Privatization 13, Firesale of GOCCs, notes in 2005

Cleaning my old emails, I found these notes interesting, about privatization plans of government-owned and controlled corporations (GOCCs) in the Philippines.
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(1) Let's have a fire sale!

By Peter Wallace

January 26, 2005

The President, in her State of the Nation address, said National Power Corp. and Transco must be sold, but not at fire sale prices. I had earlier suggested that, if necessary, they should be sold at fire sale prices…

Get these massive debts off the government's books and operating efficiently. This is far more important than maximizing cash returns now, even if the government is desperate for funds…

Simple calculation would show that a 30 percent discount from market value so as to sell NPC quickly could be recovered within two years just from stopping the hemorrhage of NPC (assuming a conservative asset value of P200 billion for the Generating Companies (Gencos) and an annual average loss of P30 billion). But, more importantly, the urgently needed capital for expansion, upgrading, modernization would become available in these companies.

What the President should do is sell everything. Every government-owned or -controlled corporation (GOCC) except maybe, a very select few, such as GSIS, DBP and Land Bank), every share in every corporation, every piece of land not being actually used by government where government has no business being. Every asset of every sort — at bargain basement prices. Do it like they do in the retail business announce: FIRE SALE, EVERYTHING MUST GO. Even businessmen can't resist a bargain.

Government has no business being in San Miguel, or competing with the private sector to import rice (it can ensure there is honest, open competitive dealing instead). I do not buy the argument, for example, that the National Food Administration (NFA) is necessary to stabilize prices and ensure supply in case of shortages. A truly open market with minimal duties on imports would draw enough players to ensure supply — at competitive prices. I would argue that it was the controls and interference of NFA that have led to the oligopolistic nature of this sector.

It's the same with so many of government's other agencies. What really are they doing, and is it really necessary? I'd argue that they have no role, no role the private sector can't do better. Government's role should be to regulate them, where regulation is really necessary. And this should be minimal, too. The countries that succeed best are the ones where the government intervenes the least in business.

No one seems to know the real numbers, but, just off the top of my head, there are something like 60 GOCCs competing with or can be run more effectively by the private sector. There are also, government shares in a number of major private companies (e.g. Philippine National Bank, Petron, Philippine Airlines, etc.) and about 50 pieces of valuable real estate.

P1 trillion worth to sell

A very rough calculation indicates that there could be at least P1 trillion that could be sold, assuming a conservative average of P10-12 billion per non-Napocor asset. P1 trillion would not only wipe out the P190 billion budget deficit in one fell swoop, it would also allow some massive infrastructure development…

February 2005

(2) Me:

I Agree with these proposals. I would also argue that ALL govt. corporations and banks, devt. bank (DBP) and land bank (LBP) should be privatized. And both state-managed private pension funds SSS and GSIS, be deregulated if not privatized.

The philosophies are simple:

a) The state should concentrate on its core function -- protection of lives and properties. Catch most of those killers, rapists, akyat-bahay gang, kidnappers, carnappers, drug pushers, gun smugglers, bombers and terrorists, out there. Prosecute them if caught, shoot if they fight back.

b) If the state cannot do the above functions, why is it running banks, tv stations, real estate companies, agri trading and shipping companies, petrol firms and private pension funds? 

c) Get the money quick, and retire a big portion of the public debt, and do not burden the citizens with additional taxes and fees. If the state can raise just P1 trillion from such fire-sale, at 8% interest rate, that's P80 billion savings from interest payment ANNUALLY. It's like finding a Yamashita gold and spending the interest earnings to public infra and strengthening the justice system to protect lives and properties.

(3) From Marcial: Why does the government INSISTS on holding on to these corporations? The advantages of divestment should be obvious to them now. The man-on-the-street answer usually revolves around words like 'greed', 'corruption', and 'inefficiency'. but we don't believe that. why then?

(4) From Joseph: Any sale of government assets should be held under the most transparent conditions.  We certainly do not want a repeat of how the sale of PNB and of PAL to Lucio Tan went through.  Sales like these are equivalent to behest loans.

We do have some statists who insist on some government involvement so as to "balance" the so-called "greed" of corporations.  As to what will make GOCCs profitable without profit incentive, I just don't see it.

As to the so-called "nationalists" who insist on controlling our patrimony, all to the good if on one hand law enforcement really works, and on the other, if "national" priorities are straight.  Otherwise,

it's just one big hypocrisy.

(5) From Cynthia: All the reasons government gives, the noble reasons such as government's role in catalyzing development, the provision of essential services, are just cover-ups. GOCC's and government shares in corporations are just the means of expanding the delicious pie that the parties in power can divide among themselves.  Anybody who has witnessed the posturings of the clowns appointed as directors and senior officers in GOCCs (why do GOCCs, which have only one shareholder- the government, have a Board of Directors anyway? All the better to accommodate all political debts, the more available appointive seats, the happier the appointing authority!), and the panic that ensues when elections are near and everybody is scrambling to keep their seats.  The advantages of divestment are not obvious to these people because nobody will willingly give up their turf and gravy train.

For example, I'm involved in the valuation of one of those companies mentioned for privatization, but the senior officers insist on moving very, very SSLLOOWWLLYY, ostensibly in the interest of transparency, following correct procedure, etc.  But the real reason, I think, is if they're

successful, their jobs are also gone. That simple.

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See also:
Privatization 10: More on Selling PAGCOR, June 12, 2013
Privatization 11: Presentation in Hawaii in 2007, June 08, 2013 
Privatization 12: PH government corporations sold, retained as of 2007, February 07, 2016

Privatization 12: PH government corporations sold, retained as of 2007

I just found a hard copy of my paper presented at the 1st Pacific Rim Policy Exchange, held at Sheraton Waikiki Hotel, Hawaii, in late May 2007 or nearly 9 years ago. The event was jointly sponsored by the Americans for Tax Reforms (ATR), Property Rights Alliance (PRA), International Policy Network (IPN), Grassroot Institute Hawaii (GIH), and a Japanese foundation.

