Political Economy During Ramos

8/2/2019 Political Economy During Ramos

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The Political Economy of

Reform during the Ramos

Administration (199298)

Romeo L. Bernardo

Marie-Christine G. Tang

WORKING PAPER NO.39


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WORKINGPAPERNO.39

ThePoliticalEconomyof

ReformduringtheRamos

Administration(199298)

RomeoL.Bernardo

MarieChristineG.Tang


4/76

2008TheInternationalBankforReconstructionandDevelopment/TheWorldBank

OnbehalfoftheCommissiononGrowthandDevelopment

1818HStreetNW

Washington,DC20433

Telephone:2024731000

Internet: www.worldbank.org

www.growthcommission.org

Email: [email protected]

[email protected]

Allrightsreserved

1234511100908

ThisworkingpaperisaproductoftheCommissiononGrowthandDevelopment,whichissponsoredby

thefollowingorganizations:

AustralianAgency

for

International

Development

(AusAID)

DutchMinistryofForeignAffairs

SwedishInternationalDevelopmentCooperationAgency(SIDA)

U.K.DepartmentofInternationalDevelopment(DFID)

TheWilliamandFloraHewlettFoundation

TheWorldBankGroup

Thefindings,interpretations,andconclusionsexpressedhereindonotnecessarilyreflecttheviewsofthe

sponsoringorganizationsorthegovernmentstheyrepresent.

Thesponsoringorganizationsdonotguaranteetheaccuracyofthedataincludedinthiswork.The

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The Political Economy of Reform during the Ramos Administration (199298) iii

AbouttheSeries

The Commission on Growth and Development led by Nobel Laureate Mike

SpencewasestablishedinApril2006asaresponsetotwoinsights.First,poverty

cannotbereduced in isolationfromeconomicgrowthanobservation thathas

been

overlooked

in

the

thinking

and

strategies

of

many

practitioners.

Second,

thereisgrowingawarenessthatknowledgeabouteconomicgrowthismuchless

definitivethancommonlythought.Consequently,theCommissionsmandateis

totakestockof thestateof theoreticalandempiricalknowledgeoneconomic

growthwithaviewtodrawing implicationsforpolicyfor thecurrentandnext

generationofpolicymakers.

To help explore the state of knowledge, the Commission invited leading

academics and policy makers from developing and industrialized countries to

explore and discuss economic issues it thought relevant for growth and

development, including controversial ideas. Thematic papers assessed

knowledgeand

highlighted

ongoing

debates

in

areas

such

as

monetary

and

fiscal

policies, climate change, and equity and growth. Additionally, 25 country case

studieswerecommissionedtoexplorethedynamicsofgrowthandchangeinthe

contextofspecificcountries.

WorkingpapersinthisserieswerepresentedandreviewedatCommission

workshops, which were held in 200708 in Washington, D.C., New York City,

and New Haven, Connecticut. Each paper benefited from comments by

workshop participants, including academics, policy makers, development

practitioners, representatives of bilateral and multilateral institutions, and

Commissionmembers.

The

working

papers,

and

all

thematic

papers

and

case

studies

written

ascontributions to the work of the Commission, were made possibleby support

fromtheAustralianAgencyforInternationalDevelopment(AusAID),theDutch

MinistryofForeignAffairs,theSwedishInternationalDevelopmentCooperation

Agency (SIDA), theU.K.Departmentof InternationalDevelopment (DFID), the

WilliamandFloraHewlettFoundation,andtheWorldBankGroup.

TheworkingpaperserieswasproducedunderthegeneralguidanceofMike

SpenceandDannyLeipziger,ChairandViceChairoftheCommission,andthe

Commissions Secretariat, which is based in the Poverty Reduction and

Economic Management Network of the World Bank. Papers in this series

representtheindependentviewoftheauthors.


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iv Romeo L. Bernardo and Marie-Christine G. Tang

Acknowledgments

Theauthorswould like tothankShaneeBerniceSia forresearchassistanceand

YhsaCabutajeforadministrativesupport.


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The Political Economy of Reform during the Ramos Administration (199298) v

Abstract

This paper is one of several case studies prepared for the World Bank. The

objective of the case studies is to provide the Commission on Growth and

Developmentinsightsonthepolicyreformprocessindevelopingcountriesthat

giverise

to

economic

growth.

In contrast to other countries where economic reforms ushered in a long

period of sustained growth, there is no such episode in Philippine economic

history. Since the restoration of democracy in 1986, the Philippines under the

Ramos administration came closest tobreaking out of its sick man of Asia

image. The confidence generated by the administration among local and

international players and analysts resulted from wideranging reforms rooted

primarily in a sound macroeconomic and investorfriendly regime as well as

globalcompetitiveness.

This study is not intended as a scorecard of the Ramos Administration.

Rather,

it

concentrates

on

three

specific

sector

reforms

during

the

Ramos

administration that demonstrate the elements of successful reform processes.

These reforms not only helped to free up demands on public finances then

considered, in todays parlance, the binding constraint on needed public

investment and reduced risk premium to encourage private investmentsbut

over time brought gains, some unforeseen and broader in terms of positive

spillovereffectsontherestoftheeconomy,andlinkagetooverallgrowthtoday.

Viewed under political economy lenses, the main point weaved from the

threestoriesistheimportanceofstrongpoliticalleadershipinacountrywitha

historically weak state where special interests hold sway over policymaking

processes.

Ultimately,

it

is

the

presidenthis

person,

character,

vision

for

thecountry,andabilityandwillingnesstospendpoliticalcapitalwhocanmuster

thenationalconsensus,clearroadblocks,anddrivethereformagendaforward.

Ongoing challenges in the three reformed sectors today, which some have

usedasargumentsagainstreform,shouldratherbeseenaspartandparcelofthe

reform process where rules that build on past successes and lessons learnt

continuallyevolvewithchangingexternalandinternalconditions.


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The Political Economy of Reform during the Ramos Administration (199298) vii

Contents

AbouttheSeries ............................................................................................................. iiiAcknowledgments ..........................................................................................................ivAbstract .............................................................................................................................vBackground.......................................................................................................................9 CaseStudiesofThreeReformExperiences ................................................................18PerspectivesontheThreeReformExperiences.........................................................22ReformOutcomes ..........................................................................................................27ReformasaContinuingProcess ..................................................................................43Conclusion ......................................................................................................................46PrincipalPlayers.............................................................................................................48 Annex1:OilDeregulation............................................................................................50 Annex2:DemonopolizingTelecommunications.....................................................55 Annex3:WaterPrivatization ....................................................................................... 61References .......................................................................................................................68


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The Political Economy of Reform during the Ramos Administration (199298) 9

ThePoliticalEconomyof

ReformduringtheRamos

Administration(199298)

RomeoL.Bernardo

MarieChristineG.Tang1

Background

The Long-Term Growth Context

Charting the Philippines economic growth record reveals aboombust picture

withthe

economy

unable

to

sustain

growth

of

over

5percent

for

more

than

six

years(figure1).Theonlytimethatgrowthstayedabove5percentforsixyears

was in the late1970s.Even then, theeconomicexpansion, financedbymassive

foreign borrowings (from 1975 to 1982, the countrys foreign debt stock

quintupled from $4.9billion to $25billion), paved the way for a deep external

paymentscrisisintheearly1980s.TheMarcosdictatorship(196586)endedsoon

afterinFebruary1986.

The first twelveyearsafter the restorationofdemocracy in thePhilippines

coincidedwithevenmorevolatilegrowth.Abriefboomtwoyearsofover5

percent growthwas followedby abust, where growthbecame flator even

negative.

While

this

was

a

period

of

significant

economic

reformsboth

the

AquinoandRamosgovernmentsespousedliberaleconomicpolicyandcapital

buildup, it was also a period marked by political difficulties (several coup

attemptsthrough1992);naturaldisasters(includingamajorearthquakein1990

and a devastating volcanic eruption in 1991); and, toward the end, the Asian

crisis. A debilitating power shortage moreover contributed to the economys

contractionin1991.

1RomeoBernardoisPresidentofLazaroBernardoTiu&Associates,Inc.,aconsultancyfirm.Mr.

BernardowasanalternatedirectoroftheAsianDevelopmentBankfrom1997to1998andFinance

UndersecretaryforInternationalFinance,Privatization&TreasuryOperationsoftheDepartment

of Finance of the Republic of the Philippines from 1990 to 1996. MarieChristine G. Tang is

ExecutiveDirectorofLazaroBernardoTiu&Associates, Inc. (since1999),previouslyworking in

variouscapacitiesintheprivate(brokerage,businessnewsreporting)andpublicsectors(planning,

centralbanking).Shehascoauthoredpapersinpublicfinance,pension,microfinance,andhousing

aswellaswrittenanalyticalreportsonthemacroeconomyandvariouseconomicissues.Sheholds

aCFAdesignationandanMAineconomicsfromtheUniversityofthePhilippines.


