• Solving the public service cost crisis

    Ben D. Kritz

    Ben D. Kritz

    It has been a bad month for Filipino consumers of basic services.

    In the first two weeks of the new year, the public was greeted with substantial increases in fares for Metro Manila’s three light rail lines, an increase in water rates, the announcement of another even bigger increase in water rates, and news of a new charge that will soon appear on electric bills.

    To add insult to injury, the month has ended with the suspicious news that a number of unplanned generating plant outages will drive up electric rates even further next month.

    It has taken two special reports this month to provide just the most basic explanation of the current issues. Setting train fares or rates for utility services is a complicated business, and even more so if one wishes to do it correctly. For the Philippines, the problem is not that these regulatory functions are being done incorrectly; it is that the rules enabling regulation are inadequate.

    At least as much as can be determined from available data —which is frustratingly difficult to obtain for the light rail system —the public and private parties involved are for the most part “doing it correctly,” making decisions according to the rules provided. The best evidence for this is the failure so far of any complaint against an increase in consumer costs; the Supreme Court’s order to the government and the light rail operators to respond to the petition for a temporary restraining order against the fare increase is the closest to success any fare- or rate-hike complaint has come in years. (Readers will undoubtedly point out that Meralco’s over-the-top attempt to raise electric rates in December 2013 was also quashed in court, but that was an exception controversy in more ways than one.)

    Thus, the flaws that result in high consumer costs for services of poor quality and reliability are in the rules, the legal framework that provides for those services.

    Fixing the problem is a tall order, because it would necessarily involve a comprehensive review of at least four major laws: The Water Crisis Act, the Electric Power Industry Reform Act (Epira), the amended BOT law and the Renewable Energy Act. The solution would also most likely involve some revision of the Constitution with respect to the formation of regulatory bodies and limitations on foreign ownership.

    Finding the solution is going to take the sustained effort of a variety of stakeholders, who will eventually be able to develop a framework everyone can live with if they follow a few basic principles:

    *It is the responsibility of the government to provide basic infrastructure and vital services such as water and electricity. How the government chooses to go about doing that can be flexible, but any failure is ultimately a government liability.

    * The “user pays” principle is valid only if it is treated as tax. Water, electricity, and functioning transportation systems are necessities, not commodities.

    * Concessionaires and franchisees are entitled to earn a fair income for providing those services, but…

    * …While the limits can be generous, they must clearly be defined. Moreover, the authority to change those definitions must be limited as well.

    * In natural monopolies, the only available substitute for competitive forces that would help drive innovation and better performance is risk. If all risk is passed to consumers, the incentive to focus on performance is lost.


    Because today (Friday) is the National Day of Mourning for 44 (or more) police officers killed in Maguindanao, let me first say I share the outrage and sorrow of the Filipino people. Don’t let this one go – there needs to be a reckoning with real consequences, and soon.

    On Thursday I had the chance to listen to Senator Ferdinand “Bongbong” Marcos Jr. discuss the current crisis. As most of my readers and I suspect the Senator himself are well aware, I am not a fan, to put it delicately. He offered, however, a perspective on the entire issue of peace in Mindanao that is the most sensible thing anyone has said about it in probably the last 20 years.

    Space on the printed page being limited, I will save a more detailed discussion of that for another time or the online space, but Marcos’ own summary of the situation describes the problem perfectly. “Everyone is focusing on BBL, BBL, BBL,” he said, referring to the Bangsamoro Basic Law, “But we should be focusing on peace, peace, peace.” The reason why he suspended his Local Government committee’s hearings on the BBL was that, “We have a peace treaty, the BBL flows from that. The treaty is supposed to prevent this sort of thing from happening—it didn’t, and therefore, we do not have peace. And we need to know why, and fix it before we can go forward with the BBL.”



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    1 Comment

    1. Privatization must be abandoned as a policy, period. But first things first. Privatization and practically the whole orthodoxy being applied to public utilities, among others, is that it is an integral part of the ideology that is driving this yellow regime. Making major changes is akin to asking the Republican Party to tax the rich which is anathema to its basic belief system. Therefore the problem at its most fundamental is political and the solution is regime change or an upheaval. You said in natural monopolies, risk is the key to innovation and performance. Do you mean to forbid the grant of sovereign guarantees? One more alternative is genuine regulation, but “regulatory capture” is a standard feature of a plutocracy, so again the problem is political. By the way, Senator Marcos is an Oxford alumni.