Below is the 5-pages Annex of my paper, the list of PH GOCCs and GFIs. Those that were fully privatized, those that were retained.

Hundreds of government corporations, typical 70s and 80s model of "state as saviour, planner, businessman" model. From agriculture to manufacturing, energy, shipping, banking, there were hundreds of government corporations.

One big problem in government for taxpayers -- once a government agency, a bureau or department or corporation or university, etc. is created, they almost always become permanent. If they lose money (very often they do), no problem for them because the DOF and Congress will simply set aside and appropriate money to bail them out.

Energy Econ 24: NPC Debt, PSALM and Universal Charges

This report is confusing. It says, "Psalm said Napocor incurred stranded contract costs (SCC) amounting to P4.1 billion in 2013... Last year, Psalm proposed a P0.13 per kilowatt-hour increase in the SCC after Napocor incurred P17.69 billion in obligations from 2011 to 2012."

I checked with the National Power Corp. (NPC), it already has net income since 2012. Its 2013 net income is P500+ M. The Power Sector Assets and Liabilities Management Corp. (PSALM) is referring to old NPC loans especially during the power crisis of the early 90s when the Independent Power Producers (IPPs) put up quickie power plants that charged high just to solve the daily brownouts during that time. So those are old NPC loans transferred to PSALM, the latter borrowed money to pay those obligations. Now PSALM wants to increase the universal charges (UC) in our monthly electricity bill so it can pay those transferred debts.

Deka-dekada na ang mga utang na yon ng NPC, di pa bayad until now. That’s how big NPC debts are. I remember NPC was losing money or incurring debts something like P50 B a year in the 90s.

This should be a lesson for people who campaign for "Back to government control of power generation" and "Junk EPIRA". When government is a player, it has little or no incentive to be efficient. Their cost of operations, no matter how high or bloated, is “pre-paid” with subsidies via annual Congressional appropriations. If they get into deep s__t of debts, it’s not them that will pay but the national government (NG) or other specialized government agencies. In this case, it is NPC debt to PSALM debt. We will pay for those debts later via higher taxes, or higher electricity/utility bills.

There should also be no NG guarantees for debts by government corporations and financial institutions. If LRTA, PNCC, NFA, etc. keep borrowing as if money to pay someday will come from Batman and Spiderman, their debt should not be guaranteed. That means they must become bankrupt someday. NFA keeps piling debt until now, estimated around P155 B already. Since these are guaranteed debt by the NG, ultimately those debt will become part of DOF debt, and annual interest payment will rise even higher, very soon.

But if NG will not guarantee debts by govt corporations like NFA, PSALM, LRTA, etc., no one will lend to these state corporations. Private lenders know that these corporations are undisciplined, spend-spend-spend entities. They only know how to borrow but do not know how to pay. That is why many if not all government corporations should be privatized soon. Use the proceeds to pay many of the public debt.

Meanwhile, some old notes below.

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Long daily brown outs in Mindanao last March-May, the main culprit is that Mindanao exempted themselves (through the politicians there) from EPIRA. All hydro power plants in Luzon were privatized and became efficient, participating at WESM. Whereas All hydro power plants in Mindanao remain in govt hands and remain not so efficient. They are also not connected to the national grid. The Mindanao power problem is not a new "crisis" that requires an “emergency power” from the President, but an annual scourge.

Unfortunately, some people think that more government, more bureaucracies, will produce more power plants. It should be the opposite. Less bureaucracies will produce more power plants.

A friend once commented that "renewable energies (REs) are not favoured by the government." This is not true. The average generation charge of coal, nat gas, geothermal, big hydro, is around P5/kWh or less. Including the use of peak-load diesel plants during peak hours makes the generation charge around P5.50/kWh. Yet the feed in tariff (FIT) or guaranteed min. rate for solar is P9.68/kWh, wind is P8.53/kWh. The solar and wind can sell at P12 or P20 or higher if supply is tight, but the FIT is the guaranteed minimum for them, which is almost 2x the ave price of conventional power.

In addition, REs have renewable portfolio standards (RPS). If conventional power plants bid at WESM, they must bid zero or P1 so they can be dispatched by WESM. REs however, can bid at FIT level and they are assured almost 100 percent of being dispatched by WESM. The RE law of 2008 is clear favoritism of REs. Now DOE has increased the allocation for REs. Solar from 50 MW to 500 MW. Wind rose to also 250 or 500 MW.

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See also:
Energy Econ 20: On Slashing the Max Power Generation Charge, May 05, 2014

Energy Econ 21: Joint Statement on EPIRA Implementation, May 27, 2014

Energy Econ 22: FEF on FIT for Solar Power Plants, June 13, 2014

Energy Econ 23: Death of Australia's Carbon Tax, July 17, 2014

UHC 23: Orthopedic Hospital Corporatization, Not Privatization

There have been a number of political noise about the corporatization and modernization of the Philippine Orthopedic Center (POC). Many groups are opposing its “privatization” with lots of street rallies and the petitioners going to the Supreme Court opposing the said “privatization.”

This is a typical disease of confusing and equating corporatization as privatization. The former means the government will just create a board relatively (but not fully) independent of Malacanang and Congress, with private sector presence in the board as they will inject their own money. The DOH Secretary or his/her representatives will still be on the board.

Here is one news report, more objective and non-emotional.

 The Orthopedic Center PPP,,, involves the construction as well as operations and maintenance (O&M) of a new 700-bed-capacity tertiary orthopedic hospital in the National Kidney and Transplant Institute compound in Quezon City.