12/76

10 Romeo L. Bernardo and Marie-Christine G. Tang

Figure 1: Philippine Historical GDP Performance

10

8

6

4

2

02

4

6

8

10

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

Import

substitution

Martial law

BOP crisis

Oil price

shocks

BOP crisis/debt

moratoriumEDSA 1

Asian crisis

-Arroyo-

-Estrada-

-Ramos--Aquino-- Marcos --Macapagal-

-Garcia-

EDSA 2

Fiscal

crisis

BOP, power

crisis/coup

Percent

Year

Source: http://www.imf.org.

While thegrowthepisodeswerebrief, thequalityofgrowth,groundedon

employmentgenerating investments in plant and equipment, maybe deemed

superiortothecurrentremittancecumconsumptiondriveneconomicexpansion.

Investment activity then wasbased on tremendous amounts of domestic and

international goodwill and, especially during the Ramos administration (1992

98),alotofconsumerandinvestorexuberanceandconfidenceinthePhilippines.

Asreported inone internationalmagazine,2newbusinesses,oncediscouraged

by the unfair domination of Marcos cronies, arebusting onto the scene, and

projects in the hundreds of millions thatbusinessmen could only dream of

beforebecame regular fare. The macroeconomic environment was moreover

characterizedbystablepricesandrecordtaxcollectionasapercentageofGDP.3Reformstrade and investments liberalization, tax policy reform,

privatization of government assets, restructuring of government enterprises

enabled investments to come in while improving governments financial

position.ThePhilippinegovernmentunderPresidentRamoswasfinallyseenas

one that could set its mind to do something and actually do it.4 Indeed, the

reformsbrought the economy within sight of newly industrializing economy

(NIC)statusandby1997thePhilippineswasonestepawayfromaninvestment

graderating.5

Philippinegrowthtodayowesmuchtothereformsintroducedoverthis12

yearperiod.

Outside

of

workers

remittances

that

have

allowed

the

economy

to

2DorindaElliott,FromtheAshes,Newsweek,25November1996.

3 Although inflow of shortterm hot money also rose, these were less than what other Asian

economiesreceived.4Ibid,quotinganADBeconomist.

5Standard&Poors inearly1997 issuedapositiveoutlookreporton thePhilippinesBB+credit

rating.


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tread a more stable growth path since 2002, some of the economys most

dynamicsectors(forexample,electronicsexports,telecommunications,business

processoutsourcing)wouldnothavebeenpossibleifnotforthereformsduring

this period. Likewise, in light of the present global rise of oil, food, and other

commodity prices, a number of the reforms during the period (for example,

removal

of

oil

subsidies,

creationof

an

independent

monetary

authority,

tariff

reduction)havedirectlycontributedtocurrentmacroeconomicstability.

The Reform Context

When the Ramos administration assumed office in 1992, the Philippines, in

analysts view, remained the sick man of Asia. Per capita income growth

continuedtolagversusneighboringeconomies(figure2).Inaregionwheremost

othereconomiesweregrowingrobustly,thedomesticeconomy,weigheddown

bya largepublicdebt inherited from theMarcosregime,coupattempts,anda

severe power shortage, had failed to keep up, with output even contracting in

1991.

Indeed,

a

lot

of

the

traditional

features

of

the

economy

that

observers

have

notedtobemoreLatinAmericanthanAsianpersisted.

Inflation rates and interest rates were at doubledigit levels; public debt

stock was high, which resulted in government devoting over a third of its

revenuesonservicinginterestpayments;anddomesticsavingswerelow(figure

4),inpartduetopersistentgovernmentdeficits,suchthatinvestmentfinancing

reliedheavilyonforeigncapital(figure5).Therewere,moreover,extensiveend

user subsidies inbasic sectors (for example, power, water, fuel, transport) that

not onlyworsenedpublic corporationsbottom linesbutalso, coupled with an

illdefinedregulatoryregime,discouragedprivateinvestments.

Figure 2: GDP per Capita Growth Rate, US$ Constant, Average 198691

0 2 4 6 8 10

The Philippines

Vietnam

India

Malaysia

Indonesia

Singapore

Hong Kong, China

China

Thailand

Percent

Source:Development Data Group, The World Bank.


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Figure 3: Fiscal Position and Inflation Rate

10

5

0

5

10

15

20

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Percent

Cons public sector position, % GDP

Inflation rate

Year

Source: Department of Budget and Management for CPSD; Bangko Sentral ng Pilipinas for inflation.

Figure 4: Savings and Investments, % of GDP

0

5

10

15

20

25

30

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Gross domestic savings

Gross domestic capital formation

Percent

Year

Source: ADB Key Indicators, various years.


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Figure 5: Current Account Balance, % of GDP

7

6

5

4

3

2

1

0

1

2

3

4

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Percen

t

Year

Source: Bangko Sentral ng Pilipinas (old BOP concept).

Political analysts today regard the Ramos administration as a reformist

government.Ayearbeforeitcametopower,thePhilippinesenatehadvotedto

rejectanewtreatythatwouldallowU.S.basestostayinthecountry.Expecting

dwindlingAmericansupportfollowingtroopwithdrawal,PresidentRamoshad

made Filipinos responsible for their own fate,6 fostering closer ties with

neighboringeconomies,andexploringotheravenuesforexpandinginternational

trade and investment (including accession to the World Trade Organization in

1995 and acceleration of tariff reduction to a uniform 5 percent rate under the

ASEANFreeTradeAgreement).

Theadministrations

vision

had

been

to

pursue

reforms

that

would

create

a

levelplayingfield,whichwasseenasthekeyforcompetitiontothriveandfor

thePhilippinestobegloballycompetitiveandprosperous.7PresidentRamoshad

abroadreformagendacoveringnotonlyeconomic liberalizationmeasures (for

example, continuing trade liberalization, privatization, dismantling monopolies

and cartels) but also institutional reforms (tax and customs administration,

bureaucracy, judiciary), redistributive reforms (social reform agenda), and

6Elliott1996.

7GeneralAlmontetracesthisvisiontowaybackin1956when,asCommandersofarmyplatoons

fightingcommunistinsurgentsinSouthernLuzon,CaptainRamosandSecondLieutenantAlmonte

beganaskingwhyFilipinosoldierswerebeingorderedtokillfellowFilipinos.Itwashoweveronly

much later that theywere able tosatisfactorilyanswer thisquestion.Observing theevents post

1986, General Almonte noted that unlike other societies that have used their freedoms tobuild

nations, Filipinos, especially their leaders, have failed to use the freedom acquired to transfer

power to the people and make the Filipino people wealth creators. As a result, without a level

playing field, the tendency is for everybody from top to bottom to exercise freedom for

themselves, creating an environment where peoplebecome poor. From this view of Philippine

developmentemergedPresidentRamossvisionofestablishingalevelplayingfield.


16/76


politicalreform(partysystem,electoralprocess).8Attheendoftheday,hehad

been most successful where the reform effort entailed liberalization and

deregulation,thatis,gettinggovernmentoutofthewaytofostermarketefficiency.

Thesuccessrecordofhisprogramsforinstitutionalreformislessevident,partly

becausethesearebynaturemoreintractableandcomplexandrequiresustained

actionover

along

period,

perhaps

longer

than

apresidents

term.

Aswithmanyreformorienteddevelopingcountriesatthetime,theRamos

governments reform agenda hadbeen shapedby the stabilize, privatize and

liberalize9 doctrine of the Washington Consensus. Within this framework, the

government sought to achieve macroeconomic stability, accelerate trade

liberalization,andwhereandwhenitcould,deregulateandprivatizeindustries

(for example, oil, transportation, water), dismantle monopolies (for example,

telecommunications),andattractmoreprivateinvestments(forexample,through

thepassageoftheBOT(BuildOperateTransfer)Lawprovidingtheframeworkfor

private sector participation in infrastructure projects). These reforms were

moreover

embedded

in

the

Philippines

programs

under

the

InternationalMonetaryFund(IMF)andsuccessiveWorldBankadjustmentloans.

Thethinkingwasthatearlyvictorieswiththesesocalledlowlyingfruits

wouldwincredibilityforthepresidentsreformprogramandcatalyzeresponses

ofabroadernature(primarilybypromotinginvestorinterestandexpandingthe

economic growth frontier) and, with success, generate support for further

reforms.Whileinhindsight,manytodaywouldarguethatthegovernmentwent

too far, especially in the area of financial liberalization that increased the

economys vulnerability to the Asian crisis,10 the markets at the time were

warminguptothePhilippineswiththegovernmentseveryreformmeasure.By

themid1990s,theinternationalcommunityhadbeenalertedtotheemergenceof

thenextAsiantiger.11

The Washington Consensus

Fiscal discipline Trade liberalization

Reorientation of public expenditures Openness to direct foreign investments

Tax reform Privatization

Financial liberalization Deregulation

Unified and competitive exchange rates Secure property rights

Source: Rodrik 2006, p. 978.

