The Real Nature of MWSS Privatization Program: Crony Capitalism

Like in the contemporary movies, in the world of politics, life is shown as either existing in black or white, or a choice between good or evil or taking sides between oppressor and the oppressed.

Media’s populist moralism can be seen in today’s headlines where supposed iniquities has been committed by private sector concessionaires, whom had been alluded to as 'greedy' since these firms profit from society by passing their costs to the consumers.

From the inquirer.net

A long list of expenses, including those for foreign trips, entertainment and recreation as well those for advertising, gifts, flowers and other tokens for all occasions, had been passed on to customers of the two water concessionaires in Metro Manila and nearby areas, according to a consumer advocacy group.

The Water for the People Network (WPN) said these expenses were on top of the P15.3 billion in income taxes that Maynilad Water Services Inc. and Manila Water Co. had passed on to consumers from 2008 to 2012.

WPN said the two concessionaires “have effectively turned water service into a profitable business while consumers shoulder the burden of onerous charges and taxes.”

Sonny Africa, executive director of Ibon Foundation, one of WPN’s convenors, called on regulators to disallow the recovery from consumers of such expenses and to thumb down proposals for rate increases.

“We are sure these same items are included in the business proposals of Maynilad and Manila Water for the next rate rebasing (cycle),” Africa said.

Maynilad wants a P5.83 per cubic meter increase in its basic charge while Manila Water plans to raise its rates to P8.58/cu. m. from 2013 to 2017. The concessionaires are allowed to seek an increase every five years.

Maynilad currently charges P48/cu. m. and Manila Water, P38/cu. m.

The Metropolitan Waterworks and Sewerage System (MWSS) allowed the recovery of income tax through tariffs in a resolution issued in 2004.

And so it seems.

Lost within the controversial article is the foundational relationship between the principal, Metropolitan Waterworks and Sewerage System (MWSS) and two water concessionaires

In another article, the Office of the Government Corporate Counsel (OGCC) recently clarified that these concessionaires are “agents of a public utility” and not public utilities. 

The fact is that the MWSS is a creation of the Philippine Congress via REPUBLIC ACT No. 6234 in 1971 and is regulated by the 5-man Board of Trustees, three of whom including the Chairman are appointed by the Office of the President but with the consent of the Commission of Appointments.

The government agency’s General Manager is also appointed by “the President of the Philippines with the consent of the Commission on Appointments”. Assistant managers are also appointed by the board, “with the approval of the President”.

In 1997, MWSS had been transformed into an agency empowered to privatize the provision of water services via RA 8041 via the Water Crisis Act.

The price setting function by MWSS have been determined by the Board of MWSS, where a sitting majority comprises appointees of the President

According to Wikipedia.org

Water tariffs in Manila are adjusted on the basis of four mechanisms:

First, tariffs are adjusted automatically on the basis of exchange rate fluctuations applied to the company's debt. This mechanism is revenue-neutral. Initially this mechanism was applied with a lag, but after a contract amendment it is now applied every three months.

Second, tariffs are adjusted annually on the basis of inflation (indexing to the consumer price index).

Third, tariffs are adjusted every five years to guarantee a certain rate of return to the private concession holder (rate rebasing). The company's performance vis a vis regulatory targets is also considered in determining the tariff.

Fourth, extraordinary price adjustments can also be granted, but only in spefific circumstances such as a change in law or force majeure.

Tariffs are set by the Board of MWSS upon recommendation of its regulatory office.

In short, the pricing mechanism by the highly politicized water industry has not been set by the markets but according to the interests of the political leaders.

Nonetheless, legalistically the regulator and the people running MWSS have all been protégés of the President. 

Thus, it seems a logical corollary that these private contractors would have to be in good or cordial standings with today’s political leaders or else…lose their political-economic privileges 

This is a neat example of the functional relationship of public partnership partnership (PPP).

As I previously wrote,

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

And considering the politicized nature of these public utility sub-agencies, aside from regulatory limitations on profit, as I pointed out in the case of Meralco (bold original)

In a world where profits will be deemed as inconsistent with political interests, the owners of Meralco will likely wring profits out through other mechanisms, e.g. off balance sheet transactions, loans or contracts to affiliated parties, transfer pricing and etc.

So whatever alleged padding of expenses as enumerated by the article appears as natural offshoots to the politicized nature of operations between, on the one hand, the MWSS and the Office of the President, and on the other, the privileged private sector contractors.

What has been seen as privatization program has in reality been a form of rent seeking crony capitalism. This can also be described as the localized version of privatization of profits and socialization of losses.

Contra media, such imbalances has hardly been about good or evil but about the (anti-competition-protectionist) political-legal-institutional framework from which the domestic political economic environment operates on.