It is a 25-year contract with construction is expected to take two and a half years, and the remaining 22.5 years allotted for O&M.

MPIC, Megawide, 7 others interested in Orthopedic Center PPP

www.gmanetwork.com

Nine firms have so far expressed interest in bidding for the multi-billion peso ...See More

POC will move out of its Banawe location to the Kidney Center, still in Quezon City. In exchange, the government and DOH will:

(a) get new, modern hospital at no cost to taxpayers,

(b) bigger hospital with 700 beds (vs current ____ beds),

(c) poor and sponsored PhilHealth members will get 420 beds under no balance billing (NBB) while 70 beds for indigents, non-PHIC members, and

(d) after 25 years, DOH will own this hospital and may choose zero private sector participation, back to nationalization/centralization.

The POC private sector partner will make money from (a) the land to be vacated by the current POC in Banawe, and (b) operating the POC for 22.5 years, particularly on the remaining 200 beds that are not for (i) PHIC NBB and (ii) indigents, full charity patients.

This is not a bad deal, unless there are other hidden arrangements. As a taxpayer, this is favorable to me. DOH will have a new hospital at no extra cost to me. If the bidder will put up a residential condo in the current POC in Banawe, that means additional housing units, less squatters or less rentiers in non-high rise houses. When more demand is met by more supply (of houses, etc.), then the price of that commodity will stabilize.

Corollary situations:

1. The Philippine Children’s Medical Center (PCMC, aka "Children's Hospital"), currently a government corporation,  to be corporatized modernized too, its current two-storey structures be demolished and a new, high rise hospital be constructed, to accommodate more children patients, at no substantial cost to taxpayers.

2. AFP headquarter with golf course to get out of its prime location in QC, they sell or privatize the land, AFP gets the money and move elsewhere cheaper with lots of extra money for AFP modernization, at no extra cost to taxpayers. Win-win condition.

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Two news stories below:

Philippine Navy and Sangley Point

A friend in facebook, Dr. Aileen Baviera, an academic in UP and researcher on foreign policy and military affairs, rode a Philippine Navy chopper yesterday and took photos, posted in facebook. I have seen Sangley Point from a distance via commercial plane, but I have never been there. Nice photos.

The skyscrapers of Manila-Makati-Pasay-Paranaque, seen from Sangley Point, Cavite.

Not many battle ships anchored there that day. Maybe the other ships are in Mindanao, Palawan, and near the Spratlys, Scarborough/Masinloc areas.

That long stretch is a runway, for the Air Force, I think.

The Navy headquarters in Roxas Blvd, Manila. I read that the government intends to lease or privatize this area, good move. Huge amount of money can be realized from that scheme. Any move to modernize the Armed Forces of the Philippines (AFP) should be funded from the privatization of some DND/AFP assets and land, and not resort to raising taxes or more government borrowings.

Our public debt is rising by P400 to P450 billion a year, with or without any economic crisis. It's a pathetic and ugly fiscal situation. It should not be worsened by more public borrowings to pursue certain social or military goals. Privatization is the mdiway solution.

See also: 
External threat and the Navy, January 06, 2011 
Privatization 8: Government Debts: Military Camps and Spratly Issue, June 20, 2011 
China Watch 16: Scarborough Shoal, Spratlys and Citizens Action, May 01, 2012

Fat Free Econ 44: Deregulate Weather Forecasting

* This is my article today in interaksyon.com.
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This may sound like a “politically incorrect” statement so let me explain why.

One, there is no market failure in providing the service as the scientific and technical know-how to gather data and interpret them can be done by private enterprises. Weather forecasting need not be an exclusive function of the government.

There are several independent weather analysts in the country that often have better analysis than the Philippine Atmospheric Geophysical and Astronomical Services Administration (PAGASA), and they charge the public nothing. These guys get raw data from the meteorological agencies of Japan, Korea, Hong Kong, Taiwan, Hawaii/US, etc. They charge zero because they also get their raw information for free.

But once they charge for their services, private weather forecasting enterprises must produce value added over the free forecasts of those meteorological agencies of other countries. They must invest in modern equipment and tools, and get more trained meteorologists, oceanographers and climatologists to do more detailed analysis of short- and long-term trends in weather and climate.

Two, privatization would allow competition for more accurate, more detailed and industry-specific weather forecasting.  There is a business there. Among the major clients will be airlines, shipping lines, bus lines, hotels, beach resorts, mountain resorts, agri-business companies, event organizers, TV and radio stations, local governments, national government agencies (Air Transportation Office, MARINA, Coast Guard, Department of Agriculture, etc) and so on.

Since these companies and institutions are in for the long haul, they will be interested to see long-term perspectives on climate. Like how long will the current global cooling last, its effect on national, regional and global food production, tourism, public health and other economic and social sectors.

Three, privatization would put accountability to those forecasts. There will be a private contract between the forecasting service provider and its clients. If the latter made bad business decisions as a result of frequent false forecasts by the former, the forecasting company can be sued, it can go bankrupt and its officers can go to prison. To avoid this, forecasting companies will be forced to upgrade and modernize their tools and interpretation of raw data, and their information dissemination.

In the case of PAGASA, thousands of lives are lost, while billions of pesos of private property are damaged -- such was the case when Typhoon Sendong hit Mindanao two years ago -- because PAGASA failed to see the trajectory of the storm. Have PAGASA officials been sanctioned? Any failed or wrong analysis, or over-reaction (declaring an LPA immediately even if there is none) is a reason for PAGASA to say, "we need more money". So inefficiency is rewarded with more tax money.

