Govt. & Taxes, Philippines

Tuesday, May 30, 2006

Why DAP should be privatized

The Development Academy of the Philippines (DAP, www.dap.edu.ph) is one of those redundant government corporations whose functions are better left to the private sector and whose annual budget, along with many other government corporations, agencies, and state colleges/universities, are better not collected in the form of tax cut. Why do I say so?

One, fiscal burden.
DAP receives P70 million per year in 2005 and 2006, P168.7 million in 2004. If the budget of DAP is sourced mainly from ordinary office runners and janitors receiving salaries of P8,000/month on average, and those guys are taxed 15% on average of their annual income, or P15,600/year in personal income tax, then government will need to expropriate partly the incomes of 4,487 ordinary office employees, to get P70 million. For DAP's 2004 budget of P168.7, government would have expropriated part of the incomes of 10,814 ordinary employees.

Two, DAP is one of those redundant government "think tanks".
Among the other known government "think tanks" are the Philippine Institute for Development Studies (PIDS), National Defense College of the Philippines (NDCP), the 100+ state universities and colleges (SUCs), certain departments like NEDA, the various in-house "think tanks" within other departments (ex., NTRC under the DOF). All of those government think tanks are researching for "national development, improve governance and fight corruption, fight poverty..." All of them, no exception, have those avowed missions.

Three, DAP is itself a money-making body on top of the subsidies it gets from the state annually.
Its conference center (DAPCC) in Tagaytay for instance, earns money from its hotel and cottages (around P5,000/night for the cottages), from its conference fees, etc. DAP should continue doing those things and charge even higher if it wants too -- as a private corporation, not as government corporation that continues to live off on taxes of other people.

Four, its administration is highly politicized.
Recently, selection of DAP president is through the influence of the President of the Republic. The search committee has narrowed down the choice to 8 candidates, but all the 7 candidates did not show up for the final interview, knowing fully well that President Gloria's annointed, Antonio Kalaw, currently DAP senior vice president and corporate secretary, would get the seat.

According to a PCIJ story, (http://pcij.org/stories/2006/dap.html), "Arroyo's interest in the DAP presidency, academy insiders say, may have to with her desire to get a "friendly" president who will vote to oust Civil Service Commission chief Karina David from the chairmanship of the Career Executive Service Board (CESB), which had earlier rebuked Malacañang for ignoring civil-service rules and in effect politicizing the bureaucracy."

And that "The problem is that Kalaw is not the most qualified among the contenders. He does not have a postgraduate degree while all the other candidates are PhD holders with strong local and international connections and a string of publications, researches and awards. Kalaw also ranked seventh among the eight candidates in the evaluation of the search committee designated by the DAP board only last March 31."

At least 5 of the contenders for DAP Presidency are former or current faculty members of UP Diliman. They are Segundo Romero, former DAP executive vice president; Francisco Magno, executive director the De la Salle University's Institute of Governance, Amado Mendoza Jr., a political science professor at UP, Grace Jamon, dean of the DAP Graduate School; and Josefina Navarro, sociology professor at UP.

Five, the DAP board almost mirrors membership of NEDA board.
The DAP board is composed of the following: a representative of the Office of the President, CSC chair, DAP president, secretaries of DOF, DepEd, DBM, DA, DENR, DOH, DAR, and NEDA. NEDA board, chaired by the President, is also composed of all of them (except the CSC chair and DAP President) plus other cabinet secretaries. And NEDA board is the highest policy-making body of the government in the Executive branch, getting inputs from all departments and their attached agencies.

Six, DAP cannot really claim to be an "independent government think tank".
To say an agency to be an "independent government think tank/corporation" is a contradiction in terms. Once you're a government body, you are dependent on the bureaucrats who comprise your board, you are dependent on the legislators who appropriate your annual budget, you are dependent on the President who appoint the officials who comprise your board.

With those reasons and arguments above, there is really no need to retain DAP as a government corporation. One of the candidates for DAP Pres., Dr. Francisco Magno, who is my occassional drinking buddy, says that if he was given the opportunity, he would reduce DAP's dependency on public subsidy. He says, DAP "assets like the prime real estate in Tagaytay as well as intangible assets like databases and human capital would be leveraged to generate resources and build programs that would be self-sustaining."

Yes, certainly! But reduced subsidy is inferior to privatization and full independence from the state. There is really no need to milk the taxpayers to finance another government body whose functions can still continue as a private corporation.

Thursday, May 25, 2006

Tourism promotion via LGU competition

Tourism promotion should be done by local government units (LGUs). LGU leaders (governors, mayors, their respective councils, brangay leaders) will exert extra effort to develop the tourism attractions, roads, seaports and airports, power and telecommunication facilities, peace and order situation, and overall governance, if they are competing among themselves to attract tourists.

For instance, white-sand-beach municipalities of Mindoro Oriental (ex. Puerto Galera) will compete with white-sand-beach municipalities of Aklan (ex. Boracay), Bohol (ex. Panglao), Cebu (ex. Mactan), La Union, Ilocos Norte (ex. Pagudpud), Pangasinan (ex. Hundred Islands), etc.

Mountain resorts of Benguet (ex. Baguio) will compete with mountain resorts + waterfalls of Mt. Province (ex. Sagada), Ifugao (ex. Banaue), Cagayan (ex. Callao caves), Isabela (ex. Magat dam), Zambales (Subic), Tarlac & Pampanga (Mt. Pinatubo), Bukidnon (ex. Malaybalay), Davao, and so on.

Thus, the Department of Tourism (DOT) is abolishable. Or it can be demoted to a bureau attached under the OP handling national tourism promotion but has no regional or provincial offices.

Monday, May 22, 2006

How bloated is the Office of the President?

The Office of the President (OP) is perhaps the most bloated agency in the whole government, from the Executive to Legislative to Judiary branches. Consider the following:

1) The OP has under it 21 Cabinet Secretaries (heading the 21 departments).

2) There are around 40 Presidential Advisers/Assistants/Consultants, almost all of whom are also called "Secretaries"; ie, Cabinet level with no cabinet portfolio.

3) Other offices under the OP:
a. Commission on Higher Education (CHED)
b. Energy Regulatory Commission (ERC)
c. Housing and Urban Development Coordinating Council (HUDCC)
d. National Anti-Poverty Commission (NAPC)
e. National Security Council (NSC)
f. National Youth Commission (NYC)
g. Presidential Legislative Liaison Office (PLLO)
h. Presidential Management Staff (PMS).

Their budgets though, are not as big as the regular line departments, except CHED.

4) The Executive Secretary (aka "Little President") has 3 Senior Deputy Executive Secretaries, 4 Deputy Executive Secretaries, and 3 Assistant Executive Secretaries!

5) The OP's Communications Group is also bloated with 10 UnderSecretaries, 5 Assistant Secretaries, 1 Secretary General, 1 Executive Director, 10 Directors.

Merging DA + DENR

The Department of Agriculture (DA) and the Department of Environment and Natural Resources (DENR) are among the agencies that need merger and consolidation. Consider the roller-coaster ride in policy planning, program implementation and monitoring, between the two departments from the mountains to the seas -- assuming that there is indeed rationale for government intervention and regulation in all of those resources and ecosystem:

(a) From the mountains, forest protection and rehabilitation, if there are still forest to protect, DENR;
(b) upland and midland agriculture, grazing and animal husbandry activities, DA;
(c) protecting lakes and rivers from water pollution, DENR;
(d) tapping these lakes and rivers for irrigation and aquaculture, DA; also Laguna Lake Development Authority (LLDA) in the case of Laguna Lake;
(e) lowland and urban forestry, DENR;
(f) lowland agriculture and animal husbandry, DA;
(g) to the shorelines, mangrove forest and coastal resources protection, DENR;
(h) municipal and commercial fishery, aquaculture, DA (through the Bureau of Fisheries and Aquatic Resources or BFAR)
(i) protection of coral reefs, both DA and DENR.

Such roller-coaster and interlapping functions in policy planning and program implementation between these 2 line departments can create both confusion and indifference, of pointing someone else to blame if something goes wrong. Like in cases of huge landslides that cover entire villages with mud and rocks. The DENR is often blamed by many people for not stopping illegal logging or allowing conversion of hilly forest land to agricultural small-scale plantation. The DENR sometimes blame the DA and/or the local government units (LGUs) for not informing the farmers of appropriate soil erosion control techniques like building terraces, practicing sloping agriculture technologies, and so on.

The resulting agency can be called Department of Agriculture and Natural Resources (DANR). The function of pollution mitigation and control can be handled by an Environmental Protection Agency (EPA), an office attached to the OP.

