BusinessWorld Online Edition |The collective action problem

BusinessWorld Online Edition |The collective action problem

INTROSPECTIVE

The Collective Action Problem

By Calixto V. Chikiamco

What is the collective action problem?

It’s the problem that arises when individuals, acting as a group, would be much better off taking a projected action but do not do so because the costs of acting collectively makes individuals rationally choose non-action.

For example, parents would be better off if they could have the schools publish objective outcomes of performance (say, passing rate in the nursing exams) to guide them on where to invest on their children’s education. But the costs of associating, negotiating, demanding, meeting, etc. with all the schools would be too much for individuals to bear, plus the fact that some individuals will “free ride” on the issue. Hence, the action is not done.

Enter the government. In some ways, the rational for government is that public goods would not otherwise be provided if left to individual rational choice alone. Government can simply mandate that all schools, in order to renew their license, must publish objective outcomes of performance. It’s more efficient for government to mandate an action that would lead to society being better off because millions of individuals acting rationally would not undertake the action. (The fact that a number of schools are owned by politicians and resist government-mandated disclosures is another issue altogether.)

What’s the relationship between collective action and development?

We now know that development is not simply a matter of “getting prices right.” The market fundamentalist assumptions behind the Washington Consensus (stabilize, privatize, liberalize) proved to be a bust. Emerging economies who adopted the Washington Consensus formula did not come out better off, and in some cases, even worse off as they experienced crises and corruption. China, the star of development in the modern times, adopted economic policies, such capital controls, state-owned banks and enterprises, and managed exchange rate, that are contrary to a totally free market model.

We know that development is also a question of national will. The East Asian miracle – the story of the post World War II development successes in Japan, Taiwan, Hong Kong, Singapore, South Korea, Thailand, Malaysia, and Indonesia – was less about getting prices right, but more about political will, or the mobilization of national institutions toward growth and national development.

A characteristic of these East Asian miracle countries is that there was a single party or institution that embraced a developmental vision and then “forced marched” their respective countries to growth and development. Koumintang in Taiwan, LDP in Japan, Communist Party in China, the military in South Korea, Golkar in Indonesia, PAP in Singapore, UMNO in Malaysia – all played vital roles in mobilizing their respective nations toward development. Their collective action problem was solved by development-oriented political parties or institutions.

Obviously, this is a problem in the Philippines, where there are no genuine political parties infused with a development vision to speak of. The result is development incoherence, of the country “muddling through,” rather than marching toward development.

The Aquino administration’s developmental vision consists entirely of eliminating corruption – walang korrupt, walang mahirap – but can President Aquino by his lonesome self change the culture of corruption, and can eliminating corruption really lead to progress and economic development? The experiences of other countries – corruption scandals have been associated with the UMNO in Malaysia, LDP in Japan, Golkar in Indonesia, to name a few – show otherwise: eliminating corruption is neither a necessary nor sufficient condition for development.

The collective action problem is the reason why political reform as much as economic reform must be in the development agenda. We need to fix our political system as much as we need to do economic reform. At the very least, we need to fix our political party system, because the people’s collective needs, desires, and aspirations are best expressed politically through parties, but how?

One idea is public financing of political parties. A bill along these lines together with public financing of political campaigns was filed in the last Congress, but it died because it didn’t get any support from Malacanang. I’m not a political scientist and I do not know if this is feasible, but public financing may help deter party-switching and strengthen programmatic or ideological parties. The present patronage system encourages corruption and party-switching.

Another idea is to remove the 20 percent cap on the party list representatives. However, both the Comelec and the Supreme Court have been complicit in corrupting the process because just about any so-called marginal group, whether security guards or cockfighting afiocionados, are represented by tradpols. Besides, these so-called parties are bereft of any developmental vision.

It has been suggested that if the government is too weak to undertake collective action to confront development challenges, Philippine-conglomerates, such as San Miguel, Ayala, or PLDT-First Pacific, will step into the breach. After all, domestic conglomerates like keiretsus in Japan and chaebols in South Korea played outsized roles in their respective countries’ development push.

This is the benign view. In those countries, where conglomerates played a successful role, their tendency to commit abuses was curbed by a need to compete in the global market and by accountability to a strong political authority. On the other hand, in the Philippines, almost all the conglomerates are into regulated, non-tradable industries, are inward-looking, and confront a weak state with little capacity for collective action. It’s more likely that whatever collective action local conglomerates undertake, it would be for their shareholders and narrow self-interest.

Apart from the anti-corruption crusade, the Aquino administration seems bereft of any deep reflection about the real causes of Philippine underdevelopment. Perhaps it is indeed time for Constitutional change, if only to spark debate on how our political institutions can be shaped to better meet the challenges of development.

