PNOC-EDC must be privatized now

I often find little reason to disagree with Senators Joker Arroyo and Mar Roxas on most issues (as well as Senate President Manny Villar and Sen. Ed Angara who recently said the same thing). But on the  issue of PNOC-EDC’s privatization, I think they are missing a very important point. PNOC- EDC must be privatized as quickly as possible if it is to continue with its mission in an efficient and timely manner. PNOC-EDC’s ability to perform is seriously at risk if it continues as a government corporation.

According to Sen. Roxas, his concern is that “the state may be giving up control of an entity with the mandate and capability to explore new energy resources…in favor of increased revenues for this year.   The planned privatization of PNOC, which is mandated to explore, develop and exploit various sources of energy, including indigenous sources, may not be congruent to the national interest of finding alternative means to power our country. The private sector’s interest is in making money, not particularly in national development,” he added.

Sen. Roxas is being theoretical. On a matter of principle, what he is saying sounds good, but hardly practical based on political realities at ground level. True, the Arroyo administration may be privatizing PNOC-EDC merely to raise funds and that point may be argued either way. But Sen. Roxas is wrong to assume that continued state control of PNOC-EDC will enable it to perform its mandate better.

And while Sen. Roxas is right to observe that the private sector’s interest is in making money and not particularly national development, any private sector company that shells out P35 billion will make damn sure that it protects its investment by doing all the right things. In this case, private sector profit motives coincide well with our national development goals. Knowing Sen. Roxas, I am surprised he failed to grasp this point as he questioned this privatization effort. But I guess we can forgive his need to sound populist to make his presidential bid in 2010 viable.

Still, I expected Sen. Roxas to do more background checking before issuing press releases. If he did, he would have found out about how the Arroyo administration has politicized PNOC-EDC starting with the appointment of a former congressman who had absolutely no background in energy as its head. Okay, he is no longer there but the damage has been done. I am told PNOC-EDC is no longer the mission driven organization that it was when we founded it during the energy crisis years of the late 70s.

While it is true that it still makes a decent amount of money today, there are questions on sustainability. It is entirely possible that PNOC EDC’s steaming performance today is still powered by past accomplishments. People in the know tell me that privatization may prove to be the only strategy that would save the company in the long term.

The tragedy of PNOC-EDC is that appointment to its board and senior management has become a political carrot that Malacanang bestows on its political allies. At least during the Marcos years, the late Energy Secretary Ronnie Velasco shielded it from politicians and thus allowed the technical staff to get their work done. Velasco’s job was to make sure the geologists and other senior staff got the resources they needed and if politicians had anything to say about their operations, they had to talk to Velasco.

I also do not agree with the view of Sen. Roxas that “there is a need for appropriate legislation, to set parameters whereby the executive must go through Congress prior to sale of its assets.” I believe in checks and balance as much as Sen. Roxas but this is one instance the executive branch must be allowed to do its work without second guessing from Congress.

Provided the executive branch disposes of its assets in a transparent manner, that should be enough. In fairness, government’s privatization efforts thus far have been pretty transparent. What we don’t need is a hoard of about 300 members of Congress putting their fingers in every privatization deal. Sen. Roxas’s proposed legislation will not result in better privatization deals, but in more politicized deals to the point that decent private sector companies will shun privatization offers.

The way I look at PNOC-EDC’s privatization is simple. The Arroyo administration may have the wrong reason for it —a shortcut to raise collections as Sen. Roxas observes, but the result is beneficial to the country in terms of making a major energy institution better able to perform its mandate for energy development. So, let us encourage them to get it done quickly.

Lastly, PNOC-EDC’s privatization will finally place government where it should be in the energy business — a regulator, rather than a participant. Once government is out of the business, it can start thinking clearly on the important matter of policies that will support the private sector participants in a crucial sector of our economy. Best of all, we get the politicians away from the cash registers of functioning businesses owned by the Filipino people that should be privatized. We should have learned our lesson from all those GOCCs and PCGG sequestered companies that politics and business mix only to the detriment of the people’s interest. 

Strong peso

Now, even the Bangko Sentral is starting to get worried. Monetary officials warned that strong foreign exchange inflows are beginning to cause stress on the Philippine economy that would require immediate intervention. But it isn’t the BSP authorities who must intervene but other government officials who must act to protect the economy by diversifying the country’s product and labor markets.

There are very real limits to what the BSP or any central bank can do. Every time the BSP buys dollars from the spot market to help weaken the peso, it unleashes a lot of pesos into the system and this becomes a threat to the inflation rate. The BSP will then have to mop up excess liquidity in the system but that means tighter monetary policy and higher interest rates. That in turn, leads to further peso appreciation as investors take advantage of higher interest rates. So, the central bank would be back where it started.

The BSP has resorted to using its surplus dollars to prepay foreign debts and has urged the national government to use the same strategy. That has helped but not nearly enough. Borrowing in pesos in the domestic market has also been resorted to. While this will mean less dollars getting into the system, this also means increased competition for local funds, causing the interest rate to rise. Again, higher interest rates attract dollars and cause the peso to  appreciate.

OFW concerns are not the only thing on the minds of the BSP and other policy makers when the peso appreciates. Preliminary studies by the BSP indicated that the economy was beginning to show early symptoms of the so-called Dutch Disease, which could result in the sharp contraction of the economy if not addressed properly.

The so-called Dutch Disease broadly refers to the harmful effects of large inflows of foreign currency, beginning with loss of competitiveness that could ultimately trigger a decline in the manufacturing sector. The concept was first described after The Netherlands discovered natural gas in the 1960s and as the guilder became strong there was a marked decline in the manufacturing sector. The Dutch lost their footing in their traditional exports.

Recent modeling done by the BSP had shown initial indications of a real appreciation of the peso against a basket of currencies that includes the country’s main competitors in the world export market. The BSP has begun to see a modest increase in the real exchange rate, indicating some relative reduction in external price competitiveness.

The BSP’s models also showed a decline in the share of the tradable goods sector, including manufacturing to total output. This was also accompanied by a decline in the sector’s share in total employment since 1996. A BSP researcher surmised that “these developments could be symptomatic of the contraction of the manufacturing sector associated with the Dutch disease.”  Tough times ahead, it seems.

Methane

Cows are said to produce more harmful methane gas when they belch than cars. Scientists are now trying to develop a cattle-ytic converter.

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