PAGASA’s budget has risen through the years. It got P1.20 billion in 2011, followed by P1.28 B in 2012, and P1.46 B in 2013. The bulk of its budget is capital outlay, which means the purchase of more modern equipment and offices, followed by maintenance and other operating expenses then personnel services. The salaries and allowances of its personnel have also risen (see table below). 

Table 1. PAGASA Staff, 2012-2013

Source: DBM, Staffing Summary.

Private weather forecasting enterprises will be penalized if they make frequent bad forecasts. No tax money will be used to put them up or bail them out if they are inefficient. They are under pressure to provide more accurate, regular updates, hour by hour or even every 30 minutes in the case of severe weather disturbances. Each failure in forecast translates to financial losses, not to mention loss of reputation.

In the US, there are at least eight private weather forecasting companies that have private subscribers and make money. These are on top of US government meteorology agencies like the National Oceanic and Atmospheric Administration (NOAA)-National Weather Service (NWS) and the Joint Typhoon Warning Center (JTWC, Hawaii). These private services are as follows:

- AccuWeather, www.accuweather.com

- CustomWeather, www.customweather.com

- The Weather Channel, www.weather.com

- Schneider Electric (formerly DTN Meteorlogix), http://www.schneider-electric.com

- Forecast Advisor, www.forecastadvisor.com

- Intellicast, http://www.intellicast.com

- My Forecast, http://www.myforecast.com

- Weather Bell, http://www.weatherbell.com

In UK, I know of one solar physicist in London, Piers Corbyn, who owns a private weather forecasting company, Weather Action. And he often beats the UK Meteorology Office in predicting weather three months or one year ahead. He uses Solar Weather Technique (SWT) in making his predictions, and he gets many subscribers. 

Aside from the above reasons, I have a few personal reasons why I want to see a deregulated weather forecasting system in the country, and even a privatized PAGASA.

One, when I got married in Iloilo City several years ago, my siblings and nieces from the nearby island of Negros Occidental were unable to attend. PAGASA foisted signal no. 2 in Region 6, so the Coast Guard prevented all inter-island boats from plying the Iloilo-Bacolod route. But my sister and brother said there was not even rain in Bacolod that day, cloudy but no rain or strong wind. The same in Iloilo.

Ordinary folks can only complain of PAGASA's inefficiency but beyond that, there is nothing we can do. We cannot terminate PAGASA funding nor sue it as there is no direct and explicit contract between the public and that agency. Some people would even say, "Oh, PAGASA made lousy analysis again. Perhaps they need more money, Congress and DBM should give them more money." There is no accountability for a monopoly.

Two, I have long wanted to compare the country's temperature data. For instance, I want to know how June 2013’s average temperature was compared to the same month in earlier years. This data is unavailable in the PAGASA website, nor can it be requested for free. The data is for sale, and one must go to their office in Quezon City, pay and get the official receipt, and wait for about a week to get the data. We taxpayers give them money for their annual operation, and we have to pay them again to get data.

PAGASA will benefit if there are many private weather forecasting companies in the country as it will be forced to be on its toes and so provide more accurate short- and long-term perspectives in weather and climate.

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See also:

Fat-Free Econ 41: Cut Income Taxes, April 08, 2013 

Fat Free Econ 42: NSCB vs SWS Data on Poverty, April 30, 2013 

Fat Free Econ 43: On the Philippines' Fast Economic Growth, June 04, 2013

PAGASA Bureaucracy 1: On Temperature Data, July 14, 2011.

PAGASA Bureaucracy 2: Deregulate Weather Forecasting, December 20, 2011 

PAGASA Bureaucracy 3: On Giving Local Names to Storms with International Names, August 20, 2012

Privatization 11: Presentation in Hawaii in 2007

Six years ago, I participated in the first of four Pacific Rim Policy Exchange (2007 to 2010) mainly sponsored by the Americans for Tax Reforms (ATR) plus several other free market think tanks. I spoke on the panel on privatization.

I limited my presentation to a few theories then some data about the Philippines. Among my co-speakers in the panel was Jose Penera, the former Chairperson of Chile's Social Security system I think. Lucky for me, most if not all questions during the open forum were directed to him. It was my first talk in a mostly American audience.

When government moves away from its core function -- protecting the people's right to private property, freedom against aggression, and freedom of expression, individual liberty -- various types of inefficiencies and wastes can result.

Then I discussed some big and more scandalous public corporations like Napocor and NFA. Also big monopolies like SSS, GSIS and MIAA.

And here's how a tax cut can accompany large-scale privatization.

See also:

Privatization 8: Government Debts: Military Camps and Spratly Issue, June 20, 2011

Privatization 9: PAGCOR and Casino Operations, May 16, 2012 
Fat-Free Econ 12: Privatizing PAGCOR, June 08, 2012 
Privatization 10: More on Selling PAGCOR, June 12, 2013

Fat-Free Econ 15: IMF and Freedom From Debt

* This is my article today in TV5's news portal,
http://www.interaksyon.com/article/36217/fat-free-economics-imf-and-freedom-from-debt
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To clamor for freedom from debt, one must clamor for freedom from borrowing first. Debt is nothing but the accumulation of past wastes, inefficiencies and profligacy. If the use of past debt was useful, then the debtor – a person, a corporation, or a government – should be able to pay off those debts later while sustaining its productive momentum. Or at least the debt stock should just be a small portion of its overall wealth. But if the use of past debt was unproductive, then the debtor will have an ever-rising pile of obligations.

Recently, the IMF has mobilized funds from emerging markets to pool some $456 billion to help debt-distressed European Union economies. The Philippine government through the Bangko Sentral ng Pilipinas contributed $1 billion to the IMF crisis fund. That fund will not directly come from tax money; rather, it will come from BSP’s international reserves, which are mainly foreign investments denominated in foreign currencies and are parked at the BSP. Still, the BSP move to contribute to the Eurozone bailout fund is wrong, and here are the reasons why:

One, those debt-ridden EU governments are not exactly resource poor. They have lots of state-owned corporations and financial institutions, as well as huge assets (military camps, parks, etc.) that can be privatized to raise domestic revenues to deal partially with their current spending requirements and debt obligations, instead of relying on endless taxation and borrowings.