Some people propose to attach the Bureau of Mines and Geosciences (BMG, currently under DENR) to the Department of Energy (DOE) because of similarity of function in planning extractive activities for oil, natural gas, geothermal, other drilling exploration.

Merging DOF + DBM + NEDA

The Department of Finance (DOF) is in charge mainly of looking for revenues -- through the Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC), the Bureau of Treasury (BTr), privatization. It is also in charge of borrowing from local or foreign sources when there is budget deficit (revenues are lower than expenditures). The DOF makes revenue projections based on macro-economic growth projections, both national (GDP growth, inflation rate, interest rates, exchange rate, level of exports and imports, among others) and international (world interest rates, oil prices, and so on). The DOF also incorporates some micro-economic development, like which sectors are fast growing (like telecoms industry and cell phone texting) and hence, large revenue can be collected.

The Department of Budget and Management (DBM) is in charge of making initial budget estimates based on the following:
agency requests + LGUs’ share of tax collections (internal revenue allotment or IRA)
+ legislators and the President's pork barrel + subsidies to government corporations
+ automatic appropriations for interest payment (local and foreign debts) and agrarian reform fund (among others).

Then DBM consolidates those numbers in coordination with various agencies, including revenue projections and potential borrowings prepared by the DOF, then present the budget to Congress through the President. After Congress has discussed and enacted the annual General Appropriations Act (GAA), DBM disburses the money as allocated by Congress and as automatically appropriated.

The National Economic Development Authority (NEDA) is in charge of macro-economic planning based on development in the external/foreign environment and the domestic environment like pump-priming in certain sectors, the level of budget deficit. It is also tasked with socio-economic planning, "fighting poverty", preparing the medium-term economic plans and targets, and so on.

Very often, NEDA and the national economists who constitute its bureaucracy create the impression that they indeed plan the economy and make the economic policies. So, many people blame the economists for ruining the economy; they blame the agency for mis-planning the economy.

These 3 agencies are all planners. DOF plans the revenues, the taxes to be raised and new taxes to be created. DBM plans the expenditures, the subsidies and pork barrel that each agency and political unit (from LGUs to legislators to the President) will receive, the interest payment to be made. NEDA plans "poverty-reducing" social and economic programs that will be carried out by various other departments and agencies.

These 3 agencies' functions are often intertwined, so they meet regularly in various inter-agency bodies, like the Development Budget Coordinating Council (DBCC), along with the Bangko Sentral ng Pilipinas (BSP). Hey, you may wonder what an "independent monetary authority" is doing sitting with top bureaucracy of the Executive branch planning many things?

The DBCC is an important inter-agency body as it is the one presenting the budget and sources of financing to Congress. Former DBM Sec. Boncodin announced that they themselves are in favor of integrating and merging these 3 departments into a single department.

So, merging these 3 agencies into a Department of Finance and Economy (DFE) or whatever mongrel agency, taxpayers, especially those in the private sector, will be relieved of the high operating costs of the 3 offices: their (i) office maintenance (office rental/depreciation + lights & water + office supplies + communication and transportation), and their (ii) personnel expenditures (salaries + allowances/bonuses + travels and trainings + pension and retirement). In addition, In a number of developed economies, these 3 functions are done by a single agency, their Ministry of Finance. Finally, the new department's work will be simpler and more coordinated. After all, it's only the 3 of them that will need merger and consolidation, but many other departments. In another paper and posting.

Thursday, May 18, 2006

Why UP should be privatized

Very often, University of the Philippines (UP) students are called "iskolar ng bayan" (scholar of the people) because their education is partly financed by taxes and hence, they should "give more" to society than graduates of Ateneo, Lasalle, etc. But is the same expectation of "iskolar ng bayan" expected of graduates of Polytechnic U of the Phils.,, Mindanao State U, Benguet State U, Leyte State U, Cagayan State U, Phil Normal U, Cebu Normal U, plus 100+ other state universities and colleges (SUCS)? I seldom if ever, hear such things.

Two years from now (in 2008), UP will be 100 years old. UP was created by the American colonial government here; it was the Americans who crafted the UP charter, which until now, or 98 years after, have not been changed.

Below are my general arguments why UP should be privatized:

(1) UP should have its fiscal autonomy from the state.
It should not be a beggar as it was in the past 98 years, to Congress, the Senate, and the Office of the President (OP) and the Department of Budget and Management (DBM).

Imagine the amount of resources (time and money) saved by the UP president, chancellors, deans, college secretaries, and other administrators by not going to DBM/Malacanang-Congress-Senate-bicameral conference for many days, for many weeks, every year dealing with those bureaucrats and politicians. And you repeat this process year in and year out.

When I was still working in congress, I can only sympathize with some govt. bureaucrats who have to wait until 12 midnight, even until 3am, waiting for their budget to be discussed in the plenary (after the comm. on appropriation has reported out its proposed budget) when congress is rushing the budget. Why? Well, congress somehow wasted their time for many weeks in some politicking and investigations; hence, the rush to finish jobs which they should have done earlier.

(2) UP should have administrative autonomy from government.
Up to now, majority of the members of UP's Board of Regents (BOR) are legislators + political appointees + CHED chairperson.

Even some senseless concerns of congressmen and senators about UP but they happen to head the appropriations committee, are heard and UP has to bow to them more often than not; otherwise, UP's budget will be slashed further. Or it's charter modernization/revision bill will be gathering dust.

Once a corporation, a financial institution, a university or whatever is state-owned or controlled, it is impossible for their administrators to withstand the intrusion of politicians. SSS and GSIS are not funded by general taxpayers money, their annual financial operations are not sourced from congressional appropriations. These are private money, private constributions by members. But but the OP determines and appoints who should head these agencies, and it can occassionally pressure its political appointees whom those financial institutions can lend big amount of money, where to invest, and so on.


3) UP must assert its land property rights over squatters.
The university administrators cannot even remove the squatters in the main Diliman campus, in Mt. Makiling and Los Banos, Laguna campus, etc. Because political leaders (the mayor, the congressman, the senator, cabinet secretary, and so on) can call UP administrators to temper the move. Politicians can intervene anytime in behalf of the squatters who are not even connected with the university.

So, many UP Diliman employees, researchers and teachers live in Antipolo and Bulacan, while the squatters live inside the Diliman campus (Purok Dagohoy/Ricarte, Area 2, etc.).

4) Along with the privatization of UP and most (if not all) state universities and colleges (SUCs), income taxes should be slashed to low levels.
Or other taxes should be abolished. Expenditures cut and tax cut should go together.

The national government can either give UP a one-time endowment of say, P10 to P15 billion, then zero in the coming years (vs. the current P4.5 B/year on average, including PGH budget), or zero endowment upon privatization.

UP got lots of finance guys, both alumni and those still at the College of Business Administration (CBA), who can find ways to raise revenues for the university, like leasing for commercial use its vast idle lands, and not rely much on tuition fee hikes.

(5) UP alumni and retired faculty and non-academic personnel can exercise control over policies of the university as investors and stock owners.
This way, those who have benefitted from UP education and services can "give back" in the form of investing into the university for its modernization, upgrading of salaries and benefits of current faculty members and other personnel.

UP alumni investing in UP is one of the best form of alumni support, why not tap it? There will be greater sense of urgency among UP alumni to pour money and other resources into the university once they know that UP has stopped being a beggar to politicians in Congress and Malacanang.

There was an observation that Ateneo alumni have the culture of giving back or returning something to their alma mater. Unlike the UP alumni who got used to receiving from the UP, afterall, scholar ng bayan.

Assuming that said observation is true, among the reasons would be the following.

a) Ateneo (or other private universities) know that their universities have nowhere else to turn to for their financial muscles except the current batch of students and them, alumni. In contrast, UP and other state universities have the state to depend on, to literally beg money from every year.

b) The former’s university administration listen to them, not the politicians, for some policy issues affecting the university. In contrast, UP and other state Us have to listen to politicians --Malacanang, Congressmen and Senators -- because these are the guys who appropriate and release the money to them.

c) Ateneo & other private Us alumni see the improvements in their alma mater, no squatters occupying the universities' land area, they can enforce their property rights over their land assets. In contrast, UP alumni are discouraged to see the squalor of squatters that continue to deprive UP to provide its own faculty and non-teaching personnel decent and proximate housing.


(7) Privatization is only a means, not end.
The end remains the same -- provide top quality education to its students, rich or poor, although special preference to poorer students. At the moment, because of the deep fiscal constraints of UP, where many of its best faculty members and researchers are leaving the university, where some facilities are deteriorating, it can no longer perform effectively its goal of providing top quality education to its students.

