Privatization from a rational perspective

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Ben D. Kritz

Ben D. Kritz

THE country may be on the road to hell because of President Rodrigo Duterte’s crude experiments with social engineering, but there is still reason to be quite optimistic that it will at least get there with a much better performing and sustainable economy for anyone left to enjoy it, so long as his economic planners are allowed to work in relative peace.

According to Finance Secretary Carlos Dominguez, the government is pushing ahead with plans to privatize a vast number of government assets, even expanding the effort beyond that of the previous administration, which sought to privatize everything, and only lacked the competence and the time to do so. Specific government-owned enterprises mentioned by Dominguez this week were the Power Sector Assets and Liabilities Management Corp. (PSALM), the Philippine Amusement and Gaming Corp. (Pagcor), and the National Food Authority (NFA), and he had earlier added government-owned United Coconut Planters Bank (UCPB) to the list.
Dominguez gave a very good reason why some government assets should be privatized: The same agency should not be involved in both regulatory and commercial functions. The conflict of interest is obvious; the government enterprise in that position cannot avoid handicapping one or other of its dual mandates to operate as a profitable business and regulate its business sector. This applies to Pagcor, which is both the regulator of the gaming industry and a casino operator, and to the NFA, which is both the regulator of the rice business (rice being important enough to the Philippine diet that it is considered a strategic resource), and a rice wholesaler.

Other agencies that immediately come to mind as falling under this category include the Philippine Ports Authority (PPA), which both operates and regulates ports; the Metropolitan Water and Sewerage System (MWSS), which is technically both the operator (albeit through contractors) and regulator of water and sanitation systems around Metro Manila; and the Philippine Electricity Market Corp. (PEMC), which is both the operator of the Wholesale Electricity Spot Market (WESM) and the country’s first-line regulator of electric rates.

The potential pitfall of privatization, which we would assume Dominguez and his colleagues recognize, is that it can be overdone. That usually happens when the thinking that drove the hapless efforts of the previous Aquino administration—that everything potentially capable of turning a profit should be privatized, regardless of the social implications—is applied. The Department of Health, for example, is the regulator of the country’s health care industry, among its other duties, and it also operates a large number of medical facilities on its own, almost every one of which could, if managed just a bit differently, generate a profit. Public health, however, is considered a basic public service, something that all citizens should have access to regardless of their personal resources.


To avoid doing privatization poorly, the first thing the Duterte administration should consider —if it haven’t already—is eschew developing a model or formula for privatizing government assets. Everything must be taken on a case-by-case basis, because the rationale for privatization must be based on the specific purpose of the assets. Some cases are rather easy; UCPB, for instance, functions much like any other bank, and is not regulated by the central bank in a significantly different way because it happens to be government-owned—its character as a bank for coconut planters is an arcane holdover from the days when people used to do business on paper and in person, and is practically meaningless today. Get rid of it, and let it sink or swim as part of the commercial banking sector.

Other cases, however, will be a little more difficult, and may require the government to expand its assessment and revisit other parts of the economy—possibly undoing some privatization from the past. A good example of this is the collection of assets under PSALM, which is mandated by the Epira law to privatize. That should have happened 10 years ago, but it is actually fortunate that it has not, because the implications of privatization of the old National Power Corp. generating plants have never been fully addressed. In Mindanao in particular, critics of privatization have been vocal in protesting the plan for the government to dump generation assets, in particular the Agus-Pulangi complex, fearing (and not without some justification) skyrocketing electric rates as a result.
Privatizing the plants themselves is, by all available evidence that applies here, a good idea; the government of the Philippines has historically done an appallingly bad job of running a power business, and privatization, though not without its drawbacks, is a far superior solution.

But the privatization of generating assets is just one part of the whole system that delivers electricity to users, and in order to come up with a successful result—an attractive business proposition for a private operator and reliable electric supply at reasonable prices for consumers—the entire system must be managed as a whole, with the impact of privatization of any part of generation, transmission, or distribution on any other part, especially the people and businesses who need electricity, carefully considered.

That’s just one sector; multiply that by the many different sectors the government has a hand in, and the overall job of “privatizing government assets” becomes daunting indeed. That simply means that if they’re doing it right, the Duterte administration’s thinkers will probably not actually privatize much in the relatively short six years they have; they ought to be able to lay much of the groundwork, but finishing the job will be left to whoever gets to sit in the big chair in 2022.

ben.kritz@manilatimes.net

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