Friday, March 25, 2011

Quality and quantity of public spending: Public infrastructure, then and now - CROSS ROADS (Toward Philippine Economic and Social Progress) By Gerardo P. Sicat | The Philippine Star News Business

Quality and quantity of public spending: Public infrastructure, then and now - CROSS ROADS (Toward Philippine Economic and Social Progress) By Gerardo P. Sicat | The Philippine Star News Business

Quality and quantity of government spending: Education and public health - CROSS ROADS (Toward Philippine Economic and Social Progress) By Gerardo P. Sicat | The Philippine Star News Business

Quality and quantity of government spending: Education and public health - CROSS ROADS (Toward Philippine Economic and Social Progress) By Gerardo P. Sicat | The Philippine Star News Business


FIRST PERSON By Alex Magno (The Philippine Star) Updated March 26, 2011 12:00 AM

Perhaps a new law ought to be passed allowing private operators of public utilities to scour the open market for more efficient insurance coverage. When that happens, insurers will compete with each other to come up with the most efficient packages for the utilities.

Inefficient insurance covers produce costs that are eventually passed on to consumers by way of added tolls and charges. The old law, enacted presumably when all utilities were nationalized, restricts the choice of insurer to only one: the GSIS. The GSIS, therefore, is a monopoly with no pressure to provide better cover for lower premiums.

Insurance cover is, of course, indispensable. We saw in the case of the damaged Japanese nuclear plants that calamities and unforeseen risks could debilitate vital public utilities. When misfortune happens, the utilities ought to be able to call in insurance cover to quickly rebuild damaged facilities and keep economic disruptions to the minimum.
The same formula operates for individual vehicle owners and corporations who run our major utilities. All insurance policies involve payment of premiums actuarially arrived at by insurers. In a competitive environment, some companies might offer better cover for lower premiums.

Even if they charge the same premiums, some companies might offer a lower deductible threshold than others. In the case of ordinary cars, owners are normally asked to pay for the initial P5,000 of the total costs of insurable damages. If cost of repair is less than P5,000, the owner shoulders the entire cost. If the car is totally lost, the P5,000 might seem more than reasonable.

For large utilities, the insurance premiums run into millions of dollars. A higher deductible threshold for damaged plant and facilities could mean that a lot of cases of plant or equipment loss falling under the threshold will have to be paid for by the utilities company and not by the insurer.

Take, as a case in point, the National Grid Corporation of the Philippines (NGCP), the private company that has taken over what used to be the National Transmission Corp. (Transco).

NGCP, as did its predecessor, pays the GSIS an annual premium of $8.7 million to cover risks due to natural catastrophe or acts of terrorism. The GSIS policy features a deductible cover of $5 million (or about P200 million) for the annual aggregate of claims, $2 million for each and every loss for its submarine cables and the same $2 million for each and every incident of loss to terrorism or sabotage.

It was Transco’s experience, and now the NGCP’s, that most incidents of loss did not exceed the deductible threshold. From 2006-07, Transco’s losses from 10 separate incidents beyond its control totaled about $2.85 million. For 2007-08, losses such as terrorist attacks on power lines and towers amounted to $1.36 million. From 2008-09, the same category of losses from 12 separate incidents amounted to $2.4 million.

In all cases, the losses fell within the deductible threshold and the Transco was not able to collect a single dollar from the GSIS. All the accumulated losses accrued to operating costs passed on ultimately to consumers.

With a new law that enables greater competitiveness for the provision of insurance covers, our public utilities might find a much better deal — and less need to pass on losses to consumers.


There is no certainty about when oil prices will begin to relax. There is, likewise, no certainty about when we could begin delivering oil products to the city in the most economical way: using the pipeline that runs from Batangas to Pandacan, including underneath the controversial West Tower condominium in Bankal, Makati.
First Philippine Industrial Corporation (FPIC) spared no effort fixing the leaking portions of the pipeline, cleaning up the spill and conducting full remediation of the affected area. The pipeline operator recently hired an internationally recognized environmental remediation company, CH2M Hill, to work around the clock developing a permanent solution to the problems created by the pipeline leak.

For months now, FPIC has been hauling and treating the wastewater that continues to seep into the West Tower basement. Soon, an on-site water treatment facility will be installed in the affected area.

As an act of goodwill, FPIC offered residents of West Tower some amount to compensate for the troubles caused by the oil leak. After full remediation, the company is confident the affected residents may safely return to their homes.

