Introspective
Business World, 24 February 2019
Competitive neutrality (CN) aims to provide a level playing field between public and private firms. State corporations competing in a market may be accorded many types of support on their operations not available to private firms such as tax and tariff exemptions, debt guarantees, exemptions from procedural requirements, exclusive purchase privileges, access to lower or subsidized interest rates, etc. These non-neutral policies distort the market and attenuate market gains. When extended to provide a level-playing field for all market players regardless of ownership in the same industry, we call it “Competitive Neutrality +” (CN+). The Philippine Competition Commission (PCC) is committed to pursue efficiency and thus CN in the market. We begin by making a distinction between de jure and de facto neutrality. A rule or law may be de jure neutral but may be de facto non-neutral, that is, enforced in a non-neutral manner by the biased enforcement of the law. We start with the proposed non-exclusive franchise for Solar Philippines.
NON-EXCLUSIVE FRANCHISE: DECEPTIVELY REASSURING
HB8179 passed by the Lower House proposes to grant a non-exclusive franchise to Solar Philippines to operate, that is, sell electricity across all existing DU franchises. If enacted into law, it will unbundle further the DU legal franchise into wires and retail business with the retail business no longer exclusive. RCOA already has this effect on a more open competitive basis. Non-exclusive franchise means that other firms, say, other solar PV firms, wind power generators, mini-hydros or distributed generation cooperatives, may be prevented from selling power to households unless they are able to secure a similar non-exclusive franchise. Anyone indeed can apply for a franchise so there seems to be a de jure open entry. But securing a franchise from Congress is a mighty costly proposition and most other firms will be barred because they cannot afford the cost of the hurdle. This is an example of enforcement-based violation of CN+. A franchise may even be redundant. By becoming an RES in the RCOA architecture, Solar Philippines will already be able to sell directly to heretofore contestable consumers (≥ 1 MGW) in all franchise areas and to households when RCOA is fully unveiled.
We take the Philippine International Convention Center (PICC) as a live case to illustrate this. PICC competes with private firms in the market for function and convention services. Government agencies require function and convention services in pursuit of their mandates. COA’s Memo 14 regulates the contracting of these services by government agencies.
Memo Circular 14 directs all government departments, bureaus, agencies to “give preference to the facilities of PICC in holding their local, national and international conventions and conferences …and similar official events.”
It further directs “that in the event the procuring authority would resort to privately-owned real property or conference venue, the end-user shall justify the same as more efficient and economical to the government.”
At the outset, Memo Circular 14 seems to be de jure neutral in view of the phrase “…the end-user shall justify the same as more efficient and economical to the government.” The common sense understanding is that the end-user canvasses all suppliers including PICC and, in case PICC’s offer matches the best private sector offer, PICC gets the contract. This satisfies the “preference” and the “more efficient and economical” requirements. But that is not what happens in practice.
Enforcing Memo Circular 14, specifically evaluating the justification offered for not using PICC is assigned to the Commission on Audit (COA). That is where neutrality bogs down. COA personnel review financial transactions of gov’t agencies and issue Audit Observation Memorandum (AOM). The reward structure faced by a COA examiner is based partly on how many questions he/she has raised in the AOM regarding the compliance to COA rules.
Government agency personnel implementing the purchases are accountable for violations of COA rules. He/she has to justify employing a private provider. If the COA is not satisfied, it could result in disallowance and the personnel is monetarily responsible and/or may be subject to a legal sanctions. A retiree’s pension can be held in abeyance indefinitely. If he/she secures the best deal for his/her agency and COA accepts the justification, the government agency benefits but the personnel in question gets at best a pat in the back. If however COA does not accept the justification, he/she faces heavy losses. There is a huge asymmetry in incentives. What will the unfortunate personnel do?
Agency personnel who implement the contract mostly opt to interpret MEMO 14 defensively, as follows: Contract is first offered to PIC. If PICC accepts the contract, PICC gets it even when PICC’s price is high or the fit is poor. Only if PICC rejects the contract in writing is the canvass of private sector initiated and awarded, this being the least risky option. PICC can raise its price and/or deliver poor quality service to government customers and still have custom. Private providers are disadvantaged in procurement. This is a clear violation of CN. But the violation is hidden in the bias of the enforcement.
A modality that satisfies CN+ but also meets the requirement of “preference” and “efficient and economical to the government” is the following: The gov’t agency: (a) canvasses private suppliers for its requirements with proper and transparent documentation on price and specs (pax, service offer, time, date, etc); (b) picks the best private offer as provisional winner; (c) allows PICC to match the best offer, (d) and if PICC matches, then PICC gets the contract; if PICC declines to match in writing, the private sector best offer is the winner and gets the contract. One may call this the “A Modified Swiss Challenge” method.
But even this is a second best solution. The first best solution is just to privatize PICC. This makes Memo Circular 14 moot and academic. PICC can then be treated just as any market player.
It is useful many times to distinguish between “letter of the law” and the “enforcement of the law.” The latter may be non-neutral even when the former is neutral. And many unnecessary economic costs can be avoided.
