The missing piece in the Philippine economy

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Mike Wootton

Mike Wootton

I was at a conference last week—the Second Annual Power and Electricity Philippines—“seizing the immense investment opportunities. . . “ I must say that the choice of the Hyatt Hotel and Casino as venue for the conference was not ideal, because Mabini needs quite a lot of tidying up for it to be the right place to hold what at least appeared to be a high-powered international business conference. It was all a bit depressing really; certainly it was to me as an investor in renewable energy. Quips like “Rules keep changing,” “Philippine business environment is unique,” “much work to do in aligning regulations,” “need lots of patience and flexibility,” reflected the general mood which at an international level event to help people capture the “immense investment opportunities” seemed a bit counterproductive. It is fair to say that the power sector is in a bit of a mess.

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To be gained from the above is that a laissez faire management style does not work in a Philippine setting. “This is what the people want so we will let it just happen—it will sort itself out eventually,” is the general view. It won’t. This is not to say that the power sector is necessarily run on a laissez faire style; the power sector is itself a victim of the laissez faire style of government executive management.

The Philippines will always be one of the first places to market the latest cell phones, Internet peripherals, tablets, and other gizmos. Great publicity is given to opening Rolls-Royce and Lamborghini outlets and the latest SM Malls. It is virtually impossible to go far without having an extravagantly worded brochure foisted on you for some condominium development or other [I often wonder what people get paid for giving out these brochures and whether they are considered employed or under-employed statistically]. The trappings of advanced economies are everywhere, the Philippines really looks to the casual observer or visitor, or even the less informed Filipinos that it is on the up and up. A common rule-of-thumb measure of economic development has always been the number of tower cranes in action and around the Fort area, that there are enough to satisfy any such measure. The oligarchs are really doing their best to support the Aquino administration and in particular those of the finance department’s claims of stellar economic progress—there is alignment.

But there is something missing. What is missing is development that produces sustainable economic benefit; there just isn’t any. The Philippine way of business is to have big bags of money [obtained in a way that nobody asks too many questions about]and use that money to make whatever it is that is desired to happen. The desire is to be achieved as fast as possible and the returns are to be big and will be assured by using some of the bags of money to facilitate access to centers of power, and to “persuade” bureaucrats to keep out of the way of development of the money-making venture. “Rent seeking” is a critical part of the Philippine economy; build something like a shopping mall, rent space out to retailers on terms that guarantee your minimum required return and through which you pass the development risk onto the retailers, who in turn pass it on to the consumers. The slow pace of development of off-grid renewable energy suffers from a similar rent-seeking type approach; diesel is the fuel of choice and all consumers in the Philippines pay for it, capital investment cost is low [about P22 million per megawatt (MW)]the return on which is guaranteed through a capacity fee of about P2 per kilowatt hour, and the fuel cost of about P9/kWh is just passed through, so the cost risk is borne by all the consumers in the Philippines. Renewable energy is a different story because there is no fuel cost [except for biomass]so development risk at a capital investment cost of about P135 million/MW is borne 100 percent by the developer. Not an attractive model to a rent seeker.

I do not think that investment incentives alone are the means of stimulating long-term industrialized development. Incentives are a bonus, it’s the business environment that is critical and the business environment in the Philippines is significantly less sophisticated than the advanced gizmos that you can buy would indicate. Technical and commercial competence, knowledge and skill are grossly undervalued in the Philippines, purely because money is such a powerful facilitator and for as long as the structure of the Philippine economy remains so enamored with money, then long-term job and export creating investment will just not happen. The oligarchs need to raise their game and government such as it is needs to recognize and properly value and prioritize knowledge and skill above those so coarse and basic “big bags of money.”

Mike can be contacted at mawootton@gmail.com

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