8CategorizationofreformsbasedondeDiosandHutchcroft2003.

9Rodrik2006.

10Likemanyofitspeersintheregion.

11Elliott1996.


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The Political Economy Context

In contrast to the period immediately following the People Power Revolution

whenFilipinosgearedupforwidescalepolitical,economic,andsocialreforms,

thepoliticaleconomyin1992wasfarlessconduciveforreform.Itwaseasyatthe

time, especially in light of authoritarian rule in more successful neighboring

economies,

to

lay

the

Philippines

failure

to

keep

up

on

the

doorstep

of

democracy.12 Indeed, not only was there a lengthier process of consensus

building forreforms,but thesystemofchecksandbalancespatternedafter the

U.S.politicalsetupwassuperimposedbyasystemwherepoliticiansaspire for

office in order to protect particular interests. Hence, the situation was

inhospitable to reform, particularly reforms for leveling the playing field and

cultivatingcompetitiveness.

As may be seen in the first general election after the restoration of

democracy, elections in the country are fiercely fought. There were seven

aspirantstothepresidency,differentiatedmorebypersonalqualitiesratherthan

anyparty

ideology

or

platform,

afeature

of

Philippine

electoral

contests.

Fidel

Ramos had wonbut only with thebacking of then President Corazon Aquino

andonlybyasmallmargin24percentofthevotescastversus20percentofthe

next ranked. The narrow victory made it important for the president to form

alliancesandpartnershipsinordertobuildconstituenciesforhisreformagenda.

Atthebeginningofhisterm,itappearedthatthecountryselitesrichand

powerful groups with deeply entrenched interests in major sectors of the

economydistrusted President Ramos, seeing perhaps that he was not cast in

themoldofthetraditionalpolitician.13AWestPointgraduateandcareermilitary

officerwhoheldMBAandcivilengineeringdegrees,hehadwonfamethrough

his

role

in

the

popular

uprising

that

toppled

Marcoss

over

20

year

authoritarian

rule(hewasthentheViceChiefofStaffoftheArmedForcesofthePhilippines)

and had garnered President Aquinos supportby thwarting some seven coup

attemptsagainstherwhileservingfirstastheArmedForcesChiefofStaffthen

her Defense Secretary. On the other hand, given the elites either direct

representation in Congress or rentseeking abilities, they were in a position to

obstructhisreformagenda.Indeed,whenPresidentRamosassumedoffice,only

two of the 24 senators (one of them his sister) and 38 of the 205 congressmen

belongedtohisparty.14

12 In a speech in Manila in 1992, Singapores Senior Minister Lee Kuan Yew blamed the

undisciplined and disorderly conditions brought by democracys exuberance for the

Philippinesbackwardness.13

Tiglao (1993d) narrated that when President Ramos started pushing for reforms in the

telecommunicationssector,thepatriarchofaprominentfamilydigressedfromapreparedspeech

andstated thatThere isadeterminedeffort,on thepartofsomeofficials insensitiveplaces, to

lookuponbusiness,particularlylargeandestablishedones,asdetrimentaltothenationalinterest.14

Interview withPresidentRamos, 14 February 2007, Ramos Peace& DevelopmentFoundation,

Inc.,ExportIndustryBankBuilding,GilPuyatAvenue,MakatiCity.


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In this regard,PresidentRamoss tenure in theAquinocabinethadserved

himwell.Theexperiencegavehimaninsiderviewofthedifferentpersonalities

inside and outside thebureaucracy and insights on how to work within the

system. This was manifested for example in the way the president got things

accomplishedinthebureaucracy(requiringcompletestaffworkfromvarious

departmentson

each

issue

and

personally

following

up

the

work

by

due

dates)

as well as his dealings with Congress, where discretionary funds of legislators

(forexample,CountrywideDevelopmentFund)weregenerouslydoledout.By

thismeans, thepresident, togetherwithacloseally, theSpeakerof theHouse,

was able to obtain the lower housesbacking for many of his administrations

proposals.

OneofthefirstlegislativeprioritieswastheestablishmentoftheLegislative

Executive Advisory Council (LEDAC).15 The LEDAC, a coordination and

cooperationbodyamongtheexecutiveandthetwohousesofCongress,wasthe

presidents strategy to ensure policy consistencybetween the twobranches of

government.Over

the

course

of

his

term,

40

members

of

the

LEDAC

met

every

week whenever Congress was in sessionan estimated 30 meetings a year.16

Thus, the congressional agenda during the Ramos administration was more

aligned with the executivesalmost 60 percent of the laws passed during the

time were administrationcertified (versus 40 percent under the Aquino

administration).17

EvenwiththeLEDAC inplacehowever, thepresidentstillhad tocontend

withlessthanfullcooperationfromCongress,especiallyfromtheupperhouse,

andespeciallywhereproposedreformswouldhurtprotected interestgroups.18

Aswell,losingpartiesincreasingrelianceonthecourtsystemtosettledisputes,

even of the economic policy kind, wouldbecome a recurring problem for his

government(seetheoilderegulationcasestudy19).

President Ramos also sought to pacify other, more militant, elements of

society that had proved disruptive to political stability during the Aquino

administration.Veryearly inhis term,heforgedpeacepactswiththreeradical

groupsrebel soldiers, communist insurgents, and Muslim separatiststhat

haveinthepastposedthreatsofvaryinggravitytogovernmentauthority.Tothe

15 Created under RA 7640, the LEDAC was composed of 20 members with the president as

chairman and the following as members:the vice president, the President of the Senate, the

SpeakeroftheHouseofRepresentatives,sevenmembersofthecabinet(dependingonsectorbeing

tackled), three members each of the Senate and the House of Representatives (minority leaders,

others depending on sector), and one representative each from the local government units, the

youth,andtheprivatesector(maybedrawnfrombusiness,cooperatives,agriculture,andlabor).16

InterviewwithPresidentRamos,14February2007.17

Lumauig1998.18

Basedon theauthors interviews, thisbecame especiallyapparent duringdeliberations on the

1997taxreformprogramwhentheDepartmentofFinancefounditselfnegotiatingwithspecific

sectors whose representatives werebrought alongby legislators to discussions on the proposed

measure.19

DepartmentofEnergy2005.


19/76


firstgroup,hegrantedamnesty.To thesecond,heassuredpoliticalspaceby

repealingthelawoutlawingtheCommunistParty.20Withthethird,heresumed

peacetalksthat ledto the1996peaceagreementandtheendofmorethantwo

decades of conflictbetween the Philippine government and the Moro National

Liberation Front (MNLF).21 As a result, during his presidency, the strength of

Muslimseparatist

groups

and

the

New

Peoples

Army

waned.

Finally,deservingmention is thepresidentsparticipatory leadershipstyle,

with a noted penchant for summitry. These summits, where stakeholders

gathered to discuss issues on specific topics, may not have always produced

much substancewisebut created a lot of goodwill and gave people a sense of

ownershipandanopportunitytobuyintothereform.

Figure 6: Trends in New Peoples Army Strength

0

5,000

10,000

15,000

20,000

25,000

30,000

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Membership

Year

Source: Independent Insights, Inc.

Figure 7: Aggregate Strength of Muslim Separatist Groups

Year

0

5,000

10,000

15,000

20,000

25,000

30,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

- Combined MNLP/MILF - - MILF only-

Members

Source: Independent Insights, Inc.

20FidelRamos,APeacewithHonor,2September1992.

21SeeIribani2003.


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CaseStudiesofThreeReformExperiences

De-monopolization of Telecommunications

AttributedtoSingaporeSeniorMinisterLeeKuanYew,thelinethePhilippines

isacountrywhere98percentoftheresidentsarewaitingfora telephoneandthe

other 2 percent are waiting for a dial tonebest describes the situation of thedomestictelecommunications industryin1992.Anestimated800,000applicants,75

percentinthecountryscapital,MetroManila,werequeuingforatelephoneline.

At the time, the Philippine Long Distance Telephone Company (PLDT),

which owned the only nationwide transmission backbone, was a virtual

monopoly, controlling over 90 percent of the countrys telephone lines. Its

controllingshareholder,theCojuangcofamily,waspoliticallywellconnected,its

influence extending across the three branches of government as well as the

media.22In1986,governmentsequesteredPLDTsharesfromMarcoscroniesbut

overthenextsixyears,theinfluenceoftheCojuangcofamilyinthelegislature

andthe

bureaucracy

and

its

control

of

a

majornewspaper

turned

government

policies more favorable toward PLDT and ensured that the Presidential

CommissiononGoodGovernmentrepresentativesontheboardsofPTIC23and

PLDTremaininactive.24

Accordingtoreports,noneofthetelephonecompaniesoperatingatthetime

were in a position to challenge PLDTs leadership. Following news accounts,

PLDT,insteadofexpandingitsnetworktomeetservicedemand,spentheavily

for the protection of its market share.25 For instance, when the previous

government decided to open up the sector to competition, reports indicate that

PLDT was able to secure as needed favorable legal rulings toblock prospective

entrants.26

It

had

apparently

been

arisky

venture

for

the

president

to

go

after

PLDT.

