A Radical's Nut

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The World Bank, in its latest quarterly report on the Philippines, recently proposed that government increase the current excise tax of P4.35 per liter imposed on gasoline products to ensure a quality implementation of Arroyo’s fiscal stimulus plan and address a ballooning budget gap.

According to the multilateral lending institution, its proposal would “improve the progressivity of the tax system as petroleum products are disproportionately consumed by the richer citizens”. In other words, it is acceptable to hike current taxes imposed on gasoline products because the poor will not be hurt.

The World Bank, a global institution controlled by the US and other rich countries, has become increasingly discredited and notorious through the years. For a brief discussion on how it works to intensify global poverty, as told by a former World Bank “insider” – its former Chief Economist Joseph Stiglitz – watch the short video below.

With just a little over two weeks before Mrs. Gloria Arroyo deliver her supposedly farewell State of the Nation Address (SONA), I expected Malacañang to issue an outright rejection of the World Bank proposal. Severely wanting in favorable public opinion and amid persistent allegations of overpriced petroleum products, a categorical “no” from government would have been at least a positive public relations move.

But Finance secretary Margarito Teves, while acknowledging that the World Bank proposal is untimely, said that his department is seriously studying the suggestion and implied that if the World Bank can convince them, they might increase the gasoline excise tax, albeit in a proper time. Maybe after SONA?

There are two points I wish to raise here. One, petroleum products in the country are already artificially and unjustly high due to onerous taxes such as the 12% value added tax and overpricing especially by the Big Three (Petron, Shell, and Chevron) oil cartel. Further increasing gasoline prices through a higher excise tax will further aggravate the injustice and abuse that consumers already suffer.

Two, it is not true that the poor will not be hurt. It has been the recurring argument of Malacañang in its efforts to justify the continued imposition of the 12% VAT (which incidentally, Arroyo worked hard to increase from 10% to the current 12% starting in November 2005). But studies we made at Bayan point to the contrary. For instance, in the case of gasoline products, private car owners are not the only ones who will bear the impact of an excise tax hike. Tricycle drivers and small fishers using motorized bancas who also use gasoline products for their livelihood will be hurt more.

These people barely earn enough to meet the daily needs of their families and every centavo that will be added to their expenses will certainly make their daily existence much harder. At present, almost 600,000 tricycle drivers nationwide directly pay government P9.42 per liter in taxes on unleaded gasoline, representing the 12% VAT and the current excise tax of P4.35 per liter. Such taxes are already burdensome for them as they consume an average of 4 liters a day and thus pay government almost P38 daily in taxes.

Similarly, some 700,000 small fishers using motorized bancas directly pay government P9.10 per liter in taxes on regular gasoline, representing the VAT and excise tax. Per fishing trip, a fisher consumes as much as 10 liters and thus pay government almost P91 daily in taxes.

The World Bank, together with its twin the International Monetary Fund (IMF), has significantly shaped the country’s fiscal policies over the decades. It has strongly supported and pushed for more and higher taxes including the VAT to ensure that government would be able to service its debt obligations. At the same time, the World Bank has firmly opposed policy reforms to control the prices of basic goods and services such as the repeal of the Oil Deregulation Law. It has pushed for lower government spending on social services and promoted the privatization and commercialization of such services.

The people must oppose this latest policy dictate (cloaked as “proposal”) of the World Bank. The burden of addressing the budget gap and raising tax revenues should not fall on the shoulders of the poor. The 12% VAT on oil products must be scrapped and additional revenues should be generated through efficient tax collection, curbing corruption and smuggling, arresting the biggest tax evaders which are the corporations, and re-imposing the eliminated or reduced tariffs on imported goods.

Based on our latest estimates (released last week) at Bayan (Bagong Alyansang Makabayan or New Patriotic Alliance), oil firms collect about P167.03 million in extra profits daily from consumers due to continued overpricing.

The Big Three oil firms accumulate an estimated P138.14 million every day from overpriced petroleum products. Petron Corporation accounted for P64.64 million daily of the said amount; followed by Pilipinas Shell, P49.94 million; and Chevron Philippines, P23.55 million. A distant fourth is Total Philippines, which like the Big Three is also a local unit of a giant foreign oil firm, with P7.52 million a day. The rest of the oil players combined for P21.38 million.

As of mid-June 2009, oil products in the country are still overpriced by an average of around P4.31 a liter. This amount is lower than the much publicized P8 per liter overpricing as computed by Secretary Ralph Recto of the National Economic and Development Authority (NEDA).