Two, the bailout will create more moral hazard problems for those indebted countries. If they see that a bailout is forthcoming, why would they institute more austerity and subsidy reduction programs? Why privatize, which can hurt their chance at reelection? Instead, they made limited austerity measures, then issued some warnings that their debt problem can "spiral to the global economy” unless the world will send them more money.

If those European governments could not stabilize themselves when their public debt-to-GDP ratio was only at 60 percent or less, what makes us think that they can stabilize themselves at 110 percent or more? Spain, Italy and France for instance, have been in deficit spending for more than 30 years straight, three plus decades of living beyond their means. The PIGS (Portugal, Italy, Greece, Spain) would need possibly one trillion dollars or more of bailout money, and there is no guarantee that such rescue money will be fully paid.

Privatization 10: More on Selling PAGCOR

My article in interaksyon last week, FAT-FREE ECONOMICS: Pagcor privatization and reducing public debt has attracted some reader comments. I reply to them as much as possible, in order to clarify more points that I already made.

Here are the comments and my clarifications.

Roy Roger If the government wants new revenue, it should sell non-performing assets like idle lands first. Revenue earning assets such as pagcor & pnoc-ec should be sold last. Why sell a cash cow all of a sudden?
6 hours ago

Shan Tiodianco How much kickbacks will REcto gets from privatization of pagcor? These senators are very devious getting kickbacks of selling gov. owned companies.
Saturday at 1:52pm

Shan Tiodianco I don't trust sen. recto. why sell PAGCOR? it generates big revenues to our gov.
Saturday at 1:57pm

Paul Eugenio You haven't read the article, do you?

Saturday at 6:53pm

Nonoy Oplas Sen. Recto's goal is to raise more money for DepEd, DSWD, LGUs, the Treasury. I suggested that all privatization proceeds should go to retire some public debt, not to any specific department. Savings from annual interest payment can be used for other socio-econ programs. We just need to reduce that huge public debt stock and avoid future Europe type of econ instability.

Why sell Pagcor, to help reduce the public debt, save huge interest payment yearly. Pagcom as a regulatory body expected to earn more money as more huge casino/gaming companies from abroad are coming in.

Yesterday at 3:39am

Paul Eugenio What's the use of earning P40 B from Pagcor if it just goes to debt service, right?

Sunday at 7:53am

Nonoy Oplas hmmm, some people just want to argue on numbers even if the data are already given to them. 

Sunday at 11:26pm

Nonoy Oplas   Top Commenter · University of the philippines
Yesterday I went to the Senate for the Committee hearing of Pagcor privatization. I briefly argued the above in about a minute, in front of Sen. Koko Pimentel III and Sen. Ralph Recto. Thanks to Red Atienza for the invite.
Friday at 11:50am

Benedict Bernabe · Top Commenter · University of Melbourne
Nonoy, one of the reasons why European economies have huge public debt is because they radically privatised many of the state's income-generating activities in pursuit of the neoliberal model of growth (example, UK under Thatcher and US under Reagan), arguing that a scaled back state will be better for the market, and that the state should not operate those outside its spheres of competence. Yet even the World Bank, the IMF and ADB have repositioned themselves about scaling back the state. The Philippines has a healthy debt to GDP ratio, to the point that the country has become a net IMF creditor. A big majority of our public debt is peso-denominated, which means it's used in making the local economy work. Having lower public debt per se is not a good thing in itself. We need some public debt. For one, it's an investment vehicle for the financial market. What we need is a change in perspective in terms of looking at public debt. The governments obligations are reverse side of the coin of the investments of the market. Lastly, there are no guarantees that we will see the entry of more foreign gambling companies once we privatise gambling. Besides, if foreign gambling companies come in, that means they will take their earnings out of the Philippines. There are many ways to improve PAGCOR operations, including amending the PAGCOR charter. But not outright privatisation. I believe that gambling should remain a state monopoly.
17 hours ago

Nonoy Oplas ·A "healthy debt/GDP ratio" at 40%? And we pay P328 B a year on interest payment alone, it's "healthy? come on. CCT spending of about P25B already caused huge political debate here, and people don't think that paying debtors P300+ B a year is just fine? come on.
14 hours ago

Benedict Bernabe · Let's just say it's "manageable." It's important to know who our debtors are. According to latest estimates, 60% of public debt is owed to the domestic market. Meaning, the government is borrowing from Filipino individuals and corporations. So most of the interest payments go to Filipinos and circulate within the Philippine economy. The government is also progressively paying off foreign debt so that it will constitute a much smaller percentage of the national debt. Debt is important in plugging crucial gaps in public spending. The only sustainable way to reduce debt-to-GDP ratios is to grow the economy organically and raise new taxes. Privatisation creates one-off revenues that looks good on paper for one year but leaves a gaping hole the following year that can only be matched by another big ticket privatisation. At one point, the government will run out of things to privatise. Besides, the only time that privatisation makes sense is if the state enterprise is operating at a loss that it requires a lot of state subsidy. I don't think this is the case with PAGCOR. There are better ways to cut public debt than to sell off the state's monopoly on gambling.
13 hours ago

Benedict Bernabe · Also: "Huge government debt, not private sector and household debt, is the main reason for the on-going economic and financial turmoil in a number of European economies now. Their governments have been over-spending and borrowing irresponsibly over the past years and decades." This is an oversimplification. The increase in sovereign debt of European economies is a result of the fallout from the US subprime crisis, to which many European lenders were exposed, requiring bailout by national governments. Bailout expenses, and stimulus spending, coupled with an unresponsive economy that translated to poor growth, hence poor internal revenue, places European economies in a position that made it harder for them to borrow money to finance spending. "Overspending and borrowing irresponsibly" does not capture the essence of the European sovereign debt crisis. The Philippines is in a stable monetary position because of the lessons learned from the 1997 Asian financial crisis, our markets and banks are well regulated and financial institutions adequately capitalised. This will not put us in any European-like crisis anytime soon. So public debt reduction does not justify PAGCOR privatisation.
13 hours ago

Nonoy Oplas · "reduce debt/GDP ratio... raise taxes" ouch. Perhaps you're working in govt or foreign aid bodies that raising taxes to the public is so easy to advocate.