The rich must pay the full cost of UP education, the poor can apply for scholarships or enter into working-student or study now pay later schemes.
How about the poor entering a private UP?
Give them money so they can enrol (as scholars).
Or lend them money so they can enrol (as study-now-pay-later recipients).
Or let other private sector/foundation or govt. scholarships pay for their school fees.

A friend, Banni Alli, agreed with my initial proposal and proposed the following schemes for UP’s fiscal:

1) UP can generate enough funds by leveraging its assets by factor of 10 (its properties are considered prime land, historical books, arts, etc.).
2) When the assets are inventoried, a UP Asset Management Team can be set up to issue what we call an "Asset-Backed Securities", i.e. Bonds with 5-10 year maturities, and a servicing interest of prime rate or less.
3) The assets shall become the mainstream income to service the Bonds annual interest, and then retire the principal at maturity.

Monday, May 15, 2006

Transport reforms I hope to see

World oil prices shot up to $75+ a barrel several weeks ago, highest on record. A friend told me that he encountered a paper arguing that $150 a barrel is no longer impossible within the next few years since there are so many potentially "worsening factors". Among them:
(a) Iran and Bush's "stop that nuke enrichment or..."
(b) Venezuela and Hugo Chavez' "I'm no fan of Bush" sentiments;
(c) Nigeria and its rebels' "Oil companies, close off temporarily, we need your $ and we'll shoot government soldiers";
(d) Saudi Arabia and sabotage of the royal family;
(e) Russia and Iraq and who else...

What to expect, higher pump prices of gasoline and diesel and other petrol products, what else. And yes, jeepney strikes, fare hike and "across the board wage hike" campaigns, etc. etc.The Office of the President (OP) of the President cares so much about the public that it immediately directed the Dept. of Energy to push more "energy conservation" among the people, and asked the DOF to study possible reduction in petroleum import duties.

Me thinks even if government will do nothing, the people themselves will conserve energy. When I bought my mitsubishi pick-up 7 years ago, the price of diesel was P8+/liter. Now it's almost P36/liter. Do I need the DOE to tell me that I should conserve on oil? Many motorists will be more than willing to leave their cars at home if public transpo are convenient and available. But government cares so much about the public that it wants to collect so many taxes and fees from them, such as very high "franchise tax" on taxis, fx, vans for hire, other mutant public transpo in the Phils. The only guys who don't get slapped with very high franchise tax are the jeepney drivers and operators.

So which is which -- government encouraging car pooling and energy conservation, and government discouraging public transpo by slapping high franchise tax and bureaucratic regulations on guys who provide alternative public transpo? This is not to mention very eager "public servant" policemen and LTO guys and MMDA and barangay traffic officers in mulcting and extorting drivers of fx and other "colorum" air-con vehicles.

Here are the transport reforms that I hope I can see someday.

(1) Government to do nothing (and tax nothing) on guys who want to compete in the public transpo provision business. This means drastic relaxation, if not abolition, of public transport franchise tax and other expensive requirements. Government can just collect various petroleum taxes (import tax + excise tax + VAT), and that's it.

(2) Deregulate and depoliticize fare setting. When passengers can have various options and choices -- various fx/vans lines, various bus lines, various jeepney lines, various taxi lines, that ply their route -- competing among themselves for passengers, competitors will offer various fares at various services. For instance, dilapidated jeepneys will charge a minimum of P4/passenger for the first kilometer and P1 per succeeding kilometer, while better-maintained and cleaner jeepneys, from another jeepney lines, may charge a minimum of P5 for the 1st kilometer and P1.50 per succeeding kilometer. Air-conditioned fx and vans from various fx lines, and buses from various bus lines, can charge various fares for various types of services and vehicles.

With this transport choices and competition, many middle-class Filipinos who live in residential villages will be encouraged to leave their cars at home, take public transpo and save on oil. In addition, uncomfortable and smoke-belcher jeepneys and tricycles will be slowly reduced if not eliminated as the riding public will shun them.

Idle land tax to replace income tax

In many parts of the Philippines (and many other countries), there are millions of hectares (out of total land area of 30 million hectares) of idle and underutilized lands. Such lands can be seen not only in the provinces, in the mountains and forest lands, in the hills and the plains, but even in many areas in Metro Manila.

World wars 1 and 2 (and many earlier wars) were mainly a war for new territories, for more land. The Palestinian-Israeli decades-long and continuing conflict is a war for land, for territories. The Philippine communist revolution and insurgency (the Huks in the 40s to 50s, then the NPA from the 60s to the present), is mainly a war for land ownership and control.

Hence, to have millions of hectares of idle lands is a criminal situation, considering that there are 4 million+ unemployed and another 7 million+ underemployed Filipinos in the country, plus several million Filipinos working abroad. Millions of households also have no shelter, and millions of poor households (employed or unemployed) are complaining of high food prices, meaning food supply and production are not sufficient.

Idle and underutilized lands should be penalized with idle land tax, while productive lands, whether for forestry and agricultural plantation or aquaculture, whether residential villages or commercial/industrial/tourism projects, should be rewarded with zero income tax. Note here: idle and underutilized lands are not banned or prohibited and to be confiscated by the state; they will only be taxed. When a land is full of agricultural crops (grains, vegetables, fruits), that means (a) food supply is augmented and increased, resulting in stable and lower food prices, and (b) jobs are created, from manual laborers to agri researchers and marketing people. These alone create welfare for society.

When idle land tax is imposed, owners of idle and underutilized lands will have two options: either develop and improve their lands themselves to escape paying the tax, or sell their lands to other people and investors who can make the land productive. Either way, this will mean more jobs will be created, hence licking the high unemployment, high underemployment problem, and more food/housing/schoolbuilding/shops and other goods will be produced and created.

Government should not penalize productivity with various forms of income taxes; it should not confiscate up to 1/3 of people's income because it (or the politicians) want/s to get the credit of handing out food baskets to poor people. Instead, government should penalize laziness, indolence, and idleness.

There are concerns and questions of "Who decides what is idle and what isn't? What's the difference between a piece of property that is a private nature reserve and idle land? Land lying fallow and idle?"

It is very easy to distinguish idle land from those which are not.
A land full of trees, natural or plantation forest, is not idle.
A land full of rice, sugarcane, bananas, pineapples, mangos, rambutan, pomelo, other agricultural plantation, is not idle.
A land full of houses and villages, golf courses, parks and plazas, is not idle.
A land full of malls and shops, industrial estates and processing zones, is not idle.
A land full of cows, sheeps and goats for grazing, is not idle.

"Full" here is subject to technical and scientific definition. Plant and tree density per hectare varies from one crop to another. For instance, for industrial tree plantation (mahogany, acacia mangium, eucalyptus, gmelina, etc.), a spacing of 4 x 4 meters (or roughly around 625 trees per hectare) is good; some will have 2 x 2 meters spacing (or around 2,500 trees per hectare). For mango trees, a good spacing is around 20 x 20 meters (or only 25 trees per hectare). Agriculturists and foresters can discuss and decide on optimal crop density.

Fallow period (ie, do nothing, let the soil rest for a while) is also easy to detect. Two to three (2-3) months out of 12 months for sugarcane, 4 months out of 12 months for rice, about 6 months for 12 or 15 or 25 years for forest plantation (depending on species planted).

A land full of cogons, makahiya and other grasses with no grazing activities is idle; it should be taxed. A land full of shrubs and vines with no parks is idle; it should be taxed. So you don't need thousands of bureaucrats, lawyers and judges to decide which lands are idle and which ones are not; ahich ones are taxable and which ones are not. Just keep the philosophy: should you tax idleness or productivity? Should you tax indolence and laziness or industriousness? We shouldn't tax both; we should choose only one.

Food production is not the only use or utility of land. Land uses are plenty. If you have surplus food from too much agricultural, aquaculture and animal husbandry activities, then plant or allow more forest trees -- for lumber and poles, for construction and furniture, for community or national parks. Or if you have plenty of food and trees already, have more golf courses, more open spaces for race tracks (cars, karts, motorcycles, bicycles, horses,...), more lakes and rivers for water sports and sports fishing; more land for housing and residential villages, more industrial zones; more and wider roads, rail tracks, etc. Encourage everything except idleness and indolence.

Finally, if we change our policy from taxing industriousness and productivity to taxing idleness and laziness, the government, especially the DENR, will be exposed as the lousiest, laziest, owner and manager of land. Since these government agencies should be subject to tax as well (remember the "rule of law": the law should apply to everyone, no exception!), then the DENR will be forced to privatize those millions of hectares of idle and denuded public land which it itself has allowed to be abused, explicitly or implicitly.

