycles, etc. — and low inflation (even deflation for some), more consumption of more goods by the people.

On the global scene, here is one example.

Tariff rates on imported cars are 25% in Canada, 10% in the EU, and 2.5% in the US.

When Trump challenged equalized zero tariff for all, the others got angry. When Trump challenged equalized high tariff, the others remained angry.

So one big problem is that while people enjoy more choices via free trade, they also produce all sorts of protectionist excuses why free trade cannot be done in their country then lambast some leaders and countries for being protectionist. Double talk and trade hypocrisy is very evident here.

There are net gains (positives outweigh the negatives) from free trade and there are net pains from protectionism.

See also:

Weekend Fun 64: The Duterte Kiss

Last month when President Duterte went to Seoul, he spoke before Filipinos. After his speech, he invited some Filipinas, Duterte supporters of course, to come up stage. After a brief chit-chat, he kissed one Pinay lips to lips on stage, in front of local and foreign media. The Pinay is married to a S. Korean.

And many versions of the "Duterte kiss" have sprouted, like this.

Another satire news, not a real newspaper. Mocha Uson is a former bold star, she has lots of nude photos on the web, and now a Duterte official.


See also:
Weekend fun 61, Math jokes, March 13, 2016