"increase in sovereign debt of European economies is a result of the fallout from the US subprime crisis." See table 2 above, Greece, Italy, Portugal have debt/GDP ratio of 100%, 105% and 62% respectively, already high figures even before the US financial turmoil in 2008-09.
10 hours ago

Benedict Bernabe · Nonoy, I worked with Standard & Poor's Capital IQ as a researcher on the European market. The US subprime crisis started in 2006. European banks have been exposed to these securities even before 2006, hence the increase in debt to GDP ratio. In 2008-09. This era was marked by heavy stimulus spending, believing that spending will not stimulate economic growth. When that didn't happen, they attempted austerity measures, which are still not working. Now they're bailing out their banks. I work for the United Nations after that, on the development side and have seen that cutting out these revenue-generating entities will deal a serious blow to programs that address social inequality. We need more taxes, especially at the higher-tier income. We probably need to create a 40% income tax bracket, and we now have a political opportunity to do that. Your minimal government agenda works in developed countries but we're not there yet. Scaling back the state at this crucial point in development will only mean losing the gains that we have made so far. The privatisation of PAGCOR will only benefit the large capitalists who have enough capital to benefit from the windfall profits coming from gambling. What we need is legislation that dictates the use of proceeds from PAGCOR, not privatise it. Besides there are existing schemes that allow private sector involvement. Gambling should remain a state monopoly, at least in the next ten years.
9 hours ago

Nonoy Oplas · So you really work for one of those "spend-spend-spend, tax-tax-tax" agencies like governments and the UN, no wonder. Many government bureaucrats and politicians are busy operating casino, black jack, lotto, sweepstakes, cockfighting, etc. They are also busy regulating, taxing and restricting entrepreneurs who only want to put up a food shop, a bake shop, internet shop, barber shop, etc. Government failure in running after killlers, murderers, rapists, land grabbers, kidnappers, carnappers, other criminals is very high.

Why would govt bureaucrats and politicians want to endanger their lives running after armed robbers and murderers, when they can easily make more money operating casino and other gambling facilities.
9 hours ago

Benedict Bernabe · Your first paragraph is argumentum ad hominem and your second paragraph is argumentum ad captandum. Your entire proposition is based on reducing public debt through privatisation of PAGCOR. Why are we discussing crime rates all of a sudden? I believe this proves that the economic basis of this proposition is unsound in the first place, and mostly made up of generalisations. Your hypothesis is PAGCOR privatisation will help reduce public debt. The real question is whether the public will benefit from losing a revenue-generating enterprise and pre-paying its debt rather than paying its debt on original terms and keeping PAGCOR. Our credit ratings and credit outlook prove that we are in a very good position to pay our public debt in the long term. Perhaps it was best if you illustrated how the supposed gains from privatising PAGCOR and pre-paying public debt offsets the actual revenue losses that the government will incur.
8 hours ago

Nonoy Oplas · hmm, not ad hominem. That's how I look and view governments, the UN, other multilaterals WB, IMF, ADB, USAID, etc. Their main advocacies are consistent, government to spend-spend-spend, then tax-tax-tax, as what you precisely argued.

I brought up the issue of criminals and government failure, because ultimately we have to define "what is the raison d etre of government" and I argued that running casinos and operating poker and black jack is not and should never be a govt function.

On illustrating how PAGCOR privatization can lead to more govt resources (not losses), see the paragraph after table 1 above.
2 hours ago
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See also:

Privatization 3: UP, NDCP, other SUCs, March 27, 2010

Privatization 4: Utilizing Proceeds and Revenues, August 06, 2010

Privatization 5: Regulate Exec. Pay or Privatize Govt. Corporations? August 31, 2010 

Privatization 6: Camps Aguinaldo and Crame, January 08, 2011

Privatization 7: Debts -- Cut Borrowings, February 23, 2011

Privatization 8: Government Debts: Military Camps and Spratly Issue, June 20, 2011

Privatization 9: PAGCOR and Casino Operations, May 16, 2012

Privatization 9: PAGCOR and Casino Operations

There is a bill by Sen. Ralph Recto, SB 3178 abolishing and privatizing the Philippine Amusement and Gaming Corporation (PAGCOR), and creating the Philippine Amusement and Gaming Commission (PAGCOM), a regulatory agency.

I support this move for two reasons: One, get the money from such privatization and retire some public debts. When the debt stock is reduced, interest payment will decline. And two, government should shrink somehow, get out of casino operations and not be a player and regulator at the same time.

Proceeds of privatization should as much as possible, go to retire some debts or the excesses and over-spending in the past. Whatever savings from principal amortization + interest payment should be larger than privatization proceeds to be allocated directly to certain sectors. Hence, the savings from the reduction in debt stock and annual interest payment is sustainable.

