Business does it better

Peter Wallace - Manila Standard Today
Hong Kong is the most open economy in the world. North Korea is the most closed; it’s a disaster.

Surely it’s a no-brainer that opening up the economy to allow business to do business is what’s best for people. Hong Kong residents have a gross domestic product per capita of $25,500. We have $1,170. No one knows about North Korea, but it’s somewhere down—around $200.

So why does the Philippine government still think it has to intervene and control? I said it two weeks ago, and maybe I’ll say it every week until the message sinks in: “Government should not be in businesses business can do.”

More importantly, the government should not intervene in business, except where strictly necessary for health and safety reasons. You could add “the people’s welfare” but that becomes judgmental and, frankly, government’s judgment in this area has been poor to be kind about it.

In an open environment, the thing that most flourishes is competition. There is no, and I emphasize it for those in government, no better control of businesses operating for the best interests of the country than competition.

You can’t rip-off people when someone else can offer a better deal, you can’t offer an inferior product when someone else can offer a superior one.

Now there will be, still, the unscrupulous who’ll try to take advantage of the people. These are the ones the government protects by general standards and laws that everyone must comply with. But it’s critical not to overdo it. And it’s critical to properly enforce the standards and laws, something that the Philippine government have never been much good at. Government shouldn’t be the provider of services and the regulator. It should only be an enabler and facilitator.

Specifically, it should only focus on the management of the macro-economy, including formulation and implementation of monetary and fiscal policies; maintenance of peace and order and national security; ensuring the sustainable use of natural resources; lawmaking and administering of justice; provision of adequate infrastructure and quality basic education; mitigation of disasters; and promotion of economic and political diplomacy

Where business is concerned it’s only health and safety where government should have every right to step in, but not much else. If the Philippine government would use, wisely, just these two basic criteria, what a massive positive change this could effect.

“Do business in the Philippines, it’s easy, you can, and there’ll be no unfair competition. Just do so responsibly.”

Now isn’t that a message that could sell? Isn’t that a message the Philippines today can impart? Time it did.

I’ve talked about removing government from unreasonably, unnecessarily intervening for 25 years now. I’m sick of it.

They think they know how to do business better than business entrepreneurs, who are risking their own money. That nebulous thing “government” is composed of permanent employees who get paid regardless of what they do or don’t do. They screw up, there’s no penalty. They do well, there’s no reward. There’s no motivation. Logic tells you in such circumstance government won’t and can’t succeed at running a business competitively.

Success in business is offering the best deal at the lowest price. When did government, any government, ever think that way? It’s not in the bureaucratic culture.

I said it last time and I’ll say it again: Government, get out of businesses business can do. What are you doing in real estate? Get out, sell Subic Bay Ecozone, Clark, Cagayan, John Hay, Batangas Land Co., Kamayan Realty, etc. to businessmen who have the experience and expertise to do it better and cheaper.

Why is the government in shipbuilding? It is, it’s called the National Maritime Leasing Corp. and is currently planning to build a shipbuilding yard on 50 hectares of land at Subic. It will build 18 tankers and then lease-to-own them to local shippers.

Why is the government in mining? It has NO, and I stress NO expertise in Mining—unless you apply Imelda’s definition: This is mine, and this is mine, and this… Latest report is government will form a corporation to manage the mineral resources in Diwalwal.

Diwalwal was a disaster because “do gooders” wanted to give small people a chance. Hundreds of people died because small people were given a chance. A mine with the potential of Diwalwal needs at least $70 million, that’s P3.5 billion if it’s to be properly, responsibly developed.

Small guys don’t have P3.5 billion, even if there’s 30,000 of them (about the number that was mining Diwalwal before). Where does the average Filipino get P3.5 billion? The government doesn’t have it either. Not when almost 40 infrastructure projects the President identified in her State-of-the-Nation Address have to be done.

So offer shares to the public? Yes, that could provide the funds. But the government has to start it first. And it still comes down to the basic: Government shouldn’t be in business at all. By all means, help the private sector winner of a bidding to develop Diwalwal to relate responsibly to the local communities. But operate it themselves? NO.

Government should get out of interfering too much too. When the government opened up the banking industry to foreign entrants, Urban Bank was saved from bankruptcy with the entry of Keppel. Ailing banks could immediately enter into debt restructuring programs, preventing a collapse of the whole system. The collapse of the banking system during the early ’80s was mainly due to the capital restrictions of the government. This was compounded by the mismanagement and corruption in government-controlled banks that dominated the industry then. Privatizing them saved the day.

Here’s some others that the government could sell (there’s many, many more):

National Power Corp., National Food Authority, Land Bank of the Philippines, PNOC Energy Development Corp., Philippine Amusement and Gaming Corp., Development Bank of the Philippines, PNOC Exploration Corp., Philippine Ports Authority, Manila International Airport Authority, Light Rail Transit Authority, Subic Bay Metropolitan Authority, Local Water Utilities Authority, National Electrification Administration, Philippine National Construction Corp., National Development Co., National Irrigation Administration, and Philippine Postal Corp.

Most of these government-owned and -controlled corporations are bleeding the government dry. The subsidies going to these corporations should have been used to finance much-needed infrastructure projects and provide basic education to more Filipinos.

With regard to the first one on the list, at least here the government (through PSALM) is trying. But there’s not been much success to date. A total capacity of 3,500MW of NPC power plants have been on the chopping block for six years now, and only 13 percent of that has been sold. It’s time to ask why. I suggest the energy secretary hire an independent outside organization to conduct a review of what’s been done to effect sale, and suggest reasons for the failure so corrective measures can be introduced.

The faster we can get power into private hands, the faster we can get the spot market fully working and perhaps achieve more competitive pricing.

While on the subject of power plants (and some of the other assets too), I’d say the common wisdom that government should seek the highest price for anything it sells should be reconsidered.

It’s good that government gets money, but it means the buyer must get a reasonable return on that money he’s invested. That means the price he charges for subsequent service must be higher.

A simple example: you buy a power plant with an average monthly output of 30,000 MWh for $300 million and amortize it over, say, 25 years. That, when you also include cost of money, means you must add P0.065/kWh to the price you charge for electricity.

If you only paid $200 million (a fair enough discount for an older plant and for government to afford as a “subsidy” to the people) you’d only add P0.045/kWh.

How you then make a fair choice in winning the assets I don’t know. And that’s the problem. But it can’t be unsolvable. It’s well worth some brighter minds thinking the whole process, and its ramification both sociological and economic, through.

It’s time a really determined effort be made to get (I didn’t say “put,” but it’s a thought) government out of business. The impetus to the economy could be enormous.