To be exact, NEDA’s estimates peg the overpricing of gasoline at P5.27 to P7.89 per liter (using four different methodologies). There are a number of possible reasons for difference in overpricing estimates of Bayan and NEDA. One is that Recto’s estimates looked at gasoline products only, while our estimates computed the weighted average retail price of ALL petroleum products including gasoline products, kerosene, diesel, and liquefied petroleum gas (LPG).

Nonetheless, what must be emphasized is not the differences in overpricing estimates but that Department of Energy (DOE) Secretary Angelo Reyes should not simply dismiss the overpricing issue because independent studies such as Bayan’s and think tank IBON Foundation have alleged that oil firms are overpricing long before the NEDA chief came out with his own computation.

The point is there is overpricing. And the issue is what are the policy makers and the executive doing about it?

We must recall as well that Mrs. Gloria Macapagal-Arroyo herself has once pointed out that oil firms in the country are “not reflecting the price of crude oil in the global market”. In November last year, Mrs. Arroyo “urged” oil companies to bring down prices to July 2007 levels to mirror the drastic decline in world crude oil prices then. But such appeal was apparently useless because government has no power to require the oil companies to implement fair prices and adjustments in a deregulated environment.

Persistent allegations of overpricing, or that oil firms are “not  reflecting the price of crude oil in the global market”, from various quarters should be enough reason to compel lawmakers to repeal Republic Act (RA) 8479 or the Oil Deregulation Law. An entirely new set of measures must be put in place to regulate adjustments in oil prices and protect consumers from unreasonable oil price hikes.

We computed the “ideal” adjustment in prices using the monthly averages of Dubai crude and the foreign exchange rate from January to June 1-16. The results were then compared to actual adjustments per month (including June 1-16) in pump prices to arrive at its overpricing estimates. To calculate the projected profiteering, we used the actual sales in petroleum products last year, which was pegged at 277 thousand barrels per calendar day (MBCD), and actual market share of each oil company in the first half of 2008.

A think tank based at the House of Representatives (HoR), the Congressional Planning and Budget Department (CPBD), on Tuesday released a report upholding Republic Act (RA) 8479 or the Downstream Oil Industry Deregulation Act of 1998. The report, written by CPBD director general Rodolfo Vicerra, warned that without RA 8479, the domestic oil market would need price intervention and taxpayers would have to bear the burden of keeping oil prices stable. The CPBD report argued that scrapping the oil deregulation law “would require reviving the Oil Price Stabilization (OPSF) to be funded again by the taxpayers”.

On the same day that the CPBD report was released to the media, the Big Three (Petron Corp, Pilipinas Shell, and Chevron Philippines) has again hiked their gasoline prices by P1 a liter, and kerosene and diesel by 50 centavos. The price increases followed a 30 centavo-hike in diesel prices implemented by the same firms four days earlier, citing increasing prices in the global oil market.

The recent rounds of oil price hikes further amplified persistent calls to repeal or at least amend RA 8479. At the HoR, its Oversight committee chaired by Representative Danilo Suarez (Quezon province, 3rd district, KAMPI) is pushing for an amendment of RA 8479. Suarez said he and House energy committee chairman Rep. Mikey Arroyo (Pampanga, 2nd district, LAKAS-CMD) are crafting a bill that will “partially” regulate the downstream oil industry. The bill, according to Rep. Suarez, would focus on regulating pump prices, controlling oil imports and limiting industry participants.

The details of Suarez’s bill remain sketchy at this point, and we are not certain what he exactly means by partial regulation. Nonetheless, some quarters have expressed opposition to moves to entirely scrap RA 8479 and have instead pushed for amendments to supposedly plug its loopholes and prevent excessive and predatory pricing. This is the official position of the Department of Energy (DOE), and by extension of Malacañang, and which explains the initiatives on the oil industry of Reps. Suarez and Arroyo. These developments should make consumers wary because they blunt the calls to junk RA 8479 and establish an entirely new set of measures to effectively regulate the downstream oil industry.

A misleading and often recycled argument against proposals to regulate the country’s downstream oil industry is the discredited OPSF. Aside from the CPBD, the DOE has also raised the OPSF as an issue to thwart calls for regulation. The department’s Oil Industry Management Bureau (OIMB) chief Zenaida Monsada said that government “should be cautious about reverting to a regulated system as it could not afford reviving the OPSF” which “cost the country a lot of money”. In 2005, the DOE formed an “independent” body to review RA 8479 and among its findings was that “subsidizing oil prices (through the OPSF) is not feasible in a regime of rising crude prices due to lack of government resources”.