Ifhe loses in thisduelwith theCojuangcoclanthepresidentscredibilityasa

strongleaderwillbeseverelydented,observedonereportatthetime.27

22ThroughthefamilyownedManilaChronicle,oneofthebiggestnewspapersatthetime.

23PhilippineTelecommunications InvestmentCorp., the largestshareholder inPLDTat the time.

(Tiglao,1993d)24

Esfahani,1994.ItisnotaltogetherclearwhattheroleofPresidentAquino,herselfaCojuangco,

was in the case. Rigoberto Tiglao (On the Hook, FEER, March 1993c) reported that then

ChairmanofthePresidentialCommissiononGoodGovernment(PCGG),JovitoSalonga,distanced

himselffromthecaseafteraconversationwithPresidentAquino,Antoniosaunt.Aquinosaidthat

theAntonioCojuangcofamilyisnotthatbad,andisdifferentfromDandings,hercousinwhose

sharesinSanMiguelCorp.hadbeensequestered.PresidentAquinoconfirmedthestatementbut

deniedthatshehadmeanttodiscouragePCGGfrompursuingthecase.25

RigobertoTiglao,quotingtheWorldBank(IntoaCorner,FEER,February1993a).26

PLDTsecured(i)aSupremeCourtdecision in1992reversingitsinitialrulingallowingEastern

Telecomstooperatean internationaltelephonegateway,and(ii)aDepartmentofJusticeopinion

blockinganothercompetitor,DigitalTelecommunications,fromoperatingatelephonenetworkin

Luzonthatithadwoninaprivatizationbid(Esfahani1994).27

Tiglao1993d.


21/76


Nevertheless, the Ramos administration proceeded to pry the sector open

withvarioustactics.Theserangedfromencouragingtheformationofconsumer

groups that took to the streets and clamored for change, toboardroombattles

wherethepresidentreplacedthegovernmentsrepresentativesandsucceededin

puttingsixnewrepresentativesonPLDTs11manboard.28Aswell, therewere

some

behindthe

scenes

maneuvers

to

increase

the

concerned

parties

receptivenesstoreform.OnecasereportedlyledtotheresignationofaSupreme

CourtjusticewhosedecisionfavoringPLDTwasallegedtohavebeenwrittenby

aPLDTlawyer.29

Asaresult,thetwinexecutiveorders(EO)30thatthepresidentissuedwithin

six months of each other in 1993 opened the floodgates to investments in the

sector.BythetimeCongresspassedlegislationlargelyechoingprovisionsofthe

two executive orders, the countrys teledensity had doubled and PLDT had

alreadyembarkedonazerobacklogprogram.

Fifteen years on, thebenefits of the reform maybe seen in (i) increased

access

to

telecommunication

services,

with

teledensity

in

the

cellular

mobiletelephoneservice(CMTS)segmentofthemarketreaching50per100population

in 2007; (ii) increased market competition with the entry of more players

representing domestic and foreign interests; (iii) the rise of new growth

industriessuchasbusinessprocessoutsourcing;and (iv)awholenewrangeof

businesssolutionsusingcellularmobile telephone technology thatcaters to the

retail client, such as money transfers for overseas workers. An interesting,

perhaps ironic turn of events is that PLDT, which had strongly resisted the

reform, managed to shape up and emerged abig winner of the reform, albeit

nowunderanewcontrollingshareholder.

Oil Deregulation

Thederegulationofthedownstreamoilindustryinvolvedthehighlypoliticized

issue of liberalizing oil pricing. Three important considerations were (i) a long

history, dating back to the 1970s, of civil disturbance related to oil price

adjustments;(ii) thecostwasgoingtobespreadoutacrossawidersegmentof

thepopulation, includingwellorganized, lowincomegroupssuchas transport

groupsthatinthepastpartlyparalyzedMetroManilathroughtransportstrikes;

and(iii)legislationwasrequiredtoenactliberalization.Thus,fromthestart,the

28 In 1993 government ownership included (i) 10.6 percent of PLDT through the Social Security

System, and (ii) 46.1 percent of Philippine Telecommunications Investment Company (PTIC),

whichowned24.2percentofPLDT(Tiglao1993c).29

ThompsonandMacaranas(2006,p.147)reportedhowfollowingpressreportsoftheopinionof

Dr.DavidM.Yerkes,anexperton theauthorshipofEnglishlanguage texts, that therulingwas

pennedbyaPLDTlawyer,SupremeCourtJusticeHugoGutierreztenderedhisresignation.30

One order, EO 59, mandated interconnection among telecoms network; the other, EO 109,

required cellular operators and international carriers to install a minimum number of lines in

specificserviceareasassignedtoeach.


22/76


Ramos government focused on managing potentiallybroad opposition to the

reform.

Efforts to deregulate the industry started as early as 1993. The Ramos

administration launched a nationwide public information campaign to educate

people about the workings of the oil market and allay fears ofspiraling prices

after

deregulation.

Public

acceptance

of

(or

at

least

reduced

resistance

to)

the

proposal was deemed important to get the congressional nod for proposed

legislation to deregulate the industry. The Ramos government also committed

the reform measure under the countrys program with the IMF to help set a

timeframeforpassinglegislation.

Although government officials related that they encountered very little

resistanceduringthenationwideroadshow,whatisinterestingaboutthisreform

experienceweretheactionsofthevetoplayersthelegislatureandthejudiciary.

As the initial spadework on the proposed bill led up to the May 1995

congressionalandlocalelections,workhadtobeputonholdasthelikelihoodof

getting

congressional

approval

became

slim.

While

certain

nationalistmembers of the legislature continued to strongly oppose the proposal when

Congress resumed inJuly 1995, the LEDAC mechanism proved invaluable in

speeding up congressional approval of thebill. An oil deregulation law was

enactedandwas in force for roughly18 monthsstarting inApril1996.During

thatperiod,afullyderegulatedregime,withtheoilcompaniesfreetoadjustoil

prices, had been gradually phased in. In November 1997, in response to a

petitionbyagroupofcongressmenwhohadvotedagainstthebill,theSupreme

Courtdeclaredthelawunconstitutional.31

At the time, thePhilippineswasalready fourmonths into theAsiancrisis.

Withthepesohaving lostaquarterof itsvalue,whichpushedupdomesticoil

prices,theRamosadministrationwasunderrenewedpressuretoreregulatethe

industry. Nevertheless, the president persisted in pursuing the reformbothby

tryingtogettheSupremeCourttoreverseitsrulingandbyaskingCongressto

passanewlawwithouttheconstitutionalinfirmitycitedbythecourt.President

Ramos succeeded in the latter, signing into law the Downstream Oil Industry

DeregulationLawinFebruary1998.

Thebenefitsofoilderegulationbecameevidentduringthemostrecentrun

up in world oil prices. The full passthrough of world oil price increases to

31Thisrulingwasbasedonthreeprovisionsofthelaw:(a)the4percenttariffdifferentialbetween

crude and finished oil products; (b) the 40day inventory requirement; and (c) the prohibition

against predatory pricing. Crafters of the provisions argued that (a) prederegulation, there was

already a tariff differentialbetween crude and finished products and a larger one at that (10

percent)andthedifferentialwasneededtokeeprefineriesin,(b)theinventoryrequirementwasa

policy decision favoring supply stability over any negative impact on competition, and (c) the

prohibitionagainstpredatorypricingwastopreventtheexistingbigplayersfromchargingprices

belowcosttodiscouragenewentrants.Inanycase,supportersofoilderegulationcontendedthat

the Supreme Court overreactedby striking down the entire law rather thanjust the offending

provisions.


23/76


domesticoilpriceshelpedtoshieldthefiscalsectorfromtheburdenofproviding

oil subsidies at a time when government finances were most fragile. Other

benefitshaveincluded(i)increasedcompetitionintheindustrywiththeentryof

newplayers;(ii)lesspoliticizationofoilpricing;(iii)propermarketresponseto

high oil prices, including conservation and the search for substitutes like

biofuels;

and

(iv)

clean

and

good

restrooms

at

service

stations

all

over

the

country as a byproduct of introducing competition in the industry, helping

supporttourism.

