Privatization The Philippines occupies a strategic geographical location, acting as a potential gateway for investors to the Asian market.

It is also a favorable base for AsiaPacific expansion programs. The large workforce is skilled and well educated. Natural resources are abundant. Moreover, the Philippine government has established a liberal program of fiscal and non-fiscal incentives aimed at attracting foreign capital and technology to supplement local resources. Its affiliation with the Association of Southeast Asian Nations (ASEAN) affords it preferential access into the large ASEAN Free Trade Area (AFTA), which constitutes a large potential consumer market for a host of manufactured products. It is also a member of Asia-Pacific Economic Cooperation (APEC), whose member countries account for more than 40 percent of world trade. It has a ready supply of highly skilled and trainable labor, including professional, technical, managerial, and skilled workers. Workers typically are fluent in English. From the foregoing, it can be gleaned that the Philippines has the potential to be a hotspot for both regional and global investors. Presently, the Philippines sustains fiscal adequacy and economic growth through economic reforms, bilateral agreements with other nations, and overall structural adjustment reforms. One of the structural adjustment reforms, of which the International Monetary Fund usually pressures governments to enter into, is the privatization of state-owned enterprises (SOEs) by seeking private investment in state-owned manufacturing and public service enterprises. The privatization of SOEs has become an important instrument for improving economic performance in industrialized countries, as well as implementing transition policies in both developing nations and former socialist countries. Privatization became more attractive with increasing evidence that manySOEs are loss-makers rather than revenue generators. Studies by the Work Bank indicate that by the beginning of the 1980s, SOEs in developing countries accounted to onequarter to one-half of all outstanding domestic debt and for a substantial portion of foreign borrowing. In addition to that, the ability of government agencies and state enterprises to provide adequate water, housing, utilities and transportation,

and to dispose of waste, has been quite limited in most developing countries.5 The Philippines is not an exception. In nearly all developing countries, central or local governments are contracting with private organizations to help provide services that public agencies cannot offer efficiently or effectively.6 Deregulation and opening-up is in full swing firstly for fiscal deficit and secondly for free-market economy reasons. Consequently, privatization has become a priority of the government in addressing the need for the elimination of non-performing assets and in providing better services to the people. Several modes of privatization may be entered by the Government such as property restitution and reprivatization, auctioning of small companies, mass privatization and the divestment of large state-operated enterprises, marketization or demonopolization, public-private partnerships, transferring services to private or non-governmental organizations, and contracting with private companies. Aptly stated, in applying the principle of freedom to contract, there can be an infinite enumeration of modes of privatization depending on the peculiar circumstances that the parties may consider in each case. The World Bank surveys the nationwide trend towards privatization which has been observed since the late 1970s. They highlight the huge scale of the transfer of assets involved and the enormous potential for such liberalization in developing countries with high initial percentages of productive assets owned by the state. Their survey of developing countries identifies three aspects of a successful privatization program: >First, the program must be politically desirable in the sense that the political Leadership must see benefits for itself and its own constituents. >Second, the program must be politically feasible in terms of the leadership having power to enact reform and overcome opposition. >Third, there must be political credibility such that losers will be compensated and investors property right safeguarded.

Since 1990s, privatization has achieved prominence in Asia. Asian countries have embraced market-oriented reforms in a gradual process. Privatization as a reform process was taken as an alternative to the inadequacy of the national state in providing needed services for modernizing sectors of the economy and meeting technological changes. The development of new technologies has promoted reforms in terms of reducing entry costs, creating new services, and innovation.9 Reasons and Main Objectives of Privatization The primary objectives in privatizing State-owned enterprises (SOEs) depend on the peculiar needs of the government. Some countries would privatize some SOEsin order to satisfy the International Monetary Fund (IMF), the World Bank and regional development banks in their effort towards the attainment of their overall structural adjustment reforms. On the other hand, there are also domestic challenges that would push governments in privatizing their SOEs. The government would consider the following objectives: adjusting to rapidly changing market forces, creation of jobs, raising income levels and increasing productivity and efficiency in order to compete in the global economy. Among the primary reasons governments pursue privatization are the following: 1. In former centrally planned socialist economies, privatization of state-owned enterprises is a necessary but not sufficient condition for transforming the economy to a market-oriented system. 2. In both advanced and developing countries, there has been growing public dissatisfaction with SOEs, in respect of the quality and price of goods (especially commercial goods and services, and manufactured products) and their inability to distribute them efficiently. 3. In most developing countries, and especially in those economies which have grown rapidly over the past two decades, increased participation of the private sector is essential to meet growing demands for services produced by SOEs.The ability of government agencies and state enterprises to provide adequate water,

housing, utilities and transportation, and to dispose of waste, has been quite limited in most developing countries. 4. Throughout the world it has become evident that many state enterprises have not only been inefficient and unproductive, but have been loss-makers, draining the state treasury of scarce financial resources by incurring deficits and requiring subsidies. 5. A long period of worldwide recession during the late 1980s and early 1990s has left many governments in developed countries with severe financial constraints that make it difficult to continue subsidizing unprofitable SOEs or to bear the burden of expanding services and infrastructure alone. The same situation has arisen in many less developed countries because of declining international assistance.

