Saturday, February 29, 2020

BWorld 414, GDP and electricity demand

* My article in BusinessWorld last Tuesday, February 24, 2020.

Last week I attended three lectures. First the talk of Fritz Ocampo, Chief Investment Officer of Banco de Oro (BDO), titled “The Philippines: back on track” on the evening of Feb. 20 sponsored by the Rotary Club of Rizal West (RCRW) and held at the Elks Club, Makati. I was invited by a former clubmate, Past President Patty Michener. Then, on Feb. 20 and 21, media briefings by the Independent Electricity Market Operator of the Philippines (IEMOP) and Department of Energy (DoE), respectively.

Fritz is a dynamic guy who served as President of RCRW and District Secretary of Rotary International District 3830 twice. He showed rigor in his contention that projected GDP growth for 2020 will be 6.5%, despite the COVID-19 scare and economic dislocations.

Nonetheless, I do not share Fritz’s and BDO’s optimism. I think a GDP growth of 5.0% to 5.5% this year is more realistic. Consider these two points: One, a decline in tourism revenues. The Department of Tourism and the National Economic and Development Authority (NEDA) said the tourism industry is projected to lose up to P23 billion a month due to the persisting COVID-19 scare. Visitors from China reached 1.2 million in 2018 and probably 1.5 million in 2019. Many airlines, hotels, resorts, and shops are already affected.

Two, there is already a growth deceleration trend from 2016. The COVID-19 scare has further dampened household consumption, private investments, and net merchandise exports.

The IEMOP figures for peak demand do not consider yet the effects of COVID-19 scare. Below are their numbers including the Effective Spot Settlement Price (ESSP) for customers at the Wholesale Electricity Spot Market (WESM). I added a column on GDP growth trend (see table 1).

I think the IEMOP peak demand projection of 14.19 GW is high. Aside from lower GDP growth this year related to COVID-19 scare, electricity demand is projected to be lower due to the current transition to La Niña where we can expect more rain and colder temperatures.

The temperature anomaly (deviation from the average) for the Niño 3.4 region — the widest, centermost part of Pacific Ocean — in hot months are as follows, numbers in degrees Centigrade (C), data from Australia Bureau of Meteorology (BOM):

March to July 2018: -0.6 to +0.5 C (cold to warm).
March to July 2019: +0.8 to +0.5 C (generally warm).
March to July 2020: +0.8 to -0.5 C (warm to cold).

Taken together, the projected demand can be slashed by roughly 200 MW. This is shown under “Peak Demand B” below. We compare the supply margin of the three hottest months April — June under two scenarios, IEMOP’s and this paper’s. Peak supply 1 (PS 1) has an allowance for 1,200 reserves and it can aptly cover the projected margin by June of -67 MW.

If we take Peak Demand B scenario, the supply margin under PS 1 is still a comfortable +133 MW but when the reserve is raised to 2,000 MW, the margin turns into a deficit (see table 2).

The DoE briefing focused on the Luzon grid and they foresee potential “yellow alerts” for three weeks, from late May to mid-June this year where the power supply will likely be below the contingency reserve.

DoE has lined up several measures to address potential supply gaps. Among them: publishing the Grid Operating and Maintenance Program (GOMP), increasing import from the Visayas grid, expanding NGCP transmission from more power plants, getting more ancillary service contracts, resuming the Interruptible Load Program (ILP), and power savings from the Energy Efficiency and Conservation (EEC) program.

These are good moves but I don’t think they enough. We need new peaking plants and not just old barges, and we need to remove the disincentive of power price control, especially the secondary price cap at WESM. I raised these during the open forum at the DoE press conference. The Energy Regulatory Commission should realize that “cheap but unavailable” power is more costly than “expensive for few hours but available” power.

See also:

Covid-19, Some reflections

Some random notes here about the ongoing Corona Virus Disease 2019 (CoVid-19), previously called novel CoVi (nCov).

1. Many governments around the world seem to be busy with various mundane concerns when deep health and econ troubles are staring at them frontally. See the DOH and even WHO, pushing drug price control of innovator drugs, penalizing creators of newly invented medicines when it's precisely those innovator drugs we need to address new diseases. They are busy regulating products blamed for non-infectious, non-communicable diseases (NCDs) when real dangers are infectious and communicable diseases like Covid. If we don't die of infectious diseases or accidents, then we should die of NCDs. It is crazy to say we should live forever.

2. I see people saying that Covid is bad for people but good for the environment, implying some gratefulness for this horrible infectious disease because fossil fuel use worldwide is declining. Garbage logic. 

See this for instance,

“fewer cars, motorcycles, and buses transporting students and employees would translate to lower fossil fuel consumption. This, in turn, could provide our environment with a much-needed and long-delayed breather from the carbon rampage of industrialization.”

3. Old illogic -- fossil fuels are bad, there should be more oil taxes, more infectious diseases like Covid, etc. Lousy. If people really believe that fossil fuels are bad, they simply stop using it, don't wait for Covid. No cars, no jeepney or buses, no airplanes, etc that use fossil fuels. Use skateboards, bicycles, good running shoes, use solar planes or giant kites. To demonize fossil fuels then use lots of fossil fuels is 100% double talk and hypocrisy.

4. Covid is bad but what's worse is the hysteria. See this article,

The most dangerous thing about coronavirus is the hysteria
It is the latest phenomenon to fulfil our weird and growing appetite for doom
Ross Clark     29 February 2020    9:00 AM

“There is something more to the Covid-19 panic. It is the latest phenomenon to fulfil a weird and growing appetite for doom among the populations of developed countries. We are living in the healthiest, most peaceful time in history, yet we cannot seem to accept it. We constantly have to invent bogeymen, from climate alarmism, nuclear war and financial collapse to deadly diseases. Covid-19 has achieved such traction because it has emerged at just the right time. At the end of January, Brexit had just been completed without incident. The standoff between the US and Iran — which preposterously led the ‘Doomsday Clock’ to be advanced closer to midnight than during the Cuban missile crisis — fizzled into nothing. The Australian bush fires, which caused an explosion in climate doom-mongering (even though the global incidence of wildfires has fallen over the past two decades) had largely gone out. What more was there to worry about?"