Changing concessionaires or increasing regulations on them will hardly alter the essence of their relationship.

Of course the alternative or the populist innuendo has been to ‘socialize’ water services.

But there is no such thing as free lunch as subsidized water or subsidized anything else would have to be financed by higher taxes and inflation (loss of purchasing power). 

Moreover, subsidies lead to waste, misallocations, and eventual shortages. Indonesia’s recent riots, for instance, has been due to the lifting of unsustainable subsidies on oil which has brought about huge unwieldy fiscal deficits.

In my view, the answer to cheaper water is to de-politicize the industry by encouraging competition by abolishing legal obstacles, and by promoting decentralized and spontaneously driven self-organized governance system (Common Pool Resources)

Obviously mainstream would have none of them.

Quote of the Day: True Privatization

As Sheldon Richman explains, what American politicians pass off as “privatization” is usually merely government contracting. Government outsourcing now permeates the military establishment, schools, social service agencies, prisons, and even regulatory enforcement. Hiring private contractors, as Richman points out, does not shrink the size of government or the scope of government services; if anything, it expands it by allowing the government to do ever more. The “privatization” that is merely government outsourcing creates incentives for private firms to lobby for the expansion of the relevant government services—besides the private prison operators lobbying for longer sentences and more criminalization, other entrepreneurs lobby for the state to start new social service programs that the contractors expect to run, and so on. Such contracting has the additional insidious result of skewing tangential markets in the private sector, because the large firms that get lucrative government contracts can then underprice (and eventually eliminate) their competitors in other markets, using the taxpayer dollars they receive as leverage rather than competing fairly.

Worse, outsourcing often is a bad deal for the taxpayers—one-quarter of federal contracts have no competitive bidding (thus, no competitive pricing), and many firms that lock in a government contract can later raise the price dramatically, knowing that the agency involved cannot easily switch to another contractor. The government is certainly less efficient than the private sector; but less efficient still is the government hiring the private sector to do the government’s job. True privatization is the government withdrawing from a field and leaving it entirely to the private sector. 

(italics original, bold mine)

This superb insight is from South Texas College Professor of Law Dru Stevenson at the Cato Unbound on the discussion about Privatization.

Government outsourcing or pseudo privatization, e.g. Public Private Partnerships, leads to the gaming of the system that leads to the the feedback mechanism of the expansionist state and crony capitalism.

Fiscally Pressured Governments go for Crony based Privatizations of ‘Public Goods’

Money pressured governments are looking to privatization of parts of politically sensitive functions such as security services.

The Telegraph reports,

Private companies will be running large parts of the UK's police service within five years, according to the world's biggest security firm.

David Taylor-Smith, the head of G4S for the UK and Africa, said he expected police forces across the country to sign up to similar deals to those on the table in the West Midlands and Surrey, which could result in private companies taking responsibility for duties ranging from investigating crimes to transporting suspects and managing intelligence.

The prediction comes as it emerged that 10 more police forces were considering outsourcing deals that would see services, such as running police cells and operating IT, run by private firms.

Privatization of government functions are akin to Public-Private Partnership (PPP) enterprises on political controlled or regulated sectors. They really NOT about free markets but about cronyism.

As I previously pointed out

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

In the US even Keynesian high priest, Paul Krugman, who I vehemently disagree with on most issues, resonates with our perspective over the issue of phony privatizations (in Krugman’s case he refers to New Jersey’s “new kind of privately run halfway house” prison systems).

From Paul Krugman (hat tip Bob Wenzel, bold emphasis added)

So what’s really behind the drive to privatize prisons, and just about everything else?

One answer is that privatization can serve as a stealth form of government borrowing, in which governments avoid recording upfront expenses (or even raise money by selling existing facilities) while raising their long-run costs in ways taxpayers can’t see. We hear a lot about the hidden debts that states have incurred in the form of pension liabilities; we don’t hear much about the hidden debts now being accumulated in the form of long-term contracts with private companies hired to operate prisons, schools and more.

Another answer is that privatization is a way of getting rid of public employees, who do have a habit of unionizing and tend to lean Democratic in any case.

But the main answer, surely, is to follow the money. Never mind what privatization does or doesn’t do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. As more and more government functions get privatized, states become pay-to-play paradises, in which both political contributions and contracts for friends and relatives become a quid pro quo for getting government business. Are the corporations capturing the politicians, or the politicians capturing the corporations? Does it matter?

The point, then, is that you shouldn’t imagine that what The Times discovered about prison privatization in New Jersey is an isolated instance of bad behavior. It is, instead, almost surely a glimpse of a pervasive and growing reality, of a corrupt nexus of privatization and patronage.

