philippine case study: ramos administration...

Philippine case study:Ramos Administration

(1992-98)

Romeo L. Bernardo

Presentation Outline

• The setting• The vision• The economic agenda• Reform experiences

– De-monopolization of telecommunications sector– Deregulation of downstream oil industry– Water privatization

• Lessons from reform experiences• Conclusion

The setting

• Philippine state may be described in terms of:– Oligarchic state

• Hutchcroft: “booty capitalism”– Crony capitalism– Soft state

• Fabella: “the principal source of wealth is not created value but extracted value based on power over rules and enforcement”

– Weak state capacity

The setting

• Historical origins of the weak state– 300 years in the convent, 50 years in Hollywood

• To keep struggle for independence in check, conquering powers sought to win to its side local land-based elites, e.g.,

– Access to American markets

– These groups of families gained increasing wealth during the post-war period through influence over state policy, e.g., import substitution

– Political control became a means for extracting more wealth through favorable policies, e.g., tariff protection, tax exemptions, directed credit

The setting

• Historical origins of the weak state– Marcos declared martial law in 1972

• Many saw this as an opportunity to make the system more equitable

• Instead, cronyism reached a peak

– 1986 People power revolution• Missed opportunity to level the playing field• Gave rise anew to a “democracy of pressure groups” busy

extracting concessions from government that will preserve their favored positions

• As a result, government’s position repeatedly challenged by several coup attempts

The setting

• By the early 90s– System described as one that “enables persons with

political influence to extract wealth without effort from the economy”• Aquino government was able to pursue fundamental reforms

to open up the economy (trade liberalization, Foreign Investments Act)

• But crucial sectors of the economy continued to be shielded from competition

– Government proved ineffectual in dislodging entrenched interests

– East Asian Miracle demonstrated the importance of effective government

The vision

• “Philippines 2000”– Goal: NIC-status by end of millennium– Intermediate target: establishing effective

government “able to resist political demands”• Rather than “soft authoritarianism,” democratize the

economy, i.e., level the playing field

– Near-term target• Political stability• Opening up the economy, dismantling the monopolies and

cartel, leveling the field of business competition• Reducing corruption and inefficiency in the civil service

• Economic liberalization– Continuing trade liberalization– Privatization– Dismantling monopolies and cartels

• Strengthening institutions– Tax reform– Improve efficiency of bureaucracy– Judicial reform

• Redistributive reforms– Social reform agenda

• Political reform– Reform of political structures (party system, electoral process)

The economic reform agenda

“A finance minister has many important decisions to make; the most important one being which President to serve.”

- Roberto de Ocampo1995 Finance Minister of the Year, Euromoney


• Start with “low-lying fruits” in the hope that these early victories would win credibility for the President’s reform program and catalyze responses of a broader nature –primarily by promoting investor interest and expanding the economic growth frontier

• Three reforms that were started and completed during the Ramos Presidency that helped to:– Establish government credibility as a regulator (de-

monopolization of telecommunications)– Move government away from providing price

subsidies (oil deregulation, water privatization)– Give the private sector a greater role (water

privatization)

Focus of the case study


• The President’s weak support base – In a seven-way contest, President Ramos had won

with less than 24% of the votes cast– In congress, 2/24 senators and 38/205 congressmen

belonged to his party• Overcoming weak support

– Legislative-executive Advisory Council– Granted amnesty to rebel soldiers, “political space” to

the Communist Party, autonomy to Muslim region– Participatory leadership style with a “penchant for

summitry”

De-monopolization of telecommunications

“The Philippines is a country where 98% of the residents are waiting for a telephone and the other 2% are waiting for a dial tone.”

- Lee Kuan Yew Singapore Senior Minister

Manila, 1992

An estimated 800,000 applicants, 600k of which were in Metro Manila, queued for a telephone line.

The transformation: telecommunications

Cellular Mobile Telephone Subscriber Density

05

1015202530354045

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source of data: National Telecommunications Commission

Telephone density index (fixed lines) per 100 population

0123456789

10

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Installed

Subscribed

Source of data: National Telecommunications Commission

Internet service

020406080

100120140160180200

1997 1998 1999 2000 2001 2002 2003 2004 20050.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Registered ISPs*Subscribers (in Mil)

*Internet service providers. Source: National Telecommunications Commission

Effective teledensity, 2003

0 10 20 30 40 50

India

Vietnam

Indonesia

China

Philippines

Thailand

Malaysia

Source: The World Bank, " Philippines: M eet ing Infrastructure Challenges," p. 175; per capita income from 2006 WDR