Finally, from my friend, Willis Eschenbach:

Last winter's flu season - 80,000 deaths
2009 H1N1 (swine flu) pandemic -12,469 deaths
Coronavirus - 1 death

Last winter's flu season - 646,000 deaths
2009 H1N1 (swine flu) pandemic - 575,400 deaths
Coronavirus - 2,462 deaths

Take a deep breath, wash your hands often, relax.

Saturday, February 22, 2020

BWorld 413, Poverty and Duterte BBB

* My column in BusinessWorld last Thursday, February 20.

On Feb. 5, I attended the lecture by Dr. Dennis S. Mapa, National Statistician and head of the Philippine Statistics Authority (PSA), and Professor at the UP School of Statistics (UPSS). His talk was “Poverty in the Philippines: Evidence from the 2018 Official Poverty Statistics,” sponsored by the Department of Economics of the Ateneo de Manila University. I was invited by Dr. Majah Ravago who used to teach at UP School of Economics (UPSE) and recently migrated to Ateneo.

The 2018 poverty data is significant because the Family Income and Expenditure Survey (FIES) 2018 on which it was based, has a huge sample size — 180,000 households, responding to a questionnaire of 81 pages long (50 on expenditures, 24 on income including entrepreneurial activities, and seven on sociodemographics), and the average interview time is four to six hours — Wow! FIES is done every three years.

To summarize, poverty incidence among families has declined from 18% in 2015 to only 12% in 2018; poverty incidence among individuals declined from 23% in 2015 to 17% in 2018 (see Table 1).

I have observed since many years ago that poverty incidence in the country has been declining and previous poverty data would be exaggerated. Before, the poor would ride bicycles or horses, now they ride motorcycles, e-bikes, second- or third-hand cars. Before, the poor used slow mail to communicate, now they use smart phones and communicate via Facebook, Instagram, e-mail, and SMS. Before, farmers used carabaos or hand tractors to plow their field, now they use or rent rotor tractors and harvester + thresher machines that significantly reduce the time and cost of harvesting their crops.

Credit goes to continuing market competition and technological innovation and modernization in cars and mobility, consumer electronics and agriculture machinery. The pessimists of “the poor getting poorer” just fan emotional slogans that are not based on hard facts on the ground.

After Dennis’ lecture, PSA and Ateneo signed a Memorandum of Agreement (MoA) that will allow the university’s faculty, staff, students, and researchers access to the public use files (or anonymized raw data) of the various census and surveys being undertaken by the PSA. I assume that University of the Philippines School of Economics (UPSE) and other colleges will have a similar privilege soon.

This week I saw the paper by Dr. Epictetus E. Patalinghug, “Too Much and Too Fast? A Look at the Philippines’ Infrastructure Build Up Program,” UP Professor Emeritus Research Paper July 2019. Dr. Patalinghug was my teacher at UPSE in early 1980s before he transferred to teaching at the neighbour building, the UP College of Business Administration. He was also among my wedding godfathers along with another former UPSE, Prof. Ruperto Alonzo (RIP).

Among the data he presented was about these huge build-build-build (BBB) projects of the Duterte administration and the promises of early completion that do not coincide with their delayed construction (see Table 2).

The paper is 15 pages long, including four tables and references. The Duterte BBB team of the Department of Public Works and Highways, the Department of Transportation, the Department of Finance, the National Economic and Development Authority, etc. should read it. Dr. Patalinghug concluded his paper with this note:

“… absorptive capacity constraints has created implementation bottlenecks in the BBB program and has reduced the success rate and impact of individual projects… Given the current pace of project implementation, most of the BBB projects will be completed beyond 2022. The next administration will experience several ribbon-cutting ceremonies, as much as the current administration has experienced several ribbon-cutting ceremonies on projects initiated by the previous administration.”

Recall also the paper by another former teacher of mine at UPSE, Dr. Emmanuel de Dios, published on Feb. 10 (see where he observed that “investment during the first half of Duterte’s term has been the least efficient in producing growth. The ICOR (incremental capital-output ratio) of 4.7 for 2017-2019 is the highest it has been over the past 15 years.”

A high ICOR means high waste in public investments. Like destroying not-so-ugly roads and building new roads on the same spot and flaunting this as BBB spending.

The administration’s BBB are mostly under “hybrid PPP” schemes and hence, would require lots of tax-tax-tax and borrow-borrow-borrow. Bad policy considering that the original integrated PPP scheme would optimize private investments’ construction plus O&M later, with no need for more taxes and borrowings.

See also:

Projected electricity demand in March - Oct 2020

The projected weather phenomena starting March to October 2020 is shown below. The estimated temperature anomaly (deviation from the average) are as follows:

March-July 2018:  -0.6 to +0.5 C   (cold to hot)
March-July 2019:  +0.8 to +0.5 C  (generally hot)
March-July 2020:  +0.8 to -0.5 C.  (hot to cold)

Implications for electricity demand forecasting in the Luzon grid these coming hot months -- we expect cooler weather, rainy months this year and hence, lesser power demand.

Thursday, February 20, 2020

BWorld 412, Why PSALM and NEA should go

* My article in BusinessWorld last Tuesday, February 18.

Recently there was a story on the huge debt of the Power Sector Assets and Liabilities Management Corp. (PSALM) because it could not collect P59 billion from independent power producers (IPPs) and electric cooperatives (ECs). That is a big amount and PSALM continues to collect various universal charges (UC) for the various stranded costs and debts of the National Power Corp. (NPC).

The UC and PSALM were created by the EPIRA law of 2001. PSALM has three core functions: (a) privatize NPC generation and Transco transmission assets, (b) manage liabilities of NPC debts, obligations of electric coops to NEA and other agencies, and (c) administer the collection and disbursement of UC funds.

The current UC rate of nearly 38 centavos/kWh is big and UC remittances received by PSALM are big, and it petitions the ERC to avail of huge funds (see Table 1).