The efforts of FPIC to remediate the area, solve the water seepage into the condominium’s basement and eventually reopen the pipeline are now in a bind, however.
In order to test the integrity of the pipeline and see if there are any more leaks, FPIC must turn it on. But the residents of West Tower have blocked that by winning a Writ of 
Kalikasan from the Supreme Court.

In order to permanently solve the problem of water seepage, the FPIC needs to see the engineering plans for the building. The residents would not give them access to those plans. The Makati engineering office, surprisingly, claims it has no copy of the engineering design. Even the builder of West Tower has no copy. The plans might help in determining if a flaw in the condominium’s engineering design actually caused the oil leak and continues to cause water seepage.

Lately, the residents, encouraged by a few lawyers, have filed multi-billion peso civil suits against the FPIC. Not only have they refused to cooperate with efforts at remediation, they now want the pipeline shut down completely. Without using that pipeline, consumers will have to pay millions more each day in additional fuel costs to cover the expense of hauling the oil overland.

At this point, we can say both the remediation effort and the testing of the pipeline are held hostage by narrow interests conveniently overlooking the greater public good.

Fact whispers, fear screams

People don’t understand a lot of things about radiation, so there’s understandable fear. There’s always fear of something you don’t understand—fear of the unknown. It’s a normal human reaction. The solution to it is not to give into that fear. The answer is to understand. I was taught about nuclear power in school, but that was over 50 years ago. Much has changed since and my memory is not what it used to be. So I’ve had to brush up, and do a little research (Google is amazing isn’t it?) Having done so, I’m convinced that the risks are outweighed by the benefits. That belief is supported by what I also do (many seem unable to) and that’s to trust independent technical experts. Note the three words: “independent”, “technical”, “expert”. I will only accept someone who is all three. Independent technical experts have assured us today’s modern designs are safe under almost all conceivable conditions. Not “all”, nothing is totally sure, except death. That is sure to happen somehow, sometime. Ignorance has no place in decision-making.

Let’s look at the safety record in various industries over the past 32 years (since 1979 when the Three Mile Island accident occurred).
More than 25,000 have lost their lives due to maritime accidents, while around 20,000 have died due to aviation-related ones. There have been more than 3,000 deaths recorded due to structural fires and close to 8,000 attributed to train accidents. The World Health Organization, meanwhile, estimates that close to 1.2 million people die of road accidents each year.

Nuclear accidents, on the other hand, have killed 38 people. Here’s a list of them and what happened.
On March 28, 1979 the Three Mile Island nuclear power plant suffered partial breakdown. Around 140,000 people were evacuated after the accident. No deaths or injuries were reported.

Uranium leaked at a nuclear site in Tennessee, United States in August 1979, which resulted in the contamination of more than 1,000 people. There were no deaths.
From January to March 1981, four radioactive leaks were recorded at the Tsuruga facility in Japan. More than 200 people were contaminated. They survived.

On April 26, 1986 an experiment at the Chernobyl nuclear facility in Ukraine went wrong. One of its reactors exploded and this scattered radioactive gases into some parts of Europe. According to reports around 200 people were “seriously contaminated” after the accident. Officials reported 32 deaths. Chernobyl is considered the worst nuclear power facility accident in history. But was caused by an experiment, not through normal operations.
An explosion occurred at a reprocessing plant in Western Siberia in April 1993. The blast resulted in the release of radioactive gas composed of elements such as Uranium-235 and Plutonium-237. There were no casualties.

In November 1995 it was reported that workers trying to remove fuel from 1 of the Chernobyl plant’s reactors got exposed to radioactive gas. No official figure on the number of affected workers was provided.

An explosion occurred at the Tokaimura experimental treatment plant in Tokyo on March 11, 1997. Officials said 37 people were exposed to minimal radiation.
On September 30, 1999 an accident occurred at a uranium reprocessing facility northeast of Tokyo. According to reports some 600 people were exposed to radiation after the incident; 2 workers died.

Non-radioactive steam leaked at a nuclear power plant in Mihama, Japan on August 9, 2004. Four workers reportedly died.

As to earthquakes, this one was of unique intensity.

Since 1980, there have been around 38 major earthquakes recorded by the United States Geological Survey in the world. Two were with magnitude between 5 and 6, claiming around 3,300 lives. Eighteen earthquakes with magnitude between 6 and 7 recorded by the agency during the period caused some 320,000 deaths; 13 with magnitude ranging from 7 to 8 killed an estimated 270,000 people; 4 recorded earthquakes with strength between 8-9 claimed 20,000 lives while a lone 9.1 earthquake that struck Sumatra in 2004 caused around 230,000 deaths. There is now one more at 9, but just look at deaths, about 10,000 so far with a likely 20,000-25,000 in total expected. One tenth of the number of people killed in Indonesia. It shows how being prepared can save lives (Oh there were other factors too, but this was certainly one of the reasons fatalities were so low).

