Hagedorn's woes

There is growing concern among businessmen and investors in Puerto Princesa not only about the rapidly deteriorating power situation in the city, but also about the fact that some quarters could be undermining  the determination of Puerto Princesa Mayor Edward Hagedorn to speed up the growth of tourism and investments in this beautiful city of Palawan.

The continuing brownouts have graduated from irritating to alarming. The Palawan business sector is worried that this situation will drive away both tourists and investors.

This vital tourist destination has a power generation surplus of about five megawatts – which means that the National Power Corporation’s power producers are actually generating more power than what the province and the city can consume.

So, why the persistent brownouts? If it is not power generation, then it must be power distribution, which is the responsibility of the Palawan Electric Cooperative (Paleco).

Hagedorn, himself, was a victim of this situation. In 2007, just a few minutes before the good mayor delivered his State of the City Address, the city was hit by the now-trademark Paleco brownout. Many suspect that it was intentional. That was nearly two years ago and the situation appears not to have improved at all. 

This is why prominent Puerto Princesa business leader Vicente Tan is livid with anger. Tan is the past president of the Palawan Chamber of Commerce and now heads the Palawan Filipino-Chinese Chamber.

With the rest of the province’s business leaders, Tan is worried that the Paleco brownouts are sabotaging the aggressive promotion of Puerto Princesa’s Subterranean River National Park as one of the new seven natural wonders of the world.

The international tourism industry is a word-of-mouth enterprise. The concern is that a tragic experience of a Paleco brownout could spread like wildfire in the global tourism sector where Palawan is competing with other exotic destinations.

We were hoping that the Fr. Francisco Silva and National Electrification Administration (NEA) head Edith Bueno could help unravel the mystery of the Paleco brownouts, but it appears the Palawan coop is not within NEA’s sphere. So, who can help solve this problem?

We learned that Palawan solons Abraham Mitra and Antonio Alvarez had already held hearings at the House in Nov. last year to look into the Paleco brownouts. But the problem persists.

Malacanang itself should intercede. The entire nation has a stake in the success of Palawan’s tourism efforts, anyway. We cannot let Paleco’s brownouts torpedo the chances of this beautiful province staking its claim as a top global tourist destination.

Still a viable sector

There is a lot of confusion about the state of the country’s pre-need industry.

To say the entire pre-need sector is in trouble is a sweeping generalization that has absolutely no basis.

We have to distinguish between the so-called traditional plans including the old open-ended education plans from the fixed value education, pension, and memorial plans.

The traditional education plans guarantee to pay the planholder irrespective of the cost at the time of the availment, meaning the tuition and other school fees for the enrolment of the beneficiary. This kind of open-ended plans were launched in the market in Feb. 1986, or 22 years ago.

At that time, tuition and other school fees were not fully deregulated. If schools intended to implement more than five percent increase from the previous year, the new rates need to be approved by the Ministry of Education. Thus, annual tuition fee increases in the 1980s were a mere 10 to 12 percent per year.

The problem started when the Department of Education starting deregulating tuition fees and other school charges beginning in 1990. It was in 1994 that a policy of full deregulation was implemented.

As a result of this, tuition fees of private schools increased by an average of 16 percent every year to as much as 28 percent in a year, a far cry from the maximum projected increase of 10 to 12 percent which traditional education plan providers such as Pacific Plans Inc. considered when they launched their trad plans.

Thus, the root cause of the problem in the traditional education plan sector of the pre-need industry is the fact that these plans were approved and underwritten in the past based on assumptions which, while prudent at that time, have not been sustained by subsequent events beyond the industry’s control.

Aside from the traditional education plans, there is also another sector of the industry that is facing problems. Early pre-need plans sold in ‘70s were premised on the trust funds earning 16 to 18 percent per annum which were attainable at that time. In 1997, the Asian financial crisis came. Investment yields began to decline and never went back to the 16 to 18 percent range. Pre-need companies had to augment deficiencies in accordance with a SEC rules the earnings of the trust funds for old plans year after year. And products had to be reformulated to a lower hurdle rate assumption of nine to 12 percent.

According to the industry’s leaders, as late as Feb. 2008, the trustee banks who independently manage the trust fund accounts have assured the pre-need companies that they can continue to earn the 12 percent. Unfortunately, these trustee banks lost money last year due to the global financial crisis.

To top it all, the trust funds (TFs) are being valued based on mark-to-market accounting standards. The TFs were sustaining huge paper and not actual losses while investments in stocks that remain unsold had to recognized unrealized losses from the drop in market prices.

It is now estimated that the attainable and realistic rate is no longer double-digit but at six percent. Using the normal yield of 12 percent, pre-need companies have no deficit, given a trust fund of P95 billion and liabilities of P94.6 billion. The results would be far different using six percent. The old basket of plans have therefore become commercially impracticable.

They however have emphasized that the current pre-need plans being marketed are priced based on attainable investment yields given the current economic downturn and are therefore not part of the problem.

 And take note that each pre-need product are secured by a separate trust fund. They cannot be co-mingled based on the SEC pre-need rules.

So when the Noel Onate-led Abundance Providers Investment Corp. (APIC) acquired Pacific Plans recently and saw an abundance of opportunities for the company, APIC had been right all along in its assumptions. The trust funds for the traditional education plans are separate and covered by a court-approved rehabilitation plan (to which Onate has vowed to abide with). The 300,000 other planholders of the company are protected from the problem of the traditional education plans. PPI in itself is a viable company and holds much promise.

So other than the traditional pre-need plans, the rest of the pre-need sector remains to be a thriving part of the economy. Blaming the SEC for a weak regulation of the pre-need sector has no basis after all. A barrage of problems over which the traditional pre-need sector had no control of is after all to blame. The fixed plan sector has no reason to worry.

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