Water Privatization

Inthepublicseye,theMetropolitanWaterworksandSewerageSystem(MWSS)

wastothewatersectorwhatPLDTwastothetelecommunicationssector.Before

privatization,servicedeliverywasextremelypoor,withonlytwothirdsofMetro

ManilasresidentsconnectedtoMWSSspipes.Thesecustomerswere,moreover,

oftenaskedtoconservewater(orweresubjectedtowaterrationing)becauseof

shortages,

with

24

hour

supply

available

only

in

certain

parts

of

the

city.

Worse,

water contamination resulting in occasional outbreaks of cholera cases had

becomeagrowingconcern.

President Ramos had talked about a water crisis in 1993 and ordered the

conveningofaWaterSummitinlate1994.Inspiredbyinitialsuccessesofsimilar

efforts in other countries at the time and several proposals from foreign and

domesticinvestorswantingtoparticipateinthelocalwatersector,thepresident

hadalso directedofficials to look intoprivatizingMWSS. Thiswasseen as the

most logical way out for the financially weak MWSS, which was caught in a

chickenandegg situation. On the one hand, given the highly politicized rate

settingprocess,itcouldnotraisetariffsenoughtoundertakeinvestmentscritical

to

maintaining

and

expanding

its

network.

On

the

other

hand,

without

investmentsinimprovedservicedelivery,MWSScouldnotjustifyraisingwater

rates.Inthemeantime,significantleakagesfromoldpipesandwaterpilferages

notonlyincreasedthefirmslosses(nonrevenuewaterwasover60percent)but

alsoaggravatedthewatershortage.

To make reform possible, the president sought legislators approval of a

Water Crisis Act that would give him emergency powers to solve the water

crisis. This was passed inJune 1995, after which the Ramos administration

sought to reduce potential opposition to the reform in two ways. First,

government implemented a program to compensate the expected losers of the

reform

through

a

liberal

early

retirement

package,

of

which

about

a

third

of

MWSS employees voluntarily accepted. The shedding of excess labor also

enhanced the concessions attractiveness to potential bidders. Second,

government sent leaders of labor unions on study tours of countries that had

undertakenwaterprivatization.Upontheirreturn,theyweregivenafreehand

todraftthelaborprovisionsoftheconcessionagreement.


24/76


Atthesametime,toensuretransparencyandfaircompetition,government

broughtintheInternationalFinanceCorporation(IFC)asanadvisertodesignof

the privatization program. IFC was also used as the clearing house for

accessinggrantfinancingfrombilateraldonors(specifically,theUnitedKingdom

andFrance)withpotentialconflictsofcommercialinterest.Moreover,toenhance

potentiallyfavorable

privatization

outcomes,

President

Ramos

raised

water

rates

some monthsbefore privatization. The latter helped clinch the success of the

reformbecausethebidsreceivedwereatsteepdiscounts(asmuchas74percent)

toprevailingwaterrates.32

TheprivatizationofMWSShasledto:(a)expandedservicedeliveryinterms

of population coverage and water availability; (b) increased operational

efficiencies,mostnotablyintheeastzonewherenonrevenuewaterhasdropped

dramatically; (c) less politicized rate setting; and (d) reduced reliance on

governmenttofundMWSSbudgetshortfallsandneededcapitalexpenditures.

PerspectivesontheThreeReformExperiences

In the Philippines, a crisis situation is often needed for reform to happen. The

three sectoral reforms chosen provide counter examples of how a leader can

influence the timing of reform. The case studies also present glimpses of what

reforminademocracyentails.

It is important tobear in mind that these reforms were linked tobroader

agendas of the Ramos Administrationthe dismantling of monopolies in the

caseoftelecommunications,theEnergyActionPlan(drewupinresponsetothe

power crisis) in the case of oil deregulation, the administrations privatization

program

in

the

case

of

water,

reducing

macroeconomic/fiscal

instability

in

the

lattertwocasesthatultimatelysoughttoattractprivateinvestmentsandbring

aboutfastergrowth.Thecasesdemonstratehowelementsofpoliticalwill,vision,

communication, constituencybuilding and astute timing to take advantage of

opportunitiescanbringaboutchangeinarelativelycompressedtimeperiodand

potentiallysetthebasisforlongtermsustainedgrowth.

Role of Leadership and Political Will

It has been argued that for reform to happen, there must be broadbased

popularsentiment that thingshave to changeanda leadership that is able to

translatethis

broad

dissatisfaction

into

aconcrete

program

that

crystallizes

the

issuesandpointstotheirsolution.33PresidentRamoswasinthissensetheright

manattherighttimewithhisnononsenseleadership,energizingthereform

32Comparedwiththeexistingrateof8.78/m3,thewinningbidswere2.32/m3intheeastzoneand

4.97/m3inthewestzone(Dumol2000).33

Koromzay2004.


25/76


process.34 Ingredients of his success formula included a wellarticulated vision

forthecountryandtheconvictiontodowhatisneededtoattainthisvision.The

latter involvedpinningdownthecountrysproblems,callingattentiontothem,

offeringwaysout,and,mostimportantly,takingallnecessarystepstosolvethe

problemsinthefaceofanticipatedandunanticipatedobstacles.

Indeed,in

all

the

cases

studied,

seeing

the

work

through

required

alot

of

politicalwillon thepartof thepresident himself.Thismeantchampioning the

specific reforms to garner political support,being accountable for unpopular

decisions,anddoingeverythingnecessary toremoveobstaclesblocking reform

efforts. This demonstration of political will was evident in all the casesfrom

sacrificingofpersonalfriendshipsintakingontheCojuangcoclaninPLDT,35to

making the politically difficult decisions of raising water rates and reducing

MWSS workforce preprivatization, to staying on the oil deregulation course

despitetheSupremeCourtsnullificationofthefirstoilderegulationlaw.Inthe

lattercase,thepresidentpushedCongresstoquicklypassarevisedlawatatime

whenthe

impact

of

the

Asian

crisis

on

the

exchange

rate

had

led

to

increasing

domesticoilprices,whichinturnhadsparkedpublicoutcries.

Indeed, in light of the relative weakness of Philippine institutionswhere

thesystemofchecksandbalancesputinplacetostemabusesisoftenexploited

bythoseopposingreformtoblockoratleastdelayreformitwouldhavebeen

verydifficult,ifnotimpossible,tocarryoutthereforms,withoutthepresidents

visionandthestrengthofhisconviction.

Moreover, unlike successor presidents, there was greater continuity in

leadership and policies at the departmental level under the Ramos

administration.Forinstance,RobertodeOcamposervedasFinanceSecretaryfor

almost five years of President Ramos sixyear term.36 This is true also in

EconomicPlanning(onesecretary),TradeandIndustry(twosecretaries),Energy

(twosecretaries),andPublicWorks(twosecretaries).Atthesametime,President

Ramos, himself a career officer, understood the value to governments

effectivenessofnurturingthepoolofcivilservicepersonnelwhorose from the

ranks,andthus,unlikehissuccessors,minimizedreplacingcareerofficialswith

outsiders.

Another aspect of leadership is effective communication and constituency

building.Asnotedabove,thepresidentputgreatstoreinaparticipatoryprocess,

going the distance to involve stakeholders in the reform process. Public

consultations,informationcampaigns,multisectoralworkinggroups,summits,

andsimilar

activities

were

important

not

just

to

start

the

reform

process

but

to

ensurereformcontinuityandsupportinthefaceofoppositionfromthosewith

34Spaeth1995.

35Tiglao(1993d)observedthatmorethananythingRamoshasdoneinhisfirstyearinoffice,itis

hisattackagainsttheAntonioCojuangcofamilyscontroloverPLDTthatseemstorevealbestthe

directionofhispresidency.36

Incontrast,sevensecretariesoffinanceservedfrom1997to2007.


26/76


narrowinterests.Hence,notonlyweretheseactivitiesstartedearlyinthereform

process (to explain rationale, manage expectations, and allay fears of the

unknown),theycontinuedtobeundertakenduring(forexample,toexplainbirth

painsifany)andafterthereformshadbeencompleted(forexample,toreporton

reformoutcomes).

Indeed,

one

of

the

most

importantbenefits

of

the

deregulation

of

the

oil

industry is greater public awareness about the workings of the oil market and

governments limited capacity to influence prices setby global demand and

supply conditions. This has helped desensitize the public to periodic oil price

adjustments and confine calls for reregulation to militant sectors. Credit here

maybe given to the nationwide roadshows that government conducted at the

time.Communicationwas likewise important inwaterprivatization (especially

when government decided to raise water rates preprivatization when service

deliveryremainedpoor)andtelecommunications(especiallysincePLDTshares

werelistedinthePhilippineStockExchangeandgovernmenthadtobesensitive

to

market

reactions

to

any

news

that

maybe

perceived

as

negative,

such

as

governmenttakeoverofaprivatecompany).