Privatization became more attractive, with increasing evidence that many stateowned enterprises are loss-makers rather than revenue generators. Studies by the World Bank indicate that by the beginning of the 1980s, SOEs in developing countries accounted for one-quarter to one-half of all outstanding domestic debt and for a substantial portion of foreign borrowing.12 SOEs in many developing countries encountered many serious problems, which privatization sought to solve or lessen, including: >Mismanagement, corruption, patronage and padded payrolls that raised the costs of providing goods and services; >Inefficient operations, maintenance and service delivery arising in part from weak competition or from monopoly positions; >Involvement in highly capital-intensive operations or investments with long payback periods; >Constraints on pricing policies by governments wishing to provide subsidized or cheap services for political reasons, preventing the SOEs from recovering their full operating and investment costs;

>Overly restrictive government controls on the budgets and finances of SOEs; >Failure of central governments to provide promised subsidies or deliver budgetary resources in a timely manner; and >Government requirements that SOEs take over failed privately owned businesses or provide inherently unprofitable goods and services. Inefficiencies in SOEs arose not only from the lack of competition but also from the absence of checks and balances inherent in private ownership: the pressures that shareholders and external directors exert on managers to improve efficiency, the pressures that capital markets exert on companies to allocate scarce resources economically and to operate within hard budget constraints, and the pressures that managers who are responsible to shareholders and directors exert on workers to improve productivity.

Advantages and Disadvantages of Privatization Less intervention from state or government in market mechanism has become the main economic philosophy and has been pursued in the different corners of the contemporary world. However, as with any other mechanism, privatization does not proceed without criticisms.

Advantages: It is usually said that privatization of SOEs and deregulation of economic activities bring about: >Free entry and competition;
>Cost and price reduction; >Improved services; >Increased efficiency and efficient resource allocation; and >Temporary asset sales income to the government (which helps reducing fiscal deficits).

Disadvantages: On the other hand, demerits of privatization and deregulation include:

>Unemployment and reduced labor union power; >Reduced service to remote areas (i.e., universal services)

>Declined supply stability and reliability; >Foreign capital dominance (the so-called Wimbledon effect); >Bad debt problems; >Survival of the fittest; >Disorder or crises in certain sectors. Privatization in the Philippines President Marcos introduced privatization as a government policy in the Philippines under Presidential Decree No. 202917, but it was only under the Aquino government that a clear policy towards privatization was implemented through Proclamation No. 5018 in December 8, 1986. Furthermore, the 1987 Philippine Constitution specifically provides that the State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to neededinvestments.19 Presidential Decree No. 2029 provides that It is recognized that private enterprise shall play the primary role in undertaking desirable economic activities, especially in the production and distribution of goods and services. It is therefore also the policy of the State to encourage the participation of and to avoid competition with private enterprise in economic activities. For this purpose, the areas of operation appropriate for the government corporate form shall be defined.Under Proclamation No. 50, it was provided, as a state policy, that the State shall promote privatization through orderly, coordinated and efficient program for the prompt disposition of the large number of non-performing assets of the government financial institutions, and certain government-owned and controlled corporations (GOCCs) which have been found unnecessary or

inappropriate for the government sector to maintain. It served as basis for the creation of a Committee on Privatization and the Asset Privatization Trust. A review of landmark legislations and definitive policies of the past four presidents of the Philippines reflect a primarily economically motivated privatization policy. Thus, the Build-Operate-Transfer (BOT) Law was enacted to legitimize the entry of private business in vital government development undertakings and operations. Meanwhile, President Ramos intensified privatization during his term. In a Letter of Intent (LOI) to the IMF-World Bank, he committed further reduction in government subsidy and the entry of multinationals in more public utilities, social services, and development projects.20 The solution to the severe power shortages arose largely out of the governments effort to mobilize private sector investment into power generation, starting with fast-track projects. Executive Order No. 215, promulgated in 1987, laid the basis for the entry of the private sector into power generation, which had been a monopoly of the National Power Corporation (NPC), while Republic Act No. 6957 authorized the financing, construction, operation, and maintenance of infrastructure projects by the private sector. The Declaration of Policy under Republic Act No. 6957, enacted in July 9,1990, provides that, It is the declared policy of the State to recognize the indispensable role of the private sector as the main engine for national growth and development and provide the most appropriate favorable incentives to mobilize private resources for the purpose. ThE law provided for two modes of private sector participation in infrastructure development projects of the State, namely, the build-operate-and-transfer scheme and the build-and-transfer scheme. According to the law, All government infrastructure agencies, including government-owned and controlled corporations and local government units, are hereby authorized to enter into contract with any duly prequalified private contractor for the financing, construction, operation and maintenance of any financially viable infrastructure facilities through the build-operate-and-transfer or build-and-transfer scheme, subject to the terms and conditions hereinafter set forth. The foregoing law was amended by Republic Act No. 7718 in May 5, 1994.It provided for schemes in addition to the build-operate-and-transfer scheme and the build-and-transfer scheme provided in Republic Act No. 6957, such as Buildown-and-operate, Build-lease-and-transfer, Build-transfer-and-operate, Contractadd-and-operate, Develop-operate-and-transfer, Rehabilitate-operate-andtransfer, and Rehabilitate-own-and-operate.

