Government and Taxes: disruption

Showing posts with label disruption. Show all posts

Thursday, May 31, 2018

BWorld 216, Positive and negative disruptions in the electricity market

* This is my article in BusinessWorld last Monday, May 28, 2018.

Last week, May 22, a BusinessWorld report said “DoE forecast for peak power demand exceeded on May 17” referring to 10,688 MW peak demand in the Luzon grid on May 17 reported by the National Grid Corp. of the Philippines (NGCP) vs peak demand in 2017 of 10,054 MW.

The increase of 634 MW or 6.3% increase can be considered as positive disruption. Demand for electricity to power various economic activities by households and corporations including those with 24/7 operations remains high and they approximate GDP growth.

Reports of more renewable investments and installations, wind-solar especially, are not “disruptors” because in 2017 or nine years after the enactment of RE law of 2008, solar-wind contribution to total electricity generation in the Philippines constituted only a measly and near-negligible two percent (2%).

Reports also of more battery storage for intermittent wind-solar can neither be considered as a “disruptor” because those batteries do not produce electricity. If it is cloudy or raining then there is no extra solar power to store; if the wind does not blow then there is no extra wind power to store.

During the BusinessWorld Economic Forum 2018 last May 18 at Grand Hyatt BGC, among the speakers were Kristine Romano of McKinsey & Company, and Luis Miguel Aboitiz of Aboitiz Power Corporation. Ms. Romano partly mentioned that innovations in the energy sector is among the big disruptors in the world today. Mr. Aboitiz skirted discussing his sector and mentioned more about the challenges and opportunities of endless innovation and disruption in many sectors.

And we go back to renewables touted as disruptor to “save the planet” (save from what, rains and floods?) and there is one belief or myth that continues to persist — that the cost of wind-solar technology is declining quickly so the cost to generate electricity from them will decline too.

Intermittent or variable renewable energy sources (VREs) are given feed in tariff (FIT) or guaranteed price subsidies for 20 years, among many other perks, by the RE law of 2008 (RA 9513). What happened to this scheme?

First, the FIT rates given to RE developers keep rising yearly, despite the touted decline in the cost of wind-solar, and second, the estimated revenues per kWh is are highest for wind-solar and lowest for run of river (RoR) hydro (see table).

Bangui Wind 1 and 2, built in 2005 then August 2008 or before the enactment of RE law in 2008, a bit anomalous, were also given special FIT rates: P6.63/kWh in 2015; P7.05 in 2016; P7.26 in 2017; and P7.53 in 2018.

Then also last week, May 21, the ERC has granted the rise in FIT-Allowance (FIT-All) in our monthly electricity bill from 18.30 centavos/kWh to 25.32 centavos /kWh starting June 2018 billing. This is to cover under-recoveries in 2017 alone.

And that explains the negative disruption in the Philippines electricity market. Energy coming from “free” solar and wind and “declining” technology cost actually result in even more expensive electricity.

This higher FIT-All rate includes only under-recoveries until 2017. Under-recoveries this year not included yet, so a higher rate of probably 33 centavos/kWh can be expected in late 2018.

The environmental and RE lobbyists succeeded in making cheaper coal become more expensive via higher coal tax of P50/ton in 2018, P100/ton in 2019, and P150/ton in 2020 under the TRAIN law. Taxes for oil used by power plants also went up as well and expanded VAT application to transmission charges.

Expensive electricity is wrong.

Adding more intermittent, brownout-friendly, and expensive VREs like wind-solar is wrong. Adding battery storage will reduce the intermittency but will definitely raise the cost to consumers further.

Government should take the side of consumers who desire cheaper, stable electricity. Government should stop its double standards in energy taxation, slapping higher excise tax for reliable oil and coal plants but exempting from excise tax the unreliable, unstable, intermittent VREs especially wind-solar.

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Thursday, May 24, 2018

BWorld 214, Disruption in global economic power

* This is my article in BusinessWorld last Monday, May 21, 2018.

The past three decades showed major disruptions in global politics and economics. These include the fall of European socialism with the collapse of the Berlin Wall in 1989, the creation of many new countries from the former USSR, the move towards freer trade with the creation of the World Trade Organization (WTO) in 1995, and the transition from heavy central planning to the market economy of two big socialist economies in the world, China and Vietnam.

Disruption in macro economy and business is a result of endless innovation by new players both in business and politics. What used to be dirt-poor economies have transformed to middle-income, Internet-savvy ones.

Let us review global economic performance over the past 25 years. We use 1992 as base year because there was no WTO at that time so many economies were still grappling with trade restrictions and by extension, investment constraints. The then top 10 East Asian economies are covered here (see table).

These numbers show the following disruptions over the past quarter of a century.

One, China’s communist central planning until the ’80s has resulted in a very poor economy. Its transition to some principles of the market economy resulted in massive turn-around towards more prosperity: GDP size has expanded 24x in current prices and nearly 16x in PPP values.