Also deserving mention are the presidents personal qualities and

relationshipwithmembersof his Cabinet. In theauthors interviews of former

governmentofficialswhohaveworkedcloselywithPresidentRamos,acommon

refrain ishowhisqualitiesasa leader toarticulateaclearandcoherentvision,

leadbyexample,andguideandinspirehelpedthemtofocusontheirjobs.Also,

that indoingtheirjobs, theyweresecure in theknowledge that if thesituation

warranted,thePresidentwillbetheretobackthemup.Thissenseofhavinghis

personal support appeared to havebeen an important element inbringing out

thebest in his men, which would help explain their ability to deliver results.

(RobertodeOcampo,votedFinanceMinisterof theYear in1995byEuromoney

magazine,quippedthatthefinanceministerhasmanykeydecisionstomake

themostimportantonebeingwhichpresidenttoserve.)

The Reform ProcessOpportunistic Timing,Pragmatism, Judicious Haste, Persistence

Comparedwiththeresolutionofthepowercrisisthathasbecomeahallmarkof

the Ramos administrations effectiveness, the three reforms discussed in this

papermaybeconsideredelectivesurgery(noncrisissituations).Therefore,they

demonstratebetter the reformprocess inademocraticsettingwhere the leader

himselfhas

to

generate

the

impetus

for

reform

through

his

vision

and

persuasion

and tocraft approaches thatarepolitically feasible.Thecasestudiesshow that

theRamosadministrationhadtoaddresstheproblemsineachareainwaysthat

were possible given the timing, the window of opportunity, conditions

prevailing,andotherprospectsavailable.


27/76


Intelecommunicationsforexample,theadministrationwasabletoopenup

the sectorby executive action alone37after it creatively weakened entrenched

interestsopposingreformthroughtheuseofvarioustoolsatitsdisposal.Thus,

whereas the previous administration, despite having sequestered a significant

portion of PLDTs shares linked to deposed President Marcos, failed to exert

pressureon

the

powerful

controlling

shareholder

to

desist

from

anticompetitive

behavior, the Ramos administration succeeded in activating the governments

boardrepresentation.Thisenabledittoposeacredibletakeoverchallengeofthe

companysboardifPLDTcontinuedtoblockgovernmenteffortstoopenupthe

sector.Similarly,itundertookaflankingactiononthejudiciary.

The fact that itwasnotnecessary for the executive to secure legislation to

open up the sector made it possible to complete the reform within a short

timeframe. The sectors dynamism brought positive results very quickly for

everyone to see, thus winning legislators to the reformers side. The law itself

wasneedednot to introducereformbut toprotect thereform from reversalby

succeedingadministrations.

In water, the administration opted to pursue the worlds largest water

privatization,followingagreatdealof investor interestfrombothforeignand

local groups in the watersector in general and the MWSS inparticular. It was

able to do this in light of existing international water privatization models

(particularly Buenos Aires and Paris) from which the Philippines could learn.

Theseexperienceshelpedgovernmentanticipateandmanagepotentialareasof

conflict(forexample,withlabor)andkey issues(forexample,theneedtohave

lowerwaterratespostprivatization).

Thewaterprivatizationexperiencealsoproducedone important finding in

supportofthetheoryofsecondbestsolutionsortheperfectistheenemyofthe

good. Had the Ramos administration followed the firstbest approach of first

putting in place a strong, independent regulatorybody to keep watch post

privatization, it would in all likelihood never have accomplished the MWSS

privatization. The creation of such abody would have had to go through the

legislative mill, which would have involved a long process, as the oil

deregulation case showed, and with no guarantees of passage. Instead,

government set up a Regulatory Office within the MWSS itself to oversee

contractimplementationpostprivatization.Itthenstrengthenedtheregulation

bycontractregimebyprovidingforaninternationalarbitrationmechanismfor

disputesettlementinthecontract.Althoughissuesrelatedtoregulatorycapture

(in

a

succeeding

administration)

have

been

raised

when

one

of

the

concessionaires failed, the regulatory regime has held up well to date

consideringthemanychallengespostprivatization.38

37 Legislation followed two years later to strengthen the legalbasis and reduce risk ofjudicial

challengeandreversal.38

Forinstance,thegovernmenthassuccessfullycompletedaraterebasingexerciseandauctioned

offtheshareholdingsofthemajorityownerinthefailedconcession.


28/76


In oil, managing public opinion was a basic consideration. Thus,

governmenthadtopursuederegulationinphasesandtimefullderegulationto

coincidewithbenignoilandforeignexchangemarketconditions.Togetherwith

anintensivepublicinformationcampaign,thesewereintendedtoreducetherisk

ofpublicproteststhatcouldjeopardizethereformeffort.

Other Design Considerations

AnotherimportantpointemergingfromtheRamosadministrationsexperience

withthesereformsistheimportanceofcraftingrulesthatwouldensurefairplay

once the reforms are implemented. This meant putting systems in place that

enabledgovernmenttoaddressanymarketfailuresandstrikeabalancebetween

themarketsprofitmaximizationobjectiveandconsumerwelfare.Largely,these

rules were intended to deter market abuse rather than keep government in

control.

Intheoilsectorforinstance,wherethe issueofallegedcartelizationbythe

Big

3

oil

companies

had

always

loomed

large,

government,

in

deciding

to

privatize Petron Corporation, one of the Big 3 oil companies, has opted to

retainasignificantminorityshare(40percent)39sothatitcancontinuetomonitor

industry developments from within. Moreover, the oil deregulation law

mandates the Department of Energy to monitor oil prices and oil companies

compliance with various laws, as well as prescribe minimum inventories of

petroleumstock.Whilegovernment,intimesofnationalemergency,mayimpose

fuel rationing or take over operations of oil companies, this has not happened

sincederegulation.

Similarly in the water sector,asemiautonomous RegulatoryOffice within

the MWSS was set up to review and recommend approval of the two

concessionaires

periodic

applications

forprice

adjustments

as

well

as

conduct

regularraterebasingexercisesandoverseeasystemofpenaltiesandrewardsto

create incentives forgoodperformance.Asnotedabovehowever,onedoesnot

need to strive for perfection in designing the regulatory regime. While the

RegulatoryOfficeisnotwhollyindependentandnorisitabletomaintainapool

ofhighqualityregulatoryexperts,thesetuphasbuiltinflexibility(forexample,

hiring external consultants and having a contractually enforceable third party

internationalarbitrationprocess)thatallowsittoovercometheseshortcomings,

ensuringthatthesystemfunctionswell.

In telecommunications, governments regulatory role was initially geared

towardspreventing

PLDT

from

using

its

monopoly

position

to

weaken

competitors,

for exampleby delaying interconnection. The focus of governments regulatory

functionhassinceevolvedgiventhesectorsrapidgrowthanddynamism.

39The Ramos Administration sold 60 percent of Petron Corp. in 1994 (40 percent heldby Saudi

Aramcoand20percentbythepublic).


29/76


ReformOutcomes

In looking at reform outcomes to demonstrate the quality of the economic

policies and equity impact, the case studies took a micro/sectoral (rather than

macroeconomic)approach,zooming inonthespecific impactofthereformson

particularsectoral

parameters

that

one

can

assume

as

having

apositive

impact

onoverallgrowthperformance.Thisapproachavoidsthedifficultiesofisolating

the aggregate growth effects of the particular reforms, which is especially

problematic in an overdetermined system like in the Philippines. In this case

there are a multiplicity of binding constraints dragging down economic

performance.Inaddition,interveningfactors,suchaspoliticalinstabilityinlater

administrations and external factors like the Asian crisis, tend to mute the

longertermeffectsofthereforms.

Improved Service Delivery

Telecommunications.Since

the

reform,

the

sectors

direct

contribution

to

economic

growthhasbeenontheuptrend(figure8).Thesectorstransformationhasbeen

most dramatic, especially in the wireless segment, with mobile phones having

taken over the traditional role of fixed lines. While the installed fixedline

teledensity increased significantly given companies rollout targets, subscribed

teledensityisonlyabouthalfofinstalledlines(figure9).Incontrast,thecellular

mobiletelephonesubscriberbasehasincreasedbyacompoundedannualgrowth

rateof40percentover200005,resultinginahigh41percentteledensity(figure

10). Thus, despite the catching up that the Philippines had to do during the

1990s in terms of effective teledensity,40 2003 data show that the Philippines is

ahead

of

China,

Indonesia,

Vietnam,

and

India,

although

it

lags

Malaysia

and

Thailand (figure 11). Philippine telephone call rates have likewise been

competitive versus other Asian countries (table 1). This has had the additional

benefitofencouragingwiderInternetuse(figure12).

40Philippines:MeetingInfrastructureChallenges(WorldBank2005)defineseffectiveteledensityasthe

higherofeithertelephonemainlinesper100populationorcellularsubscribersper100population.