Ethanol and alternative energy vs. Congress

There are a number of investors and groups seeking to develop ethanol, coco-diesel, other alternative fuels to petroleum. Problem arises when investors and entrepreneurs cannot just come in and risk their money because they need lots of permits and licenses from the government, especially Congressional law that will give them a franchise or tax perks and other incentives.

But if ethanol production and marketing looks promising and profitable, why would companies and private investors need congress approval and a law to put in their money? It's their money; if they succeed, they'll become very rich. If they fail, say when petrol prices and other alternative fuels become cheaper, they'll lose their investments and savings.

Again, it's that animal called "congressional franchise" that creates monopolies and oligopolies, or simply discourage investors (and job creation) from coming in. Or a law "mandating the use of ____ (ethanol, LPG, biodiesel, etc.) in the Phils." Why would government mandate and coerce? Let people decide. If they love petrol because of that "power and speed" in their vehicles despite its high prices, then let them use petrol products. If they love ethanol and LPG or what because of that "love for environment, cheaper price", then let them use those alternative fuels. Government is a useless body to intervene on purely individual decisions like this.

Government's role is mainly to protect lives, private property, individual freedom, even public morals. It should get out in the business of mandating or forcing people to use this or that kind of fuel to use in their cars and motorcycles and trucks.

It's true that many businesses want to monopolize certain markets. Pretty much like tricycles want to monoplize a route and want to ban the presence of jeepneys and FX in their route. Or jeepneys wanting to monopolize a route and don't want to see FX and buses competing with them. Congress (and LGUs, for tricycle franchises; or LTFRB for jeepney & bus franchises) is one good institution to secure monopoly or oligopoly position through legislative franchise.

About claims that government intervention is necessary as "referee" among car manufacturers, oil companies, sugar and agri producers (as fuel raw materials), there are already lots of government intervention existing. In sugar production, there are the Sugar Regulatory Administration (SRA), Dept. of Agriculture (DA), Dept. of Trade and Industry (DTI), and so on. In car manufacturing, DTI-BOI; and in oil industry, the Dept. of Energy (DOE), Energy Regulatory Commission (ERC). On top of these, there are regulation interventions by the Dept. of Finance (DOF) for local and import taxes, the DENR (environmental clearance certificate, exploration permit), Congress (franchises, tax hikes or relief, budgetary subsidies), the LGUs (local business permits, real property tax), and of course, Malacanang and the Office of the President (OP), and any of the 40 presidential advisers and consultants.

We can generalize that every business and economic activity in the country has lots of government intervention. One indicator is the high incidence of informal or underground economy (43% of GDP is from UG economy, WB estimates 2005) as many private enterprises try to dock the multitude of licenses, permits, registrations and inspections that various govt. agencies demand from them.

So, to seek another layer of government intervention, like a law (now still a Congress bill) "mandating the use of ethanol" is seeking another set of bureaucratic paper work, certificates, permits, licenses, registrations and inspections -- and their corresponding fees, charges, taxes, fines.

About the perception that oil companies will "not put the same amount of money to find replacement to crude oil", I think it's wrong. See how British Petroleum (BP) advertises itself now -- wind energy, solar energy, other alternatives, that it now calls itself Beyond Petroleum (BP). Notice also the evolution of gas stations in the Philippines -- they are largely convenience stores, food and coffee shops, car repairs and oil change, etc. As if they're saying, "We're a convenience store and all; by the way, we also sell gasoline." Much like the evolution of National Bookstore, "We're a shop for school and office supplies, VCDs and DVDs, and all; by the way, we also sell books!" Or McDo hamburger's evolution, "We have a McCoffee, we sell pasta, fries and sundae; by the way, we also sell hamburgers."

Companies evolve where demand change and where new supply becomes more available. Oil companies will still invest a lot in petroleum because profitability in this commodity remains high. When profitability in alternative fuels will go up, then those oil companies will put in their money to those new projects.

That's the beauty of competition, of free market, of minimal (if not zero) government intervention in business. Companies and individuals who do not change and adjust can perish (lose their jobs) while those that continue to innovate expand (expand job creation). Government should come in only when a food shop is also selling hand guns, bullets and grenades. Or when an oil company or gas stations are also selling plutoniom and other nuclear devices.

Sunday, May 14, 2006

VAT as tax on other taxes

The value-added tax (VAT) as currently implemented in the Philippines is very parasitic in favor of government. The worst aspect of this law is that it is applied as a gross sales tax (GST), and not a tax on value-added by each producer in the supply chain.

Let's take the VAT on petroleum products as example. Out of the P41/liter current price of premium gasoline, my estimate is that government collects at least P14 per liter. How?

Assume an import price of premium gas of P24/liter:

(a) x 3 percent import tax, P0.72/liter = P24.72/liter landed cost
(b) x 12 input VAT, P2.97 = P27.69/liter
(c) + Excise tax of P4.35/liter = P32.04/liter
(d) + net profit of (i) oil companies, (ii) truckers and tankers, and (iii) oil dealers (or gas stations), assume they'll be happy with P1/liter each, P3/liter = P35.04/liter
(e) + implied corporate income tax (CIT)* passed on by the oil companies, truckers and oil dealers to the public, P0.55/liter each or P1.65 = P36.69/liter
(f) + 12 percent VAT, P4.40 = P41.09/liter, pump-price of premium gasoline.

* implied CIT is computed as:
Assume that the (i) oil companies, (ii) truckers and tankers, and (iii) oil dealers are happy with a net profit of P1/liter each. But since government will take away 35% of corporate income as CIT, then their after-tax profit becomes P0.65/liter only because the government has confiscated the P0.35/liter.In order to assure themselves of P1/liter net profit, their pre-tax profit should be P1.55/liter. Government removes 35 percent of this as CIT,(P1.55 x 0.35) = P0.55/liter, implied CIT passed on to consumers.

If the above numbers are correct, then government total tax take isP0.72 (3% import tax)+ P2.97 (12% VAT on imported oil)+ P4.35 (excise tax)+ P1.65 (implied CIT of oil companies, truckers and oil dealers)+ P4.40 (12% VAT, actually a gross sales tax)= P14.09/liter!

Of course, this figure is still incomplete and hence, understated. Because government also collects the following:
a) CIT from advertisers of oil companies;
b) personal income tax from employees and managers of oil companies, oil dealers, truckers/tankers, advertisers, and other enterprises directly and indirectly involved in oil importation and distribution;
c) environmental clearance fees from the Dept. of Environment (DENR) for the oil depot, oil ports, gas stations, etc.;
d) real property tax, business permit, building and sanitation permit, other taxes and fees by local government units (LGUs).

VAT is also applied actually as gross sales tax (GST) in all other VAT-able commodities and services. Take food products in restaurants, food shops and supermarkets. Say in Jollibee, McDo, BK, KFC, Max's, etc. Assuming they bought the chicken at P100/kilo. Remember that chicken, fish, vegetables, and other agri products in their raw form are VAT-exempt, according to the VAT law.

If the food chains are able to sell the cooked or processed chicken products at say, P250/kilo, pre-VAT, then
value added = P250 - P100 = P150
12% VAT payment = P150 x 0.12 = P18
total receipt = 100 + 150 + 18 = P268.

But the food chains, supermarkets, etc. apply the 12% on the whole P250, or
P250 x (1 + 0.12) = P280 total receipt.

Lessons:
(1) In petroleum products, the VAT is not only a tax on value added in each step of oil importation, processing and refinery, wholesale and retail distribution. VAT is also a tax on import tax, a tax on import VAT, a tax on excise tax, a tax on CIT, a tax on personal income tax, a tax on real property tax, and so on.

(2) Government's multiple taxes and fees, and mis-application of VAT, is the single biggest source of price distortion upwards of petroleum and other products. Which shows how government cares for the people.

(3) Misapplication of VAT as GST by sellers and suppliers works to their advantage, the consumers are worse off. Cost-conscious consumers will be well-off if they buy from non-VAT-able public markets and carinderias.

The formality of the informal sector

Big and bureaucratic governments create the distinction between "formal" and "informal" economy. You want to put up a barber shop? A vulcanizing shop? A food shop? An internet shop? Government says "No, you cannot! Unless you register and secure the following licenses and permits, pay the corresponding fees, charges and taxes: (a) barangay clearance fee, (b) business location permit, (c) health and sanitation permit, (d) building and fire dept. clearance, (e) weights and measures fee, (f) other inspection fees, (g) mayor's business permit, (h) DTI registration, (i) BIR registration, (j) SSS registration, (k) DOLE registration, (l) NFA registration (for those retailing rice and corn), (m) real property tax, if your store or shop is also on the same compound as your house, and so on. These are separate from the various taxes you have to pay once you start operating, like VAT, documentary stamp tax, personal and corporate income tax, and so on.