The four UCs components are as follows:

1. ME — a subsidy for electricity supply in small island provinces and far-flung areas.
2. SCC — excess of the contracted cost of electricity by NPC over actual selling price.
3. SD — financial obligations of NPC still unliquidated by privatization proceeds of NPC assets.
4. EC — for watershed rehabilitation and management.

PSALM is administering a huge pile of cash from us electricity consumers — P183 billion as of September 2019. Two sore thumbs sticking out here.

One, the ME subsidy for small island provinces and far away areas seem like they will go on forever when they should have been eliminated. Debureaucratize the construction of their own baseload, 24/7 power plants and just augment with big gensets running on diesel during peak hours. Then NPC-SPUG (small power utility group) can be privatized and/or eliminated as well.

Two, those old SCCs and SDs by NPC have been there since the early 1990s, and after nearly three decades they are still there and the UC rates do not seem to decline through time — Wow! PSALM, being a generation player managing and operating unprivatized NPC plants, can “sell low” power at a loss then raid the UC funds to recover its losses and appear to be financially healthy. This is lousy and creates a moral hazards problem. PSALM will have little or no incentive to hasten the privatization of the remaining NPC plants. It can become a forever bureaucracy funded by forever UC subsidies, and it can distort competition in the Philippines electricity market. PSALM should go.

On ECs, they are created by politics via Congressional franchising, monitored and even pampered by politics via the National Electrification Administration (NEA). With such high political backing, many ECs are either mismanaged and/or remain inefficient, with persistent blackouts for their franchise areas. Some also do not pay their gencos. ECs run to the NEA for loans instead of commercial banks. There are huge taxpayers subsidies given to NEA annually, mostly for sitio electrification program (SEP, see Table 2).

Around 2017, the Department of Energy identified 17 ECs that are chronic failures when it comes to providing satisfactory services to their customers — ALECO (Albay), CASURECO III (Camarines Sur), FICELCO (Catanduanes), MASELCO (Masbate), OMECO (Occidental Mindoro), ORMECO (Oriental Mindoro), and PALECO (Palawan). Other problematic ECs are PELCO (Pampanga), BASELCO (Basilan), LASURECO (Lanao), SULECO (Sulu), and ZAMCELCO (Zamboanga), DANECO (Davao del Norte).

All ECs should become corporations and depoliticized, and be registered with the Securities and Exchange Commission and not with NEA. We now have one-person corporations, so how come these big ECs cannot be corporatized? NEA as regulator-bureaucracy should go, at least its monitoring function of ECs.

Last week, I saw one article entitled “MVP’s monopoly of power and water supply.”

Fake news. There is no such thing as a “monopoly of power,” whether by MPIC or San Miguel or Ayala, etc., whether in power generation, in power distribution, or retail supply. See the list of players at the Wholesale Electricity Spot Market (WESM) for the Luzon and Visayas grids only (see Table 3).

Nationwide, including the Mindanao grid, there are a total of 155 electricity distributors: 21 DUs, 11 Ecozones, and 123 ECs. And to say there is a “monopoly of water supply” is also fake news. There are 584 water distributors nationwide.

See also: 
BWorld 409, Inflation, land transportation, and nCoV, February 12, 2020 

Dr. Raul Fabella on Pres. Lincoln and Duterte

Here is another great article from Dr. Raul Fabella of UPSE. The meme here I got from the web and not part of the original article. Enjoy.

Abraham Lincoln’s class hatred
February 16, 2020 | 11:35 pm

By Raul V. Fabella

... But not if suddenly ants acquire a class consciousness. What would happen if suddenly the worker class of ants decide that its members too should now exercise their innate but hormonally suppressed capacity to bear offspring of their own and decide to feed on, rather feed, the queen? If suddenly the forager class decides that the soldier class are having too much fun at their expense and sabotage the food train? The colony will soon die out. Not by a physical act of God but by an internal virus of class hatred.

Humans are blessed and cursed with an evolved consciousness. With this come resentment and envy — all the vices and virtues that adorn a human being. Like it or not, we are prone to class envy and even class hatred.

And human societies survive by reining in and harnessing these tendencies towards the production of social reserves. Our dams, our factories, our transport systems, they all embody our reserves. It is the brotherhood of men that rechannel these individual proclivities to productive endeavors. Unhinged, these tendencies result in social chaos and social collapse.

Apropos this rechanneling of proclivities, I am inspired by two quotations which embody my own limited understanding of how economic progress gets engendered or aborted:

“The test of government is not whether we add to the abundance of those who have much; it is whether we provide for those who have little.” — US President Franklin D. Roosevelt

“You cannot strengthen the weak by weakening the strong; you cannot help the poor by discouraging the rich; you cannot help the wage earner by pulling down the wage payer; you cannot further the brotherhood by inciting class hatred among men.” — US President Abraham Lincoln

All leaders subscribe to the equity ethic of President Roosevelt. But only a precious few subscribe to the efficiency ethic of President Lincoln. President Roosevelt’s is a commitment to the final outcome of inclusive abundance; President Lincoln’s is a commitment to an efficient path towards inclusive abundance. Lincoln’s efficient path is to rechannel not suppress the varied capabilities of different social classes towards inclusive abundance.

Class hatred is antithesis to the efficient path. Most class hating popular leaders produce economic disasters by an excess enthusiasm for the first to the exclusion of the second. Deng Xiaoping’s miraculous China attests to the wisdom of these two ethics pursued as one. Mao Zedong’s China and Nicolas Maduro’s Venezuela attest to the utter folly of the pursuit of equity without the tempering wisdom of efficiency.

It may surprise you as it did me that my first encounter with the brilliant juxtaposition of the above two quotations was not in some ponderous treatise on economic progress but in President Rodrigo Duterte’s 2016 Presidential Inaugural Address. He implied, even as he confessed ignorance of the other cannons of Economics, that these two quotations encapsulated his own innermost economic philosophy. Though more in hope than in conviction, we were reassured. Economic wisdom couldn’t be more succinctly put. In the first two years of Duterte’s presidency, he kept his promise to leave economic policy to his economic team and the economy obliged.