30/76


Figure 8: Contribution of Communications Sector to GDP Growth

0

5

10

15

20

25

1992 1993 1994 1995 1996 1997 1999 2000 2002 2003 2004 2005

Percent

Year

Source: National Statistical Coordination Board Statistical Yearbook. Data for 1998 (negative change in GDP)and 2001 (statistical glitch) are not shown.

Figure 9: Fixed-Line Telephone Density (per 100 population)

0

1

2

3

4

5

6

7

8

9

10

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Installed

Subscribed

Year

Telephonesper100population

Source: National Telecommunications Commission.


31/76


Figure 10: Cellular Mobile Telephone Subscriber Density

0

5

10

15

20

2530

35

40

45

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Year

Cellularphonesper100

population


Figure 11: Effective Teledensity, 2003

0 10 20 30 40 50

India

Vietnam

Indonesia

China

Philippines

Thailand

Malaysia 8,940

Per capita income

(US$, PPP)

7,450

4,640

4,990

3,210

2,490

2,880

Teledensity per 100 population

Source: World Bank (2005a, p. 175); World Bank World Development Report 2005 for per capita income.


32/76


Figure 12: Internet Service

0

20

40

60

80

100

120

140

160

180

200

1997 1998 1999 2000 2001 2002 2003 2004 2005

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Registered ISPs*

Subscribers (millions)

Million

RegisteredIS

Ps

Year


*Internet service providers.

Table 1: Voice Call (US$/min), Postpaid

Country Local IDD

Philippines 0.070.16 0.300.40

Australia 0.150.93 0.462.37

Malaysia 0.110.35 0.441.15

Indonesia 0.06 0.22

India 0.010.06 0.151.18

Taiwan, China 0.030.54 0.06

Hong Kong, China 0.060.13 0.027.80

Singapore 0.060.12 0.521.25

China 0.05 1.04

Source: Data consolidated by Globe International Services from individual company websites as of April 23,2007.

Note: Ranges cover prices of different providers in each country.


33/76


Water. The two concessionaires have succeeded in servicing a larger

proportionofMetroManilaspopulation,at thesame timemakingmorewater

available (figure 13) over a longer period of time (table 2). Given the financial

difficultiesofthewestzoneoperator,41performancecriteriawereevidentlybetter

in the east zone. Operational efficiencies in the east zone have improved

considerably

as

seen

in

the

steep

decline

in

nonrevenue

water

versus

the

pre

privatization record of MWSS. Operating expenditures are similarly noticeably

lower in the east compared with the west zone where performance under the

previous concessionaire hasbeen poor. On the other hand, water rates have

increasedsignificantlyfromoriginalbidratesinbothconcessions(figure14).The

increases largely reflect a combination of the outcome of the first rate rebasing

exercise,significantexchangerateadjustmentsfollowingtheAsiancrisis,general

priceinflation,andgreaterexpendituresinsewagedisposal(apublicgood)post

privatization.

Table 2: Selected Water Sector Indicators

Before(1996)

After(2005)*

Water coverage (% of population)

MWCI

MWSI

67%

94%

85%

Water availability (hours per day)

MWCI

MWSI

(HHs with 24-hour water)

17

(25%)

21

21

(98%)

Nonrevenue water

MWCI

MWSI

61%

35%

68%

Staff per 1000 connection

MWCI

MWSI

9.8

2.6

3.5

Operating expenditures (/m3

produced)

MWCI

MWSI

4.3

6.5

Source: MWSS Regulatory Office for 2005 data; Fabella (2006) for 1996 data.

*Except water coverage which is data as of September 2006.

41 The Asian Development Bank nevertheless noted that the failure of the original west zone

proponenthasproducedvaluablelessonsthatfosterprivatesectordevelopment,asevidencedby

thesuccessfulrebiddingprocessthatledtotheawardofthewestzonetoanewconcessionaireby

2007(Chiplunkaretal.2007).


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Figure 13: Billed Water Volumes (BWV) in m3

0

50

100

150

200

250

300

350

400

450

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

MWSS

Maynilad

Manila Water

Year

Cubicmeters

Source: MWSS Regulatory Office.

Figure 14: Evolution of Water Tariff Post-Privatization (/m3)

0

5

10

15

20

25

30

35

199798

1999

2000

2001

2Q2001

4Q2001

2002

2003

2004

2005

East zone

West zone

/m

Year


Oil.Improvementinservicedeliveryismostevidentintheimprovedquality

of services at refilling stations (for example, convenience stores, cleaner

washrooms).Withtheentryofthenewplayers,servicestationshaveincreasedin

numberfrom3,000in1996toalmost4,000stations,approximately20percentof

whichisownedbythenewplayers.42Pricechangeshavemeanwhilemovedinline

with internationalcrudepricesandexchangeratechanges(figure15),withprice

levelswithintherangeofpricesprevailinginotherAsiancountries(seetable4).

42DepartmentofEnergy2005.


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Figure 15: Oil prices: International vs. Domestic (1996=100)

0

50

100

150

200250

300

350

400

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

International

Domestic

Year

perbarre

l

Source: http://www.eia.doe.gov for international prices (Arabian Light), Department of Energy for domesticprices (unleaded gasoline, weighted average based on market shares of players).

Table 3: Major Foreign Players by Sector Post-Reform

Telecommunications Oila

Water

First Pacific Group, Indonesia (PLDT) Saudi Aramco United Utilities, UK (Eastzone)

NTT Communications (PLDT) Shell Mitsubishi, Japan (Eastzone)

NTT DoCoMo (PLDT) Chevron Corporation Bechtel (East zone)

Singapore Telecom (Globe) PTT (Thailand) Ondeo Services, France(West zone)

TeliasoneraAB, Sweden (Digitel) Petronas (Malaysia)

Deutsche Telecom Liquigaz (Netherlands)

Total (France)

a. Source for new players: Department of Energy 2005.

Attracting New Players and Increasing Competition

Telecommunications.Theentryofforeignplayerspostreform,inpartnershipwith

domestic firms, has heightened competition in telecommunications, where

technology is a key growth driver. Competition is particularly fierce in the

wireless

segment

of

the

market,

where

the

industry

initially

saw

an

increase

in

thenumberofplayers(fromonlytwoin1992tofiveby1994andfurthertoseven

in2001),43someofwhichlatermerged(GlobeandIslacom,PLDTandSmart).

43Thetwooperatorsin1992werePilipinoTelephoneCorporationandExpressTelecommunications

Co.Thethreenewplayers in1994wereGMCR,Inc.(Globe),IslaCommunicationsCompany, Inc.,

andSmartCommunicationsCorp.DigitelandBayantelwereauthorized in2001,Digitelbecame

operationalonlyin2003,andBayantelwasnotyetoperationalatend2005.


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Figure 16: Oil Industry Market Shares

Petron

Caltex

Shell

Others

19962004

Source: Department of Energy 2005.

Twooperators(SmartandGlobe)dominatethepresentmarketwithacombined

80percentshareofthesubscriberbase.Thisnonethelesshasfallenfromahigh87

percentsharein2002beforetheentryofDigitel.

Oil. A Department of Energy committee44 reviewed the deregulated oil

industry in 2005 and noted the following: (i) there were 35 new players in the

industry importing finished products, in addition to numerous other entities

engagedinotherdownstreamactivities,suchasretailtrade;(ii)overall,thenew

playerswereabletoincreasetheircombinedshareofthemarketfromlessthan3

percentin1997to15percentin200545(figure16);(iii)intheLPGsegmentofthe

market,the

new

players

gained

amarket

share

of

more

than

40

percent;

and

(iv)

reported return on equity for two of the biggest players, Petron and Shell,

averaged 3.7 percent and 3 percent respectively under the deregulated regime,

lowerthantheaveragePhilippineTreasurybillrateduringtheperiod.

Impact on Investments

The improvement in service delivery in all three sectors reflects the significant

amountofinvestmentsthattheprivatesectorexpendedintheirrespectiveareas.

For the telecommunicationssector for instance, the two leading cellularmobile

service providers spent a total of US$5 billion from 2000 to 2006, or the

equivalent

on

average

of

almost

1

percent

of

GDP

annually

on

capitalexpenditures (figure 17). These have enabled the firms to provide nationwide

access towirelessservices. Inoil, theDepartmentofEnergyreported that from

1996to2004,newplayersinvestedover23billion.46Inwater,from1997to2005,


45The2005figureisfromhttp://www.doe.gov.ph.



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capital expenditures of the two concessionaires totaled 18billion (or US$355

million), excluding concession fee projects. Capital expenditures increased

dramaticallyaftertheraterebasingexercisein2002,particularlyintheeastzone

(figure 18). The financial statements of the east zone concessionaire, Manila

Water, show capital spending reaching 12.3billion (or US$229 million) from

2003to

2006,

excluding

concession

fees

paid.

Figure 17: Capital Expenditures in Telecommunications ( billions)

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006

PLDT-Smart

Globe

Year

billions

Source: Globe and PLDT Annual Reports.

