Small is not beautiful

DEMAND AND SUPPLY - Boo Chanco - The Philippine Star

Our politicians have a penchant for smallness. Because of it, we are what we are today, the laggard among the ASEAN originals. Smallness is not a virtue. Our politicians use it to preserve their power and enhance their ability to benefit from corruption. Our politicians thrive on the miseries of our people arising from smallness.

Take agriculture. We are unable to grow enough rice because we have a revered but stupid agrarian reform law that celebrates smallness. Our rice farms are just about a hectare, so farmers can hardly grow enough rice for their families. A farmer with just a single hectare to till can’t make a living. He ends up driving a tricycle so his family can eat.

The story of successful rice-growing countries is all about taking advantage of farm mechanization and economies of scale. Farming is more than planting rice seedlings in the muddy ground. Seed selection and getting the right fertilizers are cheaper with scale. Scale will also make post-harvest and marketing logistics more efficiently available.

Surely BBM and his Agriculture Secretary must know that things won’t start to get better until they address the smallness issue of rice farms. Because the basic smallness problem is being ignored, they are merely pretending they are doing something useful. BBM must be brave enough to say we need to start consolidating farms, not necessarily farm ownership.

Our politicians have also been breaking up provinces. According to Google, we have 81 provinces now, but I am not sure how current that number is. That also does not include the chartered cities and the NCR with its 16 cities and one municipality. It is a good thing the people in Palawan rejected the congressional attempt to divide it into three provinces.

Of course, politicians love to chop-chop provinces to increase the number of congressional seats their family members can get elected to and increase their potential pork barrel funds. But continually dividing provinces does not result in better governance. On the contrary, more officials get more opportunities to waste more public funds.

Actually, NCR should be made one super province with one governor responsible for everything. Metro Manila is 636 sq km compared to Singapore, which is 699 sq km. It is obvious having one government in charge of city planning and providing essential services in the two geographical areas that are almost of the same size has resulted in better efficiency and outcomes for Singapore. Much will be gained by some consolidation in terms of more efficient garbage collection, better flood control, and traffic management.

Now there is a congressman who wants to chop-chop the Meralco franchise area into three. The first rule of management is to leave alone things that are already working well. Some refinements may be introduced now and then, but a major change that will upset the system is too risky. There will be a public outcry if we end up getting a diminished quality of service after the franchise is chopped into three.

Meralco is a well-functioning natural monopoly. Google defines a natural monopoly as a business that can provide a product or service cheaper than two or more business units can. The purpose of natural monopolies is to ensure efficiency and reliability through economies of scale. A power distribution utility is a good example of a natural monopoly in a given geographic area.

Indonesia, Singapore, South Korea and Taiwan have one distribution utility each. Thailand has three and Malaysia has two. The Philippines has around 140 distribution utilities/electric cooperatives plus the NPC, which runs island grids. This is an unreasonably fragmented electricity distribution system that explains why the cost of electricity is so high outside the Meralco area. Additionally, Filipinos also suffer the consequences of smallness and the cost of local corruption that electric cooperatives are known for.

Will three DUs in the current Meralco franchise area be better than having just the current one? I doubt it. Breaking it up will unsettle what is already a finely tuned working system with serious economic consequences.

Because of Meralco’s current size, it is able to get power supply contracts that enable Meralco subscribers to enjoy among the lowest rates in the country. If Meralco is broken into three smaller Meralcos, not one of them will have the same leverage to get the same lower PSA rates.

Each of the three will also have fewer resources to invest in continually upgrading the system to meet increased power demand from customers. For instance, massive investments are needed to meet the demands of data centers, and only Meralco, because it can leverage its size with suppliers and banks, can more easily meet those demands.

Three smaller Meralcos will make it more difficult to attract foreign investors who will see them as less able to provide the quality of service the current Meralco already gives. There is no economic justification to break up our most efficient distribution utility.

After natural calamities, Meralco has the resources to provide the relief backbone in helping smaller DUs and electric cooperatives get their lines back to serve their customers. But each of the three mini Meralcos will be less able to respond to national emergencies the way the current one does.

If some legislators want to tinker with power distribution, they should consolidate smaller utilities and electric cooperatives so their constituents can also enjoy the benefits of size. Consolidation will boost the economy. Our long-suffering provincial citizens will finally get some relief if a bigger DU, able to provide better governance, consolidates those cooperatives. That’s a definite positive.

But breaking up Meralco, which is already performing well, opens us up to economic and political risks we can’t afford. For sure, the smaller Meralcos will be less efficient than the original. That’s not progress.



Boo Chanco’s email address is [email protected]. Follow him on X @boochanco

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