The third year of Duterte saw a switch in the mindset: the second ethic lost ground to the first. After the opposition Otso-Diretso was squelched in the May 2019 elections, Philippine society has been subjected to a firestorm blowing from along the Pasig River. The “hated oligarchs” has resurfaced straight from Joma Sison’s playbook. Suddenly contracts that have served the public well for decades became “onerous” and were threatened with nullification. Has Lincoln’s dreaded class hatred made a landfall? If so, the arteries of brotherhood and thus the capacity to grow our reserves now face rupture. Venezuela beckons.

In that same inaugural address, President Duterte even bound himself and his underlings to the strict observance of the rule of law and the sanctity of contracts: “My adherence to due process and the rule of law is uncompromising.”

“I order all department secretaries and heads of agencies to refrain from changing and bending the rules on government contracts, transactions and projects already approved and awaiting implementation. Changing the rules when the game is ongoing is wrong.”

This is talking the talk of the rule of law and the sanctity of contracts. Walking the walk and staying the course is another matter, but we hoped. President Widodo of Indonesia, already in his second term, stayed the course on the rule of law towards jobs creation. In the Philippines of the post May 2019 election landslide victory, the walk, if at all, is just a chicken walk. 2016 seems so long ago and so far away.

Wednesday, February 19, 2020

BWorld 411, COVID-19, NCDs and ENDS

* My column in BusinessWorld last February 13.

“How to make the fitting adjustment between individual independence and social control is a subject on which nearly everything remains to be done… To an ordinary man, however, his own preference… is not only a perfectly satisfactory reason, but the only one he generally has for any of his notions of morality, taste, or propriety…”

— John Stuart Mill, On Liberty (1859), Ch. 1 Introduction

As of Feb. 11, the novel coronavirus — now called COVID-19 by the World Health Organization (WHO) — has 44,000+ cases and killed 1,100+ people in China alone. The number of infected and dead people is rising every day and there is no existing proven treatment or vaccine. The nearest vaccine/s would be 12 to 18 months away because there are many processes and clinical trials needed before a new medicine or vaccine can be officially declared as safe and effective.

I checked the website of Pharmaceutical Research and Manufacturers of America (PhRMA), the biggest association of innovator pharma and biotech companies and research institutes in the world, for drugs that are undergoing various clinical trials and research, on top of existing proven medicines (see Table 1).

This should be the result of many years of virtue signalling by the WHO and various Ministry or Department of Health of many countries that the main problem in the world now are non-communicable diseases (NCDs), not infectious diseases like COVID-19. Now we see how unprepared these global and national health authorities are when the real killer diseases come.

And still the WHO and country governments continue with more regulations of products and lifestyles to “protect people from themselves,” the evolving role of a nanny state. Target products are alcohol, tobacco, electronic cigarettes, sugar, and salt/sodium. Despite the fact that anywhere in the world, people are living longer and healthier even if they have rising consumption of alcohol, tobacco, sugar/fatty food and drinks.

I checked the narrative that “more alcohol and tobacco = more sickness and deaths,” the numbers show that it does not hold water. For instance, China and Indonesia have higher smoking prevalence (SP) than the Philippines yet they have higher life expectancy than us. The US, UK, and Japan have higher SP than Thailand yet they have longer life expectancy than the latter (see Table 2).

In Congress, I saw a bill on “Non-Combustible Nicotine Delivery Systems Regulation Act of 2019” and I was surprised at the huge number of new regulations, restrictions, and prohibitions for e-cigarettes or electronic nicotine delivery systems (ENDS), electronic non-nicotine (ENNDS), heated tobacco products (HTPs) as if these are the normal tobacco, alcohol, prohibited drugs.

For example there are outright bans and prohibitions for those ENDS/HTPs: banning their sale within 500 meters from any perimeter of a school or playground; banning advertisement, promotion, and sponsorship; banning use in schools/universities, hospitals, government offices and facilities; banning users who are below 21 years old.

Then there are allowed but highly restricted acts: online trade, advertisements in retailer establishments, flavorings, designated vaping areas (DVAs), product requirements, etc.

Just recently, Congress raised the tax on those products along with regular tobacco and alcohol products. Meaning government wants more tax money from them to fund its universal healthcare (UHC) and related programs, yet government wants less use and sale of these products. Which is which?

On raising the minimum age for vaping or smoking to 21, this is more double talk. At the age of 18, the government currently believes that people are mature enough to vote and determine political leadership at local and national levels, they can drive vehicles and are mature enough not to cause injuries or deaths on the road, they can get married, and so on. Then government changes the rules because people below 21 are still immature and need to be protected from themselves.

More bans, restrictions, and taxation only encourage more corruption and smuggling. The result is more drinking, smoking, vaping, and drugs because the smuggled products are cheaper. JS Mill has warned of the dangers of more social control — government must heed this.

See also:

Dr. Noel de Dios on ICOR under Duterte

Here is a good and factual assessment of the build-build-build and infra spending of the Duterte administration, from Dr. Emmanuel "Noel" de Dios of UPSE. Really cool paper, enjoy.

Waste and means
February 9, 2020 | 9:58 pm

By Emmanuel S. de Dios

…To be clear, however, there are two benefits from investment and particularly infrastructure spending: a Keynesian and a Smithian one. Like other forms of spending, government infrastructure investment raises current GDP immediately because it employs people and creates income. But it is not really unique in this function. The economy could just as easily have been stimulated by raising take-home pay or by reducing taxes on households or firms (i.e., by stoking household consumption or private business investment, or both). This spending effect is the reason Keynes sardonically suggested it would be just as effective a stimulus if government buried bank-notes in unused mine shafts, filled these with city garbage, and invited private business to dig them up “on well-tried principles of laissez-faire.” In short, spending to stimulate the economy does not even have to be productive or prudently chosen. The real distinction — recalling Hicks — between investment and other spending stimuli is that the former is undertaken not mainly to create income today but to raise income for the future.