I hope that this bill, with revision on the proposed allocation of proceeds, will become a law before the next elections in May 2013. Meanwhile, here are the 3 short papers I wrote in 2010.
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Privatize PAGCOR
August 02, 2010

(This is my article for People's Brigada News this week)

The main function of the government is to protect the citizens’ right to life, right to private property, and right to liberty and self-expression. That is, the government should promulgate the rule of law – the law against killing and murder, law against kidnapping and carnapping, law against stealing and plunder, and so on. And then people can concentrate on productive economic activities that expand the country’s wealth and resources.

The country’s public finance has been in an ugly situation for many years now, where government profligacy as indicated by persistent budget deficit (expenditures are larger than revenues) is the norm. From 2001 to 2009, for instance, the budget deficit averaged about P140 billion per year. That means borrowings of P140 billion per year or more.

This year, the projected budget deficit is P300 billion. But about 60 percent of it has been reached already in the first six months of the year. Raising existing taxes is a bad option for the public.

Privatization of many if not all, government-owned and controlled corporations (GOCCs) has a big potential of reducing the fiscal bleeding. And the Philippine Amusement and Gaming Corporation or PAGCOR should be among the first to go. Why?

One, government can raise new revenues without raising existing taxes or creating new taxes. Two, operating a gambling facility is far out as a "government responsibility." Far out compared to operating a public hospital or a public high school. Three, reduce corruption in government as that corporation is known to be a major milking cow by previous administrations. Four, raise additional revenues through tourism. Gambling and related entertainment is a big tourism project. The best tourist drawers will be the international gaming corporations like those operating in Las Vegas, Macau, Hong Kong and Singapore.

By privatizing PAGCOR and selling it to private operators, government can use the proceeds to retire some of the public debt. Then government’s annual debt servicing (principal amortization plus interests) will decline, then there will be less need for more borrowings and/or more taxation to pay old debts.

How much money will the government earn if it will privatize PAGCOR now? Based on independent assessments, that corporation can easily fetch between P67 to P100 billion if it is privatized this year. Former PAGCOR President Raphael “Butch” Francisco agreed with such valuation.

Gambling is an unproductive activity for the government. Unlike spending time and effort in public education, devoting time and manpower to operate casinos, poker, black jack and other gambling activities is not a wise move for the government.

Government can keep its function of regulating casinos and gambling facilities by private enterprises. In which case, PAGCOR can be renamed as a Philippine Gaming Regulatory Agency or similar name.

Plugging the budgetary leak and fiscal deficit this year and the coming years is among the most urgent challenges for the new government of President Aquino. Privatizing PAGCOR and other state enterprises is an important step in the right direction.

Fiscal irresponsibility 14: Debt crisis and government failure

(This is my article yesterday in the lobbyist.biz with original title, Debt Crisis and Government Failure)

A debt crisis is a situation where a debtor – a person, corporation, government, or other entities – is in a situation where it may not be able to pay its obligations to its creditor/s despite earlier promises or contract of paying on time, or on a renegotiated payment period.

Government failure is inability of government to provide or supply what it has vowed to the citizens. The more functions or welfare that government promises to the people, the bigger the danger of government failure. Among the most important functions of government is the promulgation of the rule of law.

When government borrows like crazy with a promise to its creditors that it will pay on time, then says that it may not be able to fulfill such obligation, that it may default some of its debt payment, then government is saying that it may throw out the rule of law on its debt contract.

The debt crisis of the US federal government was solved temporarily last August 2 when the US Congress enacted another law raising for the nth time the government’s debt limit. Thus, the debt uncertainty was “solved” temprarily by having more debt. Thus, the debt crisis of 2011 was only postponed into the future, maybe until next year, or next 2-3 years.

Now the US government got a big slap with a credit downgrade. For the first time, its AAA rating by S&P was downgraded to AA+ with a negative outlook, meaning another downgrade in the coming months and years is highly possible.

Low credit rating means lower possibility of that debtor that it can fulfill its debt contract on time and at the stipulated terms. Thus, higher risk for its creditors. So creditors will demand higher interest rate to reflect the possible danger in the future of the debt contract to be reneged or renegotiated.

I doubt that the US government, and many European governments for that matter, will realize their self-inflicted government failure, then blame market failure somehow for the mess. But the lesson is actually very clear and simple: If you live beyond your means, if you spend much higher than your income or revenue, then resort to endless borrowing to finance the funding gap, the natural resort is 100% predictable: ever higher debt.

A modest person or government would recognize the folly of such unsustainable lifestyle, and would solve such debt by cutting spending and/or raising income, not by more borrowing. A lower credit rating in fact should be a good opportunity, a good rationale, for the heavily indebted person or government, to cut its less important spending as there is higher penalty for more borrowing.

The US government has trillions of $ of assets and properties to sell if they really wish to solve that endless debt problem. Privatization of some of those assets is a good solution as the government can continue many of its projects and welfare programs, pay many of its debts and soon reduce the interest payment burden, without resorting to more taxation of the citizens.

But for many governments, rich and poor alike, more borrowing, even more taxation, is the usual solution. Today’s politicians who get today’s borrowings will not be around when those debts will fall due in the future. This is one moral hazards problem in government that largely explains why the debt problem tends to worsen rather than mitigate.

In short, hypocrisy is much larger than sincerity.
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See also:
Part 11, US debt default talks, July 18, 2011
Part 12, More on US debt default, July 28, 2011

Privatization 8: Government Debts: Military Camps and Spratly Issue

The hawks' noise, suggesting bigger military funding to "challenge" China in the Spratlys, keep ringing. Citing national pride, national sovereignty, national boundary for their claims, they are now counting how many billion pesos per year in additional funding to the Philippine Navy will be needed.

I oppose more taxation, more borrowings to finance more military spending for the Spratlys adventure. 

(Data source: Bureau of Treasury, Fiscal Performance 2010)

The budget deficit of P300 B per year is not enough, we need to raise it further? Perhaps to P350 B a year, or P400 B a year, or more? 

