Business

Regulatory capture

DEMAND AND SUPPLY - Boo Chanco - The Philippine Star

October 15, 2018 | 12:00am

Another big problem a potential investor must worry about in the Philippines is regulatory capture. It is either live with the system and feed the corruption that goes with regulatory capture or stay away from the country.

We can blame regulatory capture for the duopoly situation in our telco industry. When FVR broke the PLDT monopoly, as many as seven major telcos sprung. But eventually, only two remained after a number of mergers.

This is typical behavior of our ruling business elite. They use political clout to get a government franchise with the intention of turning around and selling it to a deep- pocketed rival or newcomer. And the government regulator lets them.

If we had a professional no nonsense regulator in the National Telecommunications Commission, the new telco players wouldn’t have been allowed to merge with each other. Or if they want to merge, they can’t bring their frequencies with them.

What happened in the telco industry is par for the course in the mining and logging industries. Concessions are obtained through political connections. Then they use the same political clout to disregard rules that we now see as serious environmental damage. DENR, the regulator, is often in their pockets.

Regulatory capture is also an accepted fact of life in the energy sector. Indeed, we recently had the spectacle of the entire membership of the Energy Regulatory Commission (ERC) suspended due to suspected partiality in a decision that some people deemed inimical to the public interest.

The more blatant example of regulatory capture today is the LTFRB. It is also an agency that operates with a mindset that has to be updated in the light of fast technological change.

The LTFRB’s reputation for corruption is also among the most notorious for decades now. This is easy because hundreds of thousands of bus, jeepney and taxi operators go to them for franchises.

Folks who need LTFRB’s approval have generally lived with the system and charge extra expenses to the cost of doing business. There was a time when fixers abound in LTFRB offices, and where there are fixers, corruption exists.

But the worse part of LTFRB today is the inability of its officials to understand how technology has changed the transportation industry. There was a big fight when Uber and Grab came into the business. LTFRB officials were frozen in the taxi age and vigorously defended taxis even when it was obviously against the public interest.

Then they reluctantly accepted Uber and Grab. But Uber and Grab decided to merge and as a result, created a monstrous monopoly. Don’t take my word for it. Competition commissions here and in Singapore came to that conclusion.

If they were literate in economics, LTFRB officials should have prayed for a worthy competitor to Grab. The small players that pretend to compete do not have the technical and financial muscle of Grab. Indeed, when the Philippine Competition Commission reluctantly approved the Grab-Uber merger, several conditions were given.

Anyone who uses Grab today knows the spirit of those conditions is violated daily. Grab, with the apparent approval of LTFRB, behaves like a virtual monopoly that hurts drivers and riders.

Talk to Grab drivers and they often complain about the increase in the commission Grab charges. I am told that it was 17 to 18 percent when Uber was around but is now at 27 percent. Many drivers say they are having second thoughts about driving for Grab, but they need the money to amortize their cars.

Riders today also complain it is more difficult to hail a Grab ride and if you get one, must pay a lot more than before.

That isn’t surprising. At the conclusion of its investigation, Singapore’s Competition Commission found out that the Grab-Uber merger is anti-competitive and has infringed their Competition Act by substantially lessening competition in the ride-hailing platform market in Singapore.

Singapore’s Competition Commission reported “receiving numerous complaints from both riders and drivers on the increase in effective fares and commissions by Grab post-transaction (e.g. via a decrease in the amount and frequency of rider promotions and driver incentives)… Indeed, CCCS has found that effective fares have increased between 10-percent and 15-percent post-transaction.”

Singapore’s Competition Commission also found out that potential competitors are hampered by anti competitive practices so they cannot scale to effectively compete against Grab.

“CCCS finds that Grab currently holds around 80 percent market share. Despite recent entry by several small players, their market shares remain insignificant. CCCS’s investigation found that strong network effects make it difficult for potential competitors to scale and expand in the market…

“CCCS’s assessment is confirmed by feedback from potential new entrants which indicated that without any intervention from CCCS, it would be difficult for them to attain a sufficient network of drivers and riders to provide a satisfactory product and experience to both drivers and riders so as to compete effectively against Grab.”

I don’t think our own competition commission is actively monitoring Grab’s compliance to the conditions they imposed for approval of the merger. I think they should. We can’t depend on LTFRB.

In the end, the only real solution is to allow a competitor with comparable resources as Grab to bring back the days when Uber was competing with it. The emerging competitor to Grab in Singapore and other Asean markets is an Indonesian start-up called Go-Jek.

Maybe we need them to keep Grab from abusing drivers and riders in a way that only a monopoly can. PCC should also conduct a seminar on monopolies for the benefit of LTFRB officials.

The current Grab monopoly only means one of two things: LTFRB officials don’t understand economics, or they have been captured by Grab.