Two, India has similar economic policies with China until the ’80s, very nationalistic, socialist, and restrictive. Its transition to some market reforms allowed it to expand its GDP size nearly 9x.

Three, seven to eight ASEAN economies have experienced GDP size expansion of at least 5x in just 25 years, whether in current prices or PPP values. Only Thailand and Brunei failed to expand 5x because they have a relatively high economic base in 1992 or earlier.

Four, traditional rich economies of Europe, Japan, and US were only able to expand three times at most. This is because they already have a high economic base in 1992, and they have become more regulated and more bureaucratic recently owing to very high labor, energy, environment, and other standards.

Going to the micro and enterprise level, many previously domestic and nation-limited companies in East Asia have become regional players and multinationals initially, then became global players.

The Philippines for instance has produced a number of big regional players: San Miguel, SM, Jollibee, Unilab, Zuellig, Max’s, and Pilmico/Aboitiz.

There are many new players that experienced disruptive ascent in just a few years of existence, like Udenna/Phoenix/Chelsea, Voyager, Mobext, AdoboMall. Their CEOs and presidents were among the speakers in the BusinessWorld Economic Forum 2018.

Endless innovation has brought new players to the top and they are the disruptors of the corporate status quo. But their ascent to the top is not guaranteed because new breed of disruptors are being born and created every year.

The market economy has an inherent disruptive, innovative, and subversive nature. Corporate expansion and bankruptcy, boom and bust, are 100% part of its DNA. This uncertainty and several other disruptions may be bad for existing players but they will always be good for consumers. Satisfying consumers is the single biggest challenge to all players, old and new.

The Philippine and Asian governments should ride the wave of disruptions and allow more market reforms, more deregulation, de-bureaucratization and less taxation of the business environment. Governments’ goal of more welfare, less inflation to the people can be better provided by a competitive and dynamic economy. Plenty of private players can create more jobs and produce newer products and services at lesser cost, better quality, and more variety.

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Wednesday, May 23, 2018

BWorld 213, Disruption, inflation and taxation

* This is my column in BusinessWorld last May 17, 2018.

Disruptors tend to be successful in three ways: (1) They dramatically lower historic prices through new cost structures…”

— Accenture, “Disruption need not be an enigma,”

February 2018

“Inflation is taxation without legislation.”

— Milton Friedman, 1974

Disruption is good for consumers. It unsettles many incumbent and entrenched players which may have been lording over the market for decades with expensive and substandard products and services.

Disruptors are often the newcomers, or old players using new and modern production methods that drastically change how things are done.

Inflation is immediately tamed by disruption, ceteris paribus or all other things being equal or held constant. Consumers are given new choices and they tend to flock to products and services with lower prices or similar prices but better quality or more add-ons.

The institutionalization of freer trade in 1995 with the creation of the World Trade Organization (WTO) has contributed to lower prices across many countries.

As a result, prices in Asia in 1995-1999 were significantly lower than prices in 1990-1994 except in Thailand and Indonesia which were badly hit by the Asian financial turmoil of 1997-1998. Then prices generally declined in the succeeding decades until 2017 (see Table 1).

Higher taxation and more government regulations however, have the opposite effect of market disruption. When a country imposes drastic tax hikes, that country experiences significant inflationary pressure and reverses the gains of disruption.

This is particularly true in the Philippines when it enacted the Tax Reform for Inclusion and Acceleration (TRAIN) law of 2017.

While personal income tax rates have declined, many products (oil, LPG, coal, sugary food and drinks, etc.) and services were slapped with higher excise tax and/or expanded VAT.

While all countries and economies were hit by rising world oil prices, many incurred even lower prices.

But in this case, the Philippines is an outlier.

Inflation jumped even after the sudden rebasing of the consumer price index (CPI) from 2006 to 2012. The two richest economies of North America and Europe are included to widen the scope of comparison, year to date (Ytd) vs. December 2017 as base year (see Table 2).

Note that the outlier inflation rate in the Philippines this year does not yet include fare hikes by land transportation companies and providers (jeepneys, taxi, UV express, buses). If such fare adjustments are granted — and they should be — then the country’s inflation will rise even higher.

The Bangko Sentral ng Pilipinas (BSP) noted this unexpected level of price increases and it raised local interest rates to encourage people to spend less and save more and hence, help reduce inflationary pressure.

Rice protectionism and NFA importation monopoly are also slowly being abandoned and the rice import quota will soon be replaced by tariffs and cheaper rice from our ASEAN neighbors will soon become more available to consumers and this will help reduce inflation.

The bad news is that January 2019 is fast approaching and there will be a second round in oil and coal tax hikes. This means another round of inflationary pressure, fare hike pressure, and even larger inflation spikes.

This is a clear case of higher taxation reversing the gains of innovation and disruption in the Philippines. Government as negative disruptor is not good. The TRAIN 2 bill should be an instrument to reverse these disagreeable provisions of TRAIN 1.

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

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