Anti-business

The Ayala group sold a huge chunk of Manila Water shares to port magnate Enrique Razon this week. While the deal may be a win-win outcome for both parties, there are those who think it is a sad commentary on the state of the business climate today.

Partnering with Razon allows the Ayala group to spread its business risks in the light of President Duterte’s prolonged harangue on the water concessionaires. Acquiring a major stake in Manila Water allows Razon an outlet for the raw water he will be generating from his Wawa Dam project. In this case, it is a win-win for both parties.

The price of Manila Water shares also dropped substantially since Duterte embarked on a crusade against those he thinks represents the oligarchy. If the business was indeed hugely profitable as alleged, the company might have been an easy target for a hostile takeover. Since the margins, in proportion to the capital involved, are not attractive, the deal with Razon might be considered a friendly partnership.

Few days ago, the stock market index dropped to the 7,100-point level – the lowest in many years. While the stock exchange does not represent the real economy, the drop is considered a barometer of business sentiment.

Last year, the volume of institutional investments (hot money) dropped significantly from its 2018 level. Foreign direct investments were also lower than the year preceding. This despite the remarkable expansion of the country’s GDP and the slew of reforms intending to improve the ease of doing business in the country. This could be taken as commentary on the business climate pervading.

To be fair, the Wuhan virus scare depleted stock exchanges across the region. But in the same way that the virus appears to infect old and vulnerable people, the lack of positive sentiment makes our market susceptible to the bears.

Since our economic fundamentals are strong, the low esteem with which our market is held by the international investment community is due to other factors. The most likely culprit is the rising specter of populism in the political atmosphere.

It is always easy to vilify big business, to make them scapegoats for other failures. It is easy to forget that business enterprise provides the institutional framework for creating wealth for stakeholders, deploying new technologies for productive ends and creating jobs for people. Business enterprises pay the taxes that enables government to expand social services.

Vilifying big business never produces a good life for all in the long run.

Recall that when the MRT-3 opened, then President Joseph Estrada, burnishing his pro-poor credentials, ordered the fares be cut drastically. As a result, over the years, the system could not be maintained properly. The decrepit rail line now penalizes poor commuters who need reliable mass transport to get to work.

Similarly, the politically driven resistance to increasing fares for the LRT-1 as the contract provides, makes the banks shy to lend money for the corporation to build the Cavite extension of the service. This will penalize poor commuters with traffic congestion and even longer commuting time long into the future.

For same populist impulses, the DOH is threatening to impose caps on medicines. Supply distortions will likely result from this. Manufacturers who will incur losses because of price caps will cease production. Medicines will be cheap on paper but unavailable in fact.

Populism never produced a healthy economy and a happy people.

Rollback

One happy side effect of the Wuhan virus epidemic is the rollback in fuel prices. This is due to the drop in crude oil prices because of expected contraction in economic activity in the face of the epidemic.

Cheaper oil will probably be short-lived, however. OPEC is expected to make severe cuts in production to push up prices from the current bear market level.

The more sustainable rollback happens for consumers in the Meralco franchise area. For the second successive month, consumers will pay less for electricity in the next billing cycle.

The reduction in power costs is the direct outcome of the power supply agreements (PSAs) Meralco entered into last December. These new agreements bring in lower priced power from gas and coal generating facilities. They were entered into by way of the competitive selection process (CSP) overseen by the Department of Energy and the Energy Regulatory Board.

The CSP brought down generation charges reflected in the billing statement. If all the power distributors used the same competitive bidding process to select their suppliers, electricity prices could be brought down nationwide. This will be good for our economy.

Consumers paying less for electricity beginning this month should credit Meralco’s strategic management of its power supply. The company awards the supply contracts to the most efficient generators in order to reward consumers with lower prices.

Competitive bidding enables transparency as well as efficiency. Over time, it will encourage investments in more economical power plants to adequately supply our growing energy demand.

Credit should also go to Energy Secretary Al Cusi and ERC chair Agnes Devanadera for expeditiously providing provisional authority and approvals for the PSAs.  Cusi led in framing the 2018 DOE Circular on Competitive Selection Process that was upheld by the Supreme Court.

This sort of productive partnership between government regulatory agencies and private sector companies make good things happen. In the case of electricity consumers, it provides a workable framework to ensure power prices will continue to decline.

The present system apparently works. That is sustainably good news.