Institutions matter. Politics matter. Collective action matters. These are true and must be taken to heart if we are to catch up with our more dynamic Asian neighbors.

Cebu City and Foundation for Economic Freedom signs MOA Advancing Residential Titling







Logo of FEF on the entrance wall of the new
Land Management Office of the Local Government of Cebu



FEF, Inc. PRESS RELEASE

May 10, 2011

Cebu City -– Mayor Mike Rama of Cebu City led the signing of a Memorandum of Agreement with Calixto Chikiamco, President of the Foundation for Economic Freedom, Inc. for the provision of technical assistance to strengthen the city’s Land Management Office.

Mayor Rama, through an executive order created the Land Management Office (“LMO”) last January 14, 2011. The LMO, with the full support of the City Council, was envisioned by the City Government as the office charged with managing land assets, land use, titling and other land related concerns of the local government. The LMO will coordinate with local agencies like the tax assessor, planning, housing and other development offices, and with national agencies like the Land Registration Authority and the Department of Environment and Natural Resources regarding issues of land titling, land use, land valuation, taxation, survey and housing.

The Foundation for Economic Freedom, together with its partner, The Asia Foundation and with support from the United States Agency for International Development, will provide technical assistance to the City of Cebu under its “Property Rights for Economic Progress” (PREP) Project.

The “Property Rights for Economic Progress” Project is a program that seeks to aid, assist and spur the establishment of land offices throughout the country to implement a multi-purpose cadastre. A multi-purpose cadastre refers to a parcel-based and up-to-date information system containing a record of interests in land and other attributes related to a parcel such as ownership or control of those interests, land development and other attributes ascribable to the particular parcel of land in relation to other parcels including physical (natural or man-made), phenomenal (natural or caused by man) legal and fiscal attributes.

The City of Cebu and FEF, sees that one of the  outcome of the Land Management Office is the creation of more titles without need of costly and long judicial adjudication. Instead the new titles will be issued administratively through the effective and systematic implementation of the Residential Free Patent Law (RA 10023). The said law authorizes the Department of Environment and Natural Resources to title previously untitled residential lands and untitled parcels of land used for public purposes such as barangay halls, schools, public parks and socialized housing among others.


Implementation Structure of the
"Property Rights for Economic Progress (PREP)" Project
Posted on the wall of the Cebu Land Management Office


With this initiative, Cebu City paves the way organizing land information in an LGU-managed multi-purpose cadastre.  It is expected that more robust title and land information in Cebu will lead to increased economic activity, reduce social conflicts and improve governance decision-making.

About the Foundation for Economic Freedom

The Foundation for Economic Freedom is a public advocacy organization dedicated to advancing the cause of economic and political liberty, good governance, secure and well-defined property rights, and market oriented reforms. It counts among its members former and present Cabinet secretaries and undersecretaries, leading figures in the academe, respected media personalities and opinion makers, and prominent members in the business and finance community.

Contact Information

The Foundation for Economic Freedom (FEF) is located at Room 303, Philippine Social Science Center (PSSC) Bldg., Commonwealth Avenue, Quezon City with telefax (02) 4532375. Follow us at Facebook and Twitter (RPeconofreeedom). Join FEF in its blog at http://econfreerp.blogspot.com/ or email FEF for any query or clarification at fefphilippines@gmail.com.

BusinessWorld Online Edition |A bad FIT

BusinessWorld Online Edition |A bad FIT

A bad FIT

Introspective -- By Romeo L. Bernardo

Business World/ May 9, 2011

There have been numerous publicity releases from advocates and developers of renewable energy projects in connection with the forthcoming release of the Feed-in-Tariff (FIT) recommendations by the National Renewable Energy Board (NREB). From here, it will be subject to public hearings by the Energy Regulatory Commission.

Allow me to share a statement, below, of the Foundation for Economic Freedom on this issue: "Make Renewable Energy subsidies transparent, limited and technology neutral." The FEF is a public advocacy group espousing market-oriented reform for good governance and consumer access.

It counts among its fellows, eminent economists and former senior government officials such as PM Cesar Virata, Felipe Medalla, Bobby de Ocampo, Mahar Mangahas, Gerry Sicat, Anton Periquet, Peter Wallace, Simon Paterno, Arsenio Balisacan, Ernest Leung, Gary Teves, and my three fellow columnists under this Introspective column banner -- Cayetano Paderanga (on leave), Raul Fabella, and Calixto Chikiamco.