While a buffer fund will be needed in a regime of regulated oil prices, such fund is entirely different from the flawed OPSF. It must be emphasized that it is possible to establish a buffer fund without passing on the burden to the taxpayers and consumers. One way of doing it is for the buffer fund to be financed by government earnings and savings from its increased participation in a regulated downstream oil industry.

Under this proposal, the government will become the exclusive importer of crude oil and petroleum products. As such, the country can expand potential oil sources and shop for the cheapest available oil. Bilateral agreements with state-owned companies from oil exporting countries may be pursued under special arrangements, including commodity swaps, which can provide the country considerable discounts. Savings and earnings from these transactions can be used to finance the buffer fund. Such system of centralized procurement also addresses the concern that a buffer fund will not work because of rising global oil prices.

The national government should also participate in storing, refining and retailing oil products in the country and use whatever earnings it will generate from these activities to finance the proposed buffer fund. Initially, the buffer fund can be financed through allocating a portion of the national budget and when un-utilized within the fiscal year should be carried over to the next fiscal year. Uncollected taxes from the oil companies, such as the P21 billion in unpaid custom duties of Shell, can also serve as seed money for the buffer fund.

Remember that the OPSF failed because it was not used strictly as a buffer fund but was designed to protect the profits of the Big Three during oil price shocks. Established under Presidential Decree (PD) 1956 on Oct 10, 1984, oil firms replenished the OPSF when their pump prices were higher than world prices and withdrew from it when the reverse happened. To prevent the OPSF from drying up, government delayed rolling back the pump price even if world prices fell thus imposing the burden to refill the OPSF on hapless consumers while protecting the profits of the Big Three.

A strict set of guidelines must be drawn up on when the government can tap into the buffer fund to prevent unwarranted utilization and corruption. A trigger price may be computed by the Department of Energy (DOE) that will determine when the buffer fund should be used to mitigate sudden and huge increases in oil prices.

The point is there are alternatives to the Oil Deregulation Law and a concrete set of measures to implement them are available if only the legislators will seriously study these proposals. We must engage the lawmakers, government agencies, and their technocrats in a debate on these issues so as to prevent questionable policy proposals like the planned bill of Reps. Suarez and Arroyo from hijacking the people’s demand to scrap RA 8479 through their so-called partial regulation. Of course, they will have an advantage if we limit the engagement in congressional hearings alone. These efforts must be complemented by continued public pressure through protest actions, etc. and broadening public support for oil industry regulation.

Pump prices continued its downtrend, with three rounds of rollbacks announced by the oil firms in the first week of March. On Monday (March 2), the so-called Big Three (Petron Corporation, Pilipinas Shell, and Chevron Philippines) slashed the price of their diesel and kerosene by P1 per liter and gasoline by 50 centavos. It was followed by two rounds of price cuts in liquefied petroleum gas (LPG) by members of the LPG Marketers’ Association (LPGMA) on Wednesday (March 4) and Friday (March 6), which brought down the price of an 11-kilogram (kg) cylinder tank by a total of P22. It matched the earlier rollback in LPG prices by the major oil players.

The reductions have come at a time when public officials have all but admitted that Republic Act (RA) 8479 or the Oil Deregulation Law have been ineffective in curbing manipulations in the industry. Under public pressure to get tough on abusive oil companies, Secretary Angelo Reyes of the Department of Energy (DOE) said that while the government’s role is to protect public interest, it will “have to follow what the law dictates”. And the law (i.e., RA 8479), Reyes added rather candidly, does not say that government takes “more aggressive action versus the oil companies”.

But with the recent price cuts, proponents of deregulation will surely argue that there is no need for such state intervention. Market forces such as competition will supposedly impose discipline on the oil companies. The problem is despite these rollbacks, the unfortunate consumers are still burdened with overpriced petroleum and the profiteering of the oil companies, especially the major players, remains vicious.

Due to overpricing, oil companies in the country are earning extra profits of around P289.51 million daily, according to the latest estimates of the multisectoral group Bagong Alyansang Makabayan (Bayan). Petron Corporation accounted for the lion’s share of the daily extra profits cornering an estimated P112.04 million; followed by Pilipinas Shell, P86.56 million; Chevron Philippines, P40.82 million; and Total Philippines, P13.03 million. Other oil players posted an estimated collective share of P37.06 million.

