Reduce Malampaya royalty to preserve jobs

The PCCI, through Jose Alejandro, its vice president for energy, made a suggestion this week that it is timely for government to reduce its royalty on Malampaya natural gas to help industries preserve jobs in this time of crisis. “Depending on the nature of activity, a firm’s power expenses range from 15 percent to 35 percent of total costs. That’s significant,” Mr. Alejandro told BusinessWorld.

The PCCI official anticipated government’s objection to such a proposal but still voiced his hope that government will listen. “We understand that the government needs a lot of resources to address the economic down-turn, but firms need support to maintain their organizations and prevent layoffs,” he said.

According to Mr. Alejandro, if “part” of the royalties from Malampaya gas sales were to be applied as power rate discounts, Luzon rates could go down by at least P1 per kilowatt hour, Mr. Alejandro said. “We do not really know how much they should reduce but maybe they can review the merit of reducing charges even temporarily,” Mr. Alejandro said.

But a government official quickly dismissed the suggestion. Energy Undersecretary-Officer-in-charge Ramon V. Oca told BusinessWorld “the effect is very minimal if you take it [royalties] away, a few centavos maybe.” Mr. Oca said the proceeds amounted to P20 billion in 2008.

I checked out the facts. Mr. Oca is wrong. It is unfortunate that a senior government official does not know the numbers related to his area. A reduction in government royalties will not have minimal effect.

Assuming the following in computing, 83 percent dispatch for Natural Gas, Oil Fired, Coal Fired Plants, total power price for geothermal plants uses deemed steam price to NPC, power plants used for computation are: Natural Gas - Santa Rita/San Lorenzo, Geothermal – Mindanao 1, Oil Fired – Bauang, Coal – Masinloc derived from February 2009 figures, power from Natural Gas will be lower by 1.925 P/kWh and bring the total power cost of 4.770 P/kWh down to 2.845 P/kWh.

All Mr. Alejandro was asking for was maybe a one peso reduction, a figure that looks affordable. Sure… government says they need the money for fiscal stimulus. But giving that peso discount should be an even more effective fiscal stimulus because it goes directly to the users of electricity. The discount could be concentrated to the industrial and commercial sectors resulting in a bigger amount that should help a lot more to save jobs.

Or if shared with residential users, it could be an effective tax break that will be spent to produce a stimulative effect. This is a better approach than collecting that much money and entrusting the government bureaucracy to spend it. You know how a lot of money tempts people in government to misuse it. The money meant for the maintenance of our highways, come to mind. And if a large part of it goes to a select group close to government, it will just be converted to dollars and spirited away to secret overseas accounts.

But there is another good reason why a reduction in Malampaya royalties is called for. We are unduly taxing a domestic natural energy resource, negating a potential benefit to our consumers that our Asean neighbors give to theirs. Our Asean neighbors tax energy resources exported and but keep the prices of what they use domestically as affordable as possible.

In our case, we have the strange situation wherein natural gas domestically produced and used for electricity generation is now more expensive than imported coal used for the same purpose (see graph). That does not seem rational. Government must revisit the issue and see the logic of Mr. Alejandro’s suggestion. The alternative in the face of this worldwide economic downturn is more lost jobs and it may prove more expensive in money and social terms for the government to deal with that.

But don’t take my word for it. I just came across a study made by Dr. Dante Canlas, a professor in the UP School Economics that sees such a reduction in royalty as beneficial to the economy. Dr. Canlas was the dissertation adviser of Ate Glue when she was a PhD candidate at UP.

Dr. Canlas showed that adopting insights from supply-side economics, appropriate tax cuts, such as the case of waived royalty payments imposed on natural gas, help spur growth. A growing economy generates additional taxes that more than offset foregone revenue from properly calibrated tax cuts.

Based on the quantitative simulations done by Dr. Canlas, under the current tax effort of 14 percent of the Philippines, the resulting increase in tax revenues more than offsets a partial waiver of royalty payments. Meanwhile, improving the tax effort to 19 percent contributes to tax revenues even more and could offset revenues foregone from a full waiver of royalty payments.

Late to the party??

I received this reaction from Nicholas Mapa to the column last Wednesday.

I totally despise the notion that everything can be tied to our “backwardness”. Countless economists have used the analogy of the Philippine ship still being afloat because we never left the port in the first place, soliciting giggles from the audience, as if they are not aware that the jab was directed at their own country. Come on, we’re not that inutil.

The Philippine ship may have not left the port, or it may have not gone very far, perhaps by choice. I have had lunches with several a big shot banker and they all say the same thing; thank god we’re more conservative and more “old school” than the rest of the world. 

I do agree that Ate Glue should not gloat (or now that she’s made a habit of it, she should not “Gluet”) about the fact that we are doing “ok”. But there have been reforms in the banking sector and fiscal sector, not totally of her doing, but reforms put in place by the government nonetheless, that have helped us weather the crisis better than our other neighbors.

As for remittances, I did some research work recently and it was comforting to note that several of the papers on remittances highlight the “altruistic” nature of those sending back remittances. One paper notes that in times of hardship faced by the mother country (Philippines) remittances tend to increase as long as the threat is perceived (by the OFs) as an “external threat”. 

If the country faces dire time due to a “local disturbance” (ex: Presidential scam), remittances are seen to decrease. In short, when the country is in trouble because of external factors, OFs tend to send home more money. Let’s hope Ate Glue doesn’t drop the ball, thereby prompting OFs to send home less money, well according to the paper at least. Don’t discount the OFs ability to find a way, isn’t that something inherent to Filipinos? Maabilidad? 

The great nations of the world are on their knees and everyone forecasts growth to begin in Asia. We have historically trudged along, growing in good times (slower than neighbors) and growing in bad times (faster than our neighbors). We just seem to tread the water, never sinking but never really swimming.

Give credit where credit is due, and I’m not saying it’s with Ate Glue. Tito Gary and Tito Say have done their homework given the limited space available to them. Prosperity has always returned and will return once more. Let’s just make sure, this time, we start the party.

New saint

 Reader Cora E. sent this one.

There is no truth to the rumor that with the high profile patients being confined in this hospital lately, it will soon be renamed St. Loot’s.

Boo Chanco’s e-mail address is [email protected]