BACKBENCHER
Rod Kapunan
8/20-21/2011
All these years, we were made to believe that capitalism thrives on competition, and it is in that condition where we extracted the substance of freedom as the elan vital that makes that system work. Our belief was reinforced by the theories on comparative advantage forwarded by British economist David Ricardo and given refinement in a different perspective by the German economist Karl Marx. It is on this basis why traditional economists subscribe that competition helps bring down the prices of goods and services, although it is also the market application of the Darwinian precept of survival of the fittest.
However, this column is not about to judge capitalism as a carnivorous economic system, but would just state it as an imperfect system. This we say because not all that is allowed to operate under the rules of free competition would bring about the desired result of lower prices and an efficient service. Let alone, capitalism would end up in a bloody cutthroat competition. Like the hierarchical order in the animal kingdom where there is that what we call “alpha male” that leads the pack, capitalism too has its own “alpha industries.”
In that instance, those that fall into the category of “alpha industries,” are by necessity, accorded the privilege status of a monopoly or oligopoly, as the economic condition would warrant. But allowing that kind of arrangement would invariably cause us to react, much that it is contrary to the principle of free competition.
We say this because capitalism, for all its buntings of free competition, still needs a degree of monopoly as well as oligopoly in some sectors of our industries. They are in fact needed to ensure that fair competition would work among the numerous downstream industries, especially those engaged in the production of consumer goods. They could radically reduce the cost of production for our local manufacturers to fight back the onslaught of foreign competition.
Only by having a system of regulated monopoly and oligopoly industries could we possibly solve the perennial problem that has plagued most secondary and downstream industries. The grant of franchise is the contract that assures them of a fair return on their investment. This explains why a franchise is given to industries engaged in the generation and distribution of power and electricity, in the production and supply of oil, in water utilization and distribution, in telecommunications and transportation industries, and in the construction and operation of modern highways.
There was much wisdom in that decision to take over these industries, and that was evident in the US during the time of US President Franklin Roosevelt, and in Great Britain before the advent of Thatcherism. The need to own and control those industries stem from the logic that net profit earned by them is always bigger than revenue derived from taxes as hooted those seeking their privatization.
In fact, allowing several companies belonging to the same industry to compete and operate in one area would be ruinous and costly to their investment. That would not result in the reduction of their rates, fares, or toll because their concern is to safeguard their huge investment from unnecessary competition. This explains why regulatory agencies like the Energy Regulatory Board, the Oil Industry Commission, the Land Transportation Franchising Regulatory Board, the Toll Regulatory Board, the Maritime Industry Authority and the Civil Aeronautics Administration were created. Their rightful role is to regulate profit and oversee that franchised monopoly and oligopoly industries conform to the standards required by the industry.
Unlike the non-monopoly market players where the invisible hand of competition is the one that regulates to bring down their prices, that mechanism does not exist or can operate in a monopoly or oligopoly situations. The grant of franchise is the government’s sort of guarantee to protect their investment. Despite that, our regulatory agencies, which we copied en toto from the US, do not know what their role is all about. Those in charge have no idea why their agency was created. Possibly none of them know that it was the US regulatory agencies that came out with the novel idea of fixing the return on investment or profit those companies are supposed to earn.
This explains why industries that enjoy a franchise cannot use as their argument for a rate increase plans to expand their operations, improve their services, or upgrade their facilities. To allow that would result in their captive customers putting up the investment, while they rake in profit with only their saliva as capital. Nonetheless, even if there is a legitimate need to expand, improve or upgrade, regulatory agencies in the US and Europe have already made it a principle in law that capital investment should come from savings generated from their profit, if that would not be enough for them to secure a loan.
“Technical consultants” sent by the World Bank, US-AID, EU, ODA to advice local operators of monopoly and oligopoly industries on the various schemes to deregulate their price like their substitution of the ROI with the so-called “return on rate base”, now called “performance-based rate”, and their recommendation to cut to pieces the National Power Corp. are all subterfuge to render useless the role of regulatory agencies. Effectively, the concept of franchise that was supposed to stand in lieu of all taxes could no longer be traced as to which of the dismembered companies should pay; whether it should be the generation company, the transmission company, the public utility distributor, etc.
Even in that, they succeeded in converting franchise tax as synonymous to value added tax, which reason why they were allowed to pass on the burden to the consumers. On top of it, they added the currency exchange rate or CERA, thus rendering the once fixed rate impose by regulatory agencies as entirely flexible.
This now explains why our regulatory agencies have lost track of their role. Instead of harmonizing competition, they have become the tool to destroy whatever comparative advantage that is left in our local industries. In the end, the deregulation effectively rendered meaningless the ratio decidendi why they were in the first place created.
(rodkap@yahoo.com.ph)