When you realize that each additional point is 10 times the intensity then going from 7 to 9 results in an earthquake that is 100 times stronger. Nuclear plants are designed to withstand a 7-8 intensity earthquake, not a 9. But, no doubt, now they will be. This is another reason why Bataan needs to be looked at carefully not just by nuclear scientists and structural engineers, but also by geologists. A new plant design needs to be equally carefully considered.

What the Fukushima disaster shows is not that nuclear power is unsafe, but that nuclear plants must be modern and fully protected with two (not just one) standby systems. Reviving Bataan is still a possibility, but it is 20 years old so would need expert assessment and an analysis as to which makes the best—and safest—sense, BNPP or a new one. Whichever is the cheapest shouldn’t even be considered, commercial factors have no role in choosing nuclear plants. One thing you don’t do is award the contract to the lowest bidder, maybe the highest. There can be no compromise on nuclear power. You limit the bidding process to only the very top names in the industry. From them and them only, you can perhaps choose the lowest cost.

Where I do have genuine concern though for a nuclear power plant in the Philippines is whether we can be 100 percent (not 99) assured operating and maintenance codes will be followed to the absolute letter. If a bolt is to be tightened to 50 ft.-lbs. will a torque wrench be used, or a guesstimate of the mechanic? This is where I’d have the real fear, the too-casual approach to maintenance in the Philippines. Will the torque wrench even be there? I can’t list the tools I’ve had stolen by people working for me, or the power tools broken by careless handling. A casual approach to operation and maintenance can’t be tolerated; everything must be done absolutely to the letter. That dedication is rare here.
Nuclear power is clean energy, it’s lower cost than other sources, it has almost unlimited raw material, it makes good sense from a factual point of view. I want cheaper, reliable power. Nuclear can give it. Thirty-eight people dead in 30 years—it’s safe.

Time to face facts, not fears.
Ombudsman Merceditas Gutierrez is partially correct when she says “my conscience is clear; I’ve done nothing wrong”. She just added one word at the end that she shouldn’t have.

One columnist, in trying to defend Gutierrez cited the large number of cases she’d handled and successfully resolved. It’s a non-sequitur, the correct analysis is: what action did she take on some (in)famous controversial cases? And there the answer is: NONE. And that’s what it’s all about.

Here’s some of the top ones that were filed in her office, and the result as of now:
Bolante fertilizer scam (amount involved: P728 million, funds earmarked for fertilizer but used instead to allegedly finance Gloria Arroyo’s candidacy in 2004 elections)—no case has been filed against Bolante despite the Senate finding fraud and recommending filing of cases against Bolante and other Agriculture officials.

NBN-ZTE Deal (amount involved: $329M, an overpriced deal entered into by the government that GMA made a special trip to China to sign. It allegedly involved P200M grease money offered to Romulo Neri that he reported to Arroyo)—yet to be acted upon.
Megapacific—Comelec contract (Amount involved: P1.3 billion, poll modernization contract with Megapacific tainted with fraud and legal infirmities)—nothing has happened.
The Ombudsman has also failed to act on the case of slain Navy ensign Philip PestaƱo and the euro generals scandal. These are just a few, but it’s enough because you’ll note a common thread through it all that many believe explains the lack of action.
Whatever the final outcome is, the exposes during the Senate inquiry should be most interesting.

The President wants to cleanse this nation of the high level of corruption it achieved under Arroyo (that’s not some biased assessment by a disillusioned analyst, that’s the independent comparative assessment by a well-regarded body with no axe to grind, Transparency International) you don’t do it with an Ombudsman that sits on cases reeking corruption. You investigate them as deeply and rapidly as you can.
Copyright Manila Standard Today 2005-2009

Thursday, March 24, 2011

FEF Welcomes two new Fellows

The Foundation for Economic Freedom added two new Fellows in its roster today: Atty. Rene Limcaoco and Prof. Victor Andres "Dindo" Manhit.

Atty. Limcauco is currently the CEO of Licca Automotive Group, the largest non-manufacturing automotive group in the Philippines.  He is also professor of Law and Economics in Ateneo de Manila University.  He took his undergraduate studies in Economics in Stanford University.
Prof. Victor Andres "Dindo" Manhit is Managing Director of Stratbase Consultancy, an advisory and research firm whose former Chairman is current Foreign Affairs Secretary Alberto del Rosario.  Prof. Manhit has a Masters in Public Administration and was a former Professor in Political Science in De La Salle.