So, just how good has infrastructure spending been in Duterte’s first three years? Was it based on the prudent selection of projects to implement in order to yield maximal social returns in the future? Or was it motivated primarily by a need to goose the economy in the short term by any means?

No final answer can be given at this point but facts and data and casual observation give enough grounds for concern.

First, some facts. Senator Franklin Drilon’s recent exposé revealed — and the government has not really denied — that only nine out of 75 of the administration’s originally planned major projects had even started more than halfway into Duterte’s term. Understandably, though this should have been anticipated, perennial problems such as right-of-way acquisition, the technical deficit in government agencies, political lobbying, and issues in bidding and contracting reared their ugly heads. The government subsequently “improved” its reported progress simply by drawing up a new list of “flagship” projects, dropping slow-moving ones and adding “less ambitious” and “more doable” ones and some already in progress. This effectively changes both numerator and denominator. Thus, rather than resolve to remove structural obstacles to major projects, the government simply changed its priorities to avoid those obstacles. Smart move.

Still, how does this square with the sizeable increase in public infrastructure spending noted earlier? Well, if it was not flagship projects that were moving, it can only mean projects of lesser importance and lower priority were those being implemented. Indeed, in lieu of movement in “game-changing” flagship projects, the government instead touts its spending on bread-and-butter items such as roads, bridges, and irrigation systems constructed or rehabilitated. All this is well and good in creating employment and prodding the economy today, but — remembering what investment is — how much more productive of future output are they?

Some statistics. A crude but readily available measure of the efficiency of investment is the incremental capital-output ratio (ICOR), which is roughly how much of an investment buck is required for a given bang in growth. On this measure, it turns out that investment during the first half of Duterte’s term has been the least efficient in producing growth (see Table). The ICOR of 4.7 for 2017-2019 is the highest it has been over the past 15 years. This strengthens the suspicion that, at least thus far, exigency and the need to shore up short-run growth has been the driving force of infrastructure spending. Keynes not Smith has been the patron saint of Build, Build, Build.

Or then again, take some casual observation. Bonny Serrano Street in Quezon City, runs alongside Camp Aguinaldo. There has since been a lane added to it. It is a fine, concrete addition. The only problem is that no vehicle can use it, since it was simply carved out of the camp grounds and leads nowhere. One must wonder how much extra social output this infrastructure has produced since it was completed. A similar infrastructure project can be seen on the stretch of Katipunan Avenue that runs behind the UP Diliman Campus. Again, an extra southbound lane has been added and cut out from UP land. Unfortunately, except for the odd tricycle and jeepney that makes a right turn on C.P. Garcia, that nice concrete road is largely unused since it ends in an asymmetrical bottleneck on the rest of Katipunan Avenue. Actually, without meaning to sound ungrateful coming from UP, the same question may be asked regarding the whole project of concrete-paving the lightly used internal campus streets. One must ask how urgent a priority that must have been in terms of increasing future output. (I can attest its effect on scholastic performance will not be that great.) Meanwhile, heavily used roads are only periodically, partially (and badly) patched with asphalt. Such examples can be multiplied country-wide. While all these projects undoubtedly raised current income, their impact on future output must be placed in doubt.

In Smith’s words: “In every such project, though the capital is consumed by productive hands only, yet, as by the injudicious manner in which they are employed, they do not reproduce the full value of their consumption, there must always be some diminution in what would otherwise have been the productive funds of the society.”

But don’t take Adam Smith’s word for it. Listen to the opinion of a provincial mayor who at some point also saw the problem for himself when he said, “Sabi ko sa kanila hindi ko kailangan ’yung build, build, build. Do not give me that kind of shit. I want build, use, build, use, build, use.”

(E, alam din pala niya.)

Emmanuel de Dios is professor emeritus at the UP School of Economics.

See other mentions of Dr. Noel de Dios: 
Some comedies in the recent PH high inflation rate, July 12, 2018 
Exports, FDI, Manufacturing, ICOR under Dutertenomics, October 21, 2019

Friday, February 14, 2020

BWorld 410, PSA, PCC and competition

* My column in BusinessWorld last February 11.

The Philippines continues to be among the laggards in East Asia in attracting more foreign direct investments (FDI). Data from the UN Conference on Trade and Development (UNCTAD) World Investment Report (WIR) show that our FDI inward stock, an indicator of cumulative foreign investments, was still below $90 billion in 2018 and only about 55% of that in Vietnam and Malaysia, 37% of that in Thailand. The only neighbors that we can “beat” as having lower FDI stocks are Myanmar, Cambodia, Laos, and Brunei (see Table). 

Japan is not a major destination of FDI mainly because it is a major source or exporter of investments. And an important reason for the Philippines’ low attractiveness to FDI is the Constitutional restrictions, if not prohibitions, for foreign equity in many sectors and sub-sectors of the economy.

On Jan. 29, the American Chamber of Commerce of the Philippines, Inc. (AmCham) launched the first of Legislation Discussion Series, focus on Public Sector Act (PSA) Amendment, held at its office in Makati City. The speakers were Congresswoman Sharon S. Garin (Party List — AAMBIS-OWA), author and principal sponsor of HB 78, Amending PSA; National Economic and Development Authority Assistant Secretary Carlos Bernardo O. Abad Santos, and FEF Fellow Dr. Joseph Emmanuel Angeles.

The Chairman of the AmCham Legislative Committee, John Forbes, provided a good overview on why this measure is important for the Philippine economy and why the existing law, the PSA — which was enacted in 1936 (it is 84 years old) — is a hurdle to more investment liberalization and job creation.

Ms. Garin’s bill intends to limit the term “public utilities” to only three sectors — electricity transmission, electricity distribution, and water distribution and sewerage system. Thus, two sectors — telecommunications and transportation (sea, land, air) — will be liberalized to allow more participation by foreign equity.