This largely explains why the Philippine economy has one of the highest informal sector in the world -- about 43 percent of GDP, per WB estimates. So, unless you put up with those bureaucracies, paper work and taxes and fees, you are "illegal", "informal" and hence, "law violator", subject to various harrassments by various government forces.

And government cannot even repair the millions of potholes in the streets; cannot even catch and prosecute many robbers, kidnappers, extortionists and rapists. Hence, government should not over-regulate business and entrepreneurship, dipping its dirty and grubby fingers in entrepreneurial activities. And government should not introduce more and higher taxes.

A small businessman friend, Reuel H., has this to add:

"It's absolutely abhorrent that we small businessmen who have already put out so much in capital now have to cough up several thousands more just for these damned permits. We haven't even earned a single cross-eyed centavo from operations, and already the government wants its take?! What gives? I thought the government swears it wants to encourage enterprises to flourish? In this kind of environment? With these vultures in the bureaucracy waiting to feed on our carcasses?Is there some way we can get the government off our backs? I see no meaningful service that they provide in exchange for the blood, sweat, and tears we send them in the form of taxes. I'm not advocating anarchy here, but beyond keeping the peace, I see no other useful purpose that government serves."

Service differentiation and competition

In economic theory, product and service differentiation is a rational behavior by firms and households in the process of innovation, of introduinge a new product or service, of trial and error. For instance, instead of producing just plain white t-shirts without collars, firms and households produce various types and designs of clothes: t-shirt with collar, without collar, various designs (flowery, pictures of sports heroes, musicians and rock stars, company logo, etc.) and colors, and so on.

The dominant bus line in Negros island (Neg. Occidental and Neg. Oriental provinces) is Ceres bus line. Ceres also dominates the whole of Panay island (the 4 provinces of Aklan, Capiz, Iloilo and Antique), Cebu province, and even the whole of mainland Mindanao (through its sister company, Bachelor-Rural Transit).

In Negros Occidental, Ceres introduced various services with varying fares. First is air-con buses that travel from Bacolod to Cebu cities, charging around P1.60/kilometer per passenger. Second is ordinary (non-air-con), regular buses that charge around P1.00/kilometer per passenger and pick up people along the way. Three is ordinary mini-buses with only 1 or 2 stops (ie, they do not pick up passengers along the way except in municipalities they're destined to make a short stop-over) that charge also around P1.00/kilometer per passenger; hence, these mini-buses run faster. And fourth is "economy fare" ordinary buses that also pick up passengers along the way but charge only around P0.60/kilometer per passenger.

The first 2 types of services are standard in most bus lines in Luzon and other parts of the country. The third is in response to vans (air-con and non-air-con) run by small and independent operators that attract direct passengers in a hurry to go to their destination (say Bacolod City, the provincial capital). And the fourth is in response to mini-buses also run by smaller bus operators that charge low fares to attract passengers.

This mixture of bus services are beneficial to various types of passengers. Poorer ones take the Ceres "economy fare" buses or the other low-fares competitors. Those in a hurry take the 1-stop and 2-stops mini-buses or their competitor vans. This is one proof that what we need are more competition from private producers and suppliers (of transpo, food, housing, other goods and services), and less government regulation and taxation. Government taxation, like franchise tax for all types of public vehicles (buses, mini-buses, jeepneys, taxis, fx and vans, tricyycles, boats, airlines, etc.) immediately jack up the cost of providing public transportation. Not only the tax itself but the bureaucracy and corruption associated with getting the franchise. And this is one argument why franchises (or government-mandated monopoly and oligopoly in various services and utilities) and franchise tax should be abolished.

Unnecessary requirements = more govt revenues

One indicator that a government is big enough is when it has the gall of imposing one requirement after another, and even come to a point of suspecting adult citizens as guilty of some crimes, then requiring them to have the burden of proof -- after paying various taxes and fees -- of showing that indeed they are not guilty of this and that crime. Below are some examples of how the big Philippine government practices this.

One, government thinks every driver’s license applicant is a potential illegal drug user. Thus, each applicant has the burden of proof of showing the Land Transportation Office (LTO) that he/she is not a user, by paying P300 “drug test fee”, go through a private clinic that is LTO- certified, submit urine sample, get the results, then pay the license and related fees, before a driver's license (new or renewal for the expired one) is issued. This cycle is done every 3 years.

Two, government thinks every vehicle, including newly-bought ones, is a potential smoke-belcher. Thus, vehicle owners have the burden of proof of showing the LTO that his/her vehicle is not a smoke-belcher, by paying "smoke emission test fee" (P500 for cars, P150 for motorcycles, higher fees for trucks and buses), undergo the test. Then pay the motor vehicle registration tax and related fees, before the vehicle is given new registration papers. This cycle is done annually.

Three, government thinks every public utility jeepney (PUJ) and bus (PUB) is a potential "over-charger" of passengers. Thus, jeepney and bus drivers and operators have to get that one piece of paper from the Land Transportation Franchising and Regulatory Board (LTFRB) that shows the new one-page fare matrix, at a hefty price of P560. Even for short-distance route of below 4 kms., the jeepney driver or operator must still get that LTFRB certificate that the route is below 4 kms., and hence, the fare should not be more than P7.50 per passenger (or any other future amount as minimum fare). If the jeepney driver or bus conductor does not have that bureau’s fare matrix, he is not allowed to charge the higher fare, even if petroleum prices and taxes have increased. Otherwise, the police will apprehend and fine him.

Four, government thinks many new job applicants for government service as well as new passport applicants have some criminal records. Thus, each applicant has the burden of proof of showing that he/she has no past criminal record (or just a light one) by going to the National Bureau of Investigation (NBI), pay the “NBI clearance fee”, before a clearance is issued. There are other cases involving other government agencies.

Now, an illegal drug user will not take drugs today if he is planning to apply for a driver's license tomorrow or the next few days. So the "drug test" will show "negative", naturally. So, how can government catch the drug users among the driver’s license applicants from this test? And if your vehicle is a smoke-belcher, and you have to re-register the vehicle this week, you will clean the muffler or change the engine oil, or put some chemicals so the smoke exhaust will not be black. So how can government catch the real smoke belchers from this test?

And makes me wonder, why would a piece of yellow-colored LTFRB paper cost P560? A jeepney driver that I talked to said he gave P600 but the bureaucrats did not even return his P40 change. If the P560 for a piece of paper is a form of tax for public jeepneys, then that’s the third tax levied on public utilities: (a) annual vehicle registration tax, (b) franchise tax, and (c) fare matrix tax. And there are tens of thousands of jeepneys in Metro Manila alone.

It is clear that those additional requirements do not serve their purported purposes, and hence, must be abolished. Additional requirements mean additional expenses, additional hassle in time and effort for the taxpayers. Those certified private clinics for the “drug test” and private emission test centers for the “emission test” get instant monopoly positions because certifications from other clinics are either not honored or will take a longer time for verification. And monopolies, almost always, are government-created and legislated, and the top bureaucrats or politicians get political “rents” from the accredited private monopolists.

Big governments, instead of considering their people as potential criminals, should look inwards and assess the distortionary effects of their over-regulation, big bureaucracy, and multiple taxes and fees, interventions that make the lives of the citizens they claim to serve more complicated.

Public transpo vs. the bureaucracy

Price is the best signal for people to alter their consumption of particular goods and services. When the price of their favorite consumption commodities go down, they will consume more of them. When the price goes up, they will consume less, even stop buying, if alternative commodities and services are available. Taking public transportation, aside from car-pooling with other family members and friends, is the usual alternative for people who opt not to use their car more often.

Since government leaders always say that they are there to render public service, then they should make life easier for the citizens. Since more and more people are opting to take public transportation, then government should make life easy for people who provide public transportation – tricycles, jeepneys, taxis and vans for hire, buses, and trains. But is it really easy for businessmen and entrepreneurs who provide said public transportation?

To operate any of the above-mentioned public transportation except trains, there are immediately 2 taxes and fees to pay: annual vehicle registration tax (plus smoke-belching test fee) and franchise tax. While the former is easier to get since the tax also applies to private and government vehicles, the latter is more bureaucratic and costly. The tax for vans for hire (aka fx taxis) for instance, is about P60,000 for a 5-year franchise.

With spiralling oil prices, fares naturally have to increase. The government’s Land Transportation Franchising and Regulatory Board (LTFRB) charge a fee of P540 per jeepney (16-18-seater vehicles on average) for the new fare matrix, and there are tens of thousands of jeepneys in Metro Manila alone. One can consider this as “fare matrix tax” since this is mandatory. Government thinks fare hike is a function of having that single piece of paper from the LTFRB, not a function of oil price hikes. So even if fuel prices and fuel taxes have been increasing but a jeepney driver does not have that single piece of paper, the police will apprehend and fine the driver for being a “law violator”.