Tuesday, March 15, 2011

What FEF is all about

Here's an old paper presented by FEF's former President Alex Magno explaining what FEF is all about.  This was posted in the Friedrich Naumann Foundation website in 2003.

Monday, March 14, 2011

BusinessWorld Online Edition |The frog prince and OPSF

BusinessWorld Online Edition |The frog prince and OPSF

Posted on March 13, 2011 08:15:25 PM

Introspective -- By Raul V. Fabella

The frog prince and OPSF

The price of Dubai crude shot up to $110.63 per barrel on March 7, 2011, up $11 from where it stood at the beginning of the year. While it is some ways from the $140 a barrel in 2007, the price spike suggests some further upward movement as the Libyan crisis protracts. Oil-importing countries are once more caught in an inflationary vortex and must manage the adverse effects on their economies. The pump price of diesel fuel has breached P43 per liter and average inflation now threatens to breach 4% in the Philippines.

This is a recurring problem, and how to address it is a delicate balancing act. On the one hand, the government must be seen to be doing something; on the other, what it does can permanently cripple the future prospect of the economy. The Philippines is a parable of repeated self-crippling.

The finance department has trial-ballooned the lifting of the 12% VAT on oil and targeted subsidy for the poor. The finance department correctly rejected the lifting of the 12% VAT on oil during the last oil price spike in 2007. The government -- facing a gaping fiscal deficit and increased spending programs -- will do well to do the same. While some programs can be indefinitely postponed (the K-12 program of the Department of Education is very costly, without commensurate foreseeable benefits and will actually impose added burden on households with school-age children), others such as the infrastructure program and the CCT cannot be postponed as they themselves act as social safety nets. Th additional targeted subsidy needs financing. The windfall tariff revenue from rising import bill should be the proper primary financing source.

Many bills filed in Congress display more bluster: repeal the Oil Industry Deregulation Law of 1998 and restore the Oil Price Stabilization Fund (OPSF). Foisted and rejected in 2001 and again in 2007, this avatar refuses to die. Why? The OPSF means to address two market failures: (1) the social cost of the price volatility of the fuel price and (2) the abuse of market power by oil companies, or both. The micro-theoretic argument for price stabilization is compelling: Set the pump price of fuel according to the long-run average price of petroleum, accumulate reserves when the current petroleum price is less than the long-run average, de-cumulate reserves when the current price is higher than the long-run average and the expected balance of the reserve equals the seed fund made available initially. When the conditions are right, the OPSF erases pump price volatility stemming from global petroleum price fluctuations around the mean. It’s the closest you come to value for nothing! In reality, the proper implementation of OPSF requires some very difficult conditions. First, the government has to know the long-run average which involves accurate forecasting of petroleum prices. If this is too low, the OPSF becomes a general pump price subsidy as the fund goes in the red. The government also has to know when there is a regime shift (a rise, say, in the long-run average) and to adjust pump price accordingly. Most crucially, government must have the mettle to stare down political pressure when it’s time to raise the pump price. Given irresolute governance, the OPSF balance quickly goes into the red and becomes a permanent fiscal burden. This is what happened.

The OPSF contributed immensely to semi-permanent Philippine fiscal crisis from 1984 to 1998. The cost of OPSF to the taxpayer in 1998 alone would have been P8b. It subsidized motorists (with more subsidy going to SUV owners) while it bled the budget for infrastructure. Cheap fuel burned over bad roads means longer travel time, more fuel burned, and higher net fuel spending! Do you wonder why our road infrastructure is so bad compared to our regional neighbors?

Behind the OPSF proposal is the usual undercurrent of romance with a nationalized oil industry. Abuse of market power by oil companies is the perennial bogeyman. That the nationalization of the oil industry as a remedy opens the floodgates to misuse of government power is conveniently shelved. That government failure costs society more than market failure is forgotten. Forget "Telepono sa Barangay"; forget the massive overpricing at NFA; forget the water supply interruptions before MWSS was privatized. I shudder at the thought of the orgy of waste and rent-seeking.

It puzzles me how the people who normally castigate the government for failing to count votes properly or run trains properly also believe that the same government can operate, to public benefit, oil price stabilization or a nationalized oil industry. Why will the perennial rogue suddenly turn into a saint? I call it the fallacy of the frog prince: however ugly you are, the kiss of the princess will at once turn you into a handsome prince. The frog is the government and the princess is OPSF or your favorite state intervention! If only life was so simple!

Raul V. Fabella is with the UP School of Economics and the National Academy of Science and Technology.