Govt. & Taxes, Philippines

Monday, May 28, 2007

Privatization and Taxes

(Below is a portion of the paper I gave on the panel on Privatization, during the "Pacific Rim Conference" held in Sheraton Waikiki, Honolulu, Hawaii, May 23-24. The event was jointly sponsored by the State Policy Network (SPN), Americans for Tax Reforms (ATR), International Policy Network (IPN), Asian Forum Japan (AFJ), Lion Rock Institute (LRI), and Grassroot Institute Hawaii.)"

From Privatization to Tax Cut: Some Theoretical Considerations and the Philippine Experience"

III. Philippine Experience of SOEs

Public enterprises were first introduced in the country during the American colonial period (1900 to WW2). Very few SOEs then, including the Philippine National Bank (PNB). After WW2, 30 government corporations were created from 1945 to 1950 alone. By 1967, there were 44 Government-Owned or Controlled Corporations (GOCCs). By 1975, 120; by 1984, 303!

And even this 303 GOCCs, it was understated. The country was under the Marcos dictatorship from 1972-1985 (Martial Law period). During that authoritarian rule, the distinction between public and private enterprises was blurred. Crony private firms would have access to government credit facilities, got loan guarantees, and granted exclusive government contracts (Patalinghug, 1996).

The idea of privatization was implemented starting 1986 when then President Cory Aquino defeated in an election a dictatorial government that ruled the country for 20 years. By that time, the volume of government losses (actually, taxpayers’ losses) to GOCCs and the bad loans accumulated by GFIs were very big. In 1982 alone, approximately 73 cents out of every dollar of outstanding foreign public debt were accounted for by public enterprises; the 27 cents attributed to national government (NG) debts. And by 1989, around 34 percent of total national debt was attributed to government enterprises, composed of (a) non-performing assets by PNB and the Development Bank of the Philippines (DBP) transferred to NG; and (b) liabilities incurred by the National Power Corp. (NPC), National Development Company (NDC), and PhilGuarantee which were absorbed by NG (Patalinghug, 1996).

Among the largest “deficit-generators” up to this day are the following GOCCs:

1. National Power Corporation (NPC) – a monopoly in power generation and transmission for many decades; until a few years ago, it was losing up to $2 billion annually. There were a dozen-plus reasons why this occurred, but among the most prominent ones are: (a) wastes and profligacy, not to mention corruption, associated with the behavior of bureaucrats, cronies and politicians administering a monopoly firm. (b) Bureaucratic inertia and absence of sufficient flexibility and dynamism to respond to changing demand, like the failure to build more power plants as the Philippine economy (along with many Asian economies) was growing rather fast in the early 90s. This resulted in tremendous power black-outs in 1990-91, forcing NPC to enter into contract with many independent power producers for quick power plants at expensive power rates.

2. National Food Authority (NFA) – a monopoly in grains (especially rice) importation for many years, sole regulator of private traders (wholesale to retail) while engaging in grains trading business itself. Its administrators and bureaucrats justify the firm’s perennial loses (around $200-$500 million annually) because it is mandated “to buy high, sell low” to protect both farmers and poorer consumers.

For the government financial institutions (GFIs), many seem to be “earning well”. Among them are the following:

1. Social Security System (SSS) – a monopoly in providing pension and various benefits to people working in the private sector. Membership here is compulsory and by coercion, provided in various labor and social security laws.

2. Government Service Insurance System (GSIS) – a monopoly in providing pension and various benefits to people working government. Again, membership here is also compulsory, by coercion.

In these 2 GFIs, by virtue of their being monopolies, it is possible to hire even the laziest and most conspiratorial administrators, they will continue receiving monthly contributions because the working people are simply forced, coerced by laws, to become members of these two giant GFIs.

3. Manila International Airport Authority (MIAA) – a monopoly in running and/or administering all international airports in the country. The international airport in Manila is among the smallest and least modern in Asia, and yet this monopoly corporation is charging all out-going international passengers (except overseas Filipino workers or OFWs, others) a “terminal fee” of $16 each, up from $11 just 3 months ago. Many big airports in Asia (about 10x larger than Manila’s airport) make money from the many airlines, and from hundreds of shops in the airport, so they do not charge out-going passengers “terminal fee” anymore.

4. Development Bank of the Philippines (DBP) – for many years in the 60s to 80s was a big source of behest loans to cronies and friends of the President and other top politicians and bureaucrats in the country. Big bad debts by the bank are still in the books of the NG in the form of "assumed liabilities" from DBP. Filipino taxpayers pay for those debts and non-performing loans (NPLs), while the bank leadership and the Office of the President enjoy the "handsome points" of said bank remitting "net income" to the NG, because the bank no longer pays those bad debts.

Even the central bank, formerly called Central Bank of the Philippines (CBP), is not spared from the above practice. It transferred several $ billion of its liabilities to the NG, got new capitalization and was renamed Bangko Sentral ng Pilipinas (BSP) starting the mid-90s.