Quote. In the matter of implementing the Renewable Energy Act of 2008 (R.A. 9513), the Foundation for Economic Freedom (FEF) believes the Feed-in-Tariffs to be issued by the Energy Regulatory Commission must provide for an absolute peso cap on the total amount of subsidies that the public will be made to bear. These subsidies must be capped both on an annual basis and for the life of the project.

The amount of public subsidy for Renewable Energy (RE) projects, which could run to several tens of billions of pesos per discussions at the National Renewable Energy Board, should be explicitly disclosed and shown to be commensurate to the social benefit that the public is expected to derive from this program. As is done for all public expenditures, the outlay should be transparently evaluated based on "value for money" to the public. It should likewise consider the ability of the public to shoulder additional levies on a per kWh cost of power. The Philippines already suffers from one of the highest power rates in the world. We should not unnecessarily add to the already heavy burdens of our electricity consumers and businesses.

Moreover, the FEF believes that the selection of projects that have recourse to such subsidies should be based on lowest cost Renewable Energy projects first, regardless of technology. We believe this is the best use of resources for the country as it will require the least amount of subsidies per kilowatt-hour generated, which in turn can support higher installation targets and greater quantities of environment-friendly energy for a given cost to the consumer.

We estimate the subsidies required for the two most expensive RE technologies, Solar and Wind, could otherwise pay for 5 times as much energy from the next cheaper source, which is Biomass, or 8 times as much energy from the cheapest, which is Run-of-River hydro, of the RE technologies eligible for the Feed-In Tariffs. When you add the cost of additional reserves and transmission facilities needed to support these RE projects, the case for judicious allocation of the FIT subsidies becomes even more compelling.

While this approach may initially discourage diversity of RE sources, the potential to produce more Renewable Energy at affordable costs should be the overriding policy direction. In any case, the projected energy from these more expensive technologies is not of a magnitude that would impact the energy mix, just the energy cost. Postponing some of the more expensive technologies, instead of locking in the high costs now for 20 years, will allow the Filipino people to benefit from the expected improvements in both the efficiency and costs of these technologies. The Philippines already has renewable energy generation capacity equivalent to almost 34% of its total installed capacity, well ahead of most other countries in the world. We can move further ahead by focusing our limited resources on the more affordable renewable energy projects at this time.

This is not to say that technologies such as Solar PV have no place in our energy mix at this time. They may be the best, or only, substitute, in some areas, for expensive diesel-fired plants serving off-grid customers. When they are used to augment off-grid diesel installations, the avoided costs (and emissions) are higher, so the required incremental subsidy is less. And no additional reserves or transmission facilities are needed. In fact, solar technology is already used in a significant number of rural electrification projects all over the country.

We support the Renewable Energy Act of 2008 and believe our future hinges on the sustainable use of resources. But when the public has to bear the costs, let us ensure the resources are used judiciously. End.

Postscript. The recommended FIT program will likely add 13 centavos per kWh to everyone’s bill, amounting to P 9 billion annually, or P 180 billion for the twenty year proposed contract period. That could buy an awful lot of school buildings, highways, houses for the homeless, etc., all of which provide very clear benefits to the public.

On the other hand, what is it exactly that the envisioned FIT program is supposed to buy us? It is unclear. Is it to lower our carbon emissions in order to help arrest global warming? Our carbon footprint is a rounding error vs. the large and more industrialized countries, and our RE component, at 30 to 40 pc of installed capacity, is already five times the global average.

If despite these, we want to do more carbon emission reduction, why choose such an inefficient RE technology like solar for on-grid whose subsidy cost for carbon reduction is six times bio-mass, and eleven times hydro?

Instead of adopting the NREB recommendations, the ERC can rule that just like any government procurement, RE projects should be selected using an auction process, thus minimizing costs and/or maximizing benefits. Or ERC can set a universal FIT level only fractionally higher than current cost of power-say no more than 30 pc higher (vs. in excess of 300 pc premium for solar) and approving all projects meeting that hurdle, irrespective of technology. Our ERC will save our people tens of billions of pesos of needless higher electricity expense over the next 20 years. By doing this, it can also relieve pressure on electricity rates so that universal charges under the EPIRA can be promptly implemented, and thus provide our national treasury funding for needed social and infra spending -- instead of giving these money away to foreign suppliers of immature and inefficient technologies.

Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA). He was Finance undersecretary during the Aquino and Ramos administrations.  He also currently serves as the Vice Chairman of the Foundation for Economic Freedom, Inc.

Renewable energy -- reality check

BUSINESS WORLD
Opinion
Posted on January 30, 2011 08:37:59 PM
Introspective -- By Romeo Bernardo

Renewable energy -- reality check

The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.