4,650

2,540

1,170

1,290

1,140

550

620

2004 per capita income

• Identification of the problem– PLDT

• controlling shareholder able to block efforts to open up the sector

• company owned the only nationwide backbone transmission network & controlled >85% of the country’s telephone lines

Making reform possible: telecommunicationsHow it was done

• Cast of characters– President Fidel Ramos

• Endorsed by President Aquino in 1992 elections– General Jose Almonte

• President Ramos’s “chief ideologue”• Brains behind People Power Revolution; first to be

promoted to General by President Aquino– PLDT

• Cojuangco family, represented by Antonio “Tony Boy” Cojuangco, a cousin of President Aquino

• His father, Ramon Cojuangco, is a Marcos crony


• Solution: isolate PLDT– Create clamor for “More Phones” by encouraging

consumer groups– Credibly pose a takeover challenge by having six

government representatives on PLDT’s 11-man board

– Other behind-the-scenes maneuvers to increase the Cojuangco family’s receptiveness to reform• In one reported case, led to resignation of Supreme Court

justice whose decision favoring PLDT was alleged to have been written by a PLDT lawyer


• Solution: open up the sector– Two executive orders issued by the President

• E.O. 59 (Feb. 1993) mandating interconnection – PLDT acceded in light of Solution 1

• E.O. 109 (July 1993) required cellular operators and international carriers to install a minimum number of lines in specific service areas assigned to each– Nine carriers committed to install some 4M lines– PLDT embarked on a zero-backlog program

– Provisions of the E.O.s were enshrined in legislation passed in March 1995 to secure the reform from future changes in leadership


Reform outcomes: telecommunicationsThird party business process outsourcinggross value added (1985=100)

0

500

1000

1500

2000

2500

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

Source of data: National Income Accounts

BPO Revenues, US$Mil (actual & forecast)

0

2000

4000

6000

8000

10000

12000

14000

2004 2005 2006 2007 2008 2009 2010

Digital contentEngineering designSoftware developmentAnimationOther data transcriptionLegal transcriptionMedical transcriptionBack officeCustomer care

Source of data: w w w .bpap.org (2007 onw ards are forecasts)

BPO Employees ('000)

0100200300400500600700800900

1000

2004 2005 2006 2010

Customer care Back office

Medical transcription Legal transcription

Other data transcription Animation

Softw are development Engineering design

Digital content

Source of data: w w w .bpap.org; 2004-06 actual, 2010 forecast

Contact Center Performance

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 20050

500

1000

1500

2000Number of contact centers, lhsNumber of seats ('000), lhsNumber of employees ('000), lhsRevenues (US$M), rhs

Source of data: Ramos, Estrada and Felipe, ADB ERD WP 93

Deregulation of downstream oil industry

• Pursued as part of the Energy Action Plan that also included:– Creation of Department of Energy– Solving the power crisis– Privatization of the country’s largest oil

company, Petron Corporation• Government has retained a 40% stake

The transformation: oil

PetronCaltexShellOthers

1996 2004

Oil industry market shares

Source of data: DoE, Independent Committee Reviewing the Downstream Oil Industry Deregulation Act of 1998, 28 Feb. 2005

PetronCaltexShellOthers

1996 2004

Oil industry market shares

Source of data: DoE, Independent Committee Reviewing the Downstream Oil Industry Deregulation Act of 1998, 28 Feb. 2005

Oil prices: international vs. domestic (1996=100)

0

50

100

150

200

250

300

350

400

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

International

Domestic

Source: w w w .eia.doe.gov for international prices (Arabian Light), Department of Energy for domestic prices (unleaded gasoline, w eighted average based on market shares of players)

• Identification of the problem– Fiscal risk from end-user oil price subsidies

• Oil Price Stabilization Fund – recurring deficits • Expectations that government is responsible for

providing price support gave rise to social tensions whenever market conditions require upward price adjustments

Making reform possible: oilHow it was done

• Solution: allow automatic and full pass through of international crude oil prices to domestic end-user prices. This required:– Public education– Legislation

• Timing consideration given 1995 mid-term elections• Conditionality under IMF program helped set timeframe for

congressional deliberations– Design that phased in a fully deregulated regime

• Transition phase (<1 year) to condition the public to regular price changes; monthly price adjustments by formula; OPSF funded at P1 billion to absorb price increases above 50 centavos

• Full deregulation timed with favorable oil market conditions


• What were not foreseen– Asian crisis: steep peso depreciation and rising oil

prices– Supreme Court decision declaring oil deregulation

law unconstitutional• Decision came 18 months into implementation of a

deregulated regime• Ramos Administration returned to congress and

secured a new oil deregulation law three months after SC decision

• In all, reform process took four years– Including one-year lull in the run-up to the 1995

elections


Reform outcomes: oil

Petroleum crude import volumes and prices

0

20

40

60

80

100

120

140

1999 2000 2001 2002 2003 2004 20050

10

20

30

40

50

60Volume ( '000 metric tons)

