Introspective
Business World, 15 May 2017
One unmistakable reality of the Philippine economic landscape is the large and growing footprint of conglomerate businesses. Almost every market niche sports two, three, or more competitors connected with some conglomerates. Whether it is banking, real estate, retail and supermarket trade, food service, broadcasting and media, power generation, energy, infrastructure — you name it, conglomerates are in it. Is conglomerate dominance to be feared? No, on the contrary. Firstly, conglomerates are large because economic size is a trait selected for long-term survival especially in weak governance environment. Smallness is a statistical death sentence. If Lapanday Foods Corp. in Davao was puny and undiversified, it would have been put out of business by the NPA attack. As it is, Lapanday jobs in the thousands survive the attack; children of families dependent on those jobs will continue to eat and go to school.
In weak governance environment, legitimate businesses are forced to resort to what Nobel Laureate Oliver Williamson calls “private ordering” to supplement weak “public ordering.” Conglomerates can mount defensive ramparts that SMSEs cannot afford — predatory syndicates in government organs (BIR and customs, say) face a phalanx of high-priced specialized lawyers and accountants they can’t intimidate to cough up (which explains why it was very hard to recruit BIR insiders for the large taxpayers unit); conglomerates can bankroll the election of lawmakers or governors to reduce uncertainty from predatory rule changes (the infamous “ACDC”); they can maintain private armed sentries (blue guards in Lapanday’s ranch killed two NPA thugs) to repel banditry. The NPA called the Lapanday attack “revolutionary punishment” but non-marines know it as “revolutionary tax.”
Naturally, such defensive ramparts, once in place, can also be trained to prey on others and/or resist reform. These strategies are well-documented in the development episodes of other countries, such as the Gilded Age of the USA (1870-1900) when the West was still “wild.” The railroad companies and banks bankrolled the private posses that finally killed off the Jesse James and other gangs. Despite public sentiment for the small guy, it was the railways that won and enriched the West.
Conglomerates in small emerging markets are different from their large market counterparts. In the latter, firms can grow large staying in their original niches (WalMart in retail merchandising; Bank of America in banking; Goldman-Sachs in finance). In small markets like the Philippines, conglomerates attain size by competing in many markets, a phenomenon we have termed elsewhere as “conglopolistic competition.” (To read ‘Conglopolistic Competition in Small Emerging Economies When Large and Diversified is Beautiful,’ please visit the link http://bit.ly/conglocompete.)
This phenomenon is interesting because it eases the burden on the Philippine Competition Commission: as long as the conglomerates are in each other’s throats, consumers have a choice in each market leading to higher consumer welfare.
Thus, the Ayala group having entered retailing and malling business (TriNoma and Landmark) has put SM North EDSA on notice that consumers can just walk across the street; likewise, SMDC’s entry into residential apartments means that Ayala Land will not have all its own way in residential properties in the West Triangle area. The Aboitiz group’s entry into contestable power market in Metro Manila means that Meralco will now watch its electricity rates so as to keep its customers. Already Meralco has lost about 1 gigawatt of demand to contestable providers.
More interesting is that conglomerates boost the government’s weak capacity for public goods provision — the privatization of water distribution in Metro Manila, a signal legacy of President Ramos and General Almonte, could not have happened without the conglomerates’ sizeable resources and, more importantly, their reputation, which the foreign partners seized upon. The Connector Road projects which will connect SLEx and NLEx, the delayed legacy of the Benigno S. C. Aquino III administration, were bankrolled by Metro-Pacific and San Miguel Corp. The government will collect P28B in givebacks from Metro Pacific for the privilege to build and operate CALAX. Many observers think that public goods are the most poverty-reducing activity of the government (Keefer, 2012).
Many times profit is painted as incompatible with people — the so-called profit versus people dichotomy. Such dichotomy is many times exaggerated.
Few people know that Manila Water has provided piped water connection to some 350,000 informal settlers who could be paying three or four times for lako-borne water. Government in the Philippines provides only basketball courts, not piped water. Why? Incentives! NRW (Non-Revenue Water, water which is stolen or leaked) is lost profit. Piped water connection cuts NRW and raises profit. Profitable inclusion!
If Duterte allows his tax reform program to be mangled in Congress, DBM as reported will resort to massive low interest ODA from Japan and China which will again marginalize our by now well-honed domestic construction conglomerates from the infra space. The low interest borrowing under Marcos funded an orgy of Marcosian thievery that bankrupted the country. Worse, if Duterte keeps condoning open violations of property rights (the Kadamay takeover of NHA housing units and its call for a nationwide occupation), the wings of conglomerates (for investing and creating stable jobs, that is) will be clipped. The plain truth is that RCBC and the Yuchengco Group will create more high paying jobs and stable income for more poor people in the 500 hectares it legally bought from Hacienda Luisita in 1995 (a sale upheld by the Supreme Court) than Mariano and his Maoist ilk will ever attain! But no surprise there: inclusive poverty is what Maoists want in the run-up to eventual Maoist takeover of this country.
Lapanday has lately made noises about expanding to real estate — again true to its conglomerate aspirations but no doubt hastened by the NPA’s revolutionary taxation. If you operate in farm areas, you pay tax to the government and you pay extortion tax to the NPA or your assets are burned. Another stark reality in the Philippines: the shackles with which government hamstrings agriculture with its CARP and its bankrupt ideas mean that conglomerates are staying clear off food production where they are most needed for poverty reduction. San Miguel Foods’ industrial swinery project in Sumilao got embroiled in a national brouhaha of conflicting CARP and IP claims. This country needs many more Lapandays and San Miguel Foods in the rural areas.
Inclusive growth? Unshackle the conglomerates!