The huge amounts of extra profits that oil companies collect from overpricing make the series of price cuts that they have implemented in the past two weeks meaningless. The price rollbacks are much smaller than what oil firms should reflect in pump stations to offset their overpricing. Bayan earlier said that as of mid-February, oil products in the country remain overpriced. Diesel is overpriced by around P2.94 per liter; kerosene, P6.42; unleaded gasoline, P2.31; and 11-kg LPG cylinder, P125.35.

The group’s overpricing estimates looked at the monthly movement of Dubai crude and the US dollar – peso exchange rate and their combined impact on pump prices. The results were then compared with the actual price changes as monitored by the DOE.

The extra profits were computed using the latest available (i.e. first half of 2008) figures on local oil demand of around 286.6 thousand barrels per day (MBD) and the market share of each player. As of first half 2008, Petron controls almost 39% of the market, followed by Shell, 30%; Chevron, 14%; and Total, 4%. The rest of the market, 12.8%, is divided among the smaller oil players. Furthermore, the overpricing and profiteering belie claims of losses by oil companies such as Petron’s reported P3.9-billion net loss last year due to “extreme volatility” of global oil prices. The commanding position that Petron enjoys in the local market and the automatic price adjustments under the Oil Deregulation Law allow it to squeeze billions of profits from hapless consumers.

But are Malacañang and its allies in Congress willing to pass a law, or amend RA 8479, that will allow aggressive government intervention against the abuses of the oil industry? Consider that the national government is collecting an additional P39.48 million everyday in value added tax (VAT) imposed on overpriced oil products.

Such amount is on top of Malacañang’s regular collections from the 12% VAT on oil, which the Department of Finance (DOF) described as the “biggest tax measure since the birth of the republic”. Why will government kill its own milking cow? Obviously, the additional VAT collections of government from overpriced oil make it disinterested in calls to regulate the industry and repeal the Oil Deregulation Law.

The oil companies and Malacañang together squeeze about P328.98 million in unjust collections everyday from the Filipino consumers. This brazen act of exploitation is downright condemnable, especially today that millions of workers face unprecedented job scarcity and poverty.

The Oil Deregulation Law should be repealed to ensure reasonable pump prices. The VAT on oil must be cancelled to immediately bring down the prices of petroleum products. These urgent measures can go a long way in easing the impact of the global financial and economic crisis on ordinary Filipino consumers. (END)

First published in Bulatlat.com (Vol. IX No. 5)

Following fresh charges of overpricing, oil firms have implemented a series of oil price rollbacks last week. The retail price of liquefied petroleum gas (LPG) was slashed by a total of P44 per 11-kilogram (kg) cylinder tank. The pump price of diesel was also cut by P1 per liter (one firm, Seaoil Phil., cut its diesel price by P3).

Multisectoral group Bagong Alyansang Makabayan (Bayan) earlier said that as of mid-February, oil products are still hugely overpriced. LPG is overpriced by as much as P125.35 per 11-kg tank, Bayan said. Diesel, based on the group’s computations, is overpriced by P2.94 a liter; kerosene, P6.42 and; unleaded gasoline, P2.31.

Some lawmakers have revived calls to junk Republic Act (RA) 8479 or the Oil Deregulation Law. Bayan noted that Congress must treat such move as urgent as it warned that global oil prices are again on an uptrend and will be exploited by abusive oil firms. Since December, the spot price of Dubai crude has already jumped by more than 9 percent.

But apparently, Malacañang – despite its noise about probing the oil firms – is not inclined to heed this call, dashing consumers’ hope for reasonable oil prices amid deteriorating economic conditions.

Puzzled

Judge Silvino Pampilo Jr. of the Manila regional trial court Branch 26 said he was puzzled that Justice Secretary Raul Gonzales ordered a task force to probe the oil industry’s Big Three for alleged cartel activities. Pampilo wondered whether Gonzales has “forgotten” that the same task force released a report only last month clearing the oil firms of the said charges. “There’s a conflict now,” the Philippine Daily Inquirer quoted the judge as saying.

Pampilo is presiding over a case accusing Petron Corporation, Pilipinas Shell, and Chevron Philippines of monopoly, cartelization, and predatory pricing. He asked the task force, created under RA 8479, to investigate and submit a report. People from the Department of Energy (DOE) and Department of Justice (DOJ) make up the task force.