My attention was caught by a news article reporting a billion-dollar renewable energy loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that "most of the $ 1 billion loan will be focused on supporting solar, wind and biomass power projects". I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.

The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kWh, biomass and wind around P 10. This compares very poorly with the current grid rate of P4.50 per kWh -- anywhere from two to five times true cost now.

So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty-free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.

The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public’s power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kwh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.

Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB-supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P 5,000-a month contract for a dozen years .)

The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won’t be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge -- so no advantage in rushing.

These solar and wind technologies are already being subsidized by those who can afford them --taxpayers and consumers in developed countries helping their firms in these emergent technologies -- in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers.

Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs -- in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)

If we don’t support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity -- and calling for caution in embracing these fashionable, but for now, costly, distractions.

Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is the Vice Chair of the Foundation for Economic Freedom, Inc. and a board director of the Institute for Development and Econometric Analysis.

Make RE subsidies transparent, limited and technology neutral--FEF

In the matter of implementing the Renewable Energy Act of 2008 (R.A. 9513), the Foundation for Economic Freedom (FEF) believes the Feed-in-Tariffs to be issued by the Energy Regulatory Commission must provide for an absolute peso cap on the total amount of subsidies that the public will be made to bear. These subsidies must be capped both on an annual basis and for the life of the project.

The amount of public subsidy for Renewable Energy (RE) projects,   which could run to several tens of  billions of pesos per discussions at the National Renewable Energy Board,  should be explicitly disclosed and shown to be  commensurate to the social benefit that the public is expected to derive from this program.  As is done for all public expenditures, the outlay should be transparently evaluated based on "value for money" to the public.  It should likewise consider the ability of the public to shoulder additional levies on a per kWh cost of power. The Philippines already suffers from one of the highest power rates in the world. We should not unnecessarily add to the already heavy burdens of our electricity consumers and businesses.

Moreover, the FEF believes that the selection of projects that have recourse to such subsidies should be based on  lowest cost Renewable Energy projects first, regardless of technology. We believe this is the best use  of resources for the country as it will require the least amount of subsidies  per kilowatt-hour generated, which in turn can support higher installation  targets and greater quantities of environment-friendly energy for a given  cost to the consumer.

We estimate the subsidies required for the two  most expensive RE technologies, Solar and Wind, could otherwise pay for 6  times as much energy from the next cheaper source, which is Biomass, or 15  times as much energy from the cheapest, which is Run-of-River hydro, of the  RE technologies eligible for the Feed-In Tariffs. When you add the cost  of additional reserves and transmission facilities needed to support these RE  projects, the case for judicious allocation of the FIT subsidies becomes even  more compelling.

While this approach may initially  discourage diversity of RE sources, the potential to produce more Renewable  Energy at affordable costs should be the overriding policy direction.  In any case, the projected energy from these more expensive  technologies is not of a magnitude that would impact the energy mix, just the  energy cost. Postponing some of the more expensive technologies,  instead of locking in the high costs now for 20 years, will allow the  Filipino people to benefit from the expected improvements in both the  efficiency and costs of these technologies. The Philippines already has  renewable energy generation capacity equivalent to almost 34% of its total  installed capacity, well ahead of most other countries in the world. We  can move further ahead by focusing our limited resources on the more  affordable renewable energy projects at this time.

This is not to say  that technologies such as Solar PV have no place in our energy mix at this  time. They may be the best, or only, substitute, in some areas, for  expensive diesel-fired plants serving off-grid customers. When they are used  to augment off-grid diesel installations, the avoided costs (and emissions)  are higher, so the required incremental subsidy is less. And no additional reserves or transmission facilities are needed. In fact, solar technology is already used in a significant number of rural electrification projects all  over the country.

We support the Renewable Energy Act of 2008 and believe our  future hinges on the sustainable use of resources. But when the public has to bear the costs, let us ensure the resources are used judiciously.

The Foundation for Economic Freedom is a public advocacy group espousing market oriented reform for good governance and equitable consumer access. The Foundation is composed of, among others, eminent economists and former senior government officials such as PM Cesar Virata, Bobby Ocampo, Felipe Medalla, Romy Bernardo, Calixto Chikiamco, Mahar Mangahas, Simon Paterno, Ruping Alonzo, Gerry Sicat, Gary Teves, Peter Wallace, Alan Ortiz and Gloria Tan Climaco. Please see attached Corporate Profile for reference.

You may get in touch with our Executive Director, Atty. Ricardo P. Balatbat III, at the office number provided below or through his cell phone number, 0917 -5693262 or via his email at rpbacad@gmail.com, for any clarification or query.