Additional thoughts:

This is proof that governments have really been getting desperate over their state of finances.

But, privileges are hard to let go. Instead, politicians have used austerity from today’s crisis as opportunity to dispense concessions to friends, allies or favored special interest groups for political goals. This signifies a form of economic fascism

Politicians use accounting trickery to shield reforms.

Moreover, such privatizations represent fundamental admissions that even the most sensitive ‘public goods’, whether security or defense and prison services, can be delegated or outsourced to the private sector. This implies that these services can be depoliticized and delivered, through the competitive marketplace or (hold your breath) even without government.

The answer isn't to privatize (euphemism for fascism-cronyism) but to depoliticize and liberalize the sector.

Lastly, these are writings on the wall in favor of the growing forces of decentralization.

When governments become totally bankrupt then the de-politicization or decentralization process of political functions will become apparent.

Philippine Infrastructure Development Fund: The More Things Stay The Same

In a recent conference sponsored by Finance Asia, the Philippine government showcased to international investors a proposed $280 million government funded Infrastructure Development Fund.

Unfortunately it seems that the investor response had been tepid.

This from Asian Investor, (bold emphasis mine)

As reported by AsianInvestor recently, the President of the Philippines has promised that these new public-private partnership deals would not be tainted by corruption on the part of the national government. Since he is new to the job, people may give him the benefit of the doubt until it’s proved that nothing has changed.

However, there are worries that international investment funds are going to be embezzled and siphoned off by people seeking backhanders and kickbacks, irrespective of the good intentions expressed by the head of state.

International infrastructure investors would therefore like to see a modest track record of success and a proven ability to administer this programme before they make significant commitments, even if that is based on the evidence of just a couple of honestly and effectively managed projects that can be held up as good examples.

This seems to be a natural reaction from international investors considering the poor track record and that public-private partnership deals signify no less than political concessions subject to the caprice of politicians.

As we previously said,

PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

The more things supposedly would change, the more things seemingly would stay the same.

The Philippine growth model still depends on crony capitalism arising from its ardent adherence to the elitist based social democracy.

On President Aquino’s SONA: The More Things Change....

I have not heard or read the entire transcript of the First State of the Nation (SONA) address by President Noynoy Aquino yesterday. Thus I’ll be basing my comments on the content or quotes of the President Aquino by mainstream media.

Fundamentally the Inquirer ‘We can dream again’ article seems to give alot of weight on Mr. Aquino’s penchant for public-private partnerships arrangement.

So what is a public private partnership? It is basically government project/s outsourced to the private sector.

This from Wikipedia.org, ``PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period.” (bold emphasis mine)

In other words, PPP’s signifies as politically privileged economic rent/concessions to favoured private entities that will undertake the operations in lieu of the government. They will come in the form of monopolies, cartels or subsidies that will benefit only the politically connected.

Since the private partner partnerships aren’t bound by the profit and loss discipline from the consumers, the interest of the private partners will most likely be prioritized or aligned to please the whims of the new political masters.

And because of it, much of the resources that go into these projects will not only be costly or priced above the market to defray on the ‘political’ costs, but likewise, they will be inefficiently allocated.

Moreover, PPPs risk becoming ‘milking cows’ for these politically entitled groups and could be a rich source of corruption.

Hence, PPPs are no less than emblematic of the status quo, which I had been predicting, that highlights on the legacy of crony capitalism, which seemingly, the new administration is headed for.

Of course one may argue that these projects will be transparently offered to the public. But that would be a non-sequitur. As we should know, there are many stealthy ways to maneuver the process or to ‘skin the cat’.

Going back to the SONA it is further a wishful thinking for President Aquino to assume government knows best in allocating resources,

From the same article,

``To put a stop to the wasteful use of funds, the government would eradicate “wrong projects” and adopt a “zero-based” approach to crafting the national budget, the President said.

“What used to be the norm was every year, the budget merely gets reenacted without plugging the holes,” he said. “Next month we will be submitting a budget that accurately identifies the problem and gives much attention on the right solution.”

When resources are allocated politically, they become impervious to market pricing thus, are always subjected to waste.

Even to the most well-meaning politician, it is hardly the interest of the public that comes into play, but the interest of the public as perceived by the political leaders.

Yet these perceptions can be skewed by biases, familiarity, networks, vested interest groups, and many other influences.

Lastly, not everything is bad news though, we hope that the new president will indeed not only streamline processes “to make them predictable, reliable and efficient for those who want to invest” on the PPPs, but we hope that this will be applied to the broader businesses environment.

So there you have it, more proof that the more things change, the more they stay the same.