We should privatize Camp Aguinaldo, the DND and AFP can get the money for AFP modernization, and the DND, AFP HQ and their golf course can move somewhere. They should sacrifice somewhere in order to finance what they think is an important program. But if they insist that I and many other Filipinos will part more of our hard-earned money to finance AFP modernization, then it is something that I will not support. 

There are endless and yearly demand from all government agencies and sectors. Education and health will say "we need more money". Public works, housing, environment, justice will say "we need more money." Agriculture, credit, agrarian reform will say, "we need more money"; local governments, legislators, police, social work, CCT, etc. will say "we need more money." And soon, population control and condomeria will say "we need more money." Everyone in government is a sucker for more tax money. It's a bad culture in the government.

(Data source: Bureau of Treasury, National Government Debt, March 2011)
Advocates of "more taxes for military in Spratlys" proposal should produce sensible numbers, that their idea will not produce more adverse implications in the country's public finance and other components of the economy. They should also produce good arguments why Basilan or Sulu or Tawi-tawi provinces and archipelago, clearly in our territory, zero territorial dispute, remain undeveloped, and now they want more adventure to "develop" the Spratlys.

The BCDA Law of 1992 or RA 7227 stipulated that 32.5 percent of the proceeds of the privatization of military camps in Metro Manila and nearby provinces will go to finance the transfer of AFP camps, the construction of new camps, AFP modernization, housing and livelihood assistance to AFP personnel, rehabilitation of AFP medical facilities. 

Fifty percent (50%) will go to finance the conversion of Clark and Subic into commercial uses. Five percent for housing of the squatters of Metro Manila, Olongapo City and Angeles City. The balance to be appropriated by Congress.

Some sectors of the AFP said that they "practically got nothing" from the Fort Bonifacio privatization, so they are not in favor of privatizing Camp Aguinaldo. Well, they can keep that camp and its wide golf course, but please, they should NOT call for more taxes, more borrowings, to finance AFP modernization.

A friend suggested that the DOF and BIR should efficiently collect more taxes. These agencies know they should do it, it's just that the bad governance culture in the government simply disallows them to become efficient. Besides, a medium size corporation in the Philippines pays 47 diff. taxes and fees every year, compared to just 4-5 different taxes and fees in Singapore and Hong Kong. Supposedly capitalist Philippines actually has more business taxes than socialist China and Vietnam. Check the WB-IFC annual report, Doing Business 2011, doingbusiness.org.

Someone suggested the repeal of RA 7227 so that the whole sale of military camps will go to the AFP and not to the BCDA and other sectors mentioned above. That since the AFP modernization law was enacted in 1995, the AFP received the first release of about P5.4B in year 2000, and this was AFP's share for the sale of Fort Bonifacio. Congress NEVER included in the GAA any modernization money until it released P5B in 2002.

I can support that repeal or amendment to the BCDA law. Many people were actually asking, why give money to Clark and Subic when they have no debt, they have vast tracts of land which are clear assets, not liabilities. These are relatively easy to convert into cash for the BCDA.

We can ask one important question here: Is there any REAL external threat to the Philippines, a country that wants to invade us soon or in the medium term? 

If the answer is Yes, then we will need soldiers trained to fight invaders. If the answer is No, then abolition of the AFP is a logical move. The real threats in the country are internal -- killers, murderers, rapists, kidnappers, hold-uppers, carnappers, land grabbers, extortionists, thieves, drug pushers and other criminals. Both in government and the private sector. Even the communist NPAs and the Muslim rebellion are internal threats and should be a police function, not AFP function.

Some hawks insist that China and Vietnam are external threats to the Philippines. Wrong. As I repeatedly argued here earlier, China became richer by sending thousands of ships of cheap goods to the Philippines and elsewhere. China is now the world's 2nd largest economy (GDP size) next to the US, even without sending a single warship or a single tank to invade any country (except, well, its Tibet occupation). China and Vietnam will continue enriching themselves through trade. But vested interests who are salivating at the multi-billipn peso deals for military equipment are fanning the war dance rhetoric.

Someone suggested that China setting up drug labs, make us a dumping ground, do human smuggling in Chinatown, head the intellectual piracy, steal our natural resources, overfish, steal our coins and bring to China, and threaten our boundary by setting up military structures and send warships to patrol the area, as examples that China is an external threat.

Drug labs -- Chinese, Filipinos, others do it here. Human smuggling -- chinese, pinoys, europeans, do it here. Dumping of cheap goods, it's good. Only the very rich who do not need to go to Divisoria or Baclaran or elsewhere don't appreciate cheap goods from China. Intellectual piracy -- chinese, pinoys, indians, others do it here. Stealing of coins -- chinese, pinoys, do it here too. Where's the external threat there? 

About military structures in the Spratlys, that's why the solution is more foreign diplomacy, expose such actions by China and bring to various international fora. Better that we hire 50 or more new diplomats and researchers, than get 50 new warships, 50 new jet fighters, etc. to do what, "challenge" China?

I am no apologist nor lover of the China government. I can never support any BIG government, much less a communist government. But neither will I support expanding the Philippine government to supposedly "challenge" a fellow BIG government in the north.
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See also:

Privatization 1: Philippine Military Academy (PMA), January 02, 2010

Privatization 2: State Universities and Colleges (SUCs), March 20, 2010

Privatization 3: UP, NDCP, other SUCs, March 27, 2010

Privatization 4: Utilizing Proceeds and Revenues, August 06, 2010

Privatization 5: Regulate Exec. Pay or Privatize Govt. Corporations? August 31, 2010

Privatization 6: Camps Aguinaldo and Crame, January 08, 2011

Privatization 7: Debts -- Cut Borrowings, February 23, 2011