Through the BOT approach, the Government was not only able to mobilize foreign and domestic financing sources to augment official development assistance, but also was able to achieve simultaneous implementation of a larger number of projects over a shorter period of time. Hard currency financing included export credit agencies, commercial bank debt, and equity from sponsors and investors. Domestic capital was mobilized through the stock market. Domestic credit was available as dollar debt from local banks, peso debt from insurance companies and/or commercial paper market, and peso financing from local banks for pesoworking capital needs.23 In 1995, the government decided to privatize the telecommunications industry and created Republic Act No. 7925, otherwise known as the Public Telecommunications Policy Act of 1995 in the hopes of creating a more level playing ground for all companies. The Act was defined as the new legal, policy, and regulatory framework in the promotion and governance of Philippine telecommunications development. The country was divided up into eleven regions, opening up the market to various competing telecommunication companies.24TheAct covers all telecommunications entities, protects users' rights, increases the roll-out period from five to three years, enforces the deregulation of value-added services and the complete privatization of all government telecommunications facilities by 1998.25 Privatization has taken place in three waves: >First was the disposition of non-performing assets owned by the government. Included in the first wave of privatization were the surrendered and sequestered assets from the friends and relatives of deposed president Ferdinand Marcos. Government ended up funding all these operations at a loss. With the country at that time experiencing an economic crisis double digit inflation, a deficit in the balance of payments, gross international reserves below $1 billion the Government, in its dire need of cash, decided to cut its losses and resell these companies.

>The Second wave included the privatization of the power sector and the expansion of the BOT law in other areas of infrastructure, such as roads airports, seaports, water, and even information technology.

>The Third wave is what the country is experiencing at present housing, health, postal services, and pension funds. These are very delicate areas, so now the Government is undertaking studies on how best to implement these social services. In 2003, there were 55 Government-Owned and Controlled Corporations (GOCCs) that were fully privatized, 29 partially privatized, and 25 are in the process for dissolution. There were still 29 remaining GOCCs. On the basis of the Medium Term Philippine Development Plan for 2001-2004 of the Macapagal-Arroyo government, consistent with its continuing commitment to deregulation and privatization, the participation of the private sectoring financing, construction, and operation of major infrastructure in transportation, power, and water is encouraged through partial or total cost recovery from user charges. The government provided a regulatory framework that enhances competition and at the same time ensures public welfare, safety, and environmental quality. The government focused on policymaking and regulation, leaving operations and management mainly to the private sector. In line with this, the government concentrated on defining priorities, identifying and preparing core infrastructure projects, creating and enhancing the framework for private sector participation, economic and technical regulation, and reengineering the government 26bureaucracy to perform in the market-led environment. The supervisory capabilities of concerned government agencies were strengthened to protect the interest of society and ensure transparency and integrity in project-related transactions. The Arroyo administration relies on private enterprise and markets guided by the price system in the push for equitable growth. Private enterprise nurtures competition, innovation, and entrepreneurship in developing globally competitive enterprises. Hence, the administration continues to liberalize trade and investments to reduce the cost of doing business and permit even microenterprises and SMEs to access least-cost capital equipment, raw materials, and components available in world markets. Other bottlenecks to investments are being removed. High electric power rates are taken care of by the privatization of power generation under the Electric Industry Reform Act of 2001 which, after nine years, was finally enacted into law under the Macapagal-Arroyo administration. The

government, at both the national and local levels, pursues seamless, investorfriendly actions. In addition to that, the Arroyo government is working towards the privatization of the National Power Corporation (Napocor), Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) and Philippine National Construction Corporation (PNCC). The restructuring of some GOCCs like the National Food Authority (NFA) is also being pursued. Private sector participation is being sought in the rail transportation sector while privatization in the water sector is also being further pursued. Financing policies in the water and in rural electrification is being reformed to improve the performance of the consolidated public sector. Furthermore, the Medium-Term Development Plan provides that the privatization and participation of more players in the operation of government ports will improve the turnaround time of shipment and cargoes while rationalized rates will reflect the cost of providing the service. Executive Order No. 59is being thoroughly reviewed and a new executive issuance will be formulated in consultation with the private sector to liberalize port management policies and significantly improve efficiency in the transport of goods, cargoes, and passengers. Foreign air carriers are also being encouraged to operate in the Philippines under bilateral agreements and in accordance with existing laws to ensure that adequate and affordable international air services are provided. A comprehensive strategy for the privatization and restructuring of the rail transportation sector is being formulated. The government is restructuring port institutions to improve port services. Regulatory functions are being transferred to an independent regulator (or regulators), which shall have jurisdiction over all ports. Commercial decisionmaking, planning, and management of port operations are progressively decentralized to Port District Offices and Port Management Offices in preparation for the privatization of individual ports or groups of ports. The government pursues the amendment of the PPA charter to address, among other things, the dual role of PPA as regulator and operator.