As a regular traveller to Negros Occidental (my home province) and Iloilo (my wife’s province) at least once a year, by plane or driving by land and RORO (roll on roll off boats), I am particularly interested to see more airline competition, at least more flights by each of the three existing airlines flying to these big islands and provinces. I am also interested to see more shipping competition among boats plying the Batangas-Mindoro or Batangas-Aklan, Manila-Iloilo routes. PSA liberalization is among the few good bills in Congress.

That same week, the Philippine Competition Commission (PCC) also organized a “Forum on Competition in Developing Countries” on Jan. 30-31 at Sofitel Philippine Plaza. I attended only Day 2 and there were two key speakers, Senator Sherwin Gatchalian, then Dr. Ioannis Kokkoris, Professor of Competition Law and Economics and Dean for International for the Faculty of Humanities and Social Sciences, Queen Mary University of London, UK.

I have discussed the speech of Mr. Gatchalian in my previous column (see Dr. Kokkoris’ lecture I found too general and a reiteration of what many people in the audience would probably understand and advocate. Like the advantages of a competitive market over a monopoly/oligopoly market structure.

There were five reactors to his talk and all were highly knowledgeable on competition issues: Department of Trade and Industry Undersecretary for Competitiveness and Innovation Group, Rafaelita Aldaba; World Bank Senior Economist Graciela Miralles Murciego; RCBC Executive Vice-President Lito Villanueva; Indonesia Competition Commission’s Mochammad Hendry Setyawan; and University of Hong Kong’s Professor Thomas Cheng. They all have contributed specific observations on the progress or limitations of competition in their respective areas and economies. Thanks to the PCC for organizing such a big international forum.

Of course the PCC is helpless in implementing competition in sectors where government itself is the creator of monopolies and oligopolies via Congressional franchise, agency franchise, or local government units (LGUs) franchise. For example, the National Grid Corporation of the Philippines (NGCP) is the only national monopoly in the country and it was created by a Congress franchise. Airline routes are given by Civil Aeronautics Board, shipping routes are given by the Maritime Industry Authority (better known as Marina), busline or jeepney routes are given by the Land Transportation Franchising and Regulatory Board, tricycle routes are given by local government units.

A weird thing in the country now is the insistence by the Department of Health (DoH) to impose another round of drug price controls. Price and brand competition is healthy for the companies, patients, hospitals, and physicians. People are given choices whether to buy more expensive but well-known and effective brands or cheaper but lesser well-known brands and generics.

Forcing price controls — removing the higher prices for certain brands — will narrow the choices and competition to medium- to lower-price ranges. Then better-known disease-killer brands will be discouraged from selling while those that are already selling cheap will be forced to sell even cheaper and face possible bankruptcy.

Competition is better done by sellers as they receive price signals from the public, not by government bureaucracies and politicians. What products or brands to patronize are better done by the consumers, patients and their healthcare providers, not by government bureaucracies.

See also:

BWorld 407, NCoV, IPR and WHO, February 10, 2020 

Welfarism 35, Healthcare is not personal/parental responsibility, only state responsibility

The most socialistic sectors in society, that their services are not individual or parental or civil society responsibility but only state responsibility, are (1) education and (2) healthcare (HC). Free education until college, free HC until surgery and medicines. People can spend on nice gadgets and cool appliances, cars and travels, etc but they should not spend for their children's education and their own family's HC. Education and HC are rights and entitlements, not personal or household responsibility. Now more sectors are added to entitlements like housing, irrigation, etc. Lousy socialistic thinking.

Peter Wallace wrote this last February 6:

"Government health services must be completely free. This can be done if we continue to increase public spending on health. The funds are available, a historic budget of P172 billion this year, and growing from sin taxes."

I wrote to him:

Hi Peter, You have become a health socialist, inconsistent with your advocacy for more market reforms. Health is not just a right. It is a responsibility. Personal, household, civil society responsibility, more than state responsibility. If people have the money to buy alcohol, fatty food, tobacco, lots of food and be sedentary, expensive bicycles for steep downhill rides, etc. -- why can't they also buy private health insurance? Why should healthcare be free for all? Come on. Thank you.

Meanwhile, I like this illustration.

I think a good compromise is that public HC is universal for infectious, contagious and communicable diseases. Like malaria, polio, and now corona virus. For non-infectious, non-communicable diseases (NCDs) like cancer, hypertension, stroke, etc., it should be private health insurance plus support by local governments and private charities. Then people can say that HC is mainly personal and parental responsibility, not just state responsibility and an entitlement.

See also:
Cicero, welfarism and fiscal irresponsibility, August 11, 2016
Welfarism 32, On forcing restaurants to give their excess food to charities, July 27, 2016 
Welfarism 33, Janitor turned lawyer, self-reliance vs welfare-dependence, May 05, 2017 

Welfarism 34, Larry Reed on poverty and self-reliance, December 07, 2019

Wednesday, February 12, 2020

BWorld 409, Inflation, land transportation, and nCoV

* My article in BusinessWorld, February 6, 2020.

Consumers in the Philippines continue to be penalized by high inflation. In 2018 when the TRAIN law was implemented, the country was the “inflation valedictorian” among the big and stable economies in East Asia with 5.2%. Last year, six economies had inflation rates of below 1% and yet the Philippines had 2.5%. In January, our inflation rate spiked to 2.9% (see Table 1).

Three commodity groups experienced significant price hikes in January this year compared with 2019 full year levels: alcohol and tobacco, education, and transport. All other commodity groups have had generally flat or mild decline in prices (see Table 2). 

Big price hikes in alcohol and tobacco products are due to sustained tax hikes by the Department of Finance and Congress. The price hikes in education are due to a low base in 2018 and 2019. The same for transportation.

I am curious, did the expansion of transport network vehicle services (TNVS) into motorcycles — from about zero in 2018 to 27,000 by Angkas in 2019 — contribute to the sudden spike in transport inflation?

In TNVS cars, there are about 10 players — Grab, Hype, HirNa, GoLag, Iparra, MiCab, Mober, U-Hop, E-Pick me up, and OWTO. The Land Transportation Franchising and Regulatory Board (LTFRB) has set a maximum of 65,000 vehicles in Metro Manila, combined for all players. Dominant player Grab, with about 43,000 cars in 2018, retained the allotted cars with no increase almost two years after Uber left the Philippines and the rest of ASEAN countries. Booking demand keeps rising while the supply of TNVS cars has remained constant.