Figure 18: Capital Expenditures in Water ( millions)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1997 1998 1999 2000 2001 2002 2003 2004 2005

West zone

East zone

m

illions

Year



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Contribution to Fiscal Stability

Oil. The abolition of the Oil Price Stabilization Fund (OPSF) following

deregulationfreedgovernmentoftheburdenofgrapplingwithrecurringdeficits

intheOPSF47(figure19).Forinstance,asaresultofahugedeficitintheOPSFin

1989 that reachedalmost1percentof GDP,governmenthad toput ina reported

5.3billion48

the

following

year

(equivalent

to

0.5

percent

of

1990

GDP)

to

reduce

the

deficit.Thisreformisperhapsbestappreciatedinthelightoftherecentrunup in

world oil prices. A World Bank study showed that, compared with neighboring

economieslikeChina,India,Indonesia,andMalaysia,whichhadbeenfinancing

fuelsubsidies from thebudget, thePhilippinesallowedhigherpassthroughof

increasesincrudeoilpricetodomesticprices49(table4).Thishashelpedshield

the fiscal sector from theburden of providing oil subsidies at a time when

governmentfinancesweremostfragile.

Figure 19: OPSF versus Oil Prices

1.0

0.80.6

0.4

0.2

0.0

0.2

0.4

0.6

0.8

1.0

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

0

100

200

300

400

500

600

700

800OPSF, % of GDP, lhs

Oil prices (/bbl), rhs

PercentofGDP

Pesos

Year

Source: For OPSF, Department of Budget and Management, Fiscal Statistics Handbook for 19842003; for oilprices, http://www.eia.doe.gov; for exchange rate, Bangko Sentral ng Pilipinas.

47TheOPSFwasintendedtokeepdomesticoilpricesstable.Fundsweredrawndownwhenworld

oilpriceswerehighandreplenishedwhenworldoilpriceswerelow.Wheneverdeficitsstartedto

buildup,governmenthadtoeitherinfusefreshcapitalorraisepetroleumprices,whichwasoften

met with strikesandprotests. On the other hand, when insurplus, the OPSF couldbe used for

otherends,suchasgeneralbudgetfinancing.48

Thenationalgovernmentcontributed5billiontotheOPSFwithPAGCORcontributinganother

300million(PIDS1995).49

BaconandMasami2006.


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Figure 20: National Government Budgetary Support to MWSS ( million)

400

200

0

200

400

600

800

1,000

milllions

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Source: Department of Budget and Management, Fiscal Statistics Handbook for 19842003.

Table 4: Pass-Through Coefficients in Local Currency (January 2004April 2006)

Gasoline Diesel

China 0.71 0.53

India 1.25 0.66

Indonesia 1.20 1.02

Malaysia 0.75 0.84

Philippines 1.29 1.30

Thailand 1.37 1.15

Vietnam 1.03 0.70

Mean of case studies (31 countries) 1.03 0.88

Mean of net oil importers (25 countries) 1.19 1.01

Mean of net oil exporters (6 countries) 0.35 0.32

Industrial countries

Germany 1.20 0.98

Japan 0.85 0.65

United Kingdom 1.25 1.08

United States 1.02 1.05

Source: Bacon and Masami (2006, pp. 4 and 60).

Note: Coefficients were computed by dividing fuel price increases in local currencies by price increases on theinternational market converted to local currencies.


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Water. Prior to privatization, the national government had to allot funds

annuallyfromthegeneralbudgetintheformofequitycontributions,advances

for loan payments, or outright subsidiesto fund MWSS losses (figure 20).

Under the privatized setup, the concessionaires took over operations and

servicing of MWSS debt (through the payment of concession fees), freeing

government

of

theburden

of

supporting

MWSS.50

Moreover,

going

forward,

government no longer had to worry about financing the huge amount of

investment(US$7billion,over5percentof2006GDPoverthe25yearconcession

period51)neededtoupgradesystemsandexpandservicesinMetroManila.

Governments Role and Politicization of Pricing

The reforms have helped to redefine governments role and the publics

expectations of it. Because of the reforms, government has decidedly moved

awayfromtheroleofaprovidertothatofanenabler/regulator.Asnotedabove

though, to make some of the reforms possible, government has had to accept

less

than

perfect,

second

best

solutions

to

the

regulatory

setup.

Thus,

there

is

much room for strengthening governments regulatory function to ensure its

continued responsiveness to changing market needs (especially in highly

dynamic areas such as telecommunications) and to avoid opportunities for

regulatory capture that can undermine the success of the reform effort. In this

regard, there has been a lot of learningabout utility operations, market

dynamics,andpublicresponse,amongothersoverthepast10to15years.This

follows many challenges to existing rules, especially in the water and

telecommunicationssectors,toaidregulatorsgoingforward.

The ratesetting process has likewisebecome much less politicized today,

with the public mostly desensitized to the regular price adjustments in the oil

and

water

sectors.

Although

there

are

still

occasional

demands

from

nationalists forgovernment tocontrolorsubsidizeprices,especially in the

oil sector, these demands largely havebeen ignored, anddomestic prices have

beenallowedtomoveinstepwithinternationalcrudeprices.Theprivateplayers

themselves, in both the oil and water sectors, appear to be sensitive to the

political acceptability of rate adjustments, preferring to increase prices in

increments over a period of time rather than implementing a single, large

increase.Chargingmarketpriceshasnotonlyboosted investor confidenceand

encouragedmoreinvestments,butalsoithaselicitedproperconsumerresponses

tohighprices,suchasconservation(figure21)andsubstitution(thatis,biofuels,

whichalso

are

more

environmentally

friendly).

50Atleastuntil2001whenthewestzoneconcessionaireranintofinancialdifficultiesandwasnot

abletopayitsconcessionfees.Governmentadvancedfundsforthisandensuingeventsledtoexit

ofthewestzonesmajorityshareholderandtheauctionofitssharestoanotherprivategroup.51

WorldBank(2005a,p.114).


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Figure 21: Petroleum Crude Import Volumes and Prices

Year

0

20

40

60

80

100

120

140

1999 2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60Volume ('000 metric tons)

Price (US$/metric ton)

US$permetric

ton

000metrictons

Source: Bangko Sentral ng Pilipinas, selected economic indicators.

New Growth Drivers

One of the most significant developments following the opening up of the

telecommunications sector is its spread to other areas, such as computerbased

services. This in turn has spawned a new growth industry ofbusiness process

outsourcing (BPO) services such as call centers, software development, data

transcription,andbackroomoperations.Availabledatafromthenationalincome

accounts,capturing

only

third

party

BPO,

show

the

sectors

value

added

rising

very rapidly in recent years (figure 22). This is likely tobe an underestimate

howeversincemanycorporationssuchasbanksmaintain inhousecallcenters,

which have greatly increased in number, revenues, and employees since 2000

(figure 23). Moreover, government forecasts show that the BPO industry is

expectedtocontinuegrowinginthecomingyears,raisingdollarrevenuesbyan

annualaverageof35percentandcreatinganaverageofover200,000newjobs

peryearfrom2007to2010(figures24and25).


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Figure 22: Third-Party Business Process Outsourcing, Gross Value Added (1985=100)

0

500

1,000

1,500

2,000

2,500

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

Pesos

Year

Source: National Income Accounts.

Figure 23: Contact Center Performance

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000Number of contact centers, lhs

Number of seats ('000), lhs

Number of employees ('000), lhs

Revenues (US$ million), rhs

US$

million

Number

Year

Source: Magtibay-Ramos et al. 2007.


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Figure 24: BPO Forecast Revenues (US$ billion)

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009 2010

US$billion

Year


Figure 25: Forecast of New Jobs in BPO (thousands)

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010

No.ofjob

s(thousands)

Year



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Figure 26: Selected Fiscal Indicators (% of GDP)

6

4

2

0

2

4

6

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NG budget deficit

Social spending

Percent

Year

Source: Department of Budget and Management, Fiscal Statistics Handbook for 19962003; National

Statistical Coordination BoardStatistical Yearbook

for 200406; National Statistical Coordination Board forGDP.

ReformasaContinuingProcess

Reforms that have stood the test of time tend tobe difficult to reverse. This

appears tobe trueat least in the threespecific sector reforms discussed in this

paper,wheregovernmenthasovertheyearshasresistedcallsforoilreregulation

and nationalization or for taking over one of the water concessions that failed.

Nonetheless,

as

has

been

observed,

to

achieve

the

desired

impact

on

investments

andgrowth,reformhastobeacontinuingprocess inwhichnewreformefforts

builduponcompletedonesuntilthecountryisabletoachieveenoughcredibility

in its reform program to inspire investor confidence. However, the Philippine

presidentssixyear term(withnoopport

Political Economy During Ramos

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