Was it a simple case of memory lapse by the aging Justice Secretary? Maybe. But this oversight bares a far more important point. Despite repeated warnings and press statements, government does not intend to go after the oil cartel. Under public pressure, DOE Secretary Angelo Reyes was forced to question the small oil price rollbacks last year. At one point, former Press Secretary Jesus Dureza even warned that government will use its “iron fist” as Gonzales pushed for an “independent” audit.

But all these are hogwash. The policy bias of the Arroyo administration remains on deregulation and free market. Administration officials may issue sound bites somewhat hostile to the oil firms to douse critical public opinion. If they will back their words with concrete actions is another matter. In many instances, in fact, their actions contradict their words. The recent booboo by Gonzales is a case in point.

Reviewing RA 8479

In her 2008 State of the Nation Address (SONA), Mrs. Gloria Arroyo had this to say on oil deregulation:

“The government has persevered, without flip-flops, in its much-criticized but irreplaceable policies, including oil and power VAT and oil deregulation.” (Emphasis added)

But recent events in the oil industry have bolstered the case against Arroyo’s “irreplaceable” deregulation policy. The huge increases in global prices in the first half of 2008 pushed up local pump prices to record levels. This was followed in the second half with steep cuts in world prices that were not reflected in the refilling stations. Oil prices remained high and onerous, and the public blamed the greedy oil companies and lack of state regulation.

Then this year, the reported “shortage” in liquefied petroleum gas (LPG) broke out and probed by the lower House. In the hearings, Reyes all but declared that the DOE is helpless in curbing abuses in the oil industry like hoarding and overpricing. Reyes said:

“We need to review the price act … There’s a listing of commodities there and petroleum products are not included. Now if we want closer monitoring of the LPG industry, let us include it there. And if we really want more government action, let us regulate the industry”. (Emphasis added)

But Reyes later backtracked and instead pushed for an amendment of RA 8479, which is the official Malacañang line. The DOE now wants additional powers to check abuses but still within a deregulated regime. Malacañang said that it will support moves to put RA 8479 under review.

Note that it was only in 2005 that the DOE last reviewed RA 8479. The independent panel set up by government concluded then that “deregulation has the tendency to reduce oil prices”. It also said that “deregulation has increased competition in the downstream oil industry”.

The so-called independent review was staged to justify the continued implementation of RA 8479. In fact, the panel chairperson picked by the DOE was the former head of accounting giant SGV. Its clients include the Big Three and other oil companies. Thus, there is little hope that a review of RA 8479 today, as initiated by Malacañang or its allies in Congress, will lead to an honest review of deregulation. It will only be used as a platform to uphold deregulation and at best introduce token changes.

Pro-cartel, by design

The DOE and self-proclaimed consumer advocate Raul Concepcion argue that effective monitoring will make deregulation work. Concepcion even insists that government is just remiss in implementing RA 8479. According to him, the simple solution is for the DOE-DOJ task force to do its job.

But at the heart of deregulation is free market, where state intervention is taboo. It is where so-called market forces decide everything. But the basic problem is that free market in the oil industry is a myth. Since its birth, the global oil industry has always been under a cartel. This cartel rules in the Philippines through the Big Three.

When the first deregulation law in 1996 was passed, it set the stage for the oil cartel to further dominate. Automatic price adjustments allowed for more overpricing and profiteering.

The “proper” implementation of RA 8479 or even amendments will not address the problem. It does not have any provision on overpricing because deregulation assumes that the market will set the “fair” price. Government could not penalize the oil firms for overpricing because they do not violate any law.

Thus, when Secretary Ralph Recto of the National Economic and Development Authority (NEDA) said last October that diesel should be only around P35 a liter instead of the prevailing price then of P47, Reyes had to warn him not to create “false expectations”.

RA 8479 did create the DOE-DOJ task force to look into “any report of an unreasonable rise in the prices of petroleum products”. But how can it determine an excessive oil price hike? Which yardstick will it use when the only standard on pricing recognized under deregulation are the “business decisions” of “competing” oil firms?

Worse, the public is not even entitled to know the factors behind these “business decisions”. RA 8479 prevents government from disclosing “any trade secret or any commercial or financial information which is privileged and confidential”. Additional powers for the task force will not correct this basic defect. Unless such extra powers will include imposing a standardized pricing formula, it will not be able to curb overpricing.

But then again, it will contradict the very spirit of deregulation. (END)