Price (US$/mt)

Source of data: Bangko Sentral ng Pilipinas, Selected Phil. Economic Indicators

OPSF vs. oil prices

-1.0%-0.8%-0.6%-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 19980

100

200

300

400

500

600

700

800OPSF, % of GDP, lhs

Oil prices (Pesos/bbl), rhs

Source of data: For OPSF, Department of Budget and Management "Fiscal Statistics Handbook 1984-2003"; for oil prices, w w w .eia.doe.gov; for exchange rate, BSP

• Public largely de-sensitized to periodic price changes albeit there are occasional calls from “nationalists” for re-regulation or nationalization

• Policy handles available to government for managing political backlash – adjusting the duty on oil imports– offering time-bound fuel discounts for public utility

vehicles through Petron– using moral suasion to persuade oil companies to

adjust prices in small increments

Managing price shocks post deregulation: oil

Privatization of MWSS

“The World’s Largest Water Privatization”

- International Finance Corporation1997

The transformation: water

Before(1996)

After(2005)

Water coverage (% of population)MWCIMWSI

67%84%85%

Water availability (hours per day)MWCIMWSI

172121

Non-revenue waterMWCIMWSI

61%35%68%

Staff per 1000 connectionMWCIMWSI

9.82.63.5

• President Ramos started talking about the “water crisis” in 1993 and convened a Water Summit in late 1994

• Identification of the problem– Financial weakness of MWSS

• Could not raise water rates in order to undertake needed investments; without improvements in services, could not justify tariff increases

• Leakages from old pipes and water pilferages not only increased financial losses, also aggravated water shortage

Making reform possible: waterHow it was done

• Solution: privatize MWSS• Inspired by proposals from foreign and local investors

wanting to participate in MWSS– Solution required:

• Legislation giving the President emergency powers to solve the “water crisis”– Re-organize MWSS, including cutting down workforce by 1/3

through a generous voluntary retirement package• Managing labor

– Study tour for labor leaders who were given free hand in drafting labor provisions of concession agreement

• Raising water rates – Created constituency for water privatization as bidding results

showed rates of as much as 74% off prevailing rates


– Solution required:• Properly designing and managing the process

– Split MWSS service area into two zones: allowed benchmarking of performance of the two operators

– International arbitration mechanism: increased credibility of regulatory system


Reform outcomes: water

National government budgetary support to MWSS

-400-200

0200

400600

8001000

1986

1988

1990

1992

1994

1996

1998

2000

2002

Source of data: Department of Budget & Management, "Fiscal Statistics Handbook 1984-2003"

Pmil

• Asian crisis: peso depreciation raised the dollar-denominated concession fees significantly– Event of force majeure?

• Led to contract amendment allowing faster recovery of foreign exchange losses

• Failure of west zone concessionaire– Poor financial condition of majority shareholder, poor

working relationship with foreign partner resulting in poor management• Led to another contract amendment that raised issues of

moral hazard and regulatory capture– Successful re-bid after exit of majority shareholder

Challenges post privatization: water

• Importance of the President’s leadership role in:– Pinning down the problem and effectively

communicating it to the public– Offering a solution to the problem– Taking all necessary steps to solve the problem

(political will), including by:• Stepping to the frontline to answer for unpopular decisions

taken • Overcoming obstacles to reform from veto players (workers

within the executive, congress, judiciary) and entrenched interests

Lessons from the 3 reform experiences

• Importance of carefully managing the reform process– Understanding specific impediments holding back

growth / development• If wide sectoral impact, need public education• If entrenched interests, need creative approaches to weaken

resistance– Properly designing the reform process to minimize

surprises that may thwart reform efforts• Anticipating “hot buttons,” esp. among veto players and

interest groups– Giving stakeholders a voice in the reform process

• President Ramos’s People’s Summits


• Reform as a continuing process– Succession planning

• Ensure reforms are not reversed• Ensure continuation of reform program

– Institutional strengthening• Safeguard reforms against changes in leadership• Sufficient flexibility in regulatory regime to respond

to changing external environment (including technological advances)– Effective, rather than perfect, rules


• Reform in “soft” states with a long history of crony capitalism is highly challenging– Reformists need to understand why things

are what they are by taking into account specific personalities and families and their ties with each other

– System of checks and balances put in place to stem abuses in a democracy can be exploited to block or delay reform

– Leadership is crucial

Conclusion

End of Presentation

philippine case study: ramos administration...

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