For cabs, their taxi meter should be calibrated accordingly. Either the agency staff are too lazy and inefficient or too few because the lines of taxis waiting for their taxi meters to be calibrated is very long, and they normally take hours, even days, queuing up, not earning anything, waiting for their turn. The cost of meter testing and calibration, according to a taxi driver that I talked to, is around P3,000 per taxi. Again, there are thousands of taxis in Metro Manila alone. One can consider this as “taxi meter calibration tax”. If a taxi driver does not have his meter re-calibrated, despite the spiralling of fuel prices and fuel taxes, then technically he is not allowed to adjust his fare upwards and the police will apprehend and fine him for, again, being a “law violator”.

For fx and vans, since they travel on car pool, meter calibration does not apply to them. What restricts them is the high franchising cost + the red tape and briberies involved in getting a franchise. That is why many vans and fx are running without, or with an expired, a franchise, aka “colorum” public vehicles.

The trains. Currently there are 3 train lines operational in Metro Manila. The busiest and the one which I usually take is the mass transit system (MRT) along Edsa, the busiest road network in the country. The MRT attracts hundreds of thousands of passengers everyday. Tens of thousands of potential passengers however, are turned off and do not take the train for several reasons, among them: (a) trains always full and there not enough trains coming in even during peak and busiest hours, (b) long lines to get a ticket, and (c) absence of ticket vending machines.

Sometimes “stored value tickets” (P100 per ticket which one can use several times so as not to queu everytime he/she rides the train) are not available. And so the previously long lines have become longer as frequent riders have to queu everytime they use the train. Like the long lines of taxis waiting for their meter recalibration, on many hours of the day, either the government personnel (under the Dept. of Transportation and Communication, DOTC) in charge of issuing tickets are either too slow and inefficient or too few to attend to the long lines of passengers. Some staff in the ticket booth are either resting or moving around doing something else, some ticket booths are closed, while the long lines remain for many hours.

If those staff are unhappy with their work and show laziness in attending to the long lines of passengers, then government (or whoever operates the trains) should replace them with vending machines. The machines don’t take lunch or snack breaks, don’t take leaves, don’t get tired and don’t show unhappiness in performing a function they were especially created for, except when they are out of order and not properly maintained.

One may wonder why Metro Manila, despite having 11 million residents (nearly the combined population of Hong Kong and Singapore), does not have plenthy of operating train lines despite the long lines of investors willing to put in their money, time and technology. Metro Manila’s population actually bloats up to around13 million people during day time, when people from nearby provinces come to conduct various businesses and transactions in the capital region.

Thursday, May 11, 2006

How bloated is the 2006 budget?

The Philippine's national government (NG) got what it wanted from Congress (House of Representatives + the Senate) for its spending spree -- a P1.053 trillion budget for 2006 ($20.64 billion at P51/us$). This is about 17.2 percent of the projected P6.1 trillion GDP this year. The 2006 budget is 14.7 percent higher than the 2005 budget (P918.6 billion), and 21.5 percent higher than the 2004 budget (P867.0 billion).

If we include additional spending by local government units (LGUs), financed by locally-generated revenues like real property tax, business permit tax, other local taxes and fees, the figures will be higher. For this computation, LGU share of national government tax collections through the internal revenue allotment (IRA) is not included because they are already included in national government expenditures.

LGUs' non-IRA revenues for 2006 is P75.7 billion, and P67.9 billion in 2005.So, combinining NG budget + LGUs additional revenues for 2006, it'sP1.053 trillion + P76 billon = P1.129 trillion, or 18.5 percent of the projected GDP this year.

Now. these figures are still understated. If we include collections by various other government agencies, like the Bangko Sentral ng Pilipinas (BSP) and Securities and Exchange Commission (SEC), for various fees and charges (ex. business or NGO registration at the SEC), the figures should be higher.

More anti-corruption bodies = more corruption

Corruption in government is a malady that has probably existed since government was invented in various parts of the world. As governments expanded, ie, as agencies and bureaucracies and government enterprises expanded, so has corruption expanded.

In the Philippines, the battle against corruption was highlighted in the first People Power Revolution, also known as "Edsa 1" where a dictator which ruled the country for 20 years (1965-1985), former President Marcos, was ousted in 1986. Then new President Cory Aquino, instructed all agencies to fight corruption within their ranks; a number of new anti-corruption bodies and court were also created.

Fifteen years later, in 2001, another People Power Revolution, aka "Edsa 2" took place, and former President Estrada was ousted. The battlecries for the same citizen revolt were essentially the same: "enough of corruption".

Today, the same concerns keep on reverberating, with various accussations against the current President, Gloria Macapagal-Arroyo. It is safe to bet that the same concerns will come up again and again in the next 20 years; in the next 50 years or more.

I chanced upon a book published by the ADB, "Country Governance Assessment: Philippines", published in 2005. On page 22, there is a list of the Philippine government's anti-corruption bodies. Here they are:

1. Office of the Ombudsman (OMB) -- created under the 1987 Constitution. Investigates and prosecutes, takes criminal cases to court or Sandiganbayan, depending on the accused government official's rank.

2. Commission on Audit (COA) -- created under the 1987 Constitution. Conducts independent audits of government agencies, refers financial irregularities to the OMB.

3. Civil Service Commission (CSC) -- created under the 1987 Constitution. Sets standards and norms for civil servants; preventive role in minimizing and controlling corruption.

4. Sandiganbayan -- created under the 1987 Constitution. Main anti-graft court, adjudicates cases brought to it by OMB; deals only with cases for high-ranking government officials.

5. Judiciary (Supreme Court, Court of Appeals, lower courts) -- created under the past and 1987 constitution. Adjudicates law in all areas.

6. Department of Justice (DOJ) -- under the Executive branch. Government's chief criminal prosecution arm.

7. National Bureau of Investigation (NBI) -- under the DOJ. Gathers evidence for probable hearings and file appropriate charges.

8. Presidential Commission on Good Government (PCGG) -- created by Executive Order (EO) No. 1, 1986. Assigned to recover ill-gotten wealth of the Marcos family, now of the past President Estrada.

9. Inter-Agency Anti-Graft Coordinating Council (IAAGCC) -- created by EO 79, 1999. Shares info and resources and coordinate its members (CSC, COA, DOJ, NBI, OMB, and PCAGC, now PAGC).

10. Presidential Anti-Graft Commission (PAGC) -- created by EO 12, 2001, under Pres. Arroyo. Superseded ex-Pres. Ramos' Presidential Commission Against Graft and Corruption (PCAGC), and ex-Pres. Estrada's National Anti-Corruption Commission). Investigates corruption practices by Presidential appointees.

11. Presidential Commission on Effective Governance (PCEG) -- created by EO 165, 1999. To strengthen public sector institutions and streamlining agenda.

12. Governance Advisory Council (GAC) -- created by EO 25, 2001. Advises Presidents in formulating governance reform. Consists of private sector appointees.

13. Anti-Money Laundering Council (AMLC) -- created by Republic Act 9160, 2001. Can freeze suspicious accounts for 15 days without recourse to courts.

14. Department of Budget and Management (DBM) -- Oversees reforms in government procurement system, bureaucracy streamlining.

May I add that there are 2 more institutions not mentioned in the ADB book list that have far bigger roles in combatting corruption:

a) House of Representatives (HOR) -- created under the past and 1987 Constitution. The congressional (House and Senate) committees are the regular forum where issues and scandals are investigated, and bills are discussed and approved (or neglected, unacted). Hence, the committees can either uncover and discourage corruption, or protect the corrupt officials upon the connivance of top committee leaders. The HOR has 57 regular committees and 14 special committees!

b) Senate of the Philippines -- created under the past and 1987 Constitution. Same power of committees as those in the lower House. The senate (with 24 senators) has 36 regular committees and 20 oversight committees.

The presence of so many anti-corruption bodies is like putting in more money to find out how much money have been wasted and stolen already. All these plus other government bodies indirectly engaged in preventive anti-corruption activities (the Bangko Sentral ng Pilipinas or BSP, the Securities and Exchange Commission or SEC, among others), and private sector-initiated anti-corruption watchdogs have one thing in common: they demand "good governance". But almost none of them demand "less governance".

Big and expansive government means big opportunity for corruption. Since the fund to create and sustain a government agency does not come from the elected politicians nor the appointed administrators and bureaucrats but from taxes, especially from private sector taxpayers, the temptation to waste such money is big. The small probability of being caught and much smaller probability of being prosecuted and punished (in case one is caught) enhances the temptation to steal and waste.

Again, the dictum:
"Spending your OWN money for yourself, your family, or for others, you're careful. Spending OTHER PEOPLE's money for yourself, your family, or for others, you can be wasteful."

And so, with more anti-corruption bodies existing and new ones created or recycled, the cycle of corruption, the temptation to steal, and confusion whom to catch and who should catch, continues.

Telecomms oligopoly

I wrote this last February this year:

The telecommunications industry is among the heavily regulated (ie, most number of permits, licenses, fees, taxes, bribes) by many governments, including the Philippines. Note that Singapore with only 4 million people (plus around 8 million tourists a year, staying an average of about 3-4 days/visitor), has 5 competing telecomms companies (telcos). While the Philippines with 85 million people, or Metro Manila with 11 million people, has only 3 competing telcos, the 3rd of which is only a new-comer (2-3 years ago only). A friend once argued with me that while Singapore has only 4 million people, the spending power is bigger than those of the Philippines'. Well, not true. Estimated GDP by purchasing power parity (PPP) valuation (2004 data) of Singapore was only $116 billion, while the Philippines' was more than 3x bigger than that, $383 billion (data from IMF, World Economic Outlook, Sept. 2005, database).

This means that the combined spending of the roughly 30 million subscribers of the 3 telcos (Smart, Globe and Sun) in thePhilippines is much bigger than those in Singapore. Globe and Smart may be feeling some "heat" from new-comer Sun cellular, but that's not enough. The 2 big telcos can still afford to be complacent to some of their subscribers' complaints. After all, customers only have 2 other options, so why be extra courteous?

Certainly there's room for a 4th and 5th or 6th telecomms company here and hence, lots of promos for the consumers like cheaper calls, cheaper text messages, faster connections, cheaper cellphone units, etc. But why aren't they here? The old answer: government over-regulations, its franchising rules, of discretionary choosing players and disbarring or disallowing others. To be a new telco player, you have to make "mano po!" to the Natl. Telecomms Commission (NTC) and the Office of the President (OP) or Malacanang, get franchise from Congress (the House of Representatives and the Senate), get business permits and cell site permits from the mayors (and governors?), barangay captains, and various licenses and permits from other national government agencies (DTI, DOTC, SEC, DENR, DOLE, BIR, SSS,...) and their respective attached bureaus.

One crucial role of goverment (that's what the taxes are meant for) is the protection of private properties like a cellphone, cellsites, protection of lives, ensure rule of law. Over-regulating telecomms firms (and firms in all other industries) is not an important government role, not even a role. Activities that create jobs and provide services to the public (transpo, housing, food production,...) should not be over-regulated, if at all. Government should over-regulate idleness and laziness, like idle lands, robbers, kidnappers, land-grabbers and other criminals. Give the latter hell and taxes.

But incumbent and existing players can be happy with a bureaucratic government set-up. It protects them from incursion by new players and competitors. The red tape, taxes and bribes may be high, but so are their profits since customers don't have enough choice.

Ooppss, let it not be misunderstood that I find no improvement in the current telecom infrastructure. The current set-up is a lot better compared to 10, 15 years ago. I am only saying that a 4 or 5 or 6 competing telcos are a lot better compared to the current 3 competing telcos.

Wednesday, May 10, 2006

School choice vs. government dictation

Nowadays, one of the growing sectors in the Philippines and other poorer economies is business outsourcing (call centers, medical transcription, software development, other IT sub-contracting and related fields). Employers and entrepreneurs in this field will naturally look for staff and recruits who have good command of the English language, both written and spoken. When employers notice a deterioration in the quality of many Filipino applicants' command of English, even among university graduates, the issue goes back to the lack of use of English as medium of instruction in Philippine schools, both public and private, from elementary to tertiary levels.

Many sectors in the country though, launch relentless opposition to the use and strengthening of English as medium of instruction in the classrooms. They insist that Filipino, or other major regional languages, the vernacular, should be used, and the policy should be applied to all schools, both public and private.

Choice of education, like choice of what food to eat, what juice to drink, what shoes and clothes to wear, what vehicle to ride, what book or magazine to read, what music to play and listen, etc., are personal and parental options and prerogatives, not government.

If parents, say expats or diplomats working in Manila, want a school that uses Arabic or French or Mandarin or Japanese or Greek language as medium of instruction, they can't have it, because the Department of Education, Congress, Malacanang, some media and nationalist groups and individuals would gang up on them and insist that Filipino or English should be the ONLY language of instruction in all schools in the country. If this is so, where is personal and parental choice? Where is individual freedom?

People like diversity. That is why Nike, Adidas, Fila, Puma, New Balance, and other sports brands have hundreds of designs for running shoes alone; another hundred designs for tennis and basketball shoes alone, and so on. Food chains and shops also have dozens of varieties of pizza, dozens of varieties of pasta, dozens of varieties of hamburgers, dozens of varieties of "pulutan" and appetizers, and so on. Clothing designers and manufacturers also have hundreds of designs for t-shirts without collar, another hundred designs for t-shirts with collar, for jeans and shorts, etc. Even the lowly tricycles, there are dozens of designs for the sidecars which usually vary across provinces and municipalities.

But when it comes to education, or anything that government heavily regulates, standards and quality should approach monotony as much as possible. To hell with choice and options, uniformity (as defined by the incumbent politicians and government bureaucrats) is the single important thing to consider. And so, people debate among themselves trying to convince, even coerce, the other parties that English or Filipino (or Cebuano or Ilocano or other regional languages) should be the medium of instruction in the classrooms, at least in the respective provinces and regions, and at least up to grade 6, if not up to high school.

Why can't we have school choice? Some parents would want their children to be good in the arts and theater as early as elementary level, so they would seek elementary schools that focus on the arts and theater. Some parents would want their children to be fully guided by their religious beliefs (catholic, born again, protestant, islamic, etc.), so they would seeks those elementary schools, whether the medium of instruction is Engish or Filipino or Arabic or Russian.

School choice would also mean more private schools, less government schools. This would also mean less taxes, so parents will have plenty of family savings for their kids' education and other family needs. Supply -- from schools to hamburger to tricycles -- almost always respond to demand, by parents, by individuals, or by communities.

Although there will be opposition by many politicians and bureaucrats for this "school choice" track. Corrupt politicians and bureaucrats always make lots of money from commissions and over-charging of the cost of public schools, the books, laboratories and instructional materials used, etc. Also, they feel like "God" when they dictate and decide what subjects to be taught, how they should be taught, what language to be used, who should teach, who should be the school principals and district superintendents, and other decisions where they have the powers and arbitrary prerogatives to wield.

Tuesday, May 09, 2006

VAT hike + high income taxes = diswelfare

(The following is a portion of a statement by Minimal Government Movement (MGM) last January 2005 on the government-proposed expansion and hike in value-added tax (VAT) in the Philippines]

... One major reason why many sectors have lobbied hard and succeeded in being exempted from the current VAT is because 10% is already high. For those who are slapped with the 10% VAT, tax evasion becomes a natural act towards self-preservation. The President and the legislators should slash VAT instead, and then couple it with a policy of zero exemption in order to attain higher tax collection. A higher VAT only therefore strengthens the resolve of many sectors to dodge taxation. The incentive to voluntarily pay the correct tax is not there.

Moreover, there is a burgeoning public distrust of the politicians, from the President to the legislators, to the administrators of state corporations, and to the bureaucracy in general in view of the general knowledge that the state is currently too big for its purpose. The Office of the President (OP) alone is a perfect example of a bloated office -- 3 Senior Deputy Executive Secretaries, 3 Deputy Executive Secretaries, 3 Assistant Executive Secretaries, and 40 Presidential Advisers/Assistants. For all we know, many of these officials and bureaucrats do not even care about the shrinking spending power of Filipino taxpayers so long as they benefit directly from their political ties with the President.

Many lenders of government-issued treasuries and other debt papers also show no mercy in asking for higher premium for their money because they see government leaders as having no intention of implementing serious belt-tightening measures within itself and will just pass off the fiscal burden to the taxpayers. There are currently over 120 government-owned and controlled corporations (GOCCs) and government financial institutions (GFIs), and the figure would actually be obscenely higher if the sub-subsidiaries of subsidiaries are included. Many of these state-owned enterprises were given interest-free capitalization but had been through the years mere cost centers. They only survive because of annual subsidies taken from the taxpayers, particularly the helpless fixed-income earners, by the national government.

It becomes absurd further, knowing that a good number of these GOCCs are into real estate, trading, transportation and shipping, media and entertainment, banking, and even scuba diving! What "market failures" are being addressed by these state enterprises? What justifies their continued existence? Are they such holy cows that the food allowance for the children of an ordinary office messenger has to be reduced in the form of withholding tax, so those enterprises can continue operating even at a loss?

The government also holds substantial ownership shares of a few big private corporations -- San Miguel Corporation, Meralco, PNB, among others. The government ownership in these corporations should be sold back to private hands because the government has no business getting into matters where the private sector has already shown great competence in. Government can use the privatization proceeds to retire a big portion of the public debt, so that succeeding interest payment will be smaller.

Large-scale privatization is a major long-term solution to the country's burdensome fiscal situation. While it is true that we cannot fully privatize many of those state corporations and banks, as well as government shares in big private companies immediately and in one big swing, the government must show explicitly now that it is dead set on starting the ball rolling towards that direction. This will send signal to the international financial community that we shall have the capacity to pay those gargantuan loans progressively through the years. This in turn will result in lower interest rates and hence, lower interest payments in the future. Whatever potential savings will be tantamount to revenue hikes without further raising already high taxes.

Responsible parents will not send their children to work prematurely, even stop schooling, so the children can help pay their family's debts. Thus, the parents must sell off whatever non-core family assets (extra car, extra appliances or house/lot) to reduce the debt burden without sacrificing their children's education.

Responsible government leaders will not further burden their citizens' economic plight with more taxation if they can sell off assets -- whether losing or earning at the moment -- which can help reduce the debt burden. But callous and irresponsible government leaders will keep those assets for their political and personal egos, including using them as carrot to those that they wish to buy their continued support, and to bring to their side of the fence some of those who are potential critics.

For many years now, the government has been looking for ways to increase the revenue side only, but has done very little to cut the expense side. No definitive action towards slashing the bloated bureaucracy, no explicit plan to let go most, if not all, of those pampered state enterprises. There are just more than a dozen alternatives to raise revenues other than increasing VAT.

How about Malacanang saying that "We will issue a zero coupon bond for P xxx billion for the full privatization of Land Bank and DBP and their respective subsidiaries, other financial institutions, in 10 (or 15 or 20) years". No additional taxes there, yet you raise revenues, you borrow money to pay maturing obligations this year and the next, and you cut political patronage for the power-trippers in those institutions, both the administrators and the politically-connected borrowers.

Or Malacanang telling creditors, "Lend us $4 billion this year; we will shrink the number of agencies by a quarter (or a third or half), privatize or corporatize a quarter (or a third or half) of those state universities and colleges (SUCs), and privatize at least a quarter of those 120+ GOCCs and GFIs, within 10 to 15 years time. The savings and proceeds of those measures we will use to pay you back 10, 15 years from now, so give us a lower interest rate"...

No burdensome additional taxes needed. We can even have an income tax cut. And you are telling creditors that the government is willing to bite some hard bullets, particularly shedding the excess fat in the bureaucracy, just to get out of the impending fiscal crisis, without further shrinking the Filipinos’ pockets.

Retiring at least P1 trillion of the P5 trillion+ public debt through large-scale privatization, at 8% interest rate, means annual savings of P80 billion per year in interest payment from the annual budget. That’s more than double the projected additional revenues from VAT hike.

These are just some of other clear alternatives with immediate returns in the form of savings in expenditures due to lower interest rates, benefits which we can tap right in 2005, not in 2006 or later. Unfortunately, these are out of the dictionary of current government leaders, and that's horrible.

...Significant cut in individual Income tax system is a "public service" which we should have done yesterday, not tomorrow. A public service which for many salaried people, is a lot more meaningful than "more government services". Bigger take-home pay is a dozen times more preferable than "more pork barrel, more state bureaucrats, more subsidies to government corporations, more perks to the President and her advisers, and more subsidies to less-responsible parents and individuals who cannot plan their lives well."

When the citizens have more purchasing power in the form of significant income tax cut, then higher VAT and other forms of consumption taxes will be meaningful and more acceptable. But it is unacceptable for Malacañang and Congressional leaders to tell us that we should pay more taxes to the state when many of what we see is profligacy, waste and power-tripping in the government. So long as the state continues its confiscatory income tax system and keeping a bloated bureaucracy and pampered state enterprises, a VAT hike is unacceptable.

But by virtue of the near tax-dictatorship powers of the big Philippine state now, Malacañang, the DOF and the ruling party legislators will soon ram that higher VAT against our will. We are screwed!

In ancient times, witches used cauldrons in human sacrifice. The victims were often drowned in them and boiled or had their throats cut over the cauldron. Fast-forward to 2005 and the witches across the river Pasig are back with a vengeance in the cauldron called VAT. We Filipinos will soon be stewing in our own VAT, naturally adobo-style. It is inevitable. Bring your spices. It will be slow, simmering and sick. VAT hike is surrender. It is surrender to a monstrous bureaucracy that needs to be slashed, rendered of fat and stewed to lean tenderness. Stew the pigs called bloated government. You won't need confiscatory income taxes and VAT hikes after that.

Minimal Government Movement (MGM)
www.minimalgovernment.org
January 27, 2005

VAT expansion and hike, implications

Below are some facts about the new VAT law (RA 9337).
My comments indicated by ==>.

A. VAT expansion

A1. The following goods and services are VAT zero-rated:

(1) Transport of passenger or cargo by air or sea to a foreign country
(2) Services rendered to aircraft and vessels engaged in international transport
(3) Sale of goods supplies and fuel to aircraft and vessels engaged in international transport

==> Owners of local airlines and shipping lines playing international routes were successful in lobbying (if not bribing) the "right authorities" because they were VAT zero-rated, while other less-influential sectors are VAT 12%-rated.

A2. Other VAT-exempt commodities:

(1) agricultural and marine products in their original state such as vegetables, meat, fish, fruits, eggs and rice. These goods remain exempt from VAT even if they had undergone simple processes of preparation or preservation for the market (such as freezing, drying);
(2) educational services rendered by both public and private educational institutions;
(3) books, newspapers and magazines;
(4) lease of residential houses not exceeding P10,000 monthly;
(5) sale of low-cost house and lot not exceeding P2.5 million;
(6) sales of persons and establishments earning not more than P1.5 million annually, which could include sari-sari stores, carinderias and street vendors.

==> These somehow will spare the poor from VAT coverage and hike. But these will also encourage some persons and enterprises to remain small (#6 above) since the moment they become big, they'll be slapped with VAT. The same reason why many enterprises in informal economy remain there, so they can escape the government's (national and local units) multiple taxes, fees, permits and other regulations.

A3. The following goods and services are now subject to VAT (were previously exempted):

(1) Coal, Natural Gas and other indigenous fuels,
(2) Petroleum products and their raw materials,
(3) Power,
(4) Electric cooperatives,
(5) Domestic transport of passengers by air and sea,
(6) Medical services,
(7) Legal services,
(8) Cotton and cotton seeds; non-food agricultural products,
(9) Works of art, literary works, musical composition.

==> You or a member of your family gets sick, that will already drain a portion of your income and/or savings. Now government wants to further drain your savings. A consultation with a physician that currently costs say, P300/visit, will soon become P336. Your drugs and medicines will also become more expensive, courtesy of VAT coverage and hike.

==> Or your previous journey of twice a year visit to your folks in the Visayas and Mindanao may soon be cut to only once a year as domestic air fare and boat fare will be hiked by VAT. This is on top of hike in domestic airport terminal fee from P100 to P200 per person.

B. VAT Hike

The President increased the VAT rate to 12% starting this year since (a) VAT collection-to-GDP ratio for 2005 exceeded 2.8% or (b) the National Government deficit-to-GDP ratio for 2005 exceeded 1.5%

B1. For 2004, VAT-to-GDP ratio was 2.9%; National Government (NG) deficit-to-GDP ratio was 3.9%.

B2. For 2005, NG deficit = P180 billion; nominal GDP around P5,3 billion (low-end target)deficit/GDP ratio = 3.4%

==> This was more than double the 1.5% ceiling, so VAT was hiked by the President to 12%; it became effective February 1, 2006.

C. Total new or additional collections from VAT, 2006 = P82.6 billion

C1. From VAT expansion (reduction of exemptions) = P47.5 billion
C2. From VAT hike, 10% to 12% = P35.1 billion

==> That's P82.6 billion transfer from private citizens' pockets to politicians and the bureaucracy's pockets. But private citizens' actual cash outlay will be bigger than P82.6 billion if the costs of processing VAT payments are included -- hiring accountants and/or auditors, tax lawyers, runners/payers to BIR, bribes to BIR people if the latter will harrass taxpayers like disallowing certain tax and production inputs.