For the overall GOCCs, in 2003, 77% of them generated a low return of 5% or less on government’s equity investment; of which 42% of the GOCCs operated at a loss. And from 1997-2003, NG debt increased from P1.6 trillion (around $54 billion) to approximately P4.0 trillion ($74 billion), and more than 35% of that increase is attributable to GOCCs’ losses and activities (Carmody and Flohr, 2005).

Let us take the NFA policy of “buying high, selling low”, and why it is wrong. NFA intervenes in the grains market by being a monopoly importer for many years (in recent years, it has allowed some farmers’ organizations and private traders to import as well), buys directly from farmers at a certain guaranteed price, and sells to private traders or sells directly to poor communities at subsidized price. Effectively, it attempts to bring down the price of rice by (a) using taxpayers’ money to subsidize the products, and (b) buying cheaper rice from Thailand, Vietnam, elsewhere as a monopoly or near-monopoly importer.

This sounds plausible, except that it uses taxpayers’ money to (i) subsidize rice, and (ii) hire plenty of government personnel to administer the marketing function and regulatory function of imposing bureaucratic regulations and certain fees to people wanting to engage in grains milling, warehousing, trading, and related businesses.

There is another alternative to the above scheme that achieves the twin purpose of increasing supply and reducing price, without taking a single centavo from the pockets of taxpayers. This is to (i) have free trade, allow free flow of cheaper imported rice from neighboring countries, at zero customs duties, and (ii) relax if not abolish its bureaucratic regulations to businesses engage in grains milling, warehousing, retailing. The latter creates additional costs to business, both in actual fees to be paid, and transaction costs including bribes if the bureaucrats will deliberately slow down business papers processing. Let firms develop their own brands to attract and assure consumers that what they are buying are good quality rice at a good price. Selling bad quality, if not damaged and unhealthy rice, will result in possible lawsuits and non-patronage by consumers. This should be enough disciplinary threats to businesses who want to cut corners, make immediate profit, and disregard the welfare of their consumers.

The market system, if allowed to freely adjust to changing conditions, ensures players, both producers/sellers and consumers, develop their own system to reward and punishment at a much faster pace, than government bureaucracy, regulations and taxation of business.

This makes the NFA and all other government enterprises engaged in the practices of tax-subsidize-waste highly privatizable and/or abolishable.

IV. Retiring Debts, where to get the money

Finding big amount of money, billions of $ of it, to retire the country’s big external and domestic debt, so that budgetary resources will be rechanneled from principal + interest payment, to improve the justice system and other “public goods”, is a big question mark. Not through higher taxation, or new taxes to be created! Privatization of both bad- and good-performing GOCCs and GFIs should provide the much needed resources. The Philippines has one of the highest external debt/gross national income (GNI) ratio in the world.

This writer would even suggest that for many indebted poor countries in the world, the solution is not “more foreign aid”, which essentially means more taxes from rich countries (foreign aid budget) and from poor countries (counterpart fund). A more lasting solution that will not exact more tax burden to the people, is to privatize most if not all of the SOEs of those countries, get the money, pay their debts, and use whatever collection from existing taxes for the basic needs of the people, especially the poorer households.

The title of this paper banners “From privatization to tax cut”. Tax cut is a must to give justice to the Filipino taxpayers in the past and the present. This is partly because Filipinos are among the most taxed people in Asia, courtesy of the big Philippine government. When you look at business taxes, especially “corporate income tax”, ultimately, it’s the people, not corporations (they are just legal entities), who bear the burden – the employees in the form of lower salaries; the investors in the form of lower after-tax income, the consumers in the form of higher prices; and the unemployed in the form of fewer jobs available.

Number of business taxes that medium size companies around the world have to pay. Total tax rate (as % of profit) refers to various taxes on profit, on labor and mandatory social contributions, other taxes by national and local governments.

Philippines, 59; 53%
Indonesia, 52; 37.2%
China, 48; 77%
Singapore, 16; 29%
Japan, 15; 52%
Taiwan, 15; 36%
Hong Kong, 4; 29%

Now, is there any legal or institutional justification in calling for the privatization of most, if not all, SOEs in the Philippines? Yes, there is! While the 1987 Constitution mentions the justification for creation of GOCCs, the same constitution also emphasizes the role of private enterprises to produce welfare for society.

Article 2 of the Constitution, entitled Declaration of Principles and State Policies, it says:

“Section 20. The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments.”

Tax cut, means quick and fast disposal of all GOCCs and GFIs, including their subsidiaries and attached agencies. The main goal is to get as much money as possible (that’s why all should be sold, no exemption) to retire the big public debts, both foreign and domestic, and rechannel resources in the budget to basic social and economic services without raising taxes and fees, even cut certain taxes, abolish one or two, to provide more breathing space for the toiling Filipinos.