When it comes to TNVS motorcycles, the LTFRB accredited three players in 2020 — Angkas, JoyRide, and MoveIt — and they have a combined cap of 63,000 motorcycles, equally divided among the three players.

The competition among regular taxi, TNVS cars, and TNVS motorcycles seem to favor the latter because while the cap for taxis and TNVS cars was retained, the cap for the latter is expanding. From almost zero in 2018, this went to 27,000 through Angkas in 2019, and 63,000 in 2020 for the three players, which might be further expanded within the year.

This is good news for people who are willing to ride the two-wheel taxi. For people who want safer, more comfortable and air-con ride via regular taxis and TNVS cars, this is bad news. The LTFRB is sitting on their petition to expand the cap.

Now with nCoV scare, more people want to avoid high density transportation like trains and buses. They prefer to drive their own cars despite the heavy traffic, or take a regular taxi or TNVS car. So demand for the latter has increased but the supply has not.

The LTFRB must take this into consideration — not just passengers’ convenience and safe travel, but also safety from high-density mass transportation where potential virus transmission among people would be higher.

Expanding the cap on TNVS cars need not mean additional cars on the road. A simple change in the rules will do — like allowing cars that are up to five or six years old provided they are well-maintained, versus current restriction of cars that are three years or younger to apply for TNVS franchise.

The bottomline is that government via the LTFRB should step back from its bureaucratic and restrictive policy-making. Raise the cap, if not abolish the cap, for all TNVS vehicles — cars and motorcycles. Competition among them will ensure that the fares will adjust downwards while service quality and transparency will be maintained if not raised further.

The best judges to patronize or leave/boycott certain players and services will be the passengers, not the government bureaucracies. And with the dragging uncertainties brought along by the nCoV scare, the more passengers and commuters should be given leeway in choosing their forms of mobility. For travel convenience and health reasons.

See also:

BWorld 407, NCoV, IPR and WHO, February 10, 2020 

Transport Econ 23, Penalizing commuters with far away bus/LRT stops,

Government says people should take buses, MRT, LRT and other public transportation to help reduce cars and traffic congestion on the roads, help "save the planet" with reduced fossil fuel use, etc. Then government makes it hard and inconvenient for commuters to reach the bus stops and terminals, LRT stops. That's why many people endure driving in high traffic to spare themselves from government-created inconvenience.

See this, from where I took this photo last Tuesday is the bus stop, and I walked from that far away Edsa-Shaw intersection, came from ShangriLa plaza, Mandaluyong. Government is often full of hot air and double talk.

I talked to two #MMDA personnel, those two guys standing in EDSA in the photo above, why they make life difficult for commuters. Like typical government bureaucrats, they have one copy-paste answer: "Sa opisina namin kayo magsumbong o magreklamo, kami ay nagpapatupad lang ng order sa amin" (Send your complaints to our office, we only implement orders).

Then I said "Eh di ipaabot nyo rin sa mga boss nyo sa opisina nyo na malayo at pinapahirapan nyo mga pasahero", and they simply repeated the earlier reason, alibi by often hardly-thinking people.

Consider if one is not feeling well, or carrying heavy stuff, or pregnant, or it's raining, etc., no excuses, these road bureaucrats say one must walk far away to get a bus ride. Cool. 

Meanwhile in Makati, the City Hall personnel can quickly clamp or tow (about P1,500 fine) or penalize the motorcycle driver if they park in unauthorized areas. But city hall guys -- in charge of anti jaywalking in Buendia, front Axa bldg -- can park anywhere anytime. I took this photo last week.

Comments from some friends of mine:

1. Emil: The limiting/banning of bus stops for provincial buses on EDSA alone disenfranchised travellers (probinsiyanos) greatly.

2. Jimmy: Because decision-makers on public transportation DO NOT take public transportation.

3. Ray: Noy the last time govt granted a single route franchise was 2012. Montalban Trinoma route. It has been18 years commuter have doubled. Plus brand new cars are offered at zero downpayment. Equals mega traffic. Govt should flood the country with transport franchise.

See also:

Tuesday, February 11, 2020

BWorld 408, Power security and competition

* My column in BusinessWorld last February 4.

Last week I attended two energy fora where some important data and issues were discussed. First the “Market Operations 2019,” a media briefing by the Independent Electricity Market Operator of the Philippines (IEMOP), on Jan. 30 at the trading floor of the Wholesale Electricity Spot Market (WESM). Second, the Keynote Speech of Senator Sherwin Gatchalian, Chairman of the Senate Committee on Energy, at the “Forum on Competition in Developing Countries” on Jan. 31 at Sofitel Philippine Plaza, sponsored by the Philippine Competition Commission (PCC).

During the IEMOP briefing, an important chart was shown where power undersupply relative to rising power demand in April-July 2019 resulted in high generation prices expressed as Effective Spot Settlement Price (ESSP) in WESM of P5 to P6+ per kWh, vs average prices of P2-P4/kWh in non-peak demand months.

See that the rising average ESSP from 2016 to 2019 in the Luzon-Visayas grids as both annual electricity consumption and system peak demand keep rising. I added here data from the Department of Energy (DOE) on dependable capacity (see Table 1). The bottom line — insufficient supply when demand is high and rising would lead to both higher prices and frequent “yellow-red” alerts by the National Grid Corp. of the Philippines (NGCP).

At Mr. Gatchalian’s presentation, he focused on “limited competition” by the few big domestic players, and that retail electricity suppliers (RES) and distribution utilities (DUs) are supposed to compete with each other by offering more affordable rates but does not happen in some cases. I summarized his three charts here (see Table 2). 

Other competition issues during the good and cool PCC conference, I will discuss in the next few weeks.

Now, three points to clarify in Mr. Gatchalian’s claim of limited competition from the “big five.”

One, prices spike mainly because of power undersupply thanks to old, ageing baseload plants that go on unscheduled or extended shutdowns and no new peaking plants to provide the sudden big supply gap. This was very clear in March-July 2019, five months of occasional, sometimes daily, “yellow-red” alerts by NGCP.

Two, DUs are already highly regulated by the Energy Regulatory Commission (ERC), the Department of Energy, and even Congress because they need a Congressional franchise to operate. RES are less regulated but Retail Competition and Open Access provision of the Electric Power Industry Reform Act of 2001 — better known as the EPIRA law — remains suspended by the Supreme Court for three years now.

Three, the Philippines’ “big” power companies are actually medium-sized, even small, when compared with energy companies in the region. See the total power generation in terawatt-hours (TWH) of the Philippines in 2018, which was only 47% to 59% of our neighbors Malaysia, Thailand, and Vietnam. I include here portions of Platts’ 250 biggest energy companies in the world, I did not include largely oil-gas producers and manufacturers (see Table 3).

We need to significantly expand our power generation capacity, from conventional, stable, reliable, and dispatchable power sources, baseload to peaking plants. To do that, government, especially the ERC, should step back from too much regulation especially in pricing.

Sector deregulation will allow the small and medium companies to become big, the big companies to become bigger — without state favoritism via subsidies and climate cronyism — and the Philippines’ overall power generation will significantly expand.

Finally, bottlenecks from the biggest power monopoly in the country, the NGCP, should be relaxed so that more power plants, baseload to peaking plants, will be positioned near the high demand cities and provinces.

See also:

BWorld 407, NCoV, IPR and WHO, February 10, 2020

Agenda, One News, Part 4

Last week February 7, I was one of the three guests of Cito Beltran in his daily public affairs program "Agenda", One News, Cignal TV. Topic was the economic impact of NCoV on the PH and the global economy. My co-panelists, Prof. Leyco of AIM and PLM, and Ms. Marichu Villanueva of Philippine Star.

Briefly, I mentioned the following adverse impact, the negatives:
1. Trade, our 2019 total imports nearly $100B, 23% of it from CN; exports about $65B, around 14% to CN.
2. Tourism, about 1M of 7M foreign visitors in 2018 from CN...

Some positives:
1. Low oil prices, opportunity for local tourism and agribusiness, tractors and trucks to have cheaper operational costs.
2. Tourism diversification, some visitors abroad who plan to go to HK, CN, Macau, would prefer to go to PH, other ASEAN.
3. Trade diversification, intra ASEAN trade...

Short term impact is largely negative, national and global. Medium term large global and regional realignment of businesses, positive for the PH and ASEAN.

I also mentioned DOH and WHO unpreparedness in dealing with real infectious, killer diseases because they are focused on NCDs, regulating alcohol, sugar, tobacco, products, etc.

See also: 
Agenda, One News, Part 1, June 13, 2019 
Agenda, One News, Part 2, July 04, 2019 
Agenda, One News, Part 3, August 30, 2019

Monday, February 10, 2020

BWorld 407, NCoV, IPR and WHO

* My article in BusinessWorld last January 30, 2020.

The Novel Coronavirus (2019-nCoV) is new and hence, no existing vaccine and treatment can fight and control it. As of noon, Jan. 29, some 132 people have died and 6,000+ people are ill.

The good news is that some innovator pharmaceutical and biotechnology companies are quickly developing vaccines and other treatment. Among these companies and groups are Johnson and Johnson, and Hong Kong researchers.

The bad news are: it could take up to a year before the vaccines becomes available to the public after a series of clinical trials; and, the virus is already mutating, becoming “more easily spreadable” so that by the time the vaccines become available, new strains would have already emerged, requiring another set of vaccines and treatment.

The World Health Organization (WHO) is the main global agency that monitors and finds ways to control the virus. Their top officials have already met China PM Xi Jinping.

On Feb. 3 to 8, the WHO Executive Board (EB) will meet in Geneva, Switzerland. The EB is the decision-making arm of the WHO and it sets the agenda for the year’s work.

From what I gathered, the EB this year is considering a plan of work to weaken intellectual property rights (IPR) in order to improve access to new medicines and vaccines. These plans would be inimical and disruptive to innovation while doing little to improve access to medicines. The real reasons why access is poor in many countries is related to weak healthcare systems, regulatory barriers, taxes and tariffs, etc. and not IPR like patent protection.

Last September, the Geneva Network (UK) plus five independent think tanks in the ASEAN including Minimal Government Thinkers (Philippines) launched their report, “The importance of IPR in progress: reform agenda for ASEAN countries” in Makati. The Philippines and many ASEAN countries do not rank and perform well globally in IPR protection (see Table).

Our report on IPR in the ASEAN noted that in the health sector, life science patents are becoming more difficult to obtain and there are concerns that compulsory licensing (CL) of famous, patented drugs may become more widely used by governments. CL is driven by envy more than desire for public health. Many pharma companies would not spend on very expensive and risky R&D (patients under clinical trials may suffer serious side-effects) but when the new drug molecule is later proven to be safe and effective in killing or controlling certain diseases, various lobbies to issue CL becomes louder. When CL becomes a norm, the likelihood that newly invented, more powerful medicines will be launched in developing countries like the Philippines will grow thin, which will also undermine the availability of generic medicines of the same molecule someday.

For now, the WHO has three important challenges.

One, set aside its itch for IPR-busting policies like CL. The evolving nCoV and other viruses will require evolving medicines and vaccines. IPRs like patents for newly developed treatments should be encouraged, not discouraged and demonized.

Two, encourage member-countries to speed up the examination of patents, do not discriminate against specific technologies in the granting of patents, restrict the use of CL of patents to true emergencies, and provide sufficient terms of regulatory data protection for medicines, veterinary and agricultural biotechnology.

Three, step back from producing and encouraging more regulations and restrictions in fighting non-communicable diseases (NCDs) and refocus its resources and research on really killer communicable and infectious diseases. There are many, past and present like ebola, SARS